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Doctors’ Orders

The government’s war on medical “price fixing” squelches speech without helping consumers.

S.M. Oliva
November 22, 2010

Doctors who own independent practices sometimes band together to provide a bulk offering of services, at a collectively negotiated rate, for third-party payers such as large health insurance carriers. These groups are called “independent practice associations,” or IPAs, and they’ve been around since the 1950s. IPAs provide tangible value for physicians and patients alike: Doctors get a middleman to deal with the insurance bureaucracies, and patients get access to a wide range of health care providers at discounted prices. But thanks to the ever-expanding mission of antitrust regulators, the associations are also under constant attack from the federal government.

Since 2001, the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division have prosecuted 36 IPA groups, representing more than 18,000 physicians, for the crime of “price fixing”—that is, for jointly negotiating with insurance companies. By setting some of their prices on a group level, the theory goes, doctors are illegally colluding in a way that thwarts competition at the expense of insurance companies, other third-party payers, and ultimately patients.

This crackdown goes far beyond the level of business practice and into the realm of free speech. When the feds turned their attention in 2008 to the Boulder Valley Independent Practice Association, a 365-member organization in Colorado, its executive director, Mary Catherine Higgins, took the rare step of protesting in the press that the charges were “false” and “affirmatively disproved.” Higgins was promptly hit with a “consent order” that banned her from individually dealing with any insurance company for two years.

Even Federal Trade Commissioner J. Thomas Rosch, one of the agency’s staunchest advocates of antitrust intervention, found this order disturbing. “I am gravely concerned,” he wrote in February, “that the Commission’s abrupt decision…can be viewed as retaliation for Ms. Higgins’ decision to exercise her First Amendment rights.” This was, the commissioner said, “a sad conclusion to an unnecessarily sordid tale.”

Rosch’s concern for free speech is admirable. But the FTC is systematically depriving physicians of their First Amendment and other constitutional rights, producing “unnecessarily sordid” tales from coast to coast. When antitrust lawyers butt into the private health care industry, rights and common sense go out the window.

Speech Codes for Doctors

Beginning in the 1990s, under President George H.W. Bush and with bipartisan support thereafter, the FTC and DOJ issued a series of “statements” on how they planned to expand health-care industry enforcement of antitrust laws, which until then had been only sporadically applied.

These statements were never debated or adopted by Congress. They never even rose to the level of a “rulemaking,” the usual process of hearings and debate and public comment by which the FTC and other federal government agencies promulgate new regulations. Instead, the statements merely represented the prevailing views of the government’s antitrust lawyers, who decided that IPAs could not negotiate physician reimbursement rates with insurance companies unless the doctors in question were clinically and financially “integrated”—that is, if they coordinated actual patient care and assumed the majority of the financial risk of providing that care. The FTC and DOJ wanted to minimize—to subsidize—the financial risk to insurers. Absent “integration,” the associations were allowed to adopt a “messenger model,” in which they’d relay offers from the payers to the physicians, so long as that conversation only went one direction: Doctors were forbidden from using the IPA “messenger” to deliver a joint price negotiation to insurers.

You may wonder what the FTC was so exercised about. After all, labor unions collectively bargain on behalf of thousands of individuals, and federal law even mandates exclusive union bargaining if a simple majority of employees demands it. In contrast, IPAs are fully voluntary, nonexclusive entities. Physicians can and do belong to multiple IPAs and are free to negotiate with any payer without going through their associations.

Congress created this contradiction by exempting “the labor of a human being” from antitrust laws, thus permitting collective bargaining while excluding similar cooperation among self-employed professionals, such as physicians. The FTC therefore considers individual physicians “competitors,” legally required to act independently unless the commission permits otherwise. Obtaining these permissions is a tricky, unpredictable process.

The three dozen IPAs prosecuted to date have mostly fallen into the same trap: They tried to apply the messenger model, only to have the commission reply, “That’s not what we meant!” Many were acting upon the advice of well-paid attorneys, frequently former FTC and DOJ staffers, who were offering supposed insider expertise on what the 1990s statements did and did not allow. But the meaning of these regulations has depended on the whims of mid-level government lawyers, so conformance has not been easy.

In a February order, the commission complained that the members of another Colorado group, the Roaring Fork Valley IPA, “agreed to refuse and refused to enter into individual contracts with payers,” including major insurers such as Anthem and CIGNA. Specifically, the IPA refused to “messenger” proposed payer contracts offering the same rates of reimbursement as Medicare. Instead, Roaring Fork Valley established its own set of rates, at the behest of its members, and “messengered” those back to the payers. The IPA believed that it should not be forced to tie its private contracts to Medicare, which frequently cuts reimbursements to providers without accounting for their increased costs. The FTC said this “boycott” of Medicare-based pricing constituted price fixing.

