The Equitable Life Assurance Society

Bureau of Competition
FEDERAL TRADE COMMISSION
WASHINGTON, B.G. 20588
March 	26, 1986
Jonathan E, Gaines, Esquire
Vice President and Counsel
The Equitable Life Assurance Society
1285 Avenue of the mericas
New York, New York 	IOOl9
Bear M r , 	Gaines:
This l e t t e r 	ns 	in eesponse to your 	request on b e h a l f 	of T h e
Equitable Life Assurance Socnety of 	the United States
("Equitable") for an advisory opinion concerning Equitableas plan
to negotiate with 	individual hospitals the rates to be charged
for certain services rendered to patrents eovered 	by 	Equitableas
insueanee policles or 	by h e a l t h 	benefit plans established by
Equitable's @ustomess,
I understand 	from your 	letter of January 21, 1986, and
teiepkone eonversatrons supplementrng that letter that Equitable
issues to employers, and others, group health 	insurance policies
that obllgate Equitable to pay 	a portion of 	the cost of certain
medical and 	DospIta1 services rendered 	to covered 	individuals.
In addition, Equitable ofters an Administrative Claims Service
( " A C S m ) for self-insured health benefit plans, 	As of the end of
1985, Equitable covered approximately four million 	individuals
under 	insurance contracts, and 	approximately four million more
persons were covered in connection with ACS 	arrangements,
Equitable believes 	that 	in most 	geographic areas, its insurance
and ASC 	contracts cover less than 5% of the population.
Claims, including hospital claims, constitute the largest
cost of health 	insurance. 	In an effort to reduce the amount that
Equitable and 	its customers must pay 	for hospital services,
Equitable proposes .to negotiate with 	individual hospitals
agreements that establish a predetermined 	fee to be charged for
eaek episode of hospitalization. 	Tbese fees would 	replace the
hospitalss usual practice of charging separately for each service
provided 	to patients. 	The negotxated tees would 	be 	based on 	the
Diagnosis Related Groups 	( " D R G 9 ' ' ) 	currently used 	by Idedicare,
Equitable lntends to negotnate DRG 	payment 	rates
individually with selected hospitals in local geographic are?as,
and 	rates may vary 	from hospital to hospital, 	The 	rate for each
of 	the various diagnostic groups would 	be based 	on each
hospital" 	sistorlcal costs ror 	treatnng patrents with 	that

diagnosis, 	Tdentifying such costs requires analysis of claims
data 	for the services associated with each BRG, 	Equitable has
developed a methodology for collecting and analyzing the
necessary claims data and has begun to collect the data,I
Equitable 	intends to negotiate DRG 	rates for claims covered
by 	the insurance policies it underwrites, 	In addition, Equitable
proposes 	to offer a "DRG 	service" tkat would make available to
employers that subscribe to the service the DRG 	rates'tkat
Equitable had 	negotiated and provide a means by which each
hospital and 	the BRG 	service subscribers could agree to be bound
by 	the negotiated rates, 	Hospitals and 	the DRG 	service
subscribers could also agree in advance to be bound 	for a period
not to exceed 	12 or 	18 months by 	rates to be negotiated by
Equitable in the future, 	For this service Equitable may 	receive
a 	fee paid 	by 	the DRG service's 	subscribers,
T h e DRG 	service would 	be available to Equitable's ACS
customers and 	to employers tkat are not otherwise its
customers, 	While the service may 	inelude as subscribers
employers who purchases health 	insurance or ACS 	services from
competing firms, Equitable will not deal directly with 	the
competitor 	insurers in such eases or participate in any
negotiations between the employers and 	their 	insurers regarding
the 	impact of 	the negotiated hospitial rates on the 	insurance
premiums to be paid 	by 	the employer. 	Indeed, Equitable may 	seek
to obtain the insurance or ACS 	business of employer-subscribers
to the DRG 	service who are not currently its insurance or ACS
customers. 	In addition, Equitable does not 	intend to make 	the
DRG 	service available to groups composed principally of employers
who are competitors or 	in situations w h e ~ eit has reason to
Bn order 	to obtain a valid 	sample of 	claims relating 	to each
DRG, Equitable may 	need 	to supplement its own claims data
with data obtained from major 	employers 	in an area, 	When 	it
uses data obtained from others, Equitable intends to share
the statisticaa analysis of 	the data with cooperating
employers and 	their 	insurers or ACS 	providers, and with
cooperating hospitals. 	Since Equitable has not requested
approval of 	its data collection and dissemination activities,
this letter does not cover 	that aspect of 	the proposal,
However, 	it should be noted 	tkat sharing by 	competing
hospitals and 	insurers of aggregate information regarding the
use and costs of health care services does not appear 	to
raise antitrust issues unless the arrangement is used 	to
further an anticompetitive boycott or collusive price-
fixing, 	=, 	, Letter 	from James C. 	Miller 	111,
Chairman, Federal Trade Commission, to Senate Committee on
the Judiciary at 6-7 	(May 21, 1985); Department of Justice
business review letter to Joseph J. 	Feltes, Esquire,
concerning Stark County Health Care Coalition, Inc. 	( A u g . 	30,
1985) .

