Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
ANTITRUST AND PHYSICIAN PAYMENT Michael R. Pollard The purpose of this paper is to review antitrust principles and laws as they relate to physician payment. On their face, the antitrust statutes are deceptively simple. Unlike many federal statutes, the antitrust statutes are very brief and written in a relatively straightforward style. However, the body of antitrust law is largely the result of judicial interpretations of those statutes, and the opinions in antitrust cases can be long and complicated expositions of fact, law and economics. Antitrust cases typically raise many factual questions and the resolut ion of those questions of ten turns on sophisticated economic analysis of the competitive effects of the business practices under review by the court. Because this paper is intended for a well-informed but essentially nonlawyer audience, it is not heavily footnoted and most statements are not qualif fed by numerous caveats as they would be were it written for antitrust attorneys or economists. My intent here is to inform and guide the interested reader through an area of the law that is increasingly relevant to the issue of physician payment. The Origins and Elements of Antitrust Analysis Historical Underpinnings Every society must order its economic activity according to a basic framework. Despite a heavy overlay of government regulation, the United States economy is based on the price system and competition. The price system conveys information to both producers and consumers and it creates incentives to produce goods and services eff iciently. It also stimulates producers to innovate and offer new services that generate as well as respond to consumers' preferences. In competitive markets, producers will deliver goods and services that the majority of consumers demand. Competitive markets operate on the basis of consent and do not force individuals to act against self-interest.] The federal antitrust statutes were enacted to ensure that market competition is not unreasonably restrained by certain private agreements or practices. These statutes attempt to promote vigorous competition among many sellers: they are based on the premise that such a system will foster economic efficiencies. They were not designed to redistribute income or to achieve other social policy goals. -75-
Contemporary antitrust and trade regulation laws find their antecedents in English Common Law.2 During the thirteenth century in England, when commerce was primarily confined to local markets, the following activities were indictable offenses: 1 ) buying goods before they came to market; 2) buying goods in large quantities and selling them in smaller amounts; and, 3) buying crops before they were harvested. These were the so-called Middleman offenses.: they were grounded in the belief that middlemen raised prices without achieving any useful business or social purpose. English towns during the fifteenth and sixteenth centuries typically restricted trading by strangers through granting monopolies to local business interests, such as the trade guilds. The English Crown also engaged in granting monopolies as a means for raising revenue. Restraints on trade became so ubiquitous and burdensome that the English Parliament in 1623 enacted the Statute of Monopolies which invalidated all monopolies with exceptions for patents on new inventions, some monopolies granted by towns and guilds to establish more orderly trade relationships, and Parliamentary grants.3 English Common Law conspiracy doctrines influenced the prohibitions against unlawful conspiracies found in current antitrust statues. These doctrines condemned otherwise lawful acts if they were committed by several individuals with the intent to achieve an ~unlawful. purpose. Unlawful in this context meant Contrary to public policy.. The seeds for the antitrust statutes in the United States were sown during the rapid economic growth of the second half of the nineteeth century. This period spawned tremendous changes in industrial production and transportation, but it was marred by periodic and severe economic depressions. Populism, which arose out of discontent among agricultural and small town interests, gained many supporters and generated pressure for fundamental monetary and business reforms. The incidence of financial scandal and public corruption was high during this period, and many examples involved large trusts and monopolies such as the railroads and the oil companies. Certain markets were controlled by monopolists, but even in those markets where competition did exist, predatory pricing and other unfair business practices were commonplace. The Ant itrust Statutes Despite the scandals and corruption that occurred during the late nineteenth century, public sentiment did not favor government takeover of basic industries or even stringent government regulation as the remedy for marketplace abuses. Instead, Congress trusted competition to police the market and free it of abusive private restraints. Accordingly, Congress enacted the Sherman Antitrust Act in 1890 which condemned monopolies and contracts, combinations, and conspiracies that restrain trade.4 -76-
