Management Consulting/hospital management


competition and the market for physicians services?

Competition has spurred significant changes in the market for physician services in the past several decades.
Many physicians have sought to use innovative joint ventures to provide consumers with higher quality care at lower prices, while others have sought to stifle competition through conduct such as price-fixing and restrictions on allied health professionals.
Reflecting consumer concerns about the quality, availability, and price of physician services, and  highlight the benefits to consumers of competitive markets and vigorous antitrust enforcement.
Two types of provider network joint ventures independent practice associations (IPAs) and physician-hospital organizations (PHOs) - that are part of the rapidly changing marketplace for physician services.
Physician payment arrangements, the messenger model, and physician collective bargaining.
Evaluates the competitive impact of restricting physicians' and allied health professionals' market entry.
The application of antitrust law to certain aspects of the marketplace for physician services, including private antitrust litigation about credentialing, the Agencies' analysis to assess the financial and clinical integration of joint ventures, and the ability of physicians to share and use information relating to quality improvements.
Total spending on physician services increased at an average annual rate of 12 percent from 1970-1993.3 As Figure  reflects, the rate of increase in spending on physician services has varied in the intervening decade, but generally ranged between four and seven percent per year.4 Spending on physician services is projected to increase approximately seven percent per year for the next decade.5 Nevertheless, the percentage of national health spending devoted to physician services is likely to decline given "[t]he continued shift of care to other professional services, negative updates to the Medicare physician payment rates, and raster growth in other sectors such as prescription drugs."6 Although physician services account for only 22 percent of total health care spending, the treatment decisions of physicians profoundly affect both the cost and quality of the other health care services that consumers receive.7
The cost and geographic distribution of physician services affect the accessibility of those services. For several reasons, including higher per capita incomes and economies of scale in complementary health care inputs, there are many more physicians per capita in metropolitan areas than in non-metropolitan and rural areas.8

Provider network joint ventures have the potential to reduce costs and improve quality. Some physicians, however, have responded to changes in the market for physician services by engaging in collusive anticompetitive conduct, seeking collective bargaining rights, and manipulating licensure regulations. The following sections describe these developments and assess their implications for the cost, quality, and availability of health care. Some of these sections contain recommendations to enhance the performance of the physician services market.
A. Provider Network Joint Ventures
antitrust laws' application to health care, and spurred numerous market changes, including the development of managed care. Many physicians responded to managed care's growth by implementing network joint ventures to facilitate contracting with managed care plans. This section focuses on two joint venture types (IPAs and PHOs) and describes their key features and potential efficiencies.9 These joint venture types are not immutable categories; as managed care organizations (MCOs) have reduced reliance on capitation arrangements, some joint ventures have dissolved while others have implemented messenger models or invested in clinical integration.10 These joint ventures also compete with one another to recruit physician-members and to obtain MCO contracts.11
1. IPAs
a. Description of IPAs
IPAs are networks of independent physicians that contract with MCOs and employers.12 IPAs may be organized as sole proprietorships, partnerships, or professional corporations.13 Physician-members generally own IPAs, although individual doctors, hospitals or physician practice management companies also own some IPAs.14 IPAs contract with physicians on both an exclusive and nonexclusive basis.15 IPAs have historically included primary care physicians and specialists, although some commentators have noted a trend toward the formation of single-specialty IPAs.16 Many IPAs are nonprofit.17
IPAs can be integrated (financially, clinically, or both) to varying degrees or not at all. Physicians participating in financially integrated IPAs share financial risks. Clinically integrated IPAs seek to improve the quality of care their member-physicians provide though varied strategies. Physicians who eschew financially or clinically integrating an IPA may use a messenger model to convey price and price-related information to the payor.
Most IPAs emerged in the 1980s as a reaction to managed care.18 Panelists stated that some physicians in smaller practices thought that payors had the upper hand so they formed IPAs to gain bargaining leverage.19 Physicians were also concerned about missing out on managed care contracts, particularly contracts that included capitation provisions. the Health Maintenance Organizations Act of 1973 spurred the growth of IP As by recognizing them as an acceptable form of organized medical practice and providing funds for their development.21 As MCOs have abandoned capitation arrangements with providers, the number of IP As has declined in recent years.22
b. IPA Efficiencies
(i) Costs and Related Efficiencies
Panelists and commentators disagreed about the impact of IP As on the cost of care and whether IP As can create efficiencies. Panelists stated that IP As reduce contracting costs by lowering administrative and search costs for physicians and allowing payors to contract efficiently with pre-existing networks.30 Additionally, they asserted that IP As may generate efficiencies by integrating information technology and billing systems, using their collective purchasing power to receive volume discounts, and performing credentialing of physician-applicants.31
Physicians may use IPAs to obtain increased fees from payors.32 IPAs that engage in payor contracting and are not integrated run the risk of antitrust liability if they facilitate price agreements among their members.33 IPAs also create an additional layer of administration, which can increase administrative costs - although physician-members in the IPA have an incentive to minimize these expenses.34
Financial integration creates an incentive for physician-members to provide "quality care at the most cost effective price."35 Another panelist suggested that "pay for performance" (P4P) strategies,

