UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

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FTC Docket No. 9314

COMMENTS OF CITIZENS FOR VOLUNTARY TRADE/ THORNTON INSTITUTE FOR HEALTH CAREAND ECONOMICS RESEARCH

Proposed Decision andOrder Announced August11, 2004Comments Filed September 10, 2004

Citizens for Voluntary Trade (CVT), a Virginia nonprofitcorporation, though its Thornton Institute for Health Care andEconomics Research, files the following comments in response to

the Federal Trade Commission’s proposed Decision and Order inthe above-captioned case.

* * *On December 23, 2003, the FTC issued an administrativecomplaint against Piedmont Health Alliance (PHA) and tenindividual physicians who are shareholders in PHA. The complaintcharged PHA with violating Section 5 of the Federal Trade

Commission Act, 15 U.S.C. § 45, which generally prohibits “unfairmethods of competition” within interstate commerce. Specifically,the complaint said PHA and the individual physician respondents(collectively, “the respondents”) conspired to fix prices for

The Thornton Institute for Health Care and Economics Research, a division of Citizensfor Voluntary Trade, examines the impact of antitrust and competition laws on the healthcare industry. The Institute's members apply the principles of Austrian economics andrational ethics to contemporary public policy issues in health care. The Institute is namedin honor of Dr. Matthew Thornton (1714-1803), a New Hampshire physician and judge,and a signer of the Declaration of Independence.

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.Comments of Citizens for Voluntary Trade/Thornton Institute for Health Care and Economics Research

physician services in the Unifour area of North Carolina.

Thecomplaint said that PHA represented about 450 physician membersin contract negotiations with various third-party payers (insurers,HMOs, employers, etc.), and that in doing so, PHA fixed the prices

for its members’ services, thereby depriving the payers of “thebenefits of competition.” The FTC said that PHA coordinated itsprice-fixing with three localhospitals. The hospitals settledseparate Section 5 charges with the FTC in a consent orderannounced at the same time the PHA complaint was filed.After initially contesting the FTC’s charges before anadministrative law judge, the PHA respondents eventually optedto sign a consent order giving the Commission substantially all ofthe relief it would have sought at the administrative hearing. Theproposed order prohibits the PHA respondents from negotiatingwith payers on any physician’s behalf, facilitating any agreement todeal or not deal with any payer, or to enter into any voluntaryarrangement that allows physician to negotiate with payersexclusively through PHA.* * *In this filing, we will address the economic assumptions andconcepts underlyingthe FTC’s prosecution of the PHArespondents. Because this matter was not adjudicated before anindependent judge, we will not examine the validity of the factualallegations made by the complaint. This analysis will proceed as ifthe FTC’s facts are correct, but CVT-Thornton Institute makes nofactual conclusions as such.At the outset, we will define the “free market” or the “marketeconomy.” The Austrian economist Ludwig von Mises said, “Themarket economy is the social system of the division of labor underprivate ownership of the means of production. . . . The state, thesocial apparatus of coercion and compulsion, does not interferewith the market and with citizens’ activities directed by themarket.”

A free market, in other words, is free of all coercion, be itprivate or governmental. There is

role for force in a market

economy, even if an initiator of force claims to act “in the publicinterest,” as the FTC does here.

The Unifour area consists of Alexander, Burke, Caldwell, and Catawba counties.

Ludwig von Mises,

Human Action

, at 257.

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.Comments of Citizens for Voluntary Trade/Thornton Institute for Health Care and Economics Research

If health care in the United States operated in a free market,than individual buyers (patients) and sellers (physicians) wouldinteract free of government intervention. Any intermediariesbetween buyers and sellers would exist only if they proved tofacilitate efficient exchange. For example, in a free market, manyphysicians would choose to affiliate with a hospital rather thanconstruct their own dedicated medical facility. Similarly, severalphysicians might join together to form a practice group in order toshare costs and patients. On the other side of the ledger, patientsmight choose to pay their own health care costs, as they do for foodand other scarce services, or a group of buyers might pool theirresources together in order to collectively purchase health care.The U.S. health care system, however, does not operate in a freemarket. The government extensively intervenes in the marketplace.The principal form of intervention is the third-party payer. WhenCongress enacted the Medicare system in 1965, the governmentitself functioned as the payer. Certain patients obtained medicalservices but no longer paid for them; the government picked up thetab. Divorcing demand from the ability to pay had a predictableeffect: The price of medical care dramatically increased. Congressresponded to this, not by admitting error and ending itsintervention, but by authorizing a larger series of incursions upon

the market. This took the form of “managed care”.Managed care has its origins in the wage and price controlsenacted by the federal government during World War II. Becausemarketwages were restricted by government fiat, employersexploited a loophole in the tax system to give their employees“raises” by providing health insurance benefits (which theemployers could deduct from their taxes as a business expense.) Inthe post-Medicare to control prices, Congress adopted more explicitsubsidies to encourage employers to provide health insurance totheir employees, either on their own or through managed careorganizations (MCOs).The FTC’s own complaint in this case aptly describes the basicprinciples of MCOs. Paragraph 10 of the complaint notes that third-party payersûemployers and MCOsûoffer contracts to physiciansbased on the RBRVS, a Medicareformula that

fixes prices

formedical services

based on Medicare’s determination of the“average cost” of a given procedure. The RBRVS is not a market