Oliva System Health Genesis

Citizens for Voluntary Trade

September 18, 2002 Mr. Donald S. Clark, Esq. Office of the Secretary Federal Trade Commission 600 Pennsylvania Ave., N.W., Room 159-H Washington, DC 20580 Re:

Proposed consent agreement In the Matter of System Health Providers, Inc., and Genesis Physicians Group, Inc., FTC File No. 011 0196.

Dear Mr. Secretary: If I knew nothing about today’s world but the nature of our politicians and the philosophy represented by the medical profession, I would predict an inevitable, catastrophic clash between the two: between the government and the doctors. On purely theoretical grounds, I would predict the destruction of the doctors by the government, which in every field now protects and rewards the exact opposite of thought, effort, and achievement.1 —Dr. Leonard Peikoff, April 14, 1985 For 37 years, the United States government has waged a war against physicians. The declaration of war came in the form of Medicare and Medicaid. These programs offered a new vision for healthcare—consumers could demand and receive medical services without having to pay for them. By severing the capitalist link between supply and demand, the government produced a nation of healthcare gluttons. In 1952, U.S. healthcare expenditures were less than 5% of Gross Domestic Product; today that figure is well over 20% and rising exponentially. This rise in costs is directly attributable to the government’s interference in the healthcare marketplace. In 1973, the government added fuel to the fire by passing legislation to create health maintenance organizations, or HMOs. These quasi-private entities were supposed to contain the excessive costs generated by previous failed government interventions. Instead, they made the problem far worse. Dr. Richard Parker, a Dallas physician and senior writer for the Ayn Rand Institute, succinctly describes the true nature of HMOs: 2000 F Street, N.W. Ste. 315 Washington, DC 20006

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HMOs are government-created and taxpayer-subsidized entities that pay physicians and hospitals predetermined, per-capita fees, regardless of what medical services are actually provided. Under HMO capitation, physicians and hospitals no longer have a financial incentive to do all that is necessary to treat a patient's illness. Rather, their incentive is to minimize the care provided. In HMOs, a physician's pay is tied not to the services he renders, but to the services he does not render. The essence of the HMO system is rationing. Normally, the more services a business can provide to its market, the more successful it is. That used to be true of medicine too, when doctors were paid fees for the services they provided. It is not true today. Now, the government's "solution" to the problem its interventions have caused is to create a perverse system under which the providers of medical care look for ways to withhold their services. There are numerous ways in which government encourages the proliferation of HMOs. Grants and loans are given to them; Medicare and Medicaid increasingly make contracts with them; certain employers must offer HMOs plans to their employees; and unlike HMOs, independent physicians are prevented, by antitrust law, from joining together to bargain with employers for health-care contracts. 2 It is this last method—the use of antitrust law against physicians—that is at issue in the present case now before the FTC. But it is impossible to consider the principles and effects of the proposed consent agreement without examining the entire context. The FTC is unwilling to do this. Indeed, this case was brought under a “per se” theory that, in the FTC’s mind, absolves them of any obligation to examine context or actual facts. Since the “public interest” requires a rigorous analysis of the FTC’s principles and methodology, the following comments are offered in response to the proposed settlement.

I The facts of this care are fairly simple. Genesis Physicians Group consists of “approximately” 1,250 physicians practicing medicine in the “eastern part of the Dallas-Fort Worth metropolitan area.”3 In 1995, GPG formed System Health Providers, a medical management company. Since 1998, GPG has been the sole owner of SHP stock.4 From 1996 to 1999, GPG engaged in collective bargaining with insurance companies on behalf of its members. These actions were taken under “risk-sharing arrangements” where, presumably, some clinical and financial integration of the member physicians’ practices took

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place. These arrangements were consistent with Federal Trade Commission policy, which permits collective bargaining only under “risk-sharing” arrangements.5 GPG’s risk-sharing activities failed miserably. They resulted in “significant losses” to the physicians, and the risk-sharing entity formed by GPG was forced to file for bankruptcy protection in 1999. Thereafter, GPG and SHP began to engage in collective bargaining via nonrisk-sharing arrangements.6 In other words, the physicians maintained their individual practices while using a common agent to negotiate with HMOs and other insurance companies. This practice is prohibited by the FTC, because it is considered per se illegal price fixing. Consequently, the FTC began its investigation of GPG and SHP, resulting in the consent agreement now before the public record.

