Healthcare First, an HMO, is in the process of being formed in Carterville, a town in a Rocky Mountain state. Healthcare First is a wholly owned subsidiary of Hapless Community Hospital, one of the two hospitals in town (the other is a smaller for-profit hospital, MedAmerica, that opened about five years ago). Healthcare First has hired about a dozen primary care physicians with staff privileges at the hospital. It has also contracted with two dozen specialists to deliver services to its subscribers at discounted rates negotiated with each of the specialists by Healthcare First. Subscribers will be limited to Hapless Community Hospital except in emergencies, and will only have access to the specialists or to the hospital upon referral or admission by a plan physician. The plan only covers subscribers for primary care delivered by plan physicians, and for laboratory work and pharmaceuticals from the hospital s lab and pharmacy (except in emergencies). Primary care physicians employed by the plan may not carry an outside practice, but specialists under contract will continue their fee-for service practice, and are permitted to contract with other HMOs, PPOs, or POS plans.

Healthcare First has negotiated agreements to cover the employees of several of the largest employers in town, including two substantial industries. These employees (all non-union) will be offered only Healthcare First coverage through their employer. Healthcare First is also negotiating with the state Medicaid agency to cover Medicaid patients in the area under a program the state has initiated under federal waiver to limit freedom of choice for Medicaid patients. Under these arrangements, Healthcare First will cover about 40% of the patients in the Carterville area. Healthcare First offers rates substantially under those offered by other insurers and providers, as it expects to realize substantial economies through utilization control and more efficient ue of hospital capacity.

The plan troubles many in Carterville. First, MedAmerica, the other hospital in town, is upset at losing its patients who are employees of the businesses that have signed on with Healthcare First, and who were previously covered by Blue Cross. Second, primary care providers who were nor hired by the plan anticipate a substantial loss of business. Several also believe the plan is unethical because it restricts patients to a small group of providers whose practice will be subject to review by the HMO. Third, several specialists who chose to contract with the plan are upset by the sharp discounted rates the plan has insisted on. Finally, several employees of the companies that have signed on with Healthcare First are concerned that they will no longer be covered by health insurance unless they leave nonparticipating physicians who have cared for their families for years.

You are the newly hired CEO of the plan. The board of directors fears an antitrust suit. Please advise them as to possible theories and the likelihood of their success. Be sure to include the underlying rationale for your response