American Journal of Law & Medicine

Risky business: proposed reform of the antitrust laws as applied to health care provider networks.


Because the health care industry comprises over thirteen percent of the American economy, law enforcers increasingly apply antitrust law to all aspects of health care delivery and financing.(1) Through antitrust enforcement, consumers receive the benefits of lower health care costs and improved health care services.(2) To achieve further cost savings, health care providers are forming, as well as joining, many different types of provider network joint ventures.(3) Providers form networks,(4) expecting "them to generate efficiencies, reduce excess capacity, improve utilization, permit greater specialization and enhance quality."(5) However, because they organize competing physicians and enable them to collaborate on prices and set fee schedules, provider networks raise serious antitrust concerns.(6) Consequently, the federal government and courts are increasingly focusing their antitrust enforcement efforts on the formation and anticompetitive activities of provider networks.

In Part I, this Note addresses the degree to which network providers must be economically and financially integrated to legally collaborate and set prices. Part II briefly explains the procedures one may use to enforce the federal antitrust laws. Following this explanation of antitrust enforcement procedures, Part III discusses the relevant statutory and case law applicable to health care provider networks. Within Part III, this Note introduces two recent legal developments in antitrust enforcement, the Antitrust Health Care Advancement Act of 1997 (AHCAA)(7) and the federal antitrust enforcement agencies' 1996 Policy Statements.(8) Part IV discusses arguments made in favor of the AHCAA and the enforcement agencies' new antitrust polices. After evaluating the arguments presented in Part IV, Part V examines the ramifications of easing antitrust scrutiny of the formation and collaborative activities of non-financially integrated provider networks. Lastly, in Part VI, this Note recommends alternatives to enacting the current version of the AHCAA. As summarized in Part VII, this Note concludes that if Congress enacts any legislation in this area, it should impose a risk-sharing requirement on all network providers who collaborate on prices. Alternatively, Congress should require that all network providers that are merely clinically integrated implement a messenger model system to receive rule of reason treatment.


There are four processes available to enforce the federal antitrust laws.(9) To begin, private plaintiffs who have suffered from anticompetitive practices(10) or a state's attorney general can bring a lawsuit in federal court.(11) Alternatively, the Department of Justice (DOJ) and the Federal Trade Commission (FTC)(12) may bring an enforcement action against the same defendant(s) regarding the same matter(s).(13)

To avoid duplication and inconsistent enforcement, only one of the enforcement agencies conducts an investigation and an enforcement action if an antitrust problem is handled administratively rather than judicially.(14) The DOJ usually enforces the federal antitrust laws(15) by bringing criminal prosecutions and civil actions for injunctive relief in the federal courts.(16) In contrast, rather than bringing lawsuits in federal court, the FTC generally conducts its own administrative hearings and adjudications, which the parties may later appeal to the full Commission and the federal courts.(17) In addition to commencing formal actions, the enforcement agencies use less formal measures, such as business review letters(18) or advisory opinions,(19) to educate the public about the agencies' enforcement policies. For example, if a group of doctors wants to form a provider network, the doctors can write to either one of the enforcement agencies, detailing their plans to form the network. In responding to the inquiries it receives,(20) the enforcement agency publicly releases the written request, either stating the enforcement agencies' current enforcement policy relating to the proposed activity or stating that the enforcement agencies decline to review the request.(21)



The primary federal antitrust law that applies to provider network joint ventures is Section 1 of the Sherman Act.(22) Section 1 states that "[e]very contract, combination ... or conspiracy, in restraint of trade or commerce ... is declared to be illegal. ..."(23) Thus, to establish a Section 1 violation, a plaintiff must show that: (1) two or more private economic actors(24) entered into a contract, combined, or conspired with one another;(25) (2) unreasonably restrained trade;(26) and (3) affected interstate commerce.(27)

Most significantly, Section 1 applies only when legally separate, individual parties have entered into an agreement or conspired.(28) Thus, providers who merge and completely integrate their practices are treated as a single entity and are not subject to Section 1 of the Sherman Act, unless they conspire with another entity.(29) Unlike completely merging, forming a provider network only results in partial integration.(30) As a result, agreements among network providers can violate Section 1 of the Sherman Act because each provider is still an individual party capable of conspiring with another party.(31)


