Oliva-dc-15-45

IN THE COUNCIL OF THE DISTRICT OF COLUMBIA Committee on Consumer and Regulatory Affairs

In the Matter of Bill 15-45, An Act entitled the “Physicians Negotiation Act of 2003.”

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Filed: June 9, 2003

WRITTEN TESTIMONY OF CITIZENS FOR VOLUNTARY TRADE Bill 15-45 addresses an important issue regarding the rights of physicians. The application of antitrust and “unfair competition” laws to doctors who attempt to collectively negotiate contracts with health plans is itself unfair, unjust, and ultimately unconstitutional. Physicians already possess the basic right to act in their own economic self-interest; the only question is whether the government will protect those rights through law. For the past several decades, unfortunately, federal and state governments have elected not to protect these rights, and in many cases actively seek to violate them. Although Bill 15-45 will not end the systematic abuse of physician rights via antitrust, the Council’s consideration of this measure is nevertheless an important step in the right direction. Below is a brief summary of Citizens for Voluntary Trade’s own research on this issue, the result of more than a year of investigation into the federal government’s efforts to prosecute physicians for exercising their right to collective negotiation. I. For more than 80 years, the Sherman Act, 15 U.S.C. § 1, et seq., and other antitrust laws were not applied to the activities of physicians, attorneys, and other so-called “learned” professions. In passing the Sherman Act, Congress's target was alleged industrial trusts, such as Standard Oil and the railroads. But in 1975, the U.S. Supreme Court extended the Sherman Act’s reach to independent professionals in Goldfarb v. Virginia State Bar.1 There, the Court was asked to examine whether a minimum fee schedule for legal services constituted illegal price fixing—an automatic violation of the antitrust laws under the per se rule—notwithstanding the fact a state bar itself prescribed the schedule. A unanimous Court ruled against the bar, holding that the Sherman Act contained no exception for specific professions, even those regulated by state governments. At the same time, however, the Court noted: “In holding that certain anticompetitive conduct by lawyers is within the reach of the Sherman Act we intend no diminution of the authority of the State to regulate its professions.”2 This is noteworthy because while the Court was mindful of protecting the federal government’s exclusive authority to regulate interstate commerce, the justices also made it quite clear the states did not surrender their professional regulatory powers. In the context of antitrust prosecutions of physician groups, this is a point worth emphasizing, since the federal government

1 2

421 U.S. 773 (1975). 421 U.S. at 793.

routinely tramples on the states’ ability to supervise and regulate physicians and medical organizations, while not advancing a genuine interest related to interstate commerce. Seven years after Goldfarb, the Supreme Court made its first—and to date only—major decision related to antitrust prosecution of physician organizations. In Arizona v. Maricopa County Medical Society,3 a divided Court4 held that a maximum-fee schedule adopted by a physician group was per se unlawful under Section 1 of the Sherman Act. The majority explicitly rejected any call to put the Medical Society’s actions in proper context, citing the circular nature of the per se rule: The respondents' principal argument is that the per se rule is inapplicable because their agreements are alleged to have procompetitive justifications. The argument indicates a misunderstanding of the per se concept. The anticompetitive potential inherent in all price-fixing agreements justifies their facial invalidation even if procompetitive justifications are offered for some. Those claims of enhanced competition are so unlikely to prove significant in any particular case that we adhere to the rule of law that is justified in its general application. Even when the respondents are given every benefit of the doubt, the limited record in this case is not inconsistent with the presumption that the respondents' agreements will not significantly enhance competition.5 In dissent, Justice Powell preferred to actually look at the facts, and concluded: The medical care plan condemned by the Court today is a comparatively new method of providing insured medical services at predetermined maximum costs. It involves no coercion. Medical insurance companies, physicians, and patients alike are free to participate or not as they choose. On its face, the plan seems to be in the public interest.6 The situation in Maricopa is typical of the situations faced today by physician groups seeking to exercise their constitutional rights. Coercion is generally not involved, and any fee schedule arrangement, to the extent they are employed, is wholly voluntary. But under the per se rule, the federal government often obtains settlements against physician groups without having to prevent any substantial evidence as to the context of a group’s operations or its actual effect on the marketplace; to prevail, the government need only demonstrate that prices were fixed in some manner. Yet, as Justice Powell warned us in Maricopa, this approach often works against the supposed intent of the antitrust laws: It is settled law that once an arrangement has been labeled as “price fixing” it is to be condemned per se. But it is equally well settled that this characterization is not to be applied as a talisman to every arrangement that involves a literal fixing of prices. Many lawful contracts, mergers, and partnerships fix prices. But 3

