FTC Commissioners Uphold ALJ's Finding of Liability in Physician Price Fixing Case

The Federal Trade Commission, ruling on an appeal of a decision by an Administrative Law Judge (ALJ), held that North Texas Specialty Physicians (NTSP) violated Section 5 of the Federal Trade Commission Act.

NTSP, an independent physician association (IPA) located in Fort Worth Texas, had hundreds of physician members in multiple specialties, many of whom competed directly with one another. NTSP member physicians entered into Physician Participation Agreements (PPAs) with NTSP, under which NTSP had a right of first negotiation with all payors. NTSP regularly polled its members about the rates they would accept, and used the poll results to establish minimum rates at which NTSP would messenger contracts to the physicians. The mean, median, and mode of rates submitted in the poll were disclosed to member physicians. NTSP also routinely received powers of attorney from member physicians designating NTSP as an agent for payor negotiations. Using the powers of attorney, NTSP would refuse to messenger payor offers that contained rates below the minimum rates established by the physician poll.

The FTC's administrative complaint against NTSP, filed in 2003, was decided by the ALJ in November 2004. On appeal, a unanimous Commission upheld the ALJ's finding of liability against NTSP, holding that NTSP's arrangements with its member physicians constituted unlawful price-fixing.

The Commission first disposed of NTSP's jurisdictional argument, and then turned to the proper analytical framework. After discussing the various legal standards, the Commission declined to characterize NTSP's behavior as per se unlawful, noting that the agreements might have been found lawful had they been part of a legitimate venture to increase efficiencies and reasonably necessary to achieving those efficiencies. The Commission also declined to engage in a "full blown" rule of reason inquiry, which requires a thorough examination of the competitive effects of an agreement in the context of the relevant market. Instead, the Commission adopted the analysis used in its recent decision in Polygram Holding, Inc., often characterized as a "quick look" or a truncated rule of reason.

The Polygram analysis first requires an inquiry on the nature of an agreement, and whether it is "inherently suspect" as likely to suppress competition. An agreement is "inherently suspect" if it closely resembles other unlawful behavior. If so, then the defendant must show a legitimate justification for the agreement, or else face liability. The justifications for the agreement must be cognizable under the antitrust laws, i.e., efficiency enhancing, and plausibly improve competition. If the defendant is unable to establish a legitimate justification for its practices, proof of market definition and market power is not required. If, however, the defendant is able to provide a cognizable and plausible justification, the plaintiff must then make a more detailed showing that the restraints are likely to harm competition. Having established the appropriate framework, the Commission went on to examine each of NTSP's challenged practices.

The Commission found that NTSP's practices, taken as a whole, were "inherently suspect." NTSP's use of a poll and disclosure of the polls' results, for example, facilitated price-fixing because it allowed physicians to telegraph their intentions about future prices and encouraged them to reject price offers below the minimum fees indicated. NTSP's membership agreement (the PPA), by rendering NTSP as the sole bargaining agent for competing physicians, also facilitated price fixing. NTSP's deviations from the messenger model, such as its refusal to deliver contracts that fell below its minimum reimbursement schedule, allowed NTSP to exert collective bargaining leverage before its physicians have a chance to opt in our out of a contract. The powers of attorney granted to NTSP encouraged price fixing by improperly granting NTSP the authority to negotiate contract terms, effectively resulting in joint contracting for the physicians. NTSP also used its agency powers to terminate its members' participation in health plans when it determined that the payors' reimbursements were inadequate. The Commission pointed to its Health Care Guidelines as providing what the antitrust agencies believe is "a legal path through [an antitrust] danger zone," stating that "it is dangerous to stray off the route."

NTSP argued that its polling practices were designed to encourage risk panel physicians , who used more efficient treatment patterns, to participate in non-risk contracts, thus resulting in spillover efficiencies. The Commission rejected this argument, finding that NTSP failed to demonstrate a logical relationship between its questioned activities and the claimed efficiencies. NTSP did not explain why its risk panel physicians would have the incentive to apply the quality and cost control techniques they used on risk patients to any non-risk patents they may have. According to the Commission, NTSP "failed to articulate a logical nexus between these activities that facilitate price fixing and the claimed efficiencies."

The Commission also rejected NTSP's arguments that the PPA, its use of powers of attorney, its communications with physicians and payors, and its refusal to messenger contracts had procompetitive effects. According to NTSP, these practices all enhanced efficiency by reducing the costs of negotiation. The Commission disagreed, finding that these activities were "designed to enhance bargaining clout" rather than to increase efficiency, conserve resources, or spread the procompetitive benefits of information sharing.

Although the Commission found NTSP liable for price-fixing, it cautioned that its opinion should not be read so broadly as to chill potentially efficient practices. The Commission explained how proper use of a messenger model could avoid antitrust liability. It pointed to its advisory opinion in another physician practice case, MedSouth, in which the FTC did not object to joint negotiation because MedSouth's development of an extensive clinical resource management program sufficiently integrated the parties. NTSP's other practices could have been modified so as not to run afoul of the antitrust laws. NTSP could, for example, have polled its members on future fees so long as the results of the poll were not disclosed, all payor offers were messengered to the physicians, and NTSP did not use the polling results to negotiate price with the payors.

A copy of the decision is available at this link.

For additional information about this Antitrust Development, please contact Toby G. Singer, leader of the Jones Day Health Care Antitrust Practice.

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