P4P strategies have been adopted on an industry-wide basis in California.37 One study found that IPAs in California use 35-50 percent more care management strategies than physician organizations in other parts of the country.38 The study identified two factors that strongly correlated with this difference: IP As in California have greater exposure to external incentives to improve services and greater access to information technology than non-Californian IPAs.39
Clinical integration can reduce the cost of health care and create efficiencies. One panelist stated physicians in clinically integrated IP As can do a better job monitoring and managing patients with chronic illnesses.40 Such patients typically comprise five percent of the patient population but generate between 60 and 80 percent of health care costs.41 Another panelist stated that clinical integration allows physicians to share information more effectively.42 Two panelists reported that some IP As employ care management teams to coordinate patient care.43 On the other hand, commentators noted that clinical integration is very expensive, and cautioned that physicians may prove unwilling to make the necessary investment.44
(ii) Quality of Care and Related Efficiencies
Some have stated that financial integration provides physicians with incentives to improve quality of care.45 Nevertheless, many physicians state that financial incentives including capitation arrangements reduce quality of care.46 One commentator observed that "[t]he degree to which capitation encourages organizations to compete on quality and efficiency depends on the market context within which it is used."47
Panelists stated that clinical integration can improve quality of care.48 One panelist observed that clinically integrated IPAs can "provide technology, clinical, and population management programs to improve patient care and outcomes."49 A capitated IPA that implemented certain clinical integration initiatives "exerted a dramatic impact on patterns of utilization and expenditure," noted one commentator.50 One study found that, although many IPAs have implemented organized care management programs to improve the quality of care for their patients, the use of such processes is still "relatively uncommon."51 Some experts contend that an integrated, or "closely knit" IPA may provide a good environment for testing whether quality programs can deliver hoped-for results.52
2. PHOs
a. Description of PHOs
A PHO is a joint venture between a hospital and physicians who generally have admitting privileges at the hospital.53 Physician and hospital members of a PHO sometimes contract jointly with MCOs for providing care to a population of patients. PHOs typically vary along four parameters: exclusivity, integration, ownership/control, and organizational base.54
First, PHOs can accept hospital medical staff on an exclusive or nonexclusive basis. Open PHOs allow most medical staff to join and have minimum credentialing requirements; specialists usually dominate these PHOs.55 Closed PHOs limit physician membership by practice profiling or specialty type and are more likely to form exclusive relationships with physicians.56 PHOs that employ practice profiling seek to use objective practice data to determine which physicians they should invite to join the PHO. PHOs that recruit physician-members based on specialty type reportedly focus on the number of patients that the physician-member will see.
Second, PHOs are integrated (whether financially, clinically, or both) to varying degrees or not at all.59 Many PHOs employ financial risk-sharing arrangements with physician-members, such as partial or full-risk contracts, although PHOs, as a whole, appear to be moving away from full-risk contracts.60
Third, ownership, control, and capital structure vary. Physician-members and hospitals jointly own most PHOs, but some hospitals are sole owners.61 Although hospitals generally provide a majority of initial capitalization, some PHOs strive for equal physician-hospital ownership.62 Physicians may own interests in a PHO individually or through an entity such as an IPA.63 PHOs can take the form of a limited liability company, a general partnership, a nonprofit corporation, or a general business corporation.64
Finally, PHOs can have different organizational bases. PHOs can have a hospital, multiple hospitals, or a hospital system as their organizational base.65 Commentators often describe PHOs that involve multiple hospitals or joint ventures between multiple PHOs as super-PHOs.66
PHOs emerged in the 1980s largely as "a defensive provider reaction to increasing managed care penetration."67 PHOs subsequently became the most common form of vertical integration among physicians and hospitals.68 Approximately 60 percent of PHOs are nonprofit and 40 percent are for-profit.69 In 2002, 74 percent of PHOs were open and 26 percent were closed.70
Panelists noted that PHOs have changed substantially in recent years.71 Many PHOs initially engaged in full or partial risk contracting. As insurers and providers abandoned capitated payment arrangements in favor of preferred provider organizations (PPOs) and point of service plans (POS plans), many PHOs scrambled to identify a new role to fill.72 Numerous PHOs have dissolved or failed in the last eight years.73 One antitrust lawyer panelist stated that his recent experience with PHOs primarily involves converting them into messenger model networks.74 PHOs that engage in payor contracting and are not integrated run the risk of antitrust liability if they facilitate price agreements among their members.75
b. PHO Efficiencies
(i) Costs and Related Efficiencies
PHOs can reduce costs or otherwise result in efficiencies. Some contend that PHOs can reduce the cost of negotiating contracts between payors and physicians and hospitals by offering "one-stop shopping."76 As such, PHOs may enable payors to contract more efficiently with physicians with whom they have no existing contractual arrangements. PHOs could also allow providers to contract directly with self-insured employers and certain Medicare and Medicaid risk or managed contracts.77
PHOs may deliver economies of scale by sharing administrative and integration costs among physician-members and hospitals.78 They further said that PHOs may result in more efficient deployment of physician resources, because these arrangements allow physician-members to concentrate on practicing medicine.79 Finally, they added that PHOs may reduce legal expenses for hospitals and physicians by enabling them to "present a unified front and a common defense in the event of malpractice claims."80
The primary advantage for physicians and hospitals in forming a PHO is the increased bargaining power gained from "presenting a united front to payers."81 They assert that providers can use this additional bargaining power to obtain higher prices from payors, particularly if providers "raise barriers to entry by forming exclusive relationships."82 A panelist representing a health insurance plan stated that PHOs have given providers "greater negotiation leverage" and "contributed to some of the runaway inflation in health care costs."83
(ii) Quality of Care and Related Efficiencies
PHOs CAN  improve quality of care. Some stated that PHOs can significantly improve quality by coordinating patient care delivered to consumers in the doctor's office and the hospital.89 They also stated that PHOs can implement shared information systems.90 As Chapter 1 reflects, many commentators state such investments in information infrastructures are a necessary first step in improving quality of care.
PHO CAN financially integrated PHOs can reduce costs and improve quality by clinically integrating.91 This panelist also suggested that physicians practicing individually or in small groups that are not financially or clinically integrated have limited ability to improve quality, reduce costs, and capture related efficiencies.92 The same panelist suggested that physicians practicing in large groups do not readily cooperate with one another, and hospitals are the most likely entities to implement programs to improve health care quality and reduce costs.93
B. Physician Compensation
1. Physician Payment Arrangements
Insurers and others typically pay physicians on an FFS, salaried, or capitated basis.97 In FFS payment an insurer directly pays an individual provider based on the number and type of services that provider performs.98 Some state that FFS improves quality by rewarding physicians who do more for their patients.99 Other commentators are concerned that FFS payment creates incentives for physicians to over-provide healthcare resources because a physician's income is directly related to the volume and intensity of services rendered.100
Capitation involves a physician assuming responsibility for a certain number of patients and receiving a fixed amount for each of these patients regardless of whether those patients seek care.101 Although some state that capitation reduces the incentive to provide excessive care,102 others are concerned that capitation creates an incentive for physicians to increase the number of patients for whom they provide care and simultaneously decrease the services they actually provide.103
Physicians employed by the government, hospitals, or medical groups typically receive a salary. medical groups or organizations can align more carefully the incentives of the physician with those of the group by paying salaries.105 Others are concerned that such arrangements also create an incentive for physicians to decrease the number of patients they are responsible for and the services they provide.106
Medicare reimburses physicians on an FFS basis, using the resource-based relative value scale (RBRVS).107 The Centers for Medicare & Medicaid Services determine the RBRVS based on the cost of physician labor, practice overheads, materials, and liability insurance. The resulting figure is adjusted for geographical differences and is updated annually.108 Many private payors and MCOs base their payment of physicians on this schedule.109
2. Messenger Model
a. Description of the Messenger Model
The messenger model is an arrangement that allows contracting between providers and payors, while avoiding price-fixing among competing providers.110 Health Care Statement 9 provides that messenger models "can be organized and operated in a variety of ways."111 One panelist described the traditional messenger model as one involving a payor submitting fee schedules to an agent or third party, who transmits this schedule to the network physicians.112 This panelist elaborated that each physician decides individually whether to accept or reject the fee schedule and the messenger or agent communicates those decisions to the payor.113 The payor may then initiate another round of negotiations with the network physicians or enter into contracts with those physicians who accepted its offer, observed the panelist.114