457 U.S. 332 (1982). The case was decided by a 4-3 vote, because Justices Blackmun and O’Connor were recused. 5 457 U.S. at 351. 6 Id. at 357. 4

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our cases require a more discerning approach. The inquiry in an antitrust case is not simply one of “determining whether two or more potential competitors have literally `fixed' a `price.' . . . [Rather], it is necessary to characterize the challenged conduct as falling within or without that category of behavior to which we apply the label `per se price fixing.' That will often, but not always, be a simple matter.” Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 9 (1979). Before characterizing an arrangement as a per se price-fixing agreement meriting condemnation, a court should determine whether it is a “‘naked restrain[t] of trade with no purpose except stifling of competition.’” United States v. Topco Associates, Inc., 405 U.S. 596, 608 (1972), quoting White Motor Co. v. United States, 372 U.S. 253, 263 (1963). See also Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 -50 (1977). Such a determination is necessary because “departure from the rule-ofreason standard must be based upon demonstrable economic effect rather than . . . upon formalistic line drawing.” Id., at 5859. As part of this inquiry, a court must determine whether the procompetitive economies that the arrangement purportedly makes possible are substantial and realizable in the absence of such an agreement.7 In Maricopa, the Medical Society’s purpose was not to stifle competition, but to contain rising medical costs. Indeed, few physician groups act with the intent to stifle or impair competition. Instead, the principal function of these groups is to provide patients and insurers with access to a broad network of health care providers. Superficially, at least, this seems “procompetitive.” But there is substantial evidence to suggest the government’s actions in going after physicians is about something other than antitrust. II. In the years following Goldfarb and Maricopa, the DOJ and FTC developed substantial experience going after physician organizations. The DOJ has filed five civil claims against physician groups since 1991, and the FTC has filed dozens of similar claims, almost all of which have resulted in settlements or “consent orders.” Some cases involved a remedy as drastic as dissolving a physician network outright. There is no record of any DOJ or FTC complaint against a physician group proceeding to trial, judgment, and appeal. Thus, there is no controlling precedent from the Supreme Court or any court of appeals on the constitutionality of the specific policies used by the government in reviewing and prosecuting physician activities. The major policy at issue is the FTC-DOJ Statements of Antitrust Enforcement Policy in Health Care (“Statements”). The Statements were adopted by joint action of the FTC and DOJ Antitrust Division in September 1993, and revised by the agencies in 1994 and 1996. Congress never enacted the Statements into law, and thus these policies remain nothing more than the opinion of the FTC and the DOJ's Antitrust Division.

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Id. at 361.

