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Efficiencies and Justifications for Physician Network Joint Contracting: The FTC's North Texas Specialty Physicians Opinion and Advocate Healthcare Arbitration Decision
William E. Berlin
202-326-5011
weberlin@ober.com
Christi J. Braun
202-326-5046
cjbraun@ober.com
Appeared in Health Lawyers News
May 2006
The recent decisions of the Federal Trade Commission
(FTC) in North Texas Specialty Physicians (NTSP)1 and the
panel in the Arbitration Between United Healthcare of Illinois,
Inc. and Advocate Healthcare Network (Advocate)2 addressed
similar conduct and legal issues. Both tribunals analyzed
joint negotiations with payors by a less than fully-integrated
physician-contracting network, and both declined to
apply the per se rule to this conduct. Yet the arbitration
panel in Advocate (albeit in dicta) upheld the joint negotiations,
while the Commission in NTSP summarily condemned
the negotiations there after a truncated analysis.
Here, we focus on the justifications alleged in each case
as well as other practical differences to explore why the
tribunals arrived at divergent conclusions.
- Facts and Legal Analysis
Neither the FTC nor the arbitration panel applied the
per se rule to the joint negotiations of NTSP or the
Advocate physician network. The FTC, in NTSP, was concerned
that use of per se terminology might chill efficiency-
enhancing collaborative activity among physicians that
it wants to encourage. Similarly, the Advocate panel concluded
that the per se rule was not appropriate because
"[t]here were no offsetting potential benefits or efficiencies
from the price setting conduct" in the per se cases
United proffered as authority, "unlike the present case."3
As a result, both tribunals used the language of Polygram
Holdings, Inc. to focus on the justifications asserted in
each case.4
- The NTSP Decision
The FTC held that the NTSP network violated Section 5
of the Federal Trade Commission Act through pricefixing
and other horizontal agreements that restrained
competition. An independent practice association with
approximately 500 physician members in and around Ft.
Worth, Texas, NTSP negotiated both financial risk-sharing
and fee-for-service contracts on behalf of its member
physicians with health plans.
The FTC examined NTSP's alleged anticompetitive conduct
regarding its fee-for-service contracts, including its
(1) annual minimum price polls of members (by which
members provided it with the minimum prices they
would accept), which NTSP used to determine the minimum
prices it would accept in payor contract negotiations;
(2) physician participation agreements, requiring
members to forward all payor contract offers to NTSP
and refrain from pursuing those offers until NTSP discontinued
its negotiations with the payor; (3) powers of
attorney obtained from members, permitting it to negotiate
on behalf of members and to terminate, or threaten
to terminate, payor contracts as a means of extracting
price concessions from payors; and (4) refusing to "messenger"
contracts to its members unless the payors' price
offers met the minimum price requirements of at least
50% of its membership.5
Applying the Polygram analytical framework, the FTC
found that this conduct, in the aggregate, resulted in a
horizontal price-fixing agreement and thus was "inherently
suspect."6 Accordingly, it turned to the question of
whether NTSP's asserted justifications for its conduct
were legitimate, which required examination of whether
those justifications were cognizable and plausible. NTSP's
first justification was that using the physician participation
agreements, powers of attorney, refusals to deal, and minimum
price polls helped it identify and sign contracts of
interest to its risk panel physicians, ensuring "spillover"
efficiencies from the risk contract to the non-risk contracts.
The FTC rejected this justification because NTSP failed to
articulate a "logical nexus," or link, between the activities
resulting in price fixing and the claimed efficiencies.7
NTSP's second justification was that the restraints in question
had plausible benefits of their own. NTSP claimed,
for example, that the right of first refusal and member
obligations to notify it of offers they received "increase[d]
NTSP's contracting opportunities." With regard to its
refusal to messenger offers not meeting its minimum fee
requirements, NTSP argued that its refusal was "efficient"
because conveying contract offers acceptable to less than
50% of the physicians would waste resources.8 The FTC
found these justifications not cognizable because they
were based on an argument that competition itself is inefficient.
Moreover, the evidence did not support them.
Rather, it showed that the purpose for the conduct was not
"to increase efficiency from spillover effects, or to conserve
resources, or to spread procompetitive benefits of information
sharing" but rather "to enhance bargaining clout."
