Law 6842-01  Winter 2011
American Health Care Law
Professor Vernellia R. Randall
The University of Dayton School of Law


Numonia Medical Network Inc.

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Numonia Medical Network, Inc. ("Numonia") seeks an advisory opinion concerning its proposal to establish and operate a physician network in the Welltown, Numonia, area. Please be prepare to discuss your analysis and recommendations at the scheduled meeting.

Base your decision on the following information which has been communicated to the FTC in the attached letter:

Mr. Robert F. Leibenluft
Assistant Director
Health Care Division

Dear Mr. Leibenluft:

We represent several physicians who are forming a non-profit network. Numonia Medical Network, Inc. ("Numonia") will establish and operate a physician network in the Welltown, Numonia area . We seek an advisory opinion on whether formation of such a network would violate federal anti-trust laws.

Numonia will be a for-profit professional corporation owned by physician shareholders, most of whom also will be participants on Numonias provider panel. Membership in Numonia is limited to licensed Medical Doctors or Doctors of Osteopathy engaged in the practice of medicine in a ten-county area (the "Primary Service Area") of northwestern Numonia(1) Numonia will be governed by a 15-member board of directors, elected by the Class A shareholders. Ten of the 15 board members must be primary care doctors,(2) and 13 of the 15 must be Class A shareholders.

Shares of stock in Numonia were sold at $1,000 per share; each shareholder holds one share. There are two classes of shareholders: Class A common stock is available to independent physicians, defined as those who obtain the majority of their professional income from self- employment or employment by a physician-owned entity. Class B common stock is available to non-independent physicians -- those who are employed by hospitals or other nonprofessional groups. According to the Bylaws, Class B shareholders are not entitled to vote for members of the board of directors, or on other matters except as required by law.(3)

Numonias purposes are to preserve individual providers practices by strategically aligning the providers in a manner that enhances their ability to obtain health care contracts, to establish a vehicle for the providers to accept risk-sharing arrangements, and to enhance efficiencies and maintain quality assurance in the provision of comprehensive multi-disciplinary health care.

Numonia has 218 shareholders, and has stopped admitting new shareholders. It has not yet been determined how many shareholders will sign participation agreements and actually provide services pursuant to Numonia contracts. All shareholders also will be participating providers. In addition, Numonia may seek to enter into participation agreements with non- shareholders in order to offer comprehensive medical services. Those physicians would not participate in Numonia on an equity basis, but would participate, along with shareholders, in risk pools established by Numonia.(4)

Numonia plans to enter into contracts with third-party payers under which its participating physicians will share substantial financial risk by agreeing to provide all medically necessary services to their enrollees for a percentage of the insurance premiums collected by the payers.

Numonia will pay its primary care physicians on a capitated basis for primary care services. Specialty physicians will be paid by Numonia on a fee-for-service basis, subject to a 15- 20% withhold to be placed into a risk pool. On an annual basis, funds withheld in the risk pool may be distributed to primary care physicians and specialists upon their meeting or exceeding certain utilization and quality levels.

In order to manage the financial risk that it will assume under contracts with payers, Numonia intends to implement medical management procedures including utilization management, retrospective review, development of standard practice parameters, and sharing of professional expertise. All participating providers will participate in ongoing utilization management review, quality assurance programs, and credentialing programs undertaken by Numonia. Numonia intends to employ a paid medical director and a utilization review nurse. Thus far, Numonia has relied on Penmed Member Services Company ("PMSCO"), a for-profit arm of the Numonia Medical Society, to assist it in developing the capabilities necessary to accept risk contracts.

553 physicians actively practicing in Welltown County in the specialties will be represented in the network, and 1188 such physicians practicing in the ten-county Primary Service Area. Numonia has 218 shareholders, who are approximately 40% of all the physicians in the represented specialties in Welltown County, and approximately 18% of such physicians in the Primary Service Area.

The proportion of participation varies widely by specialty. Numonia will assume the risk of providing both primary and specialty physician services to those patients who have designated a Numonia participating physician as their primary care doctor. Numonia does not intend to attempt to contract to be the sole physician network of any health plan. Rather, Numonia envisions that payers will continue to contract with other provider networks, or with physicians individually, in order to provide services to patients whose primary care physician is not a participant in Numonia.

Participation in Numonia is nonexclusive. Numonia states that it will not impose any restrictions on the ability of network providers to provide medical services independently or through other organizations, including other physician networks. Many Numonia shareholders currently contract to provide services through the two major third-party payers operating in the Welltown area -- Highmark Blue Cross Blue Shield and Alliance Health Network, an HMO owned by hospitals in Welltown and the surrounding areas.

