IPA Sponsored PPO

t'l;lTED 5T.4TES OF A t I E R I C . 4
F E D E R A L TRADE C03131ISSION
Vl'ASHI\GTO\, 	D C 	20580
June 20, 1991
Martin 	J. 	Thompson
R i s r d a n 	& McKinzie
California P l a z a
300 	South Grand Avenue
29th Floor
Los Wngeles, 	California 	90871
Dear Mr, Thompson:
This letter responds to your revest f o r 	a staff a d v i s a q
opinion concerning a proposal by 	a physician BPW network that
sponsors a preferred provider organization (PPO) to negotiate
prices with individual hospitals whose sewices will be marketed
to payers as part of t h e 	PPQ package. 	For the reasons discussed
below, it does not appear the proposed conduct would violate the
Federal Trade Comission Act.
According to your letter o f 	April 	11, 	1991, you 	represent a
physician %PA network that currently offers a physician-services
PPO to third-party payers. 	The IPA uses a messenger model for
pricing physician semices: 	that 	is, the IPA comunieates to its
member physicians the proposed prices of each third-party payer
that contracts with the PPO, and each physician decides
individually wherner 	to aceap~or reject each price proposal.
The IPA wants to add hospital senices to the PPO in order to
offer a complete package of senices to payers. 	However, 	it. has
been infomed by payers that a messenger model will not be
acceptable for the pricing of hospital semices. 	Instead, payers
want to h o w what 	hospitals will participate in t h e program at
the time *.
t b t the payer 	and the PPO reach an agreement.
~herkfore,the EPA proposes to bargain on an individual
basis with hbspieals 	that it wants 	to include in the package o f
services it offers to third-party payers. 	It w i l l 	solicit from
each of the desired hospitals its best price offer, and then
negotiate, as necessary, w i t h 	any hospital whose prices must be
reduced iP t h e 	PPO 	is to be successfuPly marketed to third-party
payers. 	Each hospital" 	bid price will be 	kept confidential, and
the hospitals will not participate in the management sf the IPA.

D Mr, Martin J. 	Thompson
Your letter 	states that t h e 	9PW will t a k e c e r t a i n
precautions to avoid facilitating collusion among t h e 	hospitals,
In telephone conversations supplementing your letter, 	you have
explaiA3edthat the negotiations will be conducted by an
individual or a small group of persons within the IQA; 	that those
persons will not have any affiliation with any hospital; that t h e
bid or other price 	i n f o m a t i o n of a hospital will not be
disclosed to other hospitals; that discussions w i l l 	not be
carried out in a way that would 	enable a hospital to ascertain
the bids 	of other hospitals; and that hospitals-bids 	would not
be widely disclosed within t h e board sf directors or general
membership 	sf t h e 	IPA.
I understand from your letter that the PPO operates in a
large metropolitan area within which many managed case programs
compete, 	Hospitals typically participate in a n u d e r 	of managed
care plans, 	and your client will 	contract w i t h hospitals on a
won-exclusive basis,
You further state that the IPA network represents less than
10% of the physicians practicing in the region semiced by 	the
PPO. 	It is not yet known what percentage sf hospitals in t h e
market will participate in the program. 	However, t h e 	PPO will
@ 	contract only with those hospitals that it feels are necessary to
market the progrm 	successfully, and it is not anticipated that
the combined market share of the hospitals participating in the
PPO will be 	large,
Your letter asks for an advisosy opinion on one "relatively
narrow" question: 	whether there is "any 	inherent violation of
law in the proposed scenario for conductjng negotiations over
price with individual kosrZ"-\ sand then contracting to c o m i t
the services o f 	these hospitals to payers, where the organization
in vestion is not eontrolled or managed 	by t h e 	hospitals and the
organization intends to create controls calculated to prevent 	it
from facilitating any form of callusion mong competing
hospitals,"
The eomission approved the operation of a PPO in its
advisory opinion concerning Health Care Management 	Associates.1
In that instance, the PP8 was organized by a f i m that was not
affiliated with or controlled by providers a l health care