variation that involves the messenger conveying to payors information obtained individually from providers about the prices or price-related terms that those providers are willing to accept.115 The messenger may aggregate this information into a comprehensive schedule and market the schedule to payors, and may receive authority from individual physicians to accept contractual offers on their behalf, commentators have noted.116 They also stated that agents must convey offers that do not meet a physician's preferred rate to those physicians, because they are not empowered to reject offers.117 Agents also may help physicians understand the contracts offered, for example, by providing objective or empirical information about the terms of an offer.118 Messenger models can be used creatively to facilitate contracting between payors and providers, so long as they do not facilitate anticompetitive agreements on price or other terms.119
b. Messenger Model Efficiencies and Antitrust Concerns
differing views on whether the messenger model can reduce costs for providers and payors. Some stated that the messenger model simplifies contracting and contract administration, thereby reducing physicians' and payors' transaction costs.122 Two panelists observed that an agent can significantly reduce physicians' transaction costs by educating them about the terms of a contract.123 Panelists also explained that a properly implemented messenger model cannot result in higher prices for payors, because it is incapable of creating countervailing market power for physicians.124 Finally, one panelist observed that networks risk incurring administration costs for limited gain if only a minority of network physicians accept a payor's offer.125
the messenger model is not a viable business strategy and can increase costs for providers and payors.126 contended that such arrangements have high administrative costs because they are complex to implement and difficult to maintain.127 They observed that agents frequently cannot determine the antitrust implications of a particular course of conduct and therefore require expensive legal advice.128 Others noted that certain messenger model variations actually can prolong contract negotiations and increase provider and payor transaction costs.129
3. Physician Collective Bargaining
Some physicians have lobbied heavily for statutory or other legal changes that would enable independent physicians to bargain collectively by exempting them from the antitrust laws.133 Those who support such exemptions contend that physicians need to bargain collectively to exercise countervailing market power against payors.134 The Agencies have consistently opposed such exemptions because they are likely to harm consumers by increasing costs without improving quality of care. This section describes the legal landscape for physician collective bargaining, discusses the competitive impact of countervailing power, and considers the impact of collective bargaining on the cost and quality of health care.
a. Legal Landscape
Both labor and antitrust laws affect the ability of workers to bargain collectively.135 Antitrust law prohibits competitors from price-fixing and engaging in group boycotts. Labor law provides exemptions from antitrust liability under certain circumstances.136 Pursuant to the National Labor Relations Act (NLRA), employed physicians are generally allowed to unionize and bargain collectively.137 Physicians who are self-employed or independent contractors generally may not collectively bargain without violating the antitrust laws.138 A few states have passed legislation that exempts self-employed physicians from the antitrust laws and provides for state regulation of physician collective bargaining.139
Until recently, physician interest in unionization and collective bargaining was limited. Organized medicine long opposed physician unions.142 According to one panelist, physicians began making more concerted efforts to unionize and bargain collectively in the 1970's in response to the emergence of large health care organizations and changes in physician fees.143 The same panelist noted that many physicians believed that organized medicine was failing to respond to these changes.144
The AMA remained opposed to unionization until 1999 when it approved the formation of Physicians for Responsible Negotiations (PRN).145 Initially, PRN was "an AMA-affiliated labor organization dedicated to representing physicians in collective bargaining with employers."
b. Countervailing Power
Some physicians claim they need countervailing market power to offset the market power they allege health care insurers possess. They contend that monopsony power enables health plans to approach "contract negotiations with a 'take-it-or-leave-it' attitude that puts physicians in the untenable position of accepting inappropriate contract terms."150 The AMA asserts that these terms include unreasonably low fees and provisions that may harm quality of care.151
Some participants asserted that there are numerous markets in which health care insurers exercise monopsony power.152 Others disagreed, however, arguing that physicians, rather than insurers, often exercise market power.153 Although there may be disparities in bargaining position between some payors and some providers, the available evidence does not indicate that there is a monopsony power problem in most health care markets.154
A proponent of countervailing power theory stated that providers need this power if health care insurers exercise monopsony power.155 Nonetheless, those physicians seeking to bargain collectively have sought blanket exemptions from the antitrust laws. Several speakers opposed such exemptions.156 As one panelist stated, "it's clear that a blanket exemption to the antitrust laws for the purpose of allowing the creation of countervailing power is inappropriate."157 Another speaker similarly testified that allowing providers to acquire countervailing market power is unnecessary, impossible to implement, and bad public policy.158
The Agencies believe that antitrust enforcement to prevent the unlawful acquisition or exercise of monopsony power by insurers is a better solution than allowing providers to exercise countervailing power. Joel Klein, the Assistant Attorney General in 1999, noted that a "better approach [than allowing countervailing market power] is to empower consumers by encouraging price competition, opening the flow of accurate, meaningful information to consumers, and ensuring effective antitrust enforcement both with regard to buyers (health care insurance plans) and sellers (health care professionals) of provider services."159
Indeed, even if we assume physicians confront a monopsonist health plan that neither unlawfully acquired nor unlawfully exercised that power, authorizing physicians to engage in collusive conduct will not serve the interests of consumers.163 A health insurer with monopsony power is likely to impose quantity restrictions that will increase prices for consumers. If providers were to acquire countervailing market power, the result is likely to be further quantity restrictions - increasing the prices paid by consumers above those already imposed by the monopsonist.164
Providers that obtain countervailing market power also likely will cause competitive harm to other market participants that do not possess monopsony power. One panelist suggested, for example, that physicians may use their countervailing market power to disadvantage non-physician competitors, such as nurse midwives and nurse anesthetists, or health care insurers other than the monopsonist health care insurer.165
The Agencies believe that statutory or other legal changes allowing countervailing market power are ill-advised and unnecessary. To the extent monopsony power exists in some markets, the Agencies and state Attorneys General should address such matters on a case-by-case basis.
c. Physician Collective Bargaining Harms Consumers
The Agencies have consistently opposed the creation of antitrust exemptions for physician collective bargaining. In congressional testimony, the Agencies have identified various ways in which physician collective bargaining likely will harm consumers and other participants in the health care system.166
These harms include: (i) consumers and employers facing higher prices for health insurance coverage; (ii) consumers facing higher out-of-pocket expenses as copayments and other unreimbursed expenses increase; (iii) consumers receiving reduced benefits as costs increase; (iv) senior citizens participating in Medicare HMOs receiving reduced benefits; (v) the federal government paying more for health coverage for its employees; (vi) state and local governments incurring higher costs to provide health benefits to their employees; (vii) state Medicaid programs incurring higher costs to provide health benefits, forcing them to increase taxes, cut benefits, or reduce the number of beneficiaries; and (viii) the number of uninsured increasing due to more costly health insurance. The balance of this section focuses on the impact of physician collective bargaining on cost and quality.
Collective bargaining is likely to increase substantially the price of health care services, because providers collectively are likely to demand higher fees and refuse to negotiate individually.167 The Agencies have extensive experience with the consequences of alleged physician collective bargaining. For example, the Commission alleged approximately 500 physicians and 15 hospitals that comprised the vast majority of providers covering a large area of southern Georgia conspired to fix prices and not to deal with payors on an individual basis.168 According to the complaint, respondents restrained competition among the providers and forced payors to pay higher prices to its providers, thereby increasing the cost of healthcare for consumers.169
C. Licensure, Market Entry, and Practice Restrictions
Licensure impacts marketplace competition. Through licensure requirements, states may restrict market entry by physicians and allied health professionals (AHPs), and further limit the scope of authorized practice.179 Most state licensing boards are primarily composed of licensed providers, although some states require broader representation.180 The Commission recently initiated administrative litigation against a state licensing board, alleging that it had taken steps unlawfully to restrict AHPs from obtaining direct access to consumers.181
Many states have only limited or no reciprocity for licensing out-of-state physicians and AHPs seeking to practice in-state.182 A number of state licensing boards have also sought to restrict the practice of telemedicine.
1. Mechanisms to Regulate Physician and AHP Market Entry
The states have traditionally assumed responsibility for regulating physicians and AHPs using three distinct mechanisms: (i) occupational licensing or licensure; (ii) certification; and (iii) registration.183 Licensure, the most restrictive method of regulation, typically involves a mandatory system of state-imposed standards that practitioners must meet to practice a given profession.184 Autonomous boards, comprised largely of members of the regulated profession, determine applicants' eligibility requirements, develop standards of practice, and enforce disciplinary actions.185 Physicians and other licensed professionals must satisfy these requirements to practice within the state.

