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Home | Mises Library | Doctor-Assisted Price Fixing?

Doctor-Assisted Price Fixing?

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Tags Big GovernmentCorporate WelfareHealthLegal SystemU.S. Economy

09/22/2004Skip Oliva

President Bush, in his acceptance speech to the Republican convention, said a top priority for his second term would be reducing the regulatory burden on the nation’s physicians: "To make health care more affordable and accessible, we must pass medical liability reform now," Bush said, adding, "[I]n all we do to improve health care in America, we will make sure that health decisions are made by doctors and patients, not by bureaucrats in Washington, D.C."

Bush’s remarks were meant to present a contrast with the Democratic ticket, particularly vice-presidential nominee John Edwards, a onetime trial lawyer who made his fortune winning medical malpractice cases. But before the president casts stones at his opponents, he should look at the sins his own administration has committed against physicians. Bush’s appointees to the Justice Department and the Federal Trade Commission have spent the past three years prosecuting physicians in record numbers, not for malpractice, but for the cardinal economic sin of modern statism—antitrust.

In the late 1970s, the Supreme Court decided the antitrust laws should apply to "professionals" such as lawyers and physicians. In 1993, lawyers at the FTC and the DOJ’s Antitrust Division made up a set of rules governing how physicians and other health care providers should run their businesses. To avoid antitrust charges, independent physicians had to organize their practices according to a government-approved economic model. Experimentation or deviation from this model would subject doctors to criminal price-fixing charges on top of potential treble-damage civil lawsuits.

The FTC and DOJ said strict rules were necessary to "protect competition" among physicians. But competition is the last thing the government wants to see in any industry, let alone health care. Instead, the antitrust rules have further consolidated the power of government-backed managed care organizations (MCOs) and employer-sponsored health insurance plans. Preserving the third-party payer system created in the shadows of Medicare and Medicaid has always been a top government priority; antitrust is merely another tool to keep rogue physicians in line.

During the Clinton administration, the antitrust rules governing physicians were applied sporadically. Only when the Republicans—the champions of managed care, as evidenced by the recent Medicare prescription drug bill—regained power did prosecuting doctors become a top antitrust priority. Since 2001, the GOP-led FTC and DOJ have prosecuted 21 physician groups, comprising nearly 12,000 doctors, for illegal "price-fixing." Twenty of the groups settled civil charges without any form of a trial. One group has challenged an FTC complaint, and is currently contesting the charges in an administrative proceeding. A preliminary decision is expected later this year.

Due Process Denied

Each of these cases presents a similar scenario: A group of independent physicians band together to deal with the administrative and regulatory burdens imposed by managed care. The group negotiates contracts with various HMOs, PPOs, and employer-based plans. The payers soon become unhappy with their contracts—they think the doctors should have agreed to lower prices—and they petition the DOJ or FTC (but mostly the latter) to intervene. The FTC opens an investigation and demands the physician group turn over thousands of pages of documents at the group’s expense. Then without further investigation, the FTC tells the group to sign a "consent order" invalidating its existing contracts and restricting the group’s future ability to represent its members (in some cases, the group is disbanded altogether.) As a matter of FTC policy, the physicians are not afforded an opportunity to tell their side of the story.

Why would physicians sign these "consent orders"? First, when you contest an FTC complaint, you don’t get the constitutional luxury of a Seventh Amendment jury trial before an Article III court. Instead, you get a hearing before an administrative law judge appointed by the FTC, who also appoints the prosecutors and issues the complaint. If you prevail before the administrative judge, the FTC prosecutors then get to appeal to…the FTC itself! Only after the five presidentially-appointed FTC commissioners issue a final order can a defendant appeal to an Article III court. But even there, the deck is stacked against you, because the appellate courts must presume the FTC’s decision correct unless the defendant—who has already suffered through two rounds at the administrative level—can prove clear error. The length and cost of this entire process alone explains why most defendants throw up their hands and surrender the moment the FTC knocks on the door.

Second, a "consent order" does not constitute a formal finding of guilt. This is important to defendants because it means that they won’t be held liable for criminal charges, and potential civil plaintiffs—i.e. the third-party payers—can’t use the FTC proceeding to support a treble-damages action. Conversely, if you contest FTC charges and lose, the Commission’s order provides prima facie evidence of guilt in any future antitrust proceeding.

The consent orders themselves are highly restrictive. Not only do the orders prohibit physicians from negotiating future contracts as a group, they prohibit physicians from even talking to one another about future contracts. The mere act of speech is condemned by the government as an overt act of price-fixing, the First Amendment notwithstanding.

Competition Enforced by Lawyers

In the health care market envisioned by antitrust regulators, physicians should "negotiate" contracts as individuals, never in a "coercive" group. Of course, no individual physician possesses any meaningful bargaining power when dealing with an HMO that represents thousands of buyers. That’s precisely the point, however: Competition, in the government’s view, means sellers accept whatever price the buyer offers, irrespective of the sellers’ costs or economic self-interest. In antitrust parlance, the buyers have an inalienable right to the "benefits of competition", while the sellers are presumptive price-fixers eager to subvert the government’s carefully designed market scheme. 