Given NTSP's failure to establish a legitimate justification
for its inherently suspect conduct, the FTC held that
there was no need for proof of market definition or market
power. Accordingly, it summarily condemned the conduct
as a violation of § 5.
- The Advocate Decision
In a November 18, 2005 decision announced the day after NTSP, an arbitration panel decided a case similar to NTSP
in favor of the physician contracting organization. United
Healthcare, a large payor, claimed that Advocate, a
Chicago-area healthcare system, engaged in a price-fixing
agreement by contracting, and attempting to contract,
with United on behalf of over 2,500 competing physicians.
Advocate employed some of the physicians, but
most practiced independently in the community and had
privileges at Advocate hospitals.
United's claims focused on two separate contracting
episodes: negotiations resulting in contracts effective
between the years 2000 and 2002, and negotiations in
2003 that failed to result in a contract. Citing the D.C.
Circuit's decision in Polygram, the panel determined that
the rule of reason applied to Advocate's joint negotiations.9 The panel noted that the Polygram court explained
that even if it is "obvious" the restraint impairs competition,
the per se rule would not apply if the defendant
identifies "‘some reason the restraint is unlikely to harm
consumers'" or "‘some competitive benefit that plausibly
offsets the apparent or anticipated harm.'"10 Here, the
panel found "offsetting potential benefits or efficiencies
from the price setting,"11 and thus, according to the
panel, rule-of-reason analysis was appropriate. Those benefits,
according to the panel, were that the joint negotiations
and contracting provided United with "benefits and
efficiencies in quickly assembling a stable [network] without
the need to seek individual contracts with thousands
of physicians."12 A related benefit appeared to be that
Advocate's joint contracting resulted in a product that
employers found attractive.13
Unlike the FTC in NTSP, the panel made no effort to
examine whether the justifications were cognizable and
plausible. Indeed, whereas the FTC had emphasized the
necessity for a link between the challenged conduct and
the justification, the panel seemed to reject that requirement.
It explained that it "does not conclude, as United
asserts," that "the joint contracting [must] be ancillary to
the venture's legitimate procompetitive purposes and is
necessary to achieve those efficiencies."14 Rather, it
appears that any procompetitive benefits were sufficient in
the panel's mind to take the price-fixing arrangement
into a full-blown rule-of-reason analysis, where those benefits
would be weighed against the restraint's anticompetitive
effects.
Given that it determined the rule of reason was the appropriate
standard, the panel held (seemingly in the context
of deciding the appropriate standard of analysis to apply,
rather than in applying the rule of reason) that "the joint
contracting provided United . . . [has] competitive benefit
sufficient to offset any potential harm to consumers."15
Turning then to the market-power issue, the panel held
that Advocate's market share, about 15%, was not enough
to constitute market power.
Regarding the 2003 negotiations, the panel held at the
outset that there could be no price-fixing violation
because no agreement was ever signed.16 Moreover, the
panel explained that, even if there was an agreement, the
per se standard would not apply because the evidence
established Advocate was "prepared" to proceed with a
clinically integrated contract with United. In reaching this
conclusion, the arbitrators identified several payors that
signed agreements with Advocate for its product, which
included "certain" clinically integrated services.17 Despite
the fact that the program was "clearly a developing work
in progress," the panel concluded that the "proposed"
benefits from such a program "sufficiently justify
Advocate's conduct in attempting to reach a joint contract
with United on what Advocate characterized as a
‘clinically integrated' basis."18 Given the market power
analysis conducted in the previous section, the panel concluded
that United's § 1 claim also would fail with respect
to the 2003 negotiations.