II The FTC considers physician collective bargaining to be an illegal restraint of competition. In this particular case, the Commission’s objections fall into three broad areas. First, the FTC claims physicians are improperly denying HMOs their ability to offer comprehensive insurance plans to consumers; second, the physician’s actions allegedly increased consumer costs; and third, the physicians generally conspired to prevent competition from taking place. I will deal with these objections in order. In paragraph 11 of its complaint, the FTC states, “In order to be competitively marketable in the Dallas area, a payor’s health insurance plan must include a large number of primary care physicians and specialists who practice in the Dallas area.” Since GPG’s membership constituted a large number of such physicians, the implication is that GPG is obligated to provide services to any HMO that wants to compete in the Dallas market. There is, however, no reciprocal obligation on the HMOs to deal equitably with the physicians. An HMO need only state its requirements, and the physicians must comply; if they don’t, the FTC considers the physicians in violation of the antitrust laws. SHP, as the negotiating arm of GPG, is painted as the villain here. The FTC accuses SHP of “discouraging” GPG physicians from accepting contract offers.7 This is the extent of SHP’s alleged illegal conduct—discouragement. SHP is not accused of using coercive means to prevent GPG doctors from accepting any contract offer. It is difficult to fathom a context in which an attempt to voluntarily persuade individuals to take (or not take) an action can be declared illegal on its face, as the FTC has done here.

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The FTC claims that denying physicians the right to fully negotiate is justified by a need to lower consumer costs for healthcare. The FTC says it is “unreasonable” to compete in a manner that increases the price of physician services. It’s unclear what evidence, if any, exists to prove the FTC’s argument. It is not in dispute that healthcare costs in the United States have risen significantly. But the cause of increased costs is not physicians negotiating for greater compensation, but government intervention in the healthcare market. The percentage of GDP spent on U.S. healthcare only began to exponentially increase after the government created Medicare and Medicaid. As intervention increased, so too did costs. At every turn, however, the government has tried to deflect blame for its mistakes by casting aspersions on free-market ideas. This case is just part of that pattern. There’s no reason to believe consumers would directly benefit from lower physician compensation. In fact, consumers will likely suffer. Consider the FTC’s statement in paragraph 8 of the complaint: Physicians often contract with health insurance firms and other third-party payors, such as preferred provider organizations. Such contracts typically establish the terms and conditions, including price terms, under which the physicians will render services to the payors’ subscribers. Physicians entering into such contracts often agree to lower compensation in order to obtain access to additional patients made available by the payors’ relationship with insureds. These contracts may reduce payor costs and enable payors to lower the price of insurance, and thereby result in lower medical care costs for subscribers to the payors’ health insurance plans. This is what the FTC wants to take place—physicians taking less money and seeing more patients. But is that what doctors want? More tellingly, is that what consumers want? If doctors are seeing more patients and being paid less for each, it would logically follow that their motive to provide the best service to each individual patient would diminish, not increase. Not only does the physician lack the possibility of profit (since HMOs pay regardless of the services provided), but given the time constraints of seeing a greater number of patients, it’s likely that individual care will be compromised. Yes, the consumers’ direct costs might be lower in the short-term, but if the result is incomplete care, it can actually increase long-term costs. (All of this also assumes that the HMOs won’t simply pocket the savings from reducing physician fees. The FTC provides no analysis of that issue, even though it’s well known that HMO administrative costs are the more likely cause of higher consumer premiums.) This leads to the third issue, competition. The FTC says consumers benefit from competition. I agree. But what the FTC is protecting here is not “competition” in any 2000 F Street, N.W. Suite 315 Washington, DC 20006

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recognizable form. The FTC is fixated solely on short-term pricing. While prices can serve as one indicator of competition, it is not the only element, nor often the most important. In this case, price competition is barely relevant at all. But once again, the FTC decided against performing a contextual analysis, which led to conclusions ultimately unsupported by facts. Defining competition as a function of price is quite static. It presumes there’s an ideal price level that exists. In this case, the FTC presumes that price level to be Medicare’s Resource Based Relative Value System. RBRVS is a wholly subjective system, not answerable to capitalist supply-and-demand, but accountable only to officials administering the program. While RBRVS rates might occasionally reflect market pricing levels, this is purely coincidental. At its core, RBRVS is a government-imposed price control that reflects political power, not free market principles. In paragraph 10 of the Complaint, the FTC says, “In general, it is the practice of payors in the Dallas area to make contract offers to individual physicians or groups at a fee level specified in the RBRVS, plus a markup based on some percentage of that fee (e.g., “110% of 2001 RBRVS”).” If that’s the practice of some HMOs, then that’s fine. But why must it be the practice of every HMO and physician in the United States? Can the FTC offer an objective justification for restricting price levels to government-mandated terms? The respondents in this case are being punished, not for their failure to compete, but for the fact they competed at all. They asked for compensation at levels above RBRVS standards. If the HMO decided to pay the higher prices, than the FTC should not intervene, because competition was being well served. If, on the other hand, the FTC is simply acting to preserve the artificial price levels imposed by RBRVS, it should say so, and stop trying to hide behind free-market principles.