During its first two decades, the courts relied on the Sherman Act to strike down price fixing by railroads, the merger of two large western railroads, and three large trusts that controlled the meat, oil and tobacco industries. Violations of Sections 1 and 2 of the Sherman Act are criminal offenses and can be punished by up to one year imprisonment and fines. The Act is enforced by the Justice Department. In 1914, Congress supplemented the Sherman Act by enacting the Federal Trade Commission Act (FTC Act) 5 and the Clayton Antitrust Act. 6 The FTC Act appears to have emerged from both business concerns about the lack of an administrative commission or agency under the Sherman Act to provide guidance on which trade practices were lawful or unlawful, and those who believed business practices needed to be policed by a strong, independent commission with investigative and law enforcement powers. Members of this latter group felt that the Sherman Act was too general in its scope to provide adequate protection from unfair trade practices and that the Attorney General was not sufficiently insulated from political pressure to vigorously enforce a statute which often ran counter to strong business interests.7 The Federal Trade Commission Act prohibits Funfair methods of competition. and Funfair or deceptive acts or practices. affecting interstate commerce. Under judicial supervision and congressional oversight, the FTC is free to work out the exact meaning of unfairness or deception in the context of particular cases. In addition, as the result of amendments to the FTC Act in 1975, the Commission is authorized to promulgate trade regulation rules delineating and prohibiting unfair acts or practices on an industrywide basis. This rulemaking authority has embroi led the FTC in several heated controversies with industry groups. The FTC issues cease and desist orders and can impose civil penalties or require consumer redress in certain cases. The Clayton Antitrust Act was enacted to provide legal remedies for certain practices that were not specifically covered by the Sherman Act. It prohibits: 1) price discrimination; 2) sales on the condition that the buyer must stop dealing with the seller's competitors; 3) certain corporate mergers; 4) interlocking corporate directorates; and 5) certain common carrier transactions. The Clayton Act is enforced by both the Justice Department and the Federal Trade Commission, and violations of the Act are civil in nature. Elements of Analysis The antitrust laws are aimed at ~unreasonable. restraints on trade and competition, even though a literal reading of Section 1 of the Sherman Act might imply that all contracts and agreements that restrain trade are prohibited. In the 1911 case of Standard Oil Company v. United States,8 Chief Justice White first articulated the standard of reasonableness, or Mule of reason,. that guides the courts in reviewing the legality of particular trade restraints. The elements of the Mule -77-
of reason. test were further elaborated in the case of Board of Trade of Chicago v. United States. 9 Here, the Supreme Court held that the true test of legality for a restraint of trade is whether it merely regulates and promotes competition, or whether it suppresses or destroys competition. In order to make this determination, courts must review the nature of the business in question, its condition before and after the restraint was imposed, the history of the restraint, and the purposes or ends for which it was adopted. The Mule of reason,. adopted by the Supreme Court more than 70 years ago, is the principle that still guides judges today in antitrust cases. However, it is a somewhat vague standard and it leads to extensive factual analysis, including costly economic studies. Thus, the courts have decided to dispense with a full-blown rule of reason analysis in certain cases involving restraints so blatantly anticompetitive that they are deemed to be per se unreasonable and illegal.l° The courts have held the following activities to be per _ violations of the antitrust laws: price fixing, division of markets, group boycotts, and tying arrangements. Application of the Antitrust Laws to the Professions Prior to 1975, the antitrust laws were of little concern to the professions. But, in that year, the Supreme Court struck down a minimum fee schedule imposed by a bar association in the case of Goldfarb v. Virginia State Bar.ll The case is significant because the Court - rejected the argument that the learned professions were exempt from the antitrust laws and did not engage in ~trade. or ~commerce. as those terms are used in the antitrust statutes. The Court concluded that Congress did not intend for professionals to be exempt from antitrust scrutinyl2. Three years later, the Court ruled on an ethical prohibition on competitive bidding imposed by the National Society of Professional Engineers and reiterated that the professions must comply with the antitrust lawsl3. The Court emphasized that the primary objective of antitrust is to promote competition and that courts, in reviewing antitrust cases, are limited to making judgments about the competitive impact and economic significance of the challenged restraint. The Court rejected the argument that judges should decide whether competition in a particular context is socially good or bad: the justices said that such questions should be decided by Congressl4. However, the Court did acknowledge that the professions may merit special antitrust consideration because they do differ from other business services. These decisions laid the groundwork for numerous investigations of restraints on professional practice by antitrust enforcement agencies, both at the federal and state levels. The Department of Justice has investigated architects, accountants, civil engineers, mechanical engineers, and physicians' specialty societies. The Federal Trade Commission has reviewed restraints i mposed by lawyers, accountants, real -78-