Think about this for a moment. The FTC said antitrust law prohibiting price fixing required the association to messenger contracts based on the fee schedule of Medicare, which itself is an instrument of government price fixing. Physicians have ample reason to not want their private-payer reimbursements tied to Medicare rates, since those are set by congressional fiat instead of the market. But in all of its IPA cases, the commission has insisted that Medicare rates are a reliable indicator of “competitive” prices.

More generally—and alarmingly—the FTC is asserting itself as the best arbiter of what business models are appropriate for physicians. IPA prosecutions and settlements are thick with lengthy discussions of how physicians must negotiate their future contracts, and in many cases the chastened associations must pre-clear their subsequent pricing agreements with FTC staff. Although the agency claims to be promoting competition among independent physicians, this “competition” is only permitted through FTC-designed models.

In this heavily circumscribed universe, it doesn’t even matter what the payers want. In the Boulder Valley case, the IPA did engage in some joint contracting, but it did so at the request of the payer, which found that collective negotiations reduced contracting expenses. The FTC still condemned the arrangement as illegal.

FTC orders don’t merely restrict business models. They also ban speech deemed likely to improve physicians’ bargaining position. A standard clause bans the IPA, which is the freely chosen representative of the physicians, from “exchanging or facilitating in any manner the exchange or transfer of information among physicians concerning any physician’s willingness to deal with a payer, or the terms or conditions, including price terms, on which the physician is willing to deal with a payer.” Some orders are even more explicit, stating that the IPA cannot “suggest,” “encourage,” or “advise” a physician to take any action with regard to a proposed contract.

In other words, the FTC/DOJ statements and subsequent orders impose a speech code on doctors. Physicians are prohibited from seeking advice from their colleagues and outside consultants on the best way to deal with payers, because the unrestricted flow of information might improve the doctors’ bargaining position. In 2005 then-FTC Commissioner Thomas Leary complained that IPAs “have the cart before the horse. Their prime focus is on using negotiations and contracts for the purpose of enhancing their bargaining power.” Instead, Leary declared, they should focus on “clinical integration” along federally approved lines.

Government by Consent Order

Cathy Higgins got into trouble after she publicly criticized the FTC order against Boulder Valley Individual Practice Association (BVIPA). In December 2008, the FTC had said her group “actively discouraged” members from signing individual contracts with payers, thus “forcing” insurers to pay higher prices. Higgins and the BVIPA released a statement denying the FTC’s charges. They said payers were offered a number of contracting options, and that in any case, “It is difficult to see how a group of doctors in Boulder County could ‘force’ billion-dollar insurance companies to do anything.” The charges, Higgins concluded, were “not only false, they are affirmatively disproved by unmitigated facts.”

Still, BVIPA did not legally contest the FTC’s charges, signing a “consent order” restricting the speech and contracting rights of the IPA and its members. Higgins was then separately prosecuted and forced to sign an order containing terms under which she “cannot possibly do her job to the fullest extent,” according to Commissioner Rosch, since she could not represent any BVIPA member in negotiations with an insurer for two years.

So why did the association and its chief sign orders based on what they believed to be false charges? “Regrettably,” the group explained in a press release, “the cost of a fight with the FTC in this case is more than the IPA can afford.” That shouldn’t surprise anyone. The FTC is going after small groups with limited financial resources (one targeted IPA had just six members), and the entire process, from investigation through trial and appeal, is controlled by the commission. In theory, an IPA can appeal the regulators’ final decision in federal court, but it can take several years just to reach that stage, and federal law presumes that the FTC’s factual findings are correct. Of the three dozen IPAs prosecuted since 2001, only one has contested the charges.

That lone holdout was North Texas Specialty Physicians (NTSP), a Fort Worth association that spent more than five years fighting the feds. First there was an investigation conducted by FTC staff prosecutors, followed by a trial before an FTC administrative law judge and an appeal to the five FTC commissioners who initially approved the prosecutors, judge, and complaint. After navigating that minefield, NTSP finally was allowed to seek independent review before the U.S. Court of Appeals for the 5th Circuit, which announced in a 2008 decision that it was compelled by precedent to respect the FTC’s experience and judgment.

The association’s offense? It polled its members annually on the minimum rates each would accept for certain contracts. The group then used the poll results to decide which contracts its members were likely to approve and, thus, which it would “messenger.” The FTC deemed this arrangement “horizontal price fixing.”