0 	believe 	that competitors have reached agreements respecting use
of 	the service for the purpose of restricting competition among
them,
The DRG rate would 	apply only to persons covered by 	health
benefit plans established by Equitable and 	its DRG 	service
customers, and would 	not determine the prices 	that hospitals
charge to other payers. 	DRG service subscribers would 	be 	free to
use otker hospitals or 	to participate in competing BRG
arrangements, 	Equitable and 	its customers may offer 	financial
incentives to encourage covered 	individuals to use hospitals with
which 	a DRG 	rate has been negotiated, 	Equitable currently
intends to limit the number of 	subscribers to its BRG service so
that the population covered by 	the negotiated 	rates will not
exceed 	158 to 208 	sf 	the p p u l a t i o n 	o f 	any local geographic area.
Based 	on the deezriptisn of Equitable" 	proposed 	negotiation
of BRG 	rates as detailed 	in your 	submission and outlined above, I
am of the opinion that the propos2d 	conduct is not likely to
violate Section 5 of the FTC Act, 	Equitable's 	negotiation sf
the prices to be paid 	to individual hospitals for 	serviees
rendered to patients covered by 	its insurance policies does not
appear 	to raise any serious antitrust issues, 	It has been 	held
in a number of cases that an 	insures may 	bargain over 	the prices
that it is obliqated'to pay 	for 	services rendered 	to covered
individuals, 	see, 	e,g,,-~ennsylvaniaDental Ass" 	vv,Medical
p-
2alth Insurance Co,, 737 F , 2 d 	1433 	(5th Cir, 1984) , eert,
denied, 105 S, 	Ct, 9 1 2 	(19851,
With 	respect to negotiation of BRG 	rates on behalf of
employers with self-funded health benefit plans or otker
customers, Equitable" 	proposal resembles in many 	respects the
Cooperating Provider Program that was 	the subject of the
Commission" 	advisory opinion letter to Health Care Management
Associates 	("Hem"), 3 Trade Reg, Rep. 	(CCE) f 	22,036 	(June 8,
19831, 	Like WCW, 	Equitable proposes to act as an 	intermediary
between sellers of services -- 	hospitals -- 	and 	purchasers of
those services -- 	the employer 	groups and 	their members.
Equitable will identify the hospitals willing 	to enter 	into
agreements to accept DRG 	reimbursem&nt, will negotiate the
specific BRG 	rates, and 	will provide a mechanism 	through which
the hospitals and 	the employer 	groups can agree on the rates to
be paid, 	It will not negotiate with hospitals collectively,
This opinion letter 	is limited 	to the proposed program
described 	above, as explained 	in your 	letter of January 21,
1986, and 	in telephone conversations supplementing that
letter. 	It does not constitute approval for actions that are
different from those described, or 	that are not specified 	in
your 	letter,