- Analyzing Potential Benefits and Efficiences
Since both the FTC in NTSP and the arbitration panel in
Advocate analyzed similar price-fixing claims arising out of
physician network joint contracting, what explains the different
result each tribunal reached? One seemingly obvious
explanation is the purported business justifications
offered by the respondents in each case, given the important
role those justifications played in the FTC's and
panel's analyses. The Commission determined that
NTSP's justifications were not cognizable and implausible,
while the panel concluded that Advocate's efficiencies
justified its joint contracting.19
At first blush, it appears that the justifications proffered
in each case differ in several respects. First, the
Commission noted that NTSP was not sufficiently clinically
integrated to justify an in-depth rule of reason inquiry
regarding its non-risk contracts.20 In contrast, the panel
in Advocate concluded that the "proposed" benefits from
Advocate's clinically integrated program "sufficiently justify
Advocate's conduct [in the 2003 negotiations] in
attempting to reach a joint contract with United on what
Advocate characterized as a ‘clinically integrated' basis."21
In reaching this conclusion, the arbitrators identified several
payors that signed contracts with Advocate, which
included "certain" (unspecified in the decision) clinically
integrated services.twentytwo
A second difference mentioned in both decisions is the
reaction of payors to the alleged efficiency-generating
conduct. The Commission determined that NTSP's
"spillover" efficiencies justification was not cognizable
because NTSP's actions were perceived by payors as an
attempt to restrict their access to the "more-desired" nonrisk
product.23 In Advocate, the panel stated that both payors
and providers in the Chicago area believed the joint
contracting arrangements "served their interests and
freely entered into [them]."24 This distinction highlights
the importance of payors' views, and often their testimony,
in provider-payor contracting disputes and litigation.
Third, the FTC rejected NTSP's claimed "team-oriented
improvements in cost and quality" and "spillover" efficiencies
from the risk contract to the non-risk contracts
because the respondent failed to articulate a "logical
nexus," or link, between the activities that facilitated price
fixing and the claimed efficiencies.25 In other words, the
FTC found that the joint contracting by the network was
not necessary to achieve the claimed efficiencies.
Although the Advocate decision is confusing on this point,
the panel, relying on the D.C. Circuit's Polygram decision,
appears to have disavowed the need to establish a link
between the activities that facilitated price fixing and the
claimed efficiencies, as the FTC required in NTSP.26
Fourth, and perhaps most significantly, the Commission
stated that because there is "no antitrust exception for
particularly efficient, higher quality market participants;
NTSP is not entitled to ‘preeempt the working of the
market' to produce the result that it believes payors
should choose."27 Similarly, the FTC rejected respondent's
claims that the restraints in question — minimum
price polls, physician participation agreements, powers of
attorney giving NTSP exclusive negotiating rights, and its
refusals to messenger contracts — were efficient for the
physicians, stating that these justifications are based on
the idea that competition itself is inefficient, and are not
cognizable justifications that enable respondent to
increase output or improve product quality, service, or
innovation. The Commission stated that a justification
will fail "if it contradicts the procompetitive aim of the
antitrust laws."28
In contrast, the Advocate panel accepted Advocate's justification
that the jointly negotiated contract was efficient
for United, if not all payors, by helping United to establish
and stabilize its network, providing United with substantial
administrative efficiencies, and allowing payors to
assemble networks of thousands of physicians "without
the need to seek individual contracts." The key distinction
here is that NTSP's justifications focused on efficiency
for the collaborating competitor physicians, while the
panel appeared to view the payors as the consumers who
received benefits from the efficiency of Advocate's contracting
activities.
A fifth, and more mundane, explanation for the opposite
results in NTSP and Advocate is that the actual facts and
evidence supporting Advocate's efficiencies simply were
more compelling than those supporting NTSP's justifications.
It is hard to disagree with the FTC's ultimate conclusion
rejecting NTSP's claimed justifications, at least as
the record is represented in that opinion. The Commission
found that the purported justifications were unsupported
by or simply inconsistent with the evidence that established, instead, that the reason for the NTSP's
restraints was to exploit its collective bargaining leverage
over payors, not to achieve efficiencies.29 Advocate's justifications
are more difficult to assess, mainly because they
are not as well detailed in the decision. The justifications
may well have been fully established in the evidentiary
record, however.30 The panel stated that there was sufficient
evidence that the joint contracting provided payors
"competitive benefit sufficient to offset any potential harm
to consumers," and one would think that, unlike NTSP,
there was no compelling evidence showing Advocate's
anticompetitive intent to increase bargaining clout with
payors or increase prices.31
Finally, although these differences between the purported
legitimate business justifications may explain the different
outcomes, perhaps the question is answered by the other
issues commonly addressed in a rule of reason analysis of
physician contracting networks. Other factors mentioned,
if not analyzed, in both decisions that may explain the different
results are exclusivity of the joint contracts,32 market
power,33 or actual anticompetitive effects from the
physician joint contracting.34 After analyzing the respondents'
asserted justifications, the Advocate panel expressly
relied on this evidence in concluding that under a rule of
reason analysis there would be no Section 1 violation.