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In physician network cases, the critical policy is Statement 8, which effectively labels all networks owned by nominally competing physicians as per se illegal. Statement 8 says these networks are only legal under the Sherman Act if the physicians “share substantial financial risk.” As two veteran healthcare antitrust lawyers noted in 1996: It is this requirement that has generated the most controversy. This is so not because the concept of sharing risk is unusual in the context of a legitimate joint venture. Instead, the controversy stems from the fact that the enforcement statements ‘approve’ only two forms of risk sharing: capitation and withholds.8 Capitation means physicians are paid a fixed amount per month for each consumer enrolled in a given health plan; withholds means the payer keeps a certain percentage of a physician’s reimbursement unless certain cost containment goals, such as reducing particular procedures. Physician networks have no choice under Statement 8 but to employ one of these two methods, despite the fact that both capitation and withholds substantially increase physician risks without providing any actual benefit to physicians or health care consumers. If physicians don’t wish to share risk under Statement 8 but still want to negotiate with insurance companies through a network, the doctors must turn to Statement 9, which authorizes the “messenger model” described earlier. The messenger, as the name implies, is not supposed to be a negotiator, but a one-way courier of information from insurance companies to independent physicians. Or, put another way, “the messenger acts essentially as a mute and blindfolded delivery boy between the payer and each physician in the network.”9 Statements 8 and 9 create an unworkable marketplace where physicians possess no genuine bargaining power. The three tools at the physicians’ disposal—capitation, withholding, and messengering—are insufficient in dealing with HMOs on a level playing field. The government is well aware of this, and maintains these options precisely for that reason. After all, HMOs are government-sponsored entities that would perish in a truly free market. The only way to maintain the HMOs’ viability is to eliminate the “threat” of concerted physician action. That’s what Statements 8 and 9 are designed to accomplish, and they’ve done so quite effectively, albeit at the expense of the government’s integrity in enforcing its own laws. In most cases, the government claims that even though a network employed a messenger model, it did so incorrectly. This means the government itself—which is composed of antitrust lawyers, not health care professionals—subjectively decided it didn’t like the look of things. In most recent prosecutions of physician networks, the defendant argued that it followed the best available legal advice in implementing the messenger model. Yet in every case, this advice did not save the physicians from the government, which changes the rules mid-game when it doesn’t like a particular result. III. In the past 14 months alone, the DOJ and FTC have obtained antitrust settlements with nine sets of physician group defendants. Three of these cases resulted in the forced dissolution of the group in question, while the other six imposed harsh restrictions on the future business conduct of the physicians and their management consultants. None of these settlements did 8

Bruce R. Stewart and E. John Steren, “Will New Guidelines Clarify Role of Antitrust Law in Health Care?” Legal Backgrounder, Vol. 11, No. 23 (June 21, 1996). 9 Id.

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anything which produced tangible consumer benefits, although all benefited HMOs, health plans, and of course antitrust lawyers on both sides. Eight of the nine cases arose from FTC investigations. As best CVT can tell, the pattern of these investigations is similar in all eight cases: FTC staff sends a letter to the group under investigation (who has no idea they were even being investigated) demanding the group produce hundreds, if not thousands, of documents within a specified time frame. After documents are produced, at great expense to the group, the FTC takes its sweet time deciding what to do next. Months later, the FTC presents the group with two options: sign a settlement immediately that agrees to numerous FTC-imposed restrictions, or face a “trial” before an FTC-appointed administrative law judge. Given that these groups have, by this point, already expended significant resources to retain counsel and produce documents, all of the groups choose to settle without a fight. Consummate with the practices described above, the FTC makes no effort to afford physician groups any semblance of constitutional due process. Indeed, the nature of an “administrative trial” violates the Seventh Amendment’s guarantee of a jury trial in all civil cases. Beyond that, however, the FTC staff goes to great lengths to provide physician groups with as little information as possible in an effort to obtain quick surrender. In several cases CVT studied, physician groups and their consultants were denied the right to see an actual complaint of charges against them, despite repeated requests to FTC staff to produce such documentation. FTC staff intentionally delayed releasing any formal complaint until after the physician groups had decided to sign a settlement. It should also be noted that the FTC routinely characterizes the products of their coercion as “settlements.” Nothing could be further from the truth. A settlement implies a meeting of the minds where each party exchanges something of value. In a criminal plea bargain, for instance, a defendant pleads guilty in exchange for a reduced sentence or other special consideration. In antitrust cases, by contrast, the settling defendant receives nothing of value whatsoever, aside from saving several thousand dollars in future legal bills and the prospect of having their business completely destroyed by the FTC or DOJ. In the settlement negotiations CVT has reviewed, the Commission staff basically hands the physician group a list of demands and tells the group to take it or leave it. Negotiation of substantive terms is never permitted, even when the facts of a case clearly favor the physicians’ position. In the end, the federal government obtains precisely the remedies it would have sought at an administrative trial, only this way the procedural niceties of due process are dispensed with. IV Despite the frequency of the federal government’s antitrust prosecutions of physician groups, neither the DOJ nor the FTC has ever produced any credible evidence which demonstrates these policies actually benefit consumers. There is no evidence, for example, that consumer health insurance premiums were substantially lowered as the result of an FTC consent order forcing physicians to surrender their collective negotiating rights. This is not surprising, given the FTC and DOJ’s inability to produce any substantive facts in their initial complaints against physician groups. Since the federal policy is to prosecute any doctors who collectively negotiate under a per se rule, the government has essentially exempted itself from having to prove any actual consumer harm before prosecuting a physician group. Often, the impetus for these physician cases comes not from the complaint of patients (indeed, of the case CVT has studied, there was never any evidence of patient dissatisfaction) but from the complaint of health plans, such as HMOs.