III As the quote from Dr. Parker noted above, HMOs are government-created and sponsored entities. They are, in effect, cartels, the very kind of organization the FTC is supposed to “protect” the public interest from. HMOs do not operate according to capitalist principles, yet the FTC stubbornly asserts that the physicians are the party that’s not competing. The most outrageous statement made in the FTC’s complaint comes in paragraph 12, where it describes the “messenger model.” Under FTC fiat, physicians may not collectively bargain as a matter of right, but they may employ “messengers” to serve as a one-way conduit of information. The messenger can transmit an HMOs offer to a group of doctors, but the doctors may not, as a group, use the messenger to communicate to the HMO. As the FTC puts it, “Such a messenger may not, however, consistent with a competitive model, negotiate fees and 2000 F Street, N.W. Suite 315 Washington, DC 20006

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other competitively significant terms on behalf of the participating physicians, or facilitate the physicians’ coordinated responses to contract offers by, for example, electing not to convey a payor’s offer to them based on the messenger’s opinion on the appropriateness, or lack thereof, of the offer (italics added).” Competition is not a “model.” It’s not something you assemble from a store-bought kit using rubber cement. Competition is a dynamic process that is built on a process of trial-anderror. Competition requires individuals have the ability to create options, not just accept whatever arbitrary choice is handed them. Most importantly, competition permits failure, and in fact often requires it, in order to prove the validity of successful ideas. As dynamist author Virginia Postrel puts it, “Competition strengthens the legitimacy of the rules that survive.” The FTC is not interested in legitimacy. They certainly aren’t interested in competition. If they were, they would permit the physicians in this case to try a new model that didn’t conform to the FTC’s single, static vision. If the FTC believes that its model will produce superior results for consumers, than it has nothing to fear from physician collective bargaining. If the Commission is right, the doctors will soon find themselves without any patients as a result of asking for too much money. If the doctors are right, the physicians will be better paid and more effective, resulting in superior consumer service. But therein lays the problem. The FTC will never admit their model is wrong. Indeed, the FTC can’t even concede the possibility that they’re wrong. The Commission’s legitimacy does not come through competition, but through the application of coercive force. As long as the FTC is consistent in applying objectively baseless criteria, few are inclined to complain. After all, the whole rationale for the “per se” standard is that, after applying a penalty often enough, you can simply assume a given isolated fact supports one particular conclusion. Of course, the per se rule is hardly scientific. It’s not even science. Yet economics is a science, and the FTC cannot violate the laws of economics to suit its momentary whims. If the FTC has proof that their “competitive model” works, than it should present it to the public. The model must be open to criticism, feedback, and allow for individuals with differing theories to present and implement alternatives. At the end of the day, the facts of reality will adjudge the winner. Competition is a process governed by reason, not force, and not whim. In this case, we have proof that the FTC’s competitive model is flawed—the FTC’s own complaint. In paragraph 15, the Commission confesses that GPG’s pre-1999 attempts to do the FTC’s bidding and implement a risk-sharing model “resulted in significant losses.” In other words, the FTC’s model failed. Physicians did not benefit. Consumers did not benefit. The only

