Member Article

Southwest Health Alliance (“Southwest”), an independent practice association with approximately 900 member-physicians, has agreed to a proposed order recently entered by the Federal Trade Commission (“FTC”) settling charges that it engaged in anticompetitive conduct in its dealings with insurers and other payors for the provision of physician services (collectively, “insurers” or “payors”). In its complaint, the FTC alleged that since at least 2000, Southwest has restrained trade by fixing the prices its members would charge insurers, and has collectively negotiated the terms and conditions governing dealings with insurers. As a result of Southwest’s conduct, consumers and businesses had to pay higher prices for medical care.

The collective approach that Southwest employed is not barred, per se. Indeed, collective price negotiation and other agreements may be justified if the members of the independent practice association are financially or clinically integrated. However, determining whether collective action is justified requires a fact-intensive examination that health care providers would be wise to undertake before problems arise. This case gives providers a helpful guide to the FTC’s analysis of this issue

Provider – Payor Contracting

To reach agreements with physicians concerning the provision of medical services, insurers often communicate through third-party messengers. Insurers submit proposed contract terms, including reimbursement rates, to the messenger, who in turn communicates those proposed terms to physicians. Typically, physicians are required to either accept or reject the insurer’s proposal on a unilateral, independent basis.

In some instances, it is acceptable for physicians to negotiate collectively with payors. For instance, if individual practice associations like Southwest integrate their members’ practices financially or clinically, the members may be permitted to engage in collective negotiations.  When determining whether collective action is permissible, the FTC examines the extent to which the association has integrated its operations, among other things. If the operations have been combined in a way that produces beneficial efficiencies for consumers, then the FTC is more likely to find that a collective approach to negotiation is appropriate.

Southwest’s Anticompetitive Conduct

The FTC alleges that Southwest manipulated the messenger model to obtain anticompetitive ends. Specifically, the FTC claims that Southwest used a so-called “reverse messenger model” of negotiating contracts for its member-physicians since at least 2000. First, Southwest surveyed its members to determine what terms and prices they would be willing to accept from payors. Using this data, Southwest crafted a fee schedule that it presented to payors as the contract terms acceptable to its members. In contravention of the general principle that individual physicians should make unilateral decisions regarding a payor’s offer, Southwest was making an offer to payors on behalf of its physicians—an offer that was not unilateral and independent, but a representation of the members’ collective price demands. Moreover, the Commission alleged that Southwest’s collective negotiation efforts were not accompanied by any financial or clinical integration of its members (which included 25 hospitals, multiple independent practices, and a number of solo practitioners). Therefore, Southwest’s conduct was not immunized by the exception for integrated practices.

Southwest also made the fee schedule known to its members, essentially signaling to them the group consensus on appropriate terms and conditions for payor contracts. Over time, Southwest increased the rates included in the fee schedule, unilaterally and without any input from member-physicians. Through these actions, the FTC alleged, Southwest was essentially fixing prices and securing for its members an ever-increasing reimbursement rate without any corresponding benefit to payors or health care consumers.

The Commission’s Proposed Order

Following an investigation, Southwest agreed to cease and desist its allegedly unlawful conduct without admitting any wrongdoing. The order proposed by the Commission prohibits a wide range of activity aimed at curbing the conduct described above. The FTC order also includes certain notice requirements that will allow the Commission to monitor Southwest’s compliance with the order. As a final measure, Southwest is required to: 1) notify related parties of the order, 2) allow insurers to terminate any contracts they entered into with Southwest during the period covered by the complaint, and 3) file an annual report with the Commission describing how Southwest has complied with the order.

The order does not prevent Southwest from engaging in legitimate business activity. For example, Southwest may still participate in “qualified risk-sharing” or “qualified clinically integrated” arrangements, as those terms are defined in the proposed order. Southwest may also enter into agreements on behalf of doctors who are part of the same (or an integrated) medical practice. The order will be available for public comment for 30 days (until June 9, 2011), after which the Commission will vote on whether to make it final.

The “Takeaway” for Others in the Business

The U.S. antitrust enforcement agencies continue to demonstrate a high level of scrutiny and oversight of the health care industry. Therefore, although not all joint price negotiations are considered anticompetitive, providers would be wise to ensure that they have a sufficiently integrated practice before they engage in any joint price negotiations. Moreover, when examining the degree to which their practice is clinically or financially integrated, providers should consider whether the purported integration was accompanied by increased efficiency or reduced costs for businesses and consumers, and be prepared to corroborate those efficiencies with supporting documentation.

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