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If you accept federal antitrust policy, you accept the notion that HMOs—multibillion dollar cartels that exist under government protection—are the perpetual victim of numerous conspiracies among groups of physicians and consultants worth far less. In one particularly egregious case, the FTC went after a Denver-based physician consultant earning less than $30,000 working from home. The Commission claimed this consultant orchestrated a physician conspiracy to impose higher prices on three of the state’s largest health plans. This sort of regressive application is common in antitrust policy, which often harms small- and medium-sized businesses far more than the larger firms targeted in higher profile cases (such as Microsoft.) Smaller businesses not only lack the financial resources to defend themselves, but they also make more tempting targets to federal regulators, who must prosecute a certain number of cases to meet budgetary objectives. The FTC’s own recent performance review admits as much, setting a specific quota of 45-70 “nonmerger investigations” per year. To meet this goal within the constraints of the FTC’s budget, staff attorneys often selectively prosecute businesses they know have little or no chance of contesting the agency’s claims, no matter how fanciful. The eight recent FTC physician cases appear to be in conformance with this policy. V The one recent DOJ physician case bears some special scrutiny. In United States v. Mountain Health Care, the Antitrust Division claims that a physician-owned network of healthcare providers in western North Carolina violated the antitrust laws simply by existing. Mountain, a network of approximately 300 physicians and other healthcare providers, functioned for more than a decade without incident under the auspices of North Carolina state law, which recognized Mountain as a legitimate “preferred-provider organization,” or PPO. Two years ago, however, the DOJ decided to go on an antitrust witch-hunt, and opened investigations of numerous PPOs in North Carolina. In defiance of the state’s regulatory regime, the DOJ prosecuted Mountain for alleged federal antitrust violations. The DOJ’s case was little more than an attempt to criminalize policy differences in the healthcare market. Basically, the DOJ wanted to see more HMOs take root in North Carolina, which was difficult because of numerous barriers erected by state authorities. Thus, in order to benefit HMOs, the DOJ made a deliberate decision to destroy Mountain Health Care by any means necessary. The DOJ managed to coerce Mountain into literally signing its own death warrant in the form of a federal settlement providing for the PPO’s immediate dissolution. The DOJ’s actions were made without regard to the interests of Mountain’s customers, and indeed the federal government acted explicitly for the purpose of leaving western North Carolina residents without a viable PPO alternative, forcing them to go into an HMO or other health plan deemed more acceptable to antitrust regulators. To mask its intent, the federal government set out to intentionally subvert the federal law designed to monitor DOJ antitrust settlements, the Tunney Act. In filings with the U.S. District Court for the Western District of North Carolina, the DOJ intentionally omitted relevant facts which placed Mountain’s business model and activities in their proper context. For example, Mountain had adopted a new business model three years ago in an explicit effort to comply with the DOJ-FTC “messenger model.” Yet the DOJ never mentions this in their filings with the court, instead claiming Mountain was nothing more than an ongoing “price-fixing” conspiracy that made no effort at all to comply with federal mandates. Additionally, the DOJ withheld any evidence which actually describes the healthcare marketplace