Mr, Martin 	J. 	Thompson 	-3-
services or insurers, 	H E m proposed to act as 	an i n t e m e d i a q
between health care providers and third-pasty payers, negotiating
on behalf of individual providers or integrated groups of
providers binding agreements on tha prices that each provider
would accept as papent for senices provided to patients covered'
by- third-party payers that contracted with the PPO.
Your client proposes to perfom a function similar to tkat
performed by Hem, 	in that nt will be an i n t e r m e d i a q between
individual hospitals and individual third-party payers. 	While
the IPA network is controlled by physicians who compete w i t h one
another, it does 	not, according to your letter, engage in
collective price negotiation on behalf sf its mennDaer physicians,
Nor does it appear tkat the %PA network w i l l 	participate in or
facilitate collective negotiations by hospitals, 	It will simply
act as an agent for individual hospitals in reaching agreements
on price between the hospitals and third-party payers,
A 	similar arrangement was the subject of a staff o p i n i o n
letter issued to The Equitable Life Assurance Soeietya2 In tkat
matter, Equitable proposed to act as an inlemediaq between
hospitals and third-parey payers in negotiating hospital
reimbursement rates that would be based on the Diagnosis Related
@ 	Groups 	( "DRGs" ) 	developed by Medicare. 	Specifically,
Equitable proposed to identify hospitals willing to enter into
agreements to accept DRG reimbursement, and to negotiate with the
hospitals individually specific rates that would be binding on
the hospitals and the third-party payers, 	There was to be no
eolleetive negotiation with hospitals, and Equitable intended to
limit t h e 	availability of the rates it negotiated to payers
covering no wore than 15 to 20% of the population of any relevant
geographic area* 	The staff eoneluded that the proposal did n o t
appear 	likely to restrain earnpetition unreasonably in any market,
The proposed negotiations between hospitals and the
physician network, as you have described them, do not appear to
raise serious antitrust concerns, 	The hospitals will not
participate in t h e management of 	the physician I P A network that
will conduct negotiations on behalt sf individual hospitals with
third-party payers, and 	the IPA itself will not negotiate
co%leetively on behalf sf 	the hospitals, 	Furthemore, the IPA
proposes to take specific precautions to ensure the
confidentiality sf pricing information obtained from each
Letter from M e Elizabeth Gee to Jonathan E. Gaines
(March 26, 	1986).

Mr, Martin 	J. Thompson
hospital, 	Therefore, 	t h e proposed 	arrangement would not appear
to be a price-fixing mechanism f o r hospitals, or create any o t h e r
horizontal agreement that is inherently suspect under the
antitrust laws,
Moreover, there does not appear to be any significant danger
that t h e 	PPQ will obtain market power or will be able to impede
the development or operation of other managed care programs,
The PPO represents fewer than 10% of the physicians practicing in
the metropolitan area where the PPO operates, 	and does not
anticipate t h a t 	it will represent a Barge proportion of 	t h e
hospital business in the area, 	F u r t h e r m o r e , 	t h e 	participation
agreements between the PPO and the health care providers will be
non-exclusive, so that providers will 	be able to participate in
other managed eaze programs, 	Thus, the proposed conduct does n o t
appear 	to create an appreciable 	r i s k 	o f 	actual or attempted
monopolization,
For the seasons stated 	above, it does not appear that the
proposal you have described is likely to be an unfair method sf
competition in violation of the Federal Trade Comission Act,
0 Under the Comission" 	Rules of Practice S1*3(e), the Comission
is not bound by 	this staff opinion and reserves the right to
rescind it at a later tiine. 	In addition, this office retains the
right to reconsider the questions involved and, with notice to
the requesting party, Lo rescind or revoke the opinion if
implementation sf t h e proposed p r s g r m 	results in substantial
anticompetitive effects, if t h e 	program is used for improper
purposes, or if t h e public 	interest othemise so requires,
I
Mark 	J. ~orosghak
Assistant Director