In NTSP, although the Commission stated it would not
address market power or anticompetitive effects where
respondent did not meet its burden of establishing a legitimate
justification for its inherently suspect practices, it
nonetheless noted the evidence on these issues at several
points in the decision. Whether or not the Commission
should have even acknowledged these facts under a proper
threshold Polygram analysis is questionable, but
nonetheless on each of these issues the evidence clearly
differed between the two cases.
- Conclusion
Indeed, the differences in the evidence of exclusivity, market
power, and anticompetitive effects may be greater
than the differences between the purported efficiencies in
each case. It can be argued that the claimed justifications
in these cases are more alike than different. First, as discussed
above, the Advocate panel accepted that Advocate's
proposed 2004 contract would provide sufficient integration
to justify an in-depth rule of reason inquiry, while the
Commission determined that the non-risk contracts in
NTSP were not sufficiently integrated. Yet, in both cases,
the clinical integration programs were "clearly a developing
work in progress" (Advocate)35 or "not there yet"
(NTSP).36 Similarly, the panel in Advocate focused on the
one-stop shopping benefits and efficiencies for payors
(and to a lesser extent providers) resulting from joint
rather than individual contracting. In NTSP, however, the
Commission flatly rejected a very similar transaction cost
savings justification, although as noted above, NTSP's justification
focused on the benefits to the conspiring
providers themselves rather than payors. Nonetheless, the
Advocate panel's approval of the single-signature contract
justification seems too facile and susceptible to the FTC's
criticism that the "problem with these arguments is that
most efforts by competitors to collectively agree on prices
could be said to save costs in negotiations with consumers."37 In sum, it is not unreasonable to think that the
Commission may have reached the opposite conclusion
under a Polygram analysis if presented with Advocate's
claimed justifications.
In fact, the different results simply may be explained by
the fact that a different tribunal considered each case.
The Commission may be more skeptical of a defendant's
claimed justifications, and indeed take a much stricter
view of all the elements in a case than would a panel of
commercial arbitrators deciding a contracting dispute
between two business entities. This explanation seems
even more plausible here, where in applying the "equal
responsibility" defense at the outset to find no violation,
the Advocate panel determined that the parties were "relative
equals in terms of bargaining power" and "bargained
for their best economic advantage in a complex market
for health care insurance and services of health care
providers."38 Indeed, the panel incorporated much of its
discussion of Advocate's efficiencies from its equal responsibility
analysis into its justifications analysis, and no doubt
the former conclusion colored the latter one. In the end,
providers and those who represent them should not place
too much reliance on, or draw too much comfort from,
efficiencies like those articulated in Advocate. Transaction
cost savings in the contract negotiation process, proposed
or incomplete integration arrangements, and initial payor
acquiescence in the contracting arrangement may not
pass muster as justifications for past collective negotiations
by competing providers when reviewed by a government
enforcement agency or court.
The authors are attorneys in Ober Kaler Grimes and Shriver's
Washington, DC office. Prior to joining Ober|Kaler, William
Berlin was a trial attorney with DOJ's Litigation I section and its
Health Care Task Force, and Christi Braun was a staff attorney
with the FTC's Health Care Services & Products Division.
Endnotes
1 2005-2 Trade Cas. (CCH) ¶ 75,032 at 103,477 (FTC 2005)
(NTSP), available at www.ftc.gov/os/adjpro/d9312/
051201opinion.pdf. On January 20, 2006, the Commission
slightly modified the opinion. Order Granting in Part and
Denying in Part Respondent's Motion for Stay of Final Order
Pending Judicial Review at 1 n.1 (Jan. 20, 2006), available at
www.ftc.gov/os/adjpro/d9312/060120ntsporderromfs.pdf.