The courts generally consider price fixing a per se antitrust violation, which means that once the act has been established the commission need not prove it actually harmed consumers or competition. The Texas group wanted to apply the more flexible “rule of reason” standard, under which the group could present evidence in its defense. The FTC and the 5th Circuit opted for an “abbreviated” rule of reason, which amounts to dressing up the per se rule with a flimsy negligee of due process.

The 5th Circuit acknowledged that the commission “did not rely on empirical evidence” in condemning NTSP. Instead it “relied on the theoretical basis for the anticompetitive and procompetitive effects of NTSP’s challenged practices.” The court said the FTC did not even have to show that insurers paid higher prices as a result of NTSP’s member survey; it only had to argue that NTSP gathered and disseminated information that improved its members’ “bargaining power.”

The net effect of the 5th Circuit’s decision was that no IPA is likely to challenge the FTC’s authority any time in the near future. But even signing pre-trial consent orders, as every other targeted IPA now does, carries a substantial cost.

Consider the FTC’s 2002 orders against two Colorado associations and their outside consultant, a woman named Marcia Brauchler. In June 2001 Brauchler, a self-employed sole proprietor working out of her home, was informed she was under investigation for price fixing. First came a demand for documents about her business relationship with the two IPAs: nearly 14,000 pages, reproduced with a rented copier she installed in her living room. (The FTC asked Brauchler to provide these documents “voluntarily,” but refusing would have invited a subpoena, which could only be challenged before the FTC itself.) Next the FTC demanded that Brauchler sign a consent order before she could even see a complaint specifying charges against her. While Brauchler could have suggested narrow, technical changes to the order, the “negotiations” would not allow any deviation from the boilerplate FTC language used against every other IPA. Refusal to sign could have resulted in penalties beyond mere restriction of her business practices: She and her clients could face “disgorgement” of unjust profits to provide “restitution” to their victims.

The “victims” in question were Colorado’s largest insurance companies. During roughly the same time period that Anthem reported a nearly $7 million profit in the state, Brauchler billed a bit more than $33,000 in fees to her two IPAs. (Anthem, incidentally, is the same payer that forcefully lobbied the FTC to crack down even harder on the Boulder Valley IPA.) Despite all the FTC’s hand wringing over physicians’ bargaining power, one of Brauchler’s IPAs noted that its provider contracts covered just 15 percent of the patients in Aurora, Colorado, and no more than 2 percent of the patients in metropolitan Denver. Hardly the stuff of Standard Oil or Microsoft.

Scapegoating and Scaremongering

Insurers realize that the FTC’s enforcement practices give them a huge advantage over physicians in contract negotiations. If the government deems an IPA’s practices anticompetitive, the resulting consent orders allow payers to terminate their existing contracts without penalty and negotiate new ones under more favorable terms. This means insurers can refuse to honor contracts by lobbying antitrust regulators, claiming evil doctors made them agree to unreasonably high rates.

That’s what happened to James Laurenza, a Kentucky-based health care consultant who was managing a New Mexico IPA when he ran headlong into the system in 2004. When Laurenza met with an executive from Cimarron to insist that the HMO honor its existing contract before entering into new agreements with the association’s members, “counsel and myself were shocked that the managed care executive threatened twice to bring the wrath of the FTC upon our small network management company,” he later wrote on his personal website. Cimarron followed through on its threat, and the FTC forced Laurenza and the IPA to repent for their “refusal to deal” with the HMO on its terms.

So far congressional efforts to stop FTC bullying have been unsuccessful. In June 2000 the House passed a bipartisan bill, introduced by then-Rep. Tom Campbell (R-Calif.), that would have afforded IPAs the same antitrust exemption as labor unions when they negotiate joint contracts with payers. The measure died in the Senate. 

The bill has been reintroduced in the House in every succeeding Congress by Rep. Ron Paul (R-Texas), himself a physician. In a 2003 letter to then-FTC Chairman Timothy Muris, Paul criticized the agency’s prosecution of Southwest Physicians Associates, a Texas IPA, based on its refusal to continue following a commission-approved contracting model that resulted in substantial losses. “Am I to conclude the FTC expects doctors to adhere to money-losing business models rather than exercise their protected right to free association,” Paul wrote, “and that this is somehow in the public’s interest?”

As Paul noted, the problem isn’t price-fixing doctors but “government policies [that] have enforced over-reliance on third party payers.…To suggest that when groups of physicians combine to negotiate contracts with HMOs, they distort an otherwise free market, betrays a misunderstanding about the current health care industry.”