Registration is the least restrictive mechanism for regulating health care professionals because individuals simply must file their name, address, and qualifications with a government agency to practice.190 Professionals generally are not required to meet educational or experience requirements to practice under a registration system.191
a. Regulation's Impact on Cost, Quality, and Access
Commentators state that limits on entry increase health care costs.192 However, commentators and panelists disagreed on the effects of licensing on quality of care. Several commentators contend that a state-enforced minimum quality standard is an efficient response to the "limited information patients have about quality and the relatively high costs of obtaining information."193 Another commentator noted that "[o]ccupational licensure creates a greater incentive for individuals to invest in more occupation-specific human capital because they will be more able to recoup the full returns to their investment if they need not face low-quality substitutes for their services."194 Others argue that licensure may not improve quality of care because the requirements do not correspond to the factors that influence quality.195 Moreover, some maintain that licensure may decrease the overall quality of care that consumers receive by increasing prices, which can cause some consumers to forego care.196
b. Certification's Impact on Cost, Quality, and Access
Some commentators state that certification, rather than licensure, is a better way to protect quality, increase consumer choice, broaden access to care, and enhance market competition.203 They state that providing consumers with a choice of certified or uncertified providers allows consumers to receive care they might forego under a licensure regime.204 Some commentators also contend that certification spurs competition and innovation by creating increased opportunities for market entry.205
Others argue, however, that certification does not adequately protect consumers from low quality care and suggest that consumers may not factor in certain externalities when they select uncertified health care providers..
2. AHPs and Provider Control of Licensure Boards
Most state statutes delegate authority for establishing and enforcing licensure standards to state Boards of Medical Examiners.208 These boards typically promulgate regulations governing physicians and related AHPs.209 Because most board members are industry participants with economic interests at stake, the potential exists for the board to make decisions that are contrary to consumers' interests.210 Panelists and commentators have identified varying ways in which provider-controlled state-based licensure boards can limit competition and harm consumers.211
3. State Restrictions on the Interstate Practice of Telemedicine
Interstate communications between health professionals historically have not been subject to licensing requirements.221 As the Department of Health and Human Services (HHS) noted, "the consulted physician or other health professional [was] regarded either as practicing medicine only in his or her home state or as exempt from licensure under the 'consultation exception' in the patient's state."222 Developments in technology have facilitated the practice of telemedicine, which involves the use of electronic communication and information technologies to provide or support clinical care at a distance.223
Telemedicine can benefit consumers in at least three ways.224 First, telemedicine can give physicians and other health care professionals the ability to provide high quality medical services to rural or other underserved areas.225
Second, telemedicine can significantly reduce a range of health-care-related costs, including travel expenses and costs arising from the duplication of services, technologies, and specialists.226 With telemedicine, for example, a single pathologist can provide services to a number of locations. Finally, telemedicine networks can enhance training and education in new technologies for health care professionals, particularly for those located in rural areas.227 After surveying empirical studies on the costs and benefits of telemedicine, HHS observed "there may be real cost savings to be realized from telemedicine."228
Telemedicine can harm consumers in at least four ways. First, telemedicine can subject consumers to substandard care, possibly from unlicensed providers.229 Individual states have a legitimate interest in ensuring that out-of-state health professionals meet the same standards as professionals licensed within the state.230 Second, providers could use telemedicine to perpetrate fraud against consumers.231 Third, "[t]elemedicine consultations might involve personal medical records being shipped over computer lines to other regions of the country," creating privacy and confidentiality concerns.232 Finally, "[t]here is significant uncertainty regarding whether malpractice insurance policies cover services provided by telemedicine."233
This section examines the application of competition law to the marketplace for physician services. It first discusses the significance of private antitrust litigation involving physician privileges and credentialing. The section then discusses the Agencies' analysis of provider network joint ventures, focusing on market developments in financial and clinical integration. Finally, this section addresses the ability of physicians to share and use quality-related information and the application of the state action doctrine to licensure and physician collective bargaining.
A. Private Litigation Involving Physician Privileges and Credentialing
The most common type of private healthcare-related antitrust litigation raises physician privilege or credentialing issues.241 These cases usually involve physicians asserting that a hospital and/or its physician peer review committee denied them privileges for anticompetitive reasons.242 Physicians with hospital privileges may also sue hospitals and/or their peer review committee because these privileges have been revoked or curtailed.
B. Provider Network Joint Ventures
The antitrust analysis of joint ventures and multi-provider networks has received considerable attention from the Agencies and commentators in recent years.248 This issue is not unique to health care; as the Commission recently stated, "no analytical exercise is more important to U.S. competition policy than defining the bounds of acceptable cooperation between direct rivals."249 As noted previously, the Agencies have brought numerous enforcement actions against physician networks, and also issued statements, advisory opinions, and business review letters on this subject.
1. The Agencies' Antitrust Analysis of Provider Network Joint Ventures
Health Care Statement 8 describes how the Agencies evaluate physician network joint ventures. This statement sets forth antitrust safety zones for exclusive and non-exclusive physician network joint ventures that, absent extraordinary circumstances, the Agencies are unlikely to challenge. Statement 8 then outlines the analytical framework for joint ventures that fall outside the antitrust safety zones. It states that like transactions in other sectors of the economy, "physician network joint ventures will be analyzed under the rule of reason, and will not be viewed as per se illegal, if the physicians' integration through the network is likely to produce significant efficiencies that benefit consumers, and any price agreements (or other agreements that would otherwise be per se illegal) by the network physicians are reasonably necessary to realize those efficiencies."250
This statement further notes that financial risk-sharing and clinical integration may involve sufficient integration to demonstrate that the venture is likely to produce significant efficiencies. Finally, Statement 8 outlines the Agencies' rule of reason analytical framework and applies the principles set forth in the statement to seven examples of physician network joint ventures.251
2. Financial Integration
Statement 8 notes that financial risk sharing can generate significant efficiencies by providing physicians with incentives to cooperate in controlling the cost and improving the quality of services they render. It provides examples of arrangements through which participants in a physician network joint venture can share substantial financial risk, including capitation, global fee arrangements, fee-withholds, and cost or utilization-based bonuses or penalties.252 Statement 8 also establishes that only those physician networks that share substantial financial risk can qualify for an antitrust safety zone on the basis of their financial integration.
the Health Care Statements acknowledge, financing and delivery arrangements for health care have changed substantially over the past several decades.253 Some commentators and panelists state P4P arrangements may have important procompetitive benefits for consumers.254 Chapters 1 and 3 describe these arrangements and consider their potential to lower costs and increase quality.
3. Clinical Integration
Health Care Statement 8 notes that clinical integration can be evidenced by a "network implementing an active and ongoing program to evaluate and modify practice patterns by the network's physician participants and create a high degree of interdependence and cooperation among the physicians to control costs and ensure quality."255
This statement identifies three arrangements that a clinical integration program might include: (i) establishing mechanisms to monitor and control utilization of health care services that are designed to control costs and assure quality of care; (ii) selectively choosing network physicians who are likely to further these efficiency objectives; and (iii) the significant investment of capital, both monetary and human, in the necessary infrastructure and capability to realize the claimed efficiencies.