estate brokers, physicians, dentists and veterinarians. States like Ohio, West Virginia, and Arizona have focused their investigations primarily on health professionals. The most important law enforcement action brought by the Federal Trade Commission against a professional organization was the American Medical Association case decided in 197915. Here, the Commission found that the AMA had prohibited almost all forms of truthful advertising and solicitation through enforcement of various provisions of its code of professional ethics. Although the Commission found the AMA's restrictions on truthful advertising to be illegal, its opinion in the case states that the ....AMA has a valuable and unique role to play with respect to deceptive advertising and oppressive forms of solicitation by physicians.. The Commission's order expressly provides that the AMA may adopt and enforce rules to prohibit such practices. The FTC's AMA case was also a challenge to the AMA' s so-called Contract practice. rules. Under those rules, it was unethical for a physician to sign a contract with a ~ lay. hospital, or HMO, if there was ~underbidding. for the contract, or if the compensation was ~ inadequate. based on the fees usually charged in the community. These restrictions were, in some respects, quite similar to the rules against compet itive bidding that the Supreme Court found illegal in the Professional Engineers case. The commission ordered the AMA to eliminate these restrictions on price competition, which they did in their revised Principles of Medical Ethics. Effect of Antitrust on Professional Practice The fact that the antitrust laws are fully applicable to health professionals does not mean that they cannot engage in self-regulation or that restraints on their conduct will be treated in exactly the same way as a similar restraint on the conduct of a group of businessmen. Certification by medical specialty groups is an example of self-regulation that is reasonable provided the certification criteria and procedures are fair and the certification decisions are made objectively, on the basis of competence. Ethical rules that have the purpose and effect of prohibiting false or deceptive advertising are another example of permissible, in fact highly desirable, self-regulation. Insofar as health and other professional services markets are truly unique, traditional antitrust analysis is suff iciently flexible to take such conditions into account in considering whether a particular practice has had an unreasonably anticompetitive effect. It is also clear that the antitrust laws do not interfere with state regulation of the professions. In Bates v. Arizona State Barl6, the Supreme Court rejected an antitrust challenge to restrictions that the Arizona Supreme Court had imposed on attorney advertising. The reason the Court did this was because the antitrust laws proscribe certain -79-
private actions but do not extend to anticompetitive practices that are sanct toned by the states. The Court has said on numerous occasions that immunity from the antitrust laws is warranted when the anticompetitive activity is conducted pursuant to a clearly articulated and af formatively expressed state policy that is actively supervised by the state itself: this is the so-called estate action. doctrinel7. Despite the above mentioned limits on the scope of antitrust scrutiny, whenever professionals seek to influence fees or payment, antitrust concerns will be raised. Following Goldfarb's condemnation of minimum fee schedules as price-fixing, two elements of how fees are structured in medical markets became targets for antitrust scrutiny by law enforcement officials--i.e., relative value studiesl8 and medical society control of Blue Shield plansl9. Relative value studies attach a series of numerical weights to medical procedures. The weights indicate the proportional value of each procedure to all others included in the study. Such tables are not fee schedules, but they can be easily converted to them by multiplying each proportional value by a dollar conversion factor. The Justice Department and the Federal Trade Commission saw the relationship between relative value studies and the illegal pricing formulas used by other industries to set prices, and enjoined them or obtained consent decrees governing their future development and use. More recently, however, a federal district court rejected the argument that a relative value study was a form of pr ice-f ixing that constitutes a per se violation of the Sherman Act20. It is not clear how the case would have been resolved had the Justice Department introduced evidence on the adverse economic ef feats of the scheme and the court had based its decision on a rule of reason ana lys is . Medical society control of Blue Shield was, at one time, a target for antitrust enforcement agencies. During the late 1970's, it looked like the Federal Trade Commission might initiate a rulemaking proceeding challenging the medical profession's influence over the policies and practices of Blue Shield plans. This initiative ultimately was abandoned by the FTC, but not before other medically dominated organizations had taken some steps toward including more nonmedical representation on their governing boards. In the area of physicians' fees and payment arrangements, the antitrust laws clearly prohibit economic boycotts, both maximum and minimum price fixing, and attempts to monopolize the provision of services in a market. The antitrust laws do not prohibit professional consultation with health insurers, peer review of professional practices or utilization of hospital facilities, disciplinary actions by professional societies, or the formation and participation in prepaid health care plan where the physicians are sufficiently integrated into the financial structure that they would share in the risk of loss should the plan fail to meet its commitments. The legality of relative value -80-