Viewed 	in this Eight, Equitable's 	proposal does not appear
on 	its face to restrain competition in any market, 	First, the
proposed DRG 	service does not appear to involve unlawful price-
fixing 	in the hospital services market, 	The BRG 	service will 	set
o n l y 	the prices to be paid 	to 	individual hospitals by Equitable
and 	its customers, 	The program does not involve priee-related
agreements among hospitals, and 	it does not determine t h e 	amount
that the hospitals may charge to patients who are not covered by
the DRG 	service,
Second, the proposal does not appear 	to 	involve any unlawful
horizontal agreements among 	buyers of hospital services, 	The DRG
service, as described, would 	not appear to involve any agreements
among Equitable's customers, 	Moreover, even if the operation of
t h e program were to involve some agreement among purchasers
regarding 	prices to be paid 	for hospital services, it does n o t
appear 	t h a t 	the proposed DRG service would operate as an unlawful
joint purchasing arrangement, 	There is no indication tkat
Equitable or 	its customers intend 	to use the BRG 	service to
restrain competition, 	Nor does it appear likely that subscribers
to the DRG service will obtain market p w e r 	in any geographic
market, since Equitable intends to limit enrollment under 	the DRG
plan 	to 15% to 20% of 	the population in any geographic area,
Because Equitable's 	eustomers will be employers that generally
are not competitors in the markets 	in which 	they sell, the DRG
service is unlikely to facilitate collusion among 	them with
@ 	respect to grices or output or 	other ankicompetiiive
agreements, 	Finally, the proposal does not involve any
agreements among Equitable or 	its customers n o t 	to use hospitals
with which a DRG 	rate is not negotiated. 	Equitable, its
customers, and, 	in all likelihood, the individual patients, will
remain free to patronize non-BRG 	hospitals, even though there may
be 	financial incentives for them to use DRG 	hospitals,
Third, Equitable's proposal would not appear 	to pose a
danger 	to competition 	in the 	insurance industry. 	Since the
proposal as described above does not 	involve agreements among
competing insurers or ACS providers, no questions of unlawful
collusion in the mgrketing or 	sale of 	insurance or WCS 	services
are raised. 	In addition, it does not appear 	tkat the DRG 	service
will 	permit Equitable to deny 	other 	insurers or prepaid health
plans access to an 	input neeessary+for them to compete in the
market, 	The hospitals that contract with Equitable and 	its
customers will be 	free to offer equally favorable or more
favorable terms to other 	insurance companies or health benefit
However. 	agreements among 	the employer-subscr ibers to
standardize benefit packages 	for 	their employees could raise
antitrust issues,

% n sump it does 	not appear likely that Equitable's 	proposal
to establish 	a DRG service will unreasonably 	restrain competition
in any market, 	Moreover, Equitable" 	proposal may 	be
procompetitive 	by generating hospital price competition for the
business 	of Equitable" 	ceusomers, 	In addition, the proposed DRG
service could 	generate beneficial competition among third-party
payers 	and elaims administrators 	for ways 	to reduce 	the costs of
hospital and 	other health care services, 	Therefore, 	fhe proposed
conduct does not appear likely to violate Section 5 of 	the
Federal Trade Commission Act or any provision of antitrust law
t h e Commission enforces.
The above advice 	is an informal 	staff opinion. 	Under 	t h e
Commissionas Rules of Practice 	1,31cds 	t h e Commission 	is not
bound 	by 	t h i s 	advice and 	reserves 	t h e 	right 	to rescind 	i t at a
Pates time, 	% n addition, this office retains the eight 	Pa
reconsider the questions 	involved and, 	wi tk notice to the
requesting 	party, to rescind or revoke its opinion 	if
implementation of the proposed program results in substantial
anticompetitive effects, If 	the program 	is used 	for 	improper
purposes, or 	if 	it would 	be 	in the public 	interest to do so,
Sincerely yours,
M a ~ l i z a L e t kGee
Assistant Director