The FTC has opposed any congressional effort to end its physician prosecution racket. At a 1998 hearing on the exemption bill before the House Judiciary Committee, Campbell, himself a former FTC official, said it was ridiculous that “three eye doctors in Elgin, Illinois,” could have lunch together to discuss an HMO contract and get a letter from the FTC claiming they violated the Sherman Act, while every steelworker in Gary, Indiana, could go on strike without penalty. Then-FTC Chairman Robert Pitofsky responded with his own horror scenario: “All of the doctors in Elgin, Illinois, get together over lunch and say, ‘We are not making enough money, our kids are going to expensive colleges, and we are not driving the luxury car we prefer. Let’s go to this one HMO that is committed to cost containment, and we’ll say we are going on strike. Unless you pay us twice as much money, we are going on strike. We are not going to take care of people in your organization.’ ”

Such scaremongering is especially comic given that the FTC’s own intervention in health care markets raises costs—by forcing physicians to retain antitrust counsel—without any evidence of consumer benefits. The commission can’t point to any data or independent studies that show its IPA prosecutions reduce prices or improve the quality of patient care. Nor does the agency ever consider the costs of complying with its investigations and orders. Ultimately, there’s no demonstrable link between prosecuting IPAs and controlling health care costs. If anything, by making it more difficult for physicians to contract with insurers, the FTC may actually be driving physicians out of the marketplace altogether, which is certainly bad for consumers.

 

The Feds Reach Further

The FTC’s health care appetite isn’t restricted to a diet of IPAs. In 2008, after a two-year investigation, the agency challenged a proposed partnership between Prince William Hospital in Manassas, Virginia, and the larger Inova Health System. Although these were nonprofit hospital groups, the FTC had no qualms about subjecting them to one of the longest merger reviews in commission history, ultimately costing Prince William Hospital nearly $250 million in proposed capital investment from Inova, forcing both hospital groups to rack up legal bills of more than $15 million, and damaging Prince William Hospital’s credit rating.

In this case, Commissioner Rosch proved to be the villain, not the civil liberties champion he played in the Cathy Higgins case. Rosch personally oversaw the staff investigation of the hospital merger. The commission’s administrative law judges had recently exhibited a streak of independent thought in rejecting some key antitrust complaints, so he arranged to have himself appointed to sit as trial judge. Rosch insisted that he was the most qualified arbiter (in fact, he had never been a judge of any type) while laughably maintaining that he would be impartial. In fact, Rosch himself had personally supervised the staff’s investigation of the merger, which led to the decision to issue a complaint in the first place. The hospitals saw right through this, decided the process was rigged, and dropped their two-year-old merger plans. (Prince William Hospital later found another merger partner that met with the FTC’s approval.)

The worst is probably yet to come. While efforts to protect physicians have languished in Congress, the House recently passed legislation that would revoke the insurance industry’s limited antitrust exemption, in effect rewarding the FTC with expanded jurisdiction. This will add an additional layer of antitrust review—state antitrust laws already apply to insurers—that, according to the Congressional Budget Office, could lead to an increase in insurance premiums.

And the new Patient Protection and Affordable Care Act only puts more pressure on physicians to accept across-the-board price controls. If they refuse, they won’t just have to worry about the FTC. In May, the Justice Department’s Antitrust Division entered the physician-prosecution racket, joining the Idaho attorney general against a group of Boise orthopedists. The physicians were charged not just with illegally rejecting an insurance company’s contract offer but also refusing to accept patients under Idaho’s worker’s compensation system. That system, however, requires all participating doctors to accept a uniform fee schedule adopted by the state’s commissioners—in other words, government price controls. Still, the DOJ insists it was the physicians, not the state, who suppressed competition.

Although the Idaho case resulted in a civil settlement, physician groups must now be on alert for possible criminal liability. There’s no statutory distinction between civil and criminal price fixing, and the DOJ can easily convert a civil settlement into a criminal plea bargain—complete with multimillion-dollar fines and jail time for individual physicians and cartel “ringleaders” like Cathy Higgins and Marcia Brauchler.

Criminalizing physician-insurer contract negotiations would be unjust, ineffective, and disastrous for patient care. The Justice Department now also has the authority to seek wiretaps in antitrust cases, meaning the FBI could listen in even on privileged doctor-patient calls. Cracking down on the collective bargaining of self-employed doctors will do nothing to reduce rising health care prices, while serving to dampen the competition the government claims to defend. Such are the perils of letting routine contract negotiations become subject to the whims of federal lawyers.

S.M. Oliva (smoliva@inbox.com) is a writer and paralegal living in Charlottesville, Virginia. This column first appeared at Reason.com.



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