studies, professional participation in peer review of fees, exclusive contract arrangements with hospitals or other institutional providers, and participation in less than fully integrated health care plans is unclear at this time. The Effect of the Antitrust Laws on Insurers The McCarran-Ferguson Act exempts from the antitrust laws the business of insurance. to the extent that it is regulated by state law and does not involve acts of ~boycott, coercion, or intimidation.~21 In a series of cases, the Supreme Court has explained and progressively narrowed the scope of this exemption. In St. Paul Fire & Marine Insurance Company v. Barry22, the Court stated that the term ~boycott. included concerted refusals to deal with consumers, as well as competitors, within an industry. In Group Life & Health Insurance Company v. Royal Drug Company23, the Court set out three criteria for deciding whether a practice falls within the business of insurance: 1) the practice must transfer or spread a policyholder's risk; 2) the practice must be an integral part of the policy relationship between the insurer and the insured; and 3) the practice must be limited to entities within the insurance industry. Last year, the Supreme court held that the McCarran-Ferguson Act does not remove peer review of professional fees f ram the purview of the antitrust laws24. This does not mean that peer review is illegal, but merely that it is not exempt f ram antitrust scrutiny. The McCarran-Ferguson Act exemption has been asserted by professionals in the context of antitrust cases when their activities were related to health care f inancing considerations and, arguably, were part of the business of insurance. While considerable ambiguity continues to exist concerning the scope of this exemption, the Supreme Court' s decisions make it clear that it, like all exemptions f ram the ant it rust laws, wi 11 be na ~ rawly cons t rued . For several years, the commercial health insurance companies have asserted that they are unable to compete effectively with Blue Cross/Blue Shield plans in most markets because their market shares are too small for them to bargain aggressively with hospitals or other providers. In order to attain more leverage in these markets, they suggest that they should be able to share data among themselves on costs and utilization but claim that they are precluded from doing so because of the antitrust laws. The insurers never clearly stated just what types of information they wanted to pool and share wi th their competitors, and they never of f icially requested either the Justice Department or the Federal Trade Commission to review the matter and provide either informal or formal advice on the legality of such arrangements. In November 1983, Senator Arlen Specter introduced a bill entitled the Health Care Cost Containment Act of 1983. which, if enacted, would grant antitrust immunity to insurers who collaboratively collect data on health care -81-
costs and jointly negotiate prices with hospitals, physicians and other health care providers25. New Methods for Paying Physicians Antitrust has long been a tool that proponents of alternative delivery systems have used to ease their entry into traditional health care markets. When traditional fee-for-service physicians have threatened to boycott HMO's, or the physicians who affiliate with them, the antitrust laws have been an effective means for stopping such anticompetitive practices from coming to fruition. Similarly, efforts by organized medical groups to discourage price competition or prohibit the disclosure of fees have been successfully challenged under the antitrust statutes. Today, the pressure to curb rising health care costs is forcing even traditional physicians to consider participating in a variety of new organizations that promise to be more cost conscious than older methods for paying physicians but that also preserve most of the characteristics of fee-for-service practice. The growth and development of these organizations has been concentrated primarily in California and other western states26. The term preferred provider organization., or PPO, was coined by InterStudy to describe many of these new physician groups. Although PPO's can be sponsored by underwriters, providers, employers, or others, they seem to share four basic characteristics: 1) insurers or other third party payers contract with a panel of providers to furnish services; 2) negotiated fee schedule (normally discounted f ram what the provider usually charges) and a promise to pay the providers promptly; 3) some form of utilization review; and 4) patients are not limited to the PPO panel but instead are encouraged to use the panel members through incentives such as reduced deductibles or no copayments. PPO's appear to have the potential for creating competition in both the financing and provision of health care by offering price and coverage options that increase the economic incentives for physicians to control fees and utilization levels. Structuring the fee schedule or discount may pose problems for some PPO's given the Supreme Court's 1982 decision in Arizona v. Maricopa County Medical Society27. Here, the Court held that it was per se unlawful for physician members of a foundation for medical care to agree jointly on the maximum fees that could be claimed in payment for services rendered to policyholders of foundation-approved insurance plans. For a variety of reasons r not least of which that the case was decided by a 4-3 vote, the Maricoua case has lef t the law in this area uncertain. The decision is clear that the peer review and administrative functions performed by the medical care foundations did not prevent application of the per se rule; it also clarifies that competitors who have achieved sufficient operational integration by forming some sort of -82-