There are four significant general acute care hospitals in Welltown County: Hamot Medical Center ("Hamot"), Saint Vincent Heath Center ("Saint Vincent"), Metro Health Center, and Millcreek Community Hospital. Hamot and St. Vincent are large tertiary care facilities, and offer a much broader array of services than the other hospitals.(5)

Hamot employs 20 to 30 primary care physicians, and Saint Vincent employs 98 providers, including physicians and other practitioners, of whom 63 are in primary care. The doctors employed by these two hospitals account for about 12% of primary care doctors in the primary service area and about 25% of primary care doctors in Welltown County. Some physician practices also are owned by the two smaller hospitals and by Highmark. A planned merger between Hamot Medical Center and Saint Vincent Health Center has been announced.

Numonia has adopted policies designed to ensure that information relating to individual physicians fees or other information used to construct fee schedules relating to managed care contracts is not disseminated to individual participating physicians, and to discourage shareholders from using Numonia as a vehicle for reaching anticompetitive agreements affecting non-network business. Numonia has designated PMSCO as its sole agent to collect and process pricing information relating to physician services. Any data provided to PMSCO must be at least 90 days old and will not be revealed to individual members of Numonia. In addition, Numonia prohibits discussions among shareholders regarding the creation of exclusive territories for the delivery of health care, joint refusals to deal by participants with a person or entity, or price- setting or pricing information except in the course of Numonias negotiations with managed care companies or physician subcontractors.

Primary Care Physician Services. With respect to primary care physicians, Numonia includes as shareholders 41 family practitioners, 15 internists, and 6 pediatricians. These physicians constitute 33% of the family practitioners in Welltown County (plus 1 of 8 in Venango County and 1 of 28 in Crawford County); 28% of the internists in Welltown County (plus 2 of 10 in Crawford County); and 35% of the pediatricians in Welltown County.(6) Even assuming that for these physicians the geographic market is no broader than Welltown county, affiliation with Numonia of this percentage of primary care physicians, on a non-exclusive basis, does not appear likely to present a significant risk of competitive harm.(7) St. Vincent and Hamot employ a large number of primary care physicians who are highly regarded in the community and who have large patient loads.(8)

Specialty In Welltown County In PSA
Anesthesiology 29% 11%
Pathology 36% 18%
Dermatology 33% 20%
0 3%
General Surgery 31% 14%
Neurosurgery 22% 9%
Ob-Gyn 30% 13%
28% 11%
Plastic Surgery 33% 22%
Psychiatry 11% 4%
Radiology 36% 18%

Specialty Physician Services.. Numonia has as participating physicians the following proportion of practicing physicians in Welltown County and the Primary Service Area ("PSA"):

However, Numonias proposed panel has a higher portion of physicians in other specialty areas. High percentages of specialists and sub-specialists is necessary for the success of the network. In some specialty fields there are only a few physicians or a few physician group practices, so that enrolling one physician or one major group practice in a panel inevitably gives Numonia a high percentage of the available doctors in that specialty.(9) It generally is not practicable to include fewer than all members of a group practice on the panel for reasons including cross-coverage responsibilities

In other specialty areas, Numonia proposes to include a high percentage of specialists who are not all members of one group practice. For example, Numonia has as shareholders the following percentages of physicians:

Specialty In Welltown County In PSA
Cardiovascular Disease(10)
19 doctors in 2 groups
83% 66%
Thoracic Surgery(11)
9 doctors in 2 groups
69% 69%
Colon and Rectal Surgery
3 doctors in 2 groups
100% 100%
7 doctors in 3 groups
100% 50%
Infectious Diseases(12)
4 doctors in 3 groups
80% 67%
6 doctors in two groups
86% 43%
7 doctors in three groups
55% 40%

The inclusion of a large number of physicians was necessary for the network to offer coverage at both Hamot and St. Vincent (and in some cases, at Metro Health Center);((14) and that coverage at all hospitals is necessary because many patients have a strong preference for one or the other of the hospitals, so that a network offering access to only one hospital is not effectively marketable. Because Numonia will provide all covered services to patients who select a Numonia participant as their primary care doctor, the network needs to be able to provide specialty services at the hospital selected by the patient or the primary care doctor.

The majority of the members of Numonias board of directors must be primary care doctors (who also will control the flow of patients to specialists) may place some constraints on the ability of groups of specialists to charge supra-competitive prices through the venture. All Numonia providers will receive compensation from a predetermined percentage of the premium collected by contracting payers, the other physicians should have strong incentives to pay those specialists at competitive levels.