Generally, courts and the antitrust enforcement agencies use a "rule of reason" analysis to determine whether an activity violates the antitrust laws.(32) Under the rule of reason, the courts and antitrust enforcement agencies compare the procompetitive and anticompetitive effects of the parties' agreements and conduct.(33) To apply the rule of reason, a court or enforcement agency generally determines whether the challenged activity injures competition and evaluates the justifications for the restraint.(34) Even if the restraint does result in numerous procompetitive efficiencies, a court must assess whether there are less restrictive alternatives to the restraint.(35) Provided that there is not a feasible, less restrictive alternative to the imposed restraint, a court or enforcement agency must assess whether the restraint's procompetitive effects outweigh the restraint's anticompetitive effects.(36)

However, the courts and enforcement agencies do not use the rule of reason to analyze all alleged antitrust violations. When an activity has a severe anticompetitive effect and is not ancillary to productive integration that is capable of increasing output or lowering prices, the courts and enforcement agencies deem the activity illegal per se and do not perform a rule of reason analysis.(37) The Supreme Court has held that price-fixing,(38) market-allocation agreements,(39) group boycotts(40) and tying arrangements(41) are presumed illegal "without elaborate inquiry as to the precise harm they have caused or the business excuse for their use."(42) In summary, under Section 1 of the Sherman Act, these activities are unlawful, even if the parties had good intentions or the activities benefited consumers.(43)

In applying Section 1 of the Sherman Act to provider networks, courts and antitrust enforcement agencies must distinguish between legitimate joint ventures and illegal cartels.(44) It is necessary to distinguish between these types of joint ventures because the courts and enforcement agencies analyze legitimate joint ventures using the rule of reason,(45) whereas sham ventures are illegal per se.(46) Unlike legitimate joint ventures, sham ventures use horizontal restraints, such as price-fixing or market-allocation agreements, to eliminate competition, without any plausible efficiency justifications.(47) Conversely, legitimate joint ventures create efficiencies or increase competition.(48) Legitimate joint ventures have some substantial level of economic integration.(49) that results in a new product or service, lower prices or greater competition.(50)

Traditionally, courts and enforcement agencies have examined joint ventures to determine whether the parties formed the venture to share financial risks, attain efficiencies or create new products, as opposed to forming a venture to fix prices, reduce output or divide markets to eliminate competition.(51) To determine the network providers' degree of integration, courts and enforcement agencies have generally analyzed each party's capital contribution to the venture, as well as whether each party shares economic risks in the venture.(52) Courts and enforcement agencies have also looked to see if the venture creates a new product or service.(53) Even if the joint venture is sufficiently integrated or creates a new product, courts and enforcement agencies will only allow the joint venture's participants to fix prices or use other horizontal restraints if doing so is reasonably necessary for the venture to operate efficiently.(54)


1. Antitrust Health Care Advancement Act of 1997

On January 9, 1997, House Judiciary Committee Chair Henry Hyde sponsored the Antitrust Health Care Advancement Act of 1997 (AHCAA).(55) This proposed legislation would ease the scrutiny federal antitrust enforcers apply to health care provider networks.(56) Specifically, the bill mandates that antitrust enforcers use the rule of reason to analyze the legitimacy of health care provider networks, as well as the network's horizontal restraints, such as price-fixing or market-allocation agreements.(57) In the past, courts and the enforcement agencies(58) enforced federal antitrust laws in the following manner: if network providers did not create a new product(59) or did not bear a substantial risk of financial loss in the venture, the network's price-fixing activities were illegal per se.(60) However, the proposed legislation does not require network providers to share a substantial financial risk in order for the network's formation and horizontal restraints to be analyzed under the rule of reason.(61) Under the proposed legislation, rule of reason analysis extends to the network providers' price-fixing agreements, even if the network providers are not financially integrated.(62) In summary, the Act requires that federal law enforcers apply rule of reason treatment to providers' collaborative activities that previously would have been per se unlawful.