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way the physicians could successfully profit from their work was to try a different model, one that got them prosecuted by the FTC for, ironically, failing to compete. The proposed agreement prevents GPG and SHP from ever questioning the FTC’s economic judgment again. The respondents are barred from attempting any arrangement that might be construed as non-risk-sharing collective bargaining. The respondents are barred from even discussing such arrangements or exchanging information on price-related issues. This is a brazen violation of the physicians’ First Amendment right to free speech. The FTC tries to get around that by claiming that this is “commercial speech” that the courts afford less protection to, especially when the government can show a “compelling interest.” Leaving aside the judiciary’s mistakes for the moment, it is wrong to characterize the respondents’ actions as commercial speech, a category that more accurately describes advertising. What these physicians were doing was an act of political speech. Through their actions, they were challenging the FTC’s fundamental assumptions about the healthcare market. They were criticizing the government’s actions and proposing an alternative. For their efforts, they were treated like criminals by the Commission and forced to sign a settlement at the barrel of a (proverbial) gun. The FTC made no effort to convince the physicians to adopt their “messenger model.” Instead, when challenged on the merits, the FTC responded with brute force. In essence, the Commission has criminalized a policy discussion. In doing so, the FTC has suppressed political debate in this country, the most naked form of tyranny possible aside from outright murder. As a matter of social policy, the FTC is trying to undo the very nature of contract law itself, and in the process reduce physicians to the status of feudal serfs. In a capitalist market, every individual has the right to voluntarily contract with other individuals on mutually agreeable terms. Such a system requires a complete separation of economics and state. The government must protect the integrity of private contracts, but it cannot decide what contractual outcomes are permissible. Doing so negates the concept of competition on a fundamental level. The system encouraged by this consent agreement is one of status over contract. It arbitrarily assigns HMOs and insurance companies a government-protected right to rule over physicians. If physicians want to withhold their services from an HMO, the FTC will compel the doctors to submit. Competition is ultimately about the exchange of information and ideas. The FTC’s actions in this case prevent this. The Commission bans physicians from exchanging information in the hopes that it will bestow legitimacy on their centrally planned regulatory schemes. But no false idea can survive indefinitely. The FTC’s attempt to completely replace capitalism in the medical profession will likely fail; even if the FTC manages to completely abolish physician 2000 F Street, N.W. Suite 315 Washington, DC 20006

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rights, the doctors retain the final option of simply withholding services and retiring en masse. At that point, the FTC will be left holding the bag, unless they resort to direct physical force to compel physicians to render services. But at that point, even the FTC would be forced to admit they are promoting fascism, not capitalism.

IV The government’s war on physicians must end. Forty years of failed socialist policies is enough. Every time the FTC prosecutes a physician group, they are admitting the failure of government to “solve” the problem of rising healthcare costs. Indeed, these prosecutions are deliberately designed to deflect the blame from the true cause—government intervention—to a convenient and politically powerless scapegoat, the physicians. The war on physicians has severely limited the ability of doctors to generate wealth, and it’s reduced the level of services available to the individual consumer. The only groups that have benefited from current policy are the HMOs and bureaucratic agencies, including the FTC. At a minimum, the FTC must abandon the “per se” rule with all deliberate speed. This abomination of a standard is the equivalent of a “zero tolerance” policy that expels a high school student for having a butter knife in her car (sadly, that’s a true story.) The “per se” rule only benefits the FTC by relieving the agency of its duty to think before it acts. This is not acceptable behavior from an agency assigned quasi-judicial powers under the United States Constitution. Before the FTC even considers stripping American citizens of their fundamental rights, it has a sacred obligation to not only provide a comprehensive, coherent standard of proof; it must prove the alleged illegal conduct using facts, not conjecture or speculation. On a more fundamental level, the FTC has got to realize that it doesn’t have all the answers. The FTC does not practice medicine. The commissioners do not treat patients, interact with HMO administrators, or research the latest innovations. The FTC has absolutely no intellectual or moral right to dictate how the medical profession is to structure its relationships. Every government intervention has led to more problems, which in turn leads the regulators to redouble their failed efforts, which ultimately trap producers and consumers in a vicious cycle of regulation. This consent agreement is a mistake. No thinking human being could look at the facts of this case and arrive at the FTC’s conclusion. The idea that these physicians should be punished for asserting their right to direct the trade of their medical services is obscene. The agreement should be withdrawn, and the FTC should immediately dismiss this case and apologize to the 2000 F Street, N.W. Suite 315 Washington, DC 20006

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respondents. Any action short of that would violate the FTC’s oath to uphold the Constitution of the United States.

Respectfully Submitted,

S.M. Oliva President Citizens for Voluntary Trade

NOTES

1

Leonard Peikoff, Medicine: The Death of a Profession, in THE VOICE OF REASON: ESSAYS IN OBJECTIVIST THOUGHT 293 (Ayn Rand 1989).

Richard Parker, M.D., HMOs and “Patients Rights”: Rationing Medicine (July 10, 2001) .

2

3

Complaint, ¶ 6.

4

Complaint, ¶ 14.

5

See, generally, FTC-DOJ Statements of Antitrust Enforcement Policy in Healthcare (1996).

6

Complaint, ¶ 15.

7

Complaint, ¶ 18.

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