Market for Physician Services
• Structure of Physician Services Market
– Number of Physicians
• Increasing both absolutely and relative to
• Most in office-based practice
• Increasing specialization over time
– Decline in general/family practitioners as share of total
» Recent flattening/small upward trend
– Much greater specialization in US than other countries
• Most hospital-based are residents/interns
• Small numbers in:
– Other professional (research, teaching)
– Federal (mostly hospital based)
– Significant shift towards group practice over time
• Fewer physicians in individual practice
• Average size of group practice growing
• Increasing number of multi-specialty groups and
physicians in multi-specialty groups
– Tradeoffs between larger group practices and
increased patient travel time
– Other advantages to larger group practice:
• Informational economies
• Reduced uncertainty/risk
• Better bargaining power
– Measurement difficult
• Differences in services provided by individual vs.
small group vs. large group practice
• Differences in inputs for larger group practices vs. other practices
– E.g. more likely to have own testing facilities
• Differences in contracting arrangements
– E.g. group practices under HMO contract
• Differences in mix of personnel used to produce services
– E.g. nurses, physician assistants more common in larger groups
• Self-selection of physicians into group practice
• Typically use some measure of gross revenues or
number of office visits as measure of output
– Alternative approaches to assessing
• Multivariate analysis; “Survivor” analysis
– Early research suggested small economies of
scale in production of physician services
– Physicians in group practice produce about 5 percent more
patient visits than those in individual practice
– Larger economies of scale from group practice
» 22 percent more output than individual practice
» Significant increase in output with increase in use of nonphysician
professional staff (physician assts.)
» Over-utilization of most professional staff (except LPNs)
•  estimate that lowest cost
practice size is just over 5 physicians
•  estimate elasticity of costs
with respect to output as 0.6
•  find no differences
between individual and group practice physicians
– Survivor analyses
• Incorporate patient travel times implicitly
• Findings generally imply economies of scale
–  find largest group
practices most efficient
Improved Quality 15%
Better Lifestyle 20%
Profit from Ancillary Services 26%
Leverage with Hospitals 23%
Economies of Scale 46%
Leverage with Health Plans 81%
Group Physician
Respondents (74)
Failure of other groups 11%
Primary Care – Specialist Conflict 14%
Failure to manage costs of capitated patients 12%
Regulatory Costs for Capitated Patients 26%
Lack of Physician Leadership 24%
Lack Capital, IT, physician investment in group 30%
Lack of Cooperation 49%
Group Physician
Respondents (74)
Barriers to Large Group Practice
Failure of other groups 11%
Primary Care – Specialist Conflict 14%
Failure to manage costs of capitated patients 12%
Regulatory Costs for Capitated Patients 26%
Lack of Physician Leadership 24%
Lack Capital, IT, physician investment in group 30%
Lack of Cooperation 49%
Group Physician
Respondents (74)