2. 1996 DOJ and FTC Statements of Antitrust Enforcement Policy in Health Care

Beginning in 1993, to respond to the increase in health care provider integration, the enforcement agencies jointly issued a formal statement of their antitrust enforcement policies(63) regarding health care mergers and joint activities.(64) Specifically, the 1993 Policy Statements addressed the following issues: (1) hospital mergers; (2) hospital joint ventures involving high technology; (3) physicians providing information to purchasers of health care services; (4) hospitals participating in exchanges of price and cost information; (5) health care providers joint-purchasing arrangements; and (6) physician network joint ventures.(65)

In 1994, the enforcement agencies expanded the 1993 Policy Statements and reissued them as the 1994 Department of Justice and Federal Trade Commission Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust.(66) The 1994 Policy Statements included additional sections that address the following issues: (1) hospital joint ventures involving specialized clinical or other expensive health care services; (2) providers collectively providing fee-related information to purchasers of health care services; and (3) multiprovider networks.(67) Most recently, on August 28, 1996, the enforcement agencies released the 1996 Policy Statements, which supersede the 1994 Policy Statements.(68)

a. Explanation of the 1994 Policy Statements

Under the 1994 Policy Statements, federal law enforcers generally deemed joint price-setting arrangements among network providers as illegal per se if the providers did not share a financial risk(69) or did not produce a new product creating substantial efficiencies.(70) Further, the enforcement agencies established "safety zones," which are descriptions of provider networks that the agencies would be extremely unlikely to challenge as being anticompetitive.(71) Under the 1994 Policy Statements, to fall within these safety zones, network providers had to assume a risk of financial loss in their venture or create a new product.(72)

b. Explanation of the 1996 Policy Statements

The 1996 Policy Statements maintain the same safety zones that the agencies established in the 1994 Policy Statements.(73) Unlike the 1994 Policy Statements, though, the 1996 Policy Statements clearly recognize that clinical integration provides strong support for applying the rule of reason to providers' collaborative activities.(74) Hence, the 1996 Policy Statements allow the agencies, rather than require the agencies, to extend rule of reason analysis to network providers' collaborative activities, even if the providers do not share a substantial financial risk of loss in the venture or do not create a new product producing substantial efficiencies.(75) Therefore, the 1996 Policy Statements extend the rule of reason analysis to networks that the enforcement agencies were more likely to deem illegal per se under a literal application of the 1994 Policy Statements.(76)

Consequently, following the 1996 Policy Statements, when nonfinancially integrated providers form a "network" and collaborate on the prices they will charge others, such price-fixing activities and conspiracies are no longer illegal per se.(77) The changes the enforcement agencies made to the 1994 Policy Statements discussing the level of provider integration necessary before the agencies will evaluate the providers' price-fixing agreements using the rule of reason(78) may have a significant effect on the health care industry.(79)


This section of the Note details arguments supporting the revised Policy Statements and the AHCAA. Supporters of these antitrust enforcement developments argue that mandating rule of reason scrutiny is necessary to enable providers to form networks more easily and to compete in the health care industry.(80) Specifically, providers argue that the existing federal laws and the 1994 Policy Statements had the effect of being too restrictive and impeding providers from forming networks.(81) Proponents also contend that the current federal antitrust laws' and the 1994 Policy Statements' emphasis on risk-sharing among network providers had the effect of adversely affecting the quality of care patients received from their providers.(82)

According to those favoring the AHCAA and the changes made to the 1994 Policy Statements, a risk-sharing requirement is unnecessary for efficient antitrust enforcement.(83) Proponents maintain that using the rule of reason to evaluate the collaborative price-setting agreements among nonfinancially integrated network providers is beneficial because such an analysis gives providers an opportunity to prove their network's competitive efficiencies in the market.(84) Additionally, network providers argue that applying rule of reason analysis to their collaborative activities, even if the providers are not financially integrated or producing a new product, is consistent with antitrust enforcement in other industries.(85)


1. Antitrust Enforcement of the Sherman Act and the 1994 Policy Statements Discouraged Providers from Forming Networks

Throughout the United States, doctors, especially those working in solo or small practices, are concerned that they will not remain viable as managed care organizations (MCOs) continue to expand.(86) To maintain access to potential patients,(87) many-doctors have had to contract with managed care plans, thereby agreeing to a reduction in pay and autonomy.(88) In response to the growth and market power of MCOs, many solo practitioners have joined with other providers to form networks that can compete for the MCOs' business.(89) Often, providers who have formed networks find that such an alliance makes it easier to compete for managed care business, to negotiate with the MCOs to get more favorable contract terms and to maintain autonomy with regard to making medical decisions for their patients.(90) Thus, forming a provider network may enable physicians "to maintain their existing practices ... while benefiting from the management and contracting services of the larger group" when negotiating their contracts with insurers and MCOs.(91) Also, in addition to competing for managed care business, provider networks can compete against insurance companies and MCOs by selling their own, network-created, health insurance plans to consumers. …

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