We look forward to the FTC opinion.



1. (1) The 10-county Primary Service Area consists of Welltown County and the surrounding counties of Cameron, Crawford, Elk, Forest, McKean, Mercer, Potter, Venango and Warren. You state this area was defined based on hospital admissions data and referral patterns to the specialist physicians who formed Numonia; that substantially all of their referrals are from within the Primary Service Area, and a substantial number of referrals were received from each of the counties. However, almost all Numonia shareholders have their primary offices within Welltown County.

2. (2) Numonia considers family practitioners, general internal medicine practitioners, and pediatricians to be primary care physicians.

3. (3) However, one director currently is a Class B shareholder (and another may be appointed to fill a vacancy), and the Board has committed that in the future, Class B shareholders will be permitted to vote for any board positions (not to exceed two) that are designated for non- independent physicians.

4. (4) You have not provided any specific information on the terms of such contracts with non-shareholders or the doctors who would be involved, and this letter expresses no opinion on the possible implications of those contracts.

5. (5) According to the 1997-98 AHA Guide to the Health Care Field, St. Vincent has 477 beds, Hamot has 366 beds, Metro Health Center has 112 beds, and Millcreek Community Hospital has 101 beds.

6. (7) Numonia shareholders constitute 16% of the family practitioners, 11% of the internists, and 19% of the pediatricians in the 10-county Primary Service Area. In addition, there are 21 general practitioners in Welltown County, and 45 in the primary service area, who are not Numonia members.

7. (9) As a matter of convenience, we refer to as "employed physicians" those physicians who are employed by, those whose practices are owned and managed by, and those with similar financial arrangements with, the hospitals. We understand that all of these physicians are Class B shareholders.

8. 21 physicians employed by the hospitals (16 of them in primary care fields) are shareholders in Numonia; Numonias intention is to preserve control of the organization by the Class A shareholders ("independent physicians"), and that they must hold 13 of the 15 directors seats. However, two of the board seats are effectively designated for employed physicians ("non-independent" Class B shareholders), and next year these doctors will be permitted to vote for those directors. Numonias board of directors has adopted policies requiring board members to disclose conflicts of interest, and prohibiting use of confidential information acquired from Numonia for the advantage of any entity with which the director is affiliated or employed.

9. Numonia shareholders include two allergists who are 67% of that specialty in Welltown County and 40% in the PSA; three endocrinologists who are 60% of that specialty in Welltown County and 42% in the PSA; and seven otolaryngologists who are 78% of that specialty in Welltown County and 21% in the PSA. In each case, the specialists are all members of a single practice group. In addition, Numonia includes the only pain management specialist in Welltown County or the PSA, and one geriatric specialist who comprises 50% of the doctors in that specialty in Welltown County and 25% percent of those in the PSA.

10. One of the doctors in this specialty who practices in Welltown County and is not a Numonia shareholder is associated in a group practice with Numonia shareholders. The other non- Numonia cardiologists in Welltown County and in the PSA do not provide the same range of services, including invasive procedures, that are provided by the Numonia shareholders. Some high level cardiology services for patients within the PSA are performed by doctors in Pittsburgh, Cleveland, and Buffalo.

11. The four cardiovascular surgeons who are not Numonia shareholders are members of group practices with surgeons who are Numonia shareholders. The four vascular surgeons in Welltown County do not perform the same range of surgery as the Numonia shareholders.

12. One of these doctors is an administrator at one of the hospitals and does not have a substantial practice.

13. One urologist is located in Crawford County, where there is one other urologist.

14. The cardiology, cardiovascular surgery, and colon and rectal surgery groups practice exclusively at St. Vincent or at Hamot, while the infectious disease, nephrology, and urology groups confine almost all of their practices to one hospital or the other. Each of the three gastroenterology groups practices predominantly at Hamot, St. Vincent, or Metro Health Center. Consequently, the participation of each of the groups is necessary for Numonia effectively to offer services at each of those hospitals. We note, however, that under some circumstances the merger of Hamot and St. Vincent, if it takes place, could reduce the need for inclusion of practice groups having privileges at both hospitals.

Lessons - Unit 01
01 Health and Illness                                               x
02 Assuring Public Health                                              x
03 Organization                                              x
04 Structuring the System                                              x
05 Tax Exemption                                              x
06 Professionall Relationships                                              x
07 Antitrust I                                              x
08 Antitrust II                                              x





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Professor Vernellia R. Randall
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The University of Dayton School of Law
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