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in western North Carolina, instead making a blanket assertion that Mountain monopolized the market. Indeed, according to Mountain’s public statements, which the DOJ never refuted, the network faced plenty of competition: Employers in the Western North Carolina market place are contracted with many different health plans. Mountain Health Care members make up an average of only 8% of our providers patient base, and the overwhelming majority of Mountain Health Care providers participate with other plans. (italics added)10 Had the DOJ been forced to go to trial, Mountain would almost have certainly prevailed on the facts. But given the enormous financial burden faced by Mountain, the network agreed to dissolve rather than face the costs of protracted litigation, costs that ultimately would have been passed on to Mountain’s customers, the same “consumers” the DOJ claimed to be protecting in the first place. Thus, the DOJ was able to force Mountain’s dissolution without providing anyone —not the court or the general public—with an accurate description of the marketplace. This type of distortion not only leads to the gross abuse of constitutional rights, but it also maintains a status quo based on bad policy, the kind of policies that are the subject of Bill 15-45. VI Bill 15-45 is consistent with the efforts of other state legislatures to offer limited antitrust protections to physician groups that attempt to collectively negotiate. Unfortunately, the examples set by other states have not been very positive. Texas, which has a law fairly similar to Bill 15-45 in effect, is now experiencing an antitrust crisis in healthcare that is approaching epic proportions. Just today, the FTC announced a consent order putting a stop to alleged collective negotiations by a Dallas-based PPO. This is the second such case to be brought in Texas since the passage of that state’s limited exemption statute. This is not a coincidence: The FTC deliberately targets those states whose local legislatures try to hone-in on the federal physician antitrust racket. As this Council is well aware, the FTC strenuously objected to the 1999 physician negotiation bill passed by the Council and later rejected by the then-federal control board. As the FTC sees it, there is never any justification for giving physicians any leeway at all in controlling their own economic affairs. Obviously the Council has no power to overrule federal law, or even the arbitrary decision-making of federal regulators. But that does not mean the Council is powerless to act. Passage of a strong physician negotiation bill—one which explicitly recognizes the right of any physician to negotiate with a health plan, either individually or collectively with other physicians —would send a clear message that the District is not about to be bullied by arrogant FTC and DOJ antitrust lawyers. Indeed, the failure of other states like Texas to take an unambiguous stand behind physicians has only encouraged federal regulators to step up their persecution campaign. Neither the FTC nor the DOJ can afford to allow any serious debate or discussion to take place on the issue of physician rights, because the outcome of any such debate would rationally favor greater protection of those rights at the expense of federal power. And just as individual rights and harmed by these federal actions, so to are state and local governments blindsided in their efforts to regulate local affairs by antitrust officials who don’t comprehend the definition of “interstate” commerce. In almost all of the physician cases reviewed by CVT, the nature of the actions giving rise to the federal government’s complaint 10

“Myths and Facts about Mountain Health Care,” Asheville Citizen-Times (Jan. 6, 2003)

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occurred wholly within the sphere of a single state, often within a single hospital or locality. Mountain Health Care, for example, operated only within a group of counties in North Carolina. Yet the federal government so no barrier to action, despite the fact PPOs and other physician groups remain tightly regulated by state and local authorities. In pursuit of their policy agenda, DOJ lawyers simply disregarded the will of North Carolina and its people. The same could easily happen in the District, and without a strong stand by the Council in favor of physicians, doctors in Washington could end up facing the same level of increased scrutiny and prosecution that Mountain’s physician members experienced. Respectfully Submitted, CITIZENS FOR VOLUNTARY TRADE

S.M. OLIVA President 2000 F Street, N.W., Suite 315 Washington, DC 20006 Telephone: (202) 223-0071 Facsimile: (760) 418-9010 E-mail: [email protected] Dated: June 9, 2003

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