• Entry Barriers?
• Medical Education requirements
– Continued review of medical schools lowered approved
number to 69 by 1944
» Resulted in significant decline in number of physicians
per capita
– As standards changed, existing physicians grandfathered in
– AMA members still play significant role in accreditation
• Increased training requirements
– Lengthy education process
» Undergraduate degree
» 4 years medical school
» 3 years internship and residency; longer for specialists
– Continuing medical education requirements

– Additional restrictions on competition
• State practice guidelines restrict ability of other medical
personnel to provide various services
– E.g. physician assistants, registered nurses
– Limits availability of substitutes
• Restrictions on advertising
– In place until 1982 Supreme Court decision
– Supposed to prevent misleading, deceptive advertising and anticompetitive
effects of advertising
– Reduces availability of information on price and non-price factors
associated with physician services
• Other anti-competitive practices
– Sanctions for various activities - e.g. physician participation in HMO
– Citizenship requirements
– Opposition to relicensure, capitated plans, professional standards
review boards, dissemination of information on physicians etc.
• Relaxation of rules on foreign medical graduates in 1960s
– Significant rise in number of FMGs from just over 15,000 in 1960
(6.1%) to almost 77,000 by 1975 (21.0%)
– Subsequent tightening of restrictions with Health professional
Educational Assistance Act of 1976 stabilized FMG share of
physicians (23.4% in 2001)
• Elimination of restrictions on physician advertising
• Relaxing of state practice guidelines on PA, RN performance
of various services
• Increased dissemination of information on physicians
• Increased role of managed care organizations, utilization

• Monopolistic Competition
– Assumes:
• No significant entry barriers
• Differentiated but highly substitutable products
– Perceived quality, location, etc.
• Entry/exit of others affects demand faced by individual
– Implies:
• some market power (P>MC)
– Partly result of asymmetric information
• Normal profits
• Average cost above minimum
– Presence of significant entry barriers
• Greater market power
• Ability to earn extra-normal profits
• Monopolistic Competition
– Estimates of physician-level demand
consistent with monopolistic competition
• McLean (1980): -1.75 to -2.16
• Lee and Hadley (1981): -2.80 to -5.07
• McCarthy (1985): -3.07 to -3.32
– Some ability to price discriminate
• Consistent with observed evidence
– Entry barriers and market power
• Some evidence of higher internal rate of return to
medical education than college education
– Hansen (1964): physicians IRR 16% higher than male
college graduate 1949; 10% higher in 1956
• McGuire (2000) model:
– Increase in competition:
• Implies NB(O) increases
– Price falls, quantity supplied by individual physician falls, and
physician income falls
– Impact of price regulation
• Reduces price physician receives below what he/she could
previously charge
• NB(O) hasn’t changed
– Physician will increase quantity so as to maximize income under
regulated price
– Impact of coinsurance
• Since patient pays less of cost out of pocket, physician can
again increase quantity (loss of consumer surplus smaller if
patient only pays part of cost)

• Supplier Induced Demand
– relies on asymmetric information,
• Physician better able to diagnose illness, better informed
about quantity and quality of care needed to treat
• Patient places trust in physician, reluctant to switch providers
given limited information on potential substitutes
• Physician’s financial interests can create conflict of interest
– Exacerbated by moral hazard induced by comprehensive
insurance coverage
– “Target Income” model
• Related model implying physician creates demand for services
so as to reach “target” income level
– Impact of increase in supply of physicians
• Demand for individual physician’s services falls
• Physician induces demand
• Empirical evidence concerning SID:
– Difficult to determine causality
– Early research by Fuchs and others provided strong
support for SID:
• Fuchs (1978): 10 percent increase in number of surgeons per
capita increased per capita surgery rates by 3 percent and
prices increased
– 7 percent decline in surgical workload per surgeon, smaller drop
in income
• Cromwell and Mitchell (1986) – similar relationship, but
smaller impact (10 percent rise increased surgeries by 0.9
percent, elective surgeries by 1.3 percent)
• Rossiter and Wilensky (1983, 1984) – look separately at
patient initiated vs. physician initiated visits
– Statistically significant but small impact of increased physician
availability on physician initiated visits (elasticity <0.1)
• Empirical evidence concerning SID:
• Dranove and Wehner (1994) focused on OB/GYN and
– Find positive correlation between number of OB/GYNs and per
capita childbirths (as would be expected)
– Following approach used in prior studies, estimate a significant
SID effect
– Conclude that approach is flawed given that pregnancies are
determined exogenously and have no relationship to OB/GYN
availability or incomes
• Gruber and Owings (1996) look at C-sections vs. natural
childbirths, given greater profitability of C-section
– Find that drop in fertility accompanied by rise in number of Csections
– Attribute impact to SID; conclude that obstetricians regain 10
percent of lost income by increasing use of c-sections