2 Available at www.hmltd.com/article_advocate_decision.pdf
(Advocate).
3 Advocate at 12.
4 In NTSP the FTC applied the analysis from its own Polygram decision, while the Advocate panel relied on the D.C. Circuit's
subsequent opinion affirming that decision. In Polygram, the
FTC, relying on the Supreme Court's decision in California
Dental Association v. FTC, 526 U.S. 756 (1999), elaborated on
the continuum between the strict per se and full-blown rule-of-
reason standards. 5 Trade Reg. Rep. (CCH) ¶ 15,453 (FTC
Jul. 24, 2003), aff'd, 416 F.3d 29 (D.C. Cir. 2005). The first
question under the Polygram methodology asks whether the
defendant's conduct is "inherently suspect owing to its likely tendency
to suppress competition." If so, to avoid summary condemnation,
a defendant must provide a cognizable and
"plausible reason why practices that are competitively suspect
as a general matter may not be expected to have adverse consequences
. . . or . . . reasons why the practices are likely to
have beneficial effects for consumers."
5 NTSP at 18-24.
6 Id. at 26.
7 Id. at 29.
8 Id. at 31.
9 The panel's Polygram discussion and rule of reason analysis is
dicta because it initially found that the "equal responsibility"
(or in pari delicto) doctrine applied as a complete affirmative
defense to United's price-fixing allegations for the 2000-02
negotiations and no agreement was signed after the 2003
negotiations. Because the parties' devoted substantial testimony
and argument controverting the applicable legal analysis
standard, however, the panel addressed the issue.
10 Advocate at 13 (quoting Polygram, 416 F.3d at 36).
11 Id. at 12.
12 Id. at 9-13.
13 Id. at 9.
14 Id. at 12 n.4.
15 Id. at 13.
16 This holding appears incorrect. For example, if the reason no contract was reached was because United rejected the
price established and demanded by Advocate, the establishment
and use of that price would constitute a price-fixing
agreement regardless of whether United accepted it.
17 Id. at 18.
18 Id.
19 It is unclear from the Advocate decision whether the panel addressed the potential efficiencies in the context of deciding the appropriate standard to apply or actually as part of its full
rule of reason analysis.
20 NTSP at 30.
21 Advocate at 18.
22 Id.
23 NTSP at 30.
24 Advocate at 15.
25 NTSP at 28.
26 Compare Advocate at 12 n.4 with 16.
27 NTSP at 30.
28 Id. at 31, quoting the Commission's Polygram, Inc. at 30.
29 Id. at 30 n. 45 and 32.
30 Although neither Advocate's conduct nor its justifications are
described in detail in the decision, the panel noted that the
record contained 5,512 pages of hearing transcript, voluminous
documents, and exhibits, and over 1,000 pages of posttrial
documentation. Advocate at 2.
31 Advocate at 13, 17-18.
32 NTSP had the exclusive initial right to negotiate with payors,
and reinforced this exclusivity by powers of attorney appointing
NTSP as the physicians' sole bargaining agent. NTSP at 4,
5. In Advocate, the panel repeatedly emphasized that the affiliated
physician contracts were non-exclusive, United was free
to contract with each Advocate affiliated physician, and, in
fact, United was able to quickly enter into direct contracts
with 90% of the affiliated physicians. Advocate at 10-11.
33 The FTC stated that NTSP comprised a large percentage of
physicians in Ft. Worth and had become a "gorilla network"
with collective power over price. NTSP at 27, 36. In contrast,
the panel in Advocate specifically found that Advocate did not
have market power based on its 15% share of the hospital
and physician markets. Advocate at 15.
34 The Commission accepted the testimony of Complaint
Counsel's economic expert finding that the negotiations
using NTSP's minimum price had "a tendency to increase
prices overall." NTSP at 20. The arbitration panel, however,
questioned the methodology used by United's economic
expert and ultimately disagreed with his conclusion that there
was actual consumer harm in the form of higher prices resulting
from the joint contracting. Advocate at 13.
35 Advocate at 18.
36 NTSP at 30.
37 NTSP at 31.
38 Advocate at 1, 9.
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