Recent Antitrust Decisions Clarify Healthcare Issues

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• Marshfield Judgment Reversed

In two recent cases, the Department of Justice challenged the operation of physician-hospital organizations (PHO's) under the antitrust laws. Consent Decrees filed September 19, 1995, in Connecticut and Missouri federal courts, precluded anticompetitive conduct alleged to have been committed by the PHO's and began to outline the Antitrust Division's long awaited position on enforcement policy in this area.

While the Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust issued by the Department of Justice and the Federal Trade Commission on September 27, 1994, provide information generally applicable to many health care areas, the Antitrust Division has promised more specific guidance for PHO's. These Consent Decrees appear to be a step in that direction, not only proscribing anticompetitive conduct but also discussing permissible procompetitive behavior.

In the Connecticut case, 98% of the doctors with staff privileges at Danbury hospital belonged to the PHO's independent practice association ("IPA"). The Department of Justice charged that the hospital refused to deal with managed care plans except through the PHO, conditioned the use of the hospital's in-patient services on purchase of the hospital's out-patient services, and restricted the grant of staff privileges to insulate the hospital and the IPA doctors from competition.

In Missouri, the St. Joseph hospital based PHO, consisting of 85% of area physicians, established its own managed care plan. Independently, the hospital and PHO physicians allegedly refused to deal with other managed care plans except through the PHO, preventing competitors from successfully entering the market.

Further, the legitimacy of the IPA structure in both PHO's was questioned because of the apparent absence of financial risk- sharing. Consequently, the Consent Decrees include provisions preventing IPA physicians from agreeing on prices in the future, except under limited circumstances.

The future of PHO's in the managed care world is a hotly debated topic. Clearly, the Department of Justice is taking the position that the continued viability of PHO's will not depend on their ability to prevent competition by engaging in violations of the antitrust laws.

In a decision announced September 10, 1995, the United States Court of Appeals for the 7th Circuit reversed most of the judgment entered earlier this year against the Marshfield Clinic. Confirming what many antitrust lawyers believed, the Court held that health maintenance organizations (HMO's) did not constitute a separate relevant market but competed with preferred provider organizations (PPO's) and traditional indemnity plans in the Marshfield area.

In addition to its treatment of important legal issues, this ruling is significant in its recognition of the evolving competitive environment. Selection of a physician by the individual receiving treatment is becoming rare; that decision is being made by employers and other "third-party payers" who agree to arrange for the individual's medical care; the scope of that agreement continues to expand beyond just the selection of a physician; and, physician services are only one component of the package of medical services or "product" being sold.

Also of critical importance is the Court's discussion of the impact of non-exclusive physician agreements on the antitrust analysis. Specifically, the Court found that a physician who contracts with one managed care plan on a non-exclusive basis is free to and does often contract with other available managed care plans. Consequently, they remain a competitive restraint outside the contracting network.

According to the Court, these factors precluded the physicians in Marshfield from attaining or exercising market power even though a large percentage of physicians were associated together in one group. The presence of these market forces diminished the ability of any group of physicians to control prices, restrict output or exclude competition.

The portion of the judgment left intact was based on the jury finding that Marshfield Clinic and a competing HMO agreed to divide markets on a geographic basis and to refrain from doing business outside of their allocated territory. Like price-fixing, market division agreements between competitors constitute a per se violation of the Sherman Act.

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