– Multiple studies examine impact of physician
ownership of diagnostic equipment and other facilities
• Hillman et al. (1990) – use of x-ray imaging services among
those who own equipment vs. those who refer to other
– Owners four times more likely to require x-ray
– Owners charge prices 4-7 times higher
• Mitchell and Sass (1995) – ownership of physical therapy
facilities by physicians
– Physician owned receive 50 percent more referrals than nonphysician
owned facilities
– No differences in quality of services provided by ownership type
• Concern about potential for abuse resulted in Federal
legislation prohibiting physicians from referring Medicare and
Medicaid patients to facilities in which they have ownership
interest; similar policies in many states
– Multiple studies on impact of physician fee regulation
(e.g. Medicare payments) on utilization
• Rice (1983) – change in relative fees paid to urban and nonurban
physicians in Colorado under Medicare
– Higher fees reduced services provided while lower fees
increased services
– 10% drop in Medicare reimbursement increased intensity of
services by over 6 percent
• Yip (1998) – impact of Medicare fee reductions in New York
state on quantity of services provided by thoracic surgeons
– Reduced fees led to increased volume for both Medicare and
privately insured patients
– Reductions in income resulting from reduced prices led to
increase in volume of services provided
– Increased volume recouped about 70% of income lost due to fee
– Change in payment methods:
• Hemenway et al. (1990) – change in payment scheme from
hourly rate to share of charges generated
– Significant increases in number of patients, charges per patient,
total charges, number of x-rays and laboratory tests following
change in payment scheme
– Increase in physician hours
– Target income
• Rizzo and Blumenthal (1996) – surveys of physicians
comparing desired and actual incomes
– Greater gap between actual and desired income resulted in
higher price increases

• Advertising and Demand for Physician Services
– State practice codes prohibited advertising for
physician services for many years
• Concerns about deceptive and misleading advertising and its
adverse impact on quality of care, health outcomes
• Potential to raise demand and prices
• Potential to create market power by differentiating products
that are not that different
• Potential to create entry barriers
– Prohibitions struck down by Supreme Court in 1982
• Potential to increase competition by providing information
about prices, characteristics, and quality of different providers’
• Potential to reduce entry barriers by providing new entrants
greater opportunity to inform consumers about their services
– Empirical Evidence
• Descriptive evidence on substantial price variation for same
physician services in given geographic market implies
imperfect information and potential for advertising to improve
information, competition
• Several studies of optometrists services (Benham, 1972;
Benham and Benham 1975; Kwoka 1984; Haas-Wilson 1986)
where restrictions on advertising were less uniform
– Prices lower in markets where advertising was allowed –
estimated 5-25 percent
» Largest reductions among those who did advertise, but also
lower prices among those who did not advertise but who
were located in markets where advertising allowed
– Average size greater in markets where advertising allowed,
suggesting advertising allowed realization of economies of scale
– Mixed evidence on impact of advertising on quality of services
– Empirical Evidence
• Less evidence on advertising among physicians
– Rizzo and Zeckhauser (1992)
» Primary care physicians
» Find that advertising increased prices and reduced output
» Suggests that advertising reduced elasticity of demand for
physician services
» Found also that advertising increased quality of services (as
measured by average time spent with patient)
» Quality increased by more than price, implying that quality
adjusted price fell
» No clear conclusion
– Advertising among physicians still relatively limited
• Tends to focus on limited services, new technologies (e.g.
laser eye surgery, plastic surgery, some diagnostic tests)
which tend to be less covered by insurance
• Geographic Variation in Utilization
– Multiple determinants of observed differences:
• Demand side factors:
– Differences in health status
– Differences in price, income, and insurance coverage
– Unobserved differences in preferences
• Supply side factors:
– Differences in costs of producing
– Supplier Induced Demand
– Diffusion of information (training, continuing education, etc)
– Diffusion of new technologies
– Most empirical work based on “Physician Practice
Style” hypothesis
• Control for differences in population characteristics that affect
demand and key factors affecting supply
• Emphasizes differences due to training, interaction with
colleagues, “herd” behavior

– Empirical Evidence:
• Some evidence that provision of information and utilization
review affect utilization rates
– Impact tends to be small
• Mixed evidence on impact of population characteristics
– Some studies find that socioeconomic/demographic factors
explain little of observed differences, implying that practice style
explains most
– Others find that much of difference accounted for by demand
side factors, implying little impact of practice style
• Multivariate Analyses
– Phelps and Parente (1990) - basic demand/supply side factors
explain 40-75 percent of variation; remainder likely due to
differences in practice style
» Estimate welfare loss in 1993 of $33 billion