partnership or joint venture can jointly set prices without per se condemnation. But, by failing to supply us with an analytic framework, the Court missed an important opportunity to clarify a complex and critical aspect of price fixing law. Maricopa does not make it easier to discern when competitors acting in a joint enterprise have suff iciently integrated their operations so that an agreement they reach on price would be analyzed by the courts under the rule of reason as a joint productive arrangement, rather than being automatically condemned as naked price fixing. The Court gave no useful guidance for physician groups that may be willing to integrate more than was evident in Maricopa, but who might not wish to go as far as establishing partnerships or other joint ownership arrangements. This uncertainty may discourage the formation of alternative delivery systems with the potential for enhancing price competition and efficiency. While the Supreme Corut's decision in Maricopa certainly does not tell us much about what physicians can do in relation to prepayment plans, it surely does not mean that physicians who have achieved significant integration can never control payment decisions in a prepayment plan. Despite Maricopa, there are some observations I can make about provider groups and PPO' s: A group of providers could combine their practices into a single group practice or clinic and serve as the provider component of a PPO. A group of providers also could establish an entire PPO by going into the f inancing and underwriting business (the latter could be accomplished through a joint venture with an insurer ~ . Maricopa tells us that simply performing certain administrative functions, such as peer review and claims adjustment, does not take joint price setting activities out the per se category of antitrust violat ion. Summary and Conclusions The antitrust laws do impose limits on the ability of physicians to engage in joint fee setting and from employing unfair tactics to discourage or penalize competitors. At the same time, antitrust does not favor one method of payment or one type of physician organization over another. Rather, it is directed toward preserving open and fair competition in the market for health services. The doctrines and theories of traditional antitrust analysis are expansive and flexible enough to deal with new forms of physician payment that have already been introduced as well as those which are still a 83
gleam in someone's eye. As in other antitrust matters, the following concerns and questions will be addressed if any of the new payment methods are subjected to antitrust scrutiny: What are the probable effects of the challenged practice? Will it enhance or dampen competitive forces in the market? What is its purpose? Who is involved? buyers? Are they competitors or are they What is really happening? Is the practice under scrutiny a competitive restraint or is it really ancillary to a larger arrangement that will promote greater efficiency and enhance competition? -84-
Footnotes Schultze, The Public Use of Private Interest, Harpers (May 1977) at 43. 2. See Letwin, The English Common Law Concerning Monopolies, 21 U. Chi. L. Rev. 335 (1954). 3. 21 Jac. 1, c.3 (1623~. See Darcy v. Allen, 11 Coke 84, 77 Eng. Rep. 1260 (K.B. 1603). '. 90 Stat. 1397; 15 U.S.C. 38 Stat. 717; 15 U.S.C. 41. 6. 38 Stat. 730; 15 U.S.C. 12. 7. 1. For a fuller discussion of the origin of the FTC Act, see Cushman, The Independent Regulatory Commissions, 177-213 (1941~. 8. 221 U.S. 1 (1911). 9. 246 U.S. 231 (1918). 10. Northern Pacific Ry. Co. v. United States, 356 U.S. 1,5 (1958~. 11. 421 U.S. 733 (1975). 12. Id. at 787. 13. Nat'1 Soc'y of Professional Engineers v. United States, 435 U.S. 679 (1978). 14. Id. at 692. 15. American Medical Association, 94 F.T.C. 701 (1979), aff'd, 638 F. 2d 443 (2d Cir. 1980), aff'd by an equally divided court, 455 U.S. 676 (1982~. 16. 433 U.S. 350 (1977~. The advertising restrictions at issue in this case were struck down as a violation of the First Amendment's protection of commercial speech. The Estate actions doctrine was first articulated by the Supreme Court in Parker v. Brown, 317 U.S. 341 (1943). 17. California Retail Liquor Dealers Asstn v. Midcal Aluminum, Inc., 100 S. Ct. 937 (1980). 85
18. Several consent orders have been signed by professional groups agreeing not to enforce relative value scales. See California Medical Ass'n, 93 F.T.C. 519 ( 1979~; Minnesota State Medical Assn., 90 F.T.C. 337 ( 1979~; American College of Radiology, 89 F.T.C. 144 ( 1977~; American College of Obstetricians and Gynecologists, 88 F.T.C. 955 ( 1976~; American Academy of Orthopaedic Surgeons, 88 F.T.C. 968 ( 1976~. 19. The states of Ohio and West Virginia brought and settled cases to end medical control of Blue Shield plans. See Ohio v. Ohio Medical Indemnity, 1978-2 Trade Cas. 62,154 (S.D. Ohio 19781. 20. United States v. American Soc'y of Anesthesiologists, 473 F. Supp. 147 (S.D.N.Y. 1979). 21. 15 U.S.C. 1011 et seq. ( 1976) . 22. 438 U. S. 531 ( 1978 ) . 23. 440 U.S. 205 ( 1979) . 24. Union Labor Life Insurance Co. v. Pireno, 102 S. Ct. 3002 (1982). 25. S. 2051, 96th Cong., 1st Sess. (1983). 26. Medical World News (Feb. 28, 1982). 27. 102 S. Ct. 2466 (1982). 86