The DOJ and FTC permit narrow exceptions that enable physicians to negotiate contracts as a group. These exceptions, however, are nothing more than economic and political traps that further discourage physician dissent from government policy. In fact, most of the 21 physician groups that have been prosecuted since 2001 fell into one such trap, dubbed the "messenger model" by the antitrust agencies. Under the messenger model, a group of physicians may employ a common agent to "messenger" contract offers from a payer to the individual doctors. The trick is that the messenger can only be a one-way conduit: An agent must convey a payer’s offer without comment, but the agent cannot coordinate any response from the physicians.

The trap comes when a substantial number of individual physicians reject a proposed contract. The antitrust laws permit the FTC to infer price-fixing in the absence of actual evidence. Thus, if too many physicians reject a contract offer, the government can say there was illegal collusion, even when the facts don’t support such a conclusion.

The other permitted exceptions are for so-called "risk sharing" models, where physicians assume maximum financial risk to minimize the cost to the insurer (though not necessarily the ultimate consumer, the patient.) The most common forms of risk-sharing are capitation and withholding. Capitation is the basis of most MCOs: The insurer pays a fixed price per service—usually tied to the government’s reimbursement levels for Medicare and Medicaid—regardless of the actual cost to the physician. Thus, if a physician receives $5,000 to treat a heart attack patient, but the physician’s actual cost of treatment is $8,000, the physician must absorb the loss.

Withholds, which is encouraged by the FTC and DOJ but illegal in some states (and discouraged by Medicare), allow the insurer to set arbitrary cost-control goals and "withhold" a percentage of the physician’s reimbursement unless the goals are met, such as limiting the number of specialist referrals per year.

Both of these models shift risk from the insurer to the physician while simultaneously distorting the price paid by the ultimate consumer. It is illegal for consumers to know the true cost of health care and for the physicians to take any action that might enable services to be produced more efficiently. The only beneficiaries are the third-party insurers, which are cartels exercising the state’s authority by proxy.

The economic and legal models endorsed by the antitrust regulators demonstrate a key element of modern statism—the emphasis on empirical outcomes over process. Regulators are pragmatists of the worst kind; they seek to achieve random, short-term goals regardless of the validity of the methods employed. This is why the FTC is allowed to completely disregard constitutional due process, and why the Commission can impose an illogical economic model on the health care industry. As long as the FTC claims to be acting in the "public interest", everything it does is pragmatically justified. The "public interest", in effect, is a synonym for unrestricted government power.

It could be argued, however, that physicians do constitute a monopoly—via state licensing and other entry barriers—and this supports the FTC’s public interest argument. But this claim only makes sense if the FTC were attacking the source of the monopoly rather than an alleged symptom. Antitrust regulators have no objection to most state-created entry barriers. In fact, the FTC’s physician cases are designed to strengthen these barriers.

The FTC often complains that even a small group of physicians must not be allowed to withhold their consent to a proposed contract, because state laws prohibit MCOs from offering health plans for sale unless they include a specific "bundle" of services. For example, most states forbid health plans that don’t cover obstetrical services; if a small group of OB-GYNs refuse to sign a proposed contract, the MCO will not be able to operate within a state. The FTC believes the physicians are in the wrong for depriving the MCO of their services, when in fact it is government bureaucrats—at the federal and state levels—that are restricting competition and consumer choice.

A Bipartisan Approach to Antitrust


This brings us back to President Bush’s statement that health care decisions should be "made by doctors and patients, not by bureaucrats." If this were the administration’s true policy, then why not rescind the 1993 antitrust policy regarding physicians? The policy is nothing more than a memorandum issued by the FTC and DOJ; it has neither been enacted by Congress nor subjected to judicial review in the Article III courts. At the very least, the administration could ease up on the torrid pace of physician prosecutions—12,000-plus physicians in three years practically make doctors a bigger target of the Bush administration than al-Qaeda. But the White House has adopted a laissez-faire approach toward its own antitrust regulators, while simultaneously proclaiming that malpractice lawyers and their Democratic allies threaten the medical profession’s existence.

The White House’s indifference should not be viewed as an express endorsement of the anti-physician antitrust policy, nor is the policy itself driven by the demands of MCOs and their political allies in the Republican Party. The private antitrust bar is the real driving force behind the FTC and DOJ’s actions. The FTC’s members and senior staff are career antitrust lawyers who only serve in government a short time before returning to the private sector to cash-in on their policy "expertise." Many of the physician groups in fact have been represented by onetime FTC attorneys, in some cases by the same lawyers who wrote the actual policies. Yet despite this expensive expertise, these groups end up giving the FTC everything it wants without a fight. No antitrust lawyer, after all, sees the benefit in challenging the underlying policies that generate their income.

Unlike their malpractice brethren, the antitrust bar has done a good job of maintaining good relations with both major political parties, which largely insulates them from election year attacks. But bipartisanship doesn’t validate antitrust’s continued destruction. John Edwards may be a Democratic trial lawyer, but medical malpractice remains a valid field of law, even conceding Edwards and his colleagues have likely abused the system. Antitrust, on the other hand, has no place in a free society. Every physician antitrust prosecution by the Bush Justice Department and FTC violates the Constitution, without exception. Even if a second Bush term can contain the malpractice crisis, the antitrust crisis in health care will likely get worse under four more years of Republican leadership.


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