– Policy Options:
• Utilization review – targets provision of unnecessary care
• Continuing medical education – aims to improve physician
information about best practices
• Practice Guidelines – focus on use of evidence based
– e.g. for guidelines developed by partnership
between Agency for Healthcare Research and Quality, American
Medical Association, and American Association of Health Plans
• Elimination of “local standard” in malpractice litigation
• Medical Malpractice and Defensive Medicine
– Highly contentious issue
– Some argue that US faces medical malpractice “crisis”
• Contributes to rapid increases in health care costs
– Increased premiums
– Defensive medicine
• Reduced access to care
– Physicians facing high malpractice insurance premiums leave
• Prompts calls for “tort reform”
– Others argue that “crisis” doesn’t exist or is overstated
• Small component of total health care costs
• Malpractice liability serves important function
• No need for major reform
– Malpractice “Crisis” (Thorpe, 2004):
• Defined by rapid increases in medical malpractice insurance
• US in third medical malpractice “crisis”
– Mid-1970s
» increased frequency of claims, higher awards led many
insurers to leave market
» Some entry of new physician owned malpractice insurance
– 1980s
» Premium increases spurred states to adopt reforms to limit
insurance company costs (e.g. caps on damages)
– Currently:
» Combination of significant increases in premiums and drop
in number of companies offering malpractice insurance
– Efficiency of tort liability:
• Depends on how well it minimizes sum of:
– Costs resulting from injuries (including direct treatment costs, lost
productivity, pain and suffering)
– Costs associated with avoiding/preventing injuries and
opportunity costs from goods/services not provided by producers
and/or not consumed by risk averse consumers because of
potential costs
– Costs of administration and implementation (e.g. legal system
costs and attorney fees)
– Indirect economic costs (e.g. disruption caused by bankruptcy)
• Efficient outcome:
– Marginal cost of preventing injury equals marginal cost of injury
– Liability Standards:
• Strict liability – holds injurer accountable regardless of how
much preventive effort he/she engages in; victim’s behavior
irrelevant unless he/she caused injury or knowingly and
voluntarily assumed risk
• Strict liability with comparative negligence – again holds injurer
accountable but factors in victim’s behavior in determining
• Negligence – injurer accountable if he/she didn’t exercise
proper care; victim’s behavior relevant
– For medical malpractice, negligence liability standard
applies (based on “standard practice”)
– Policy alternatives to tort liability (e.g. regulation)
– Empirical Evidence:
• Impact on health care costs:
– Various studies find that medical malpractice insurance
premiums account for about 1 percent of total health
care costs (e.g. General Accounting Office, 1994)
– Estimates of extent of “defensive medicine” more varied
» Harvard Study found little impact of threat of litigation on
medical care costs despite physician reports that it had
some impact on practice (Harvard Medical Practice Study,
» Kessler and McClellan (1996):
- Medicare patients in 8 states, 1984, 1987, 1990
- Acute Myocardial Infarction, Ischemic Heart Disease
- Outcomes include hospital care expenditures one year
after admission, probability of readmission, probability of
– Empirical Evidence:
• Kessler and McClellan (1996):
– Focus on limits on tort liability
» Caps on noneconomic or total damages
» Prohibitions on punitive damages
» No automatic addition of pre-judgment interest
» Caps on contingency fees for attorneys
» Deferred payment for some/all damages
» and others
– Conclude that some reforms (damage caps, collateral source rules)
reduced expenditures by 5-9 percent
– Other reforms had opposite impact - raised expenditures by 2-3
percent (not explained)
– No impact on health outcomes
– Conclude that defensive medicine imposes significant costs and that
reforms would significantly reduce health care costs (recent HHS
update suggests $70-126 billion; up to $50.6 billion public costs)
– Proposed reforms:
• Limit damage awards (noneconomic, economic, and
• Limit plaintiff attorneys’ fees
• Allow damages to be paid out over time rather than in lumpsum
upon judgment
• Eliminate “collateral source rules” preventing defendant from
showing that plaintiff’s losses have been paid in part by
others (e.g. insurers); allow damage awards to be reduced
by amount of others’ payments
• Allow shorter statute of limitations
• Require pre-trial screening to determine merits of claim
• Allow more use of alternative dispute resolution systems
• Abolish “joint and several liability” so that damages collected
from each defendant based on their degree of responsibility
rather than ability to pay

– Impact of proposed reforms:
• Non-economic damage caps result in slower increases in
malpractice premiums
• Non-economic damage caps result in slower increases in
claim payments
• Punitive damage caps similarly reduce premiums and
• Examine several questions:
– Impact of malpractice payments on malpractice premiums
– Impact of malpractice liability on access to physician services
(practice closings, practice location decisions)
– Impact of malpractice liability on physician practice (defensive
• Data from variety of sources:
– Premium data from Medical Liability Monitor
– Malpractice payment data from National Practitioner Databank
– Physicians by specialty/age from Area Resource File
– C-section rates from National Center for Health Statistics;
Medicare claims data;
– Other factors (e.g. income, unemployment, health)
– “Neighbor” variables for contiguous states
– 1992-2002
• Payments and Premiums: weak relationship between both
settlement and judgment payments and premiums (overall and by
– 10% rise in payments per physician increases premiums by 2.5%
– Equally responsive to change in number of payments and average
payment size
• Malpractice costs and physician supply
– Increase in premiums has no significant impact on overall size of
physician workforce
– Weak, inconsistent evidence that younger and older physicians more
responsive to changes in premiums
– Rural physicians significantly more sensitive to changes in premiums
• Malpractice costs and treatment
– Little impact of malpractice premium costs on treatment practices
and expenditures (one exception is mammography, elasticity 0.4)
• Performance:
– Expenditures on physician services rising rapidly
despite efforts to contain costs
• e.g caps on growth in physician payments under public
health insurance programs, utilization review
– Prices for physician services rising rapidly
• Accounts for about 2/3 of growth in expenditures over
past 10-15 years
– Utilization of physician services rising
• About one third of growth result of increased utilization
– Physician Incomes
• Falling in real terms over much of past 10-15 years
• Some reduction in rate of return to medical education  

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Leo Lingham


management consulting process, management consulting career, management development, human resource planning and development, strategic planning in human resources, marketing, careers in management, product management etc


18 years working managerial experience covering business planning, strategic planning, corporate planning, management service, organization development, marketing, sales management etc


24 years in management consulting which includes business planning, strategic planning, marketing , product management,
human resource management, management training, business coaching,
counseling etc




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