FTC Docket No. 9314

Proposed Decision and Order Announced August 11, 2004 Comments Filed September 10, 2004

Citizens for Voluntary Trade (CVT), a Virginia nonprofit corporation, though its Thornton Institute for Health Care and Economics Research, files the following comments in response to the Federal Trade Commission’s proposed Decision and Order in the above-captioned case.1 *** On December 23, 2003, the FTC issued an administrative complaint against Piedmont Health Alliance (PHA) and ten individual physicians who are shareholders in PHA. The complaint charged PHA with violating Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, which generally prohibits “unfair methods 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 Citizens for Voluntary Trade, examines the impact of antitrust and competition laws on the health care industry. The Institute's members apply the principles of Austrian economics and rational ethics to contemporary public policy issues in health care. The Institute is named in honor of Dr. Matthew Thornton (1714-1803), a New Hampshire physician and judge, and a signer of the Declaration of Independence.

IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. Comments of Citizens for Voluntary Trade/ Thornton Institute for Health Care and Economics Research

physician services in the Unifour area of North Carolina.2 The complaint said that PHA represented about 450 physician members in 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 “the benefits of competition.” The FTC said that PHA coordinated its price-fixing with three local hospitals. The hospitals settled separate Section 5 charges with the FTC in a consent order announced at the same time the PHA complaint was filed. After initially contesting the FTC’s charges before an administrative law judge, the PHA respondents eventually opted to sign a consent order giving the Commission substantially all of the relief it would have sought at the administrative hearing. The proposed order prohibits the PHA respondents from negotiating with payers on any physician’s behalf, facilitating any agreement to deal or not deal with any payer, or to enter into any voluntary arrangement that allows physician to negotiate with payers exclusively through PHA. *** In this filing, we will address the economic assumptions and concepts underlying the FTC’s prosecution of the PHA respondents. Because this matter was not adjudicated before an independent judge, we will not examine the validity of the factual allegations made by the complaint. This analysis will proceed as if the FTC’s facts are correct, but CVT-Thornton Institute makes no factual conclusions as such. At the outset, we will define the “free market” or the “market economy.” The Austrian economist Ludwig von Mises said, “The market economy is the social system of the division of labor under private ownership of the means of production. . . . The state, the social apparatus of coercion and compulsion, does not interfere with the market and with citizens’ activities directed by the market.”3 A free market, in other words, is free of all coercion, be it private or governmental. There is no role for force in a market economy, even if an initiator of force claims to act “in the public interest,” as the FTC does here.

2 3

The Unifour area consists of Alexander, Burke, Caldwell, and Catawba counties. Ludwig von Mises, Human Action, at 257.


IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. 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) would interact free of government intervention. Any intermediaries between buyers and sellers would exist only if they proved to facilitate efficient exchange. For example, in a free market, many physicians would choose to affiliate with a hospital rather than construct their own dedicated medical facility. Similarly, several physicians might join together to form a practice group in order to share costs and patients. On the other side of the ledger, patients might choose to pay their own health care costs, as they do for food and other scarce services, or a group of buyers might pool their resources together in order to collectively purchase health care. The U.S. health care system, however, does not operate in a free market. The government extensively intervenes in the marketplace. The principal form of intervention is the third-party payer. When Congress enacted the Medicare system in 1965, the government itself functioned as the payer. Certain patients obtained medical services but no longer paid for them; the government picked up the tab. Divorcing demand from the ability to pay had a predictable effect: The price of medical care dramatically increased. Congress responded to this, not by admitting error and ending its intervention, 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 controls enacted by the federal government during World War II. Because market wages were restricted by government fiat, employers exploited a loophole in the tax system to give their employees “raises” by providing health insurance benefits (which the employers could deduct from their taxes as a business expense.) In the post-Medicare to control prices, Congress adopted more explicit subsidies to encourage employers to provide health insurance to their employees, either on their own or through managed care organizations (MCOs). The FTC’s own complaint in this case aptly describes the basic principles of MCOs. Paragraph 10 of the complaint notes that thirdparty payersûemployers and MCOsûoffer contracts to physicians based on the RBRVS, a Medicare formula that fixes prices for medical services based on Medicare’s determination of the “average cost” of a given procedure. The RBRVS is not a market


IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. Comments of Citizens for Voluntary Trade/ Thornton Institute for Health Care and Economics Research

price, but a price control. It divorces price from cost by reimbursing physicians the same amount of money per procedure regardless of actual cost or quality of care. No free market industry would voluntarily employ the RBRVS approach to prices. As an illustration of this point, imagine the furniture industry under an RBRVS scheme. The government decides all Americans have a “right” to furniture. To contain costs, the government imposes a uniform fee schedule. For example, all couches, regardless of quality or cost, will be priced at $100. Would such a fee schedule lead to greater competition and better quality products? No. Since the price remains constant irrespective of the furniture maker’s needs or actions, the market will become stagnant and reward mediocrity. MCOs take the Medicare RBRVS methodology and apply it to the private health care market. Since federal law encourages and subsidizes MCOs and employer-purchased health insurance, individual buyers have little incentive to purchase health care on their own. This allows MCOs to aggregate hundreds and thousands of buyers into a single purchasing unit that can be leveraged against physicians to extract the lowest possible price for services. There is, of course, nothing wrong with buyers voluntarily combining their purchasing power. This is commonplace in retail, where buyers often purchase goods from large resellers instead of manufacturers. Resellers leverage their large customer base to obtain lower prices from the manufacturers. Supporters of managed care argue this is precisely what MCOs do. Paragraph 9 of the FTC’s complaint makes this very argument: [P]hysicians often enter into contracts with payors that establish the terms and conditions, including fees and other competitively significant terms, for providing health care services to enrollees under the payors’ programs. Physicians entering into such contracts often agree to reductions in their usual compensation in order to obtain access to additional patients made available to them by the payors’ contractual relationships with their enrollees. Such reductions in physician fees may permit payors to constrain increases in, or reduce, the premiums they charge to their customers, or to offer broader benefits


IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. Comments of Citizens for Voluntary Trade/ Thornton Institute for Health Care and Economics Research

coverage without increasing premium levels or outof-pocket expenditures by enrollees. The FTC presents an ideal model of how it believes physicians and payers should interact. All doctors want to see as many patients as possible, all doctors will accept lower prices per patient, and all physician price reductions will be reflected in the prices payers charge individual buyers. A free market, however, does not behave according to a centrally-planned model. The FTC’s model ignores the harmful impact of third-party payers upon buyers and sellers. An MCO might sound like a retail reseller, but there are substantial differences between an HMO and Wal-Mart. Continuing the furniture example, in a free market Wal-Mart might request a manufacturer reduce the price of its couch from $150 to $130. WalMart predicts it can sell 20% more couches at the lower price (we’ll assume that Wal-Mart’s retail markup is the same regardless of the wholesale price.) The manufacturer might refuse the price reduction, arguing there is no profit at $130 even with the additional sales. Wal-Mart, conversely, might refuse to sell the couch at all at $150, preferring to sell another manufacturer’s couch at $130. All of these interactions and calculationsûand the above example is a simplificationûfigure into a market price. But under the economic model preferred by the FTC, this calculation is replaced with government mandates and inaccurate models. In a world where the government intervenes in the couch market, WalMart is no longer a private reseller, but a “furniture HMO.” The government purchases a large quantity of couches at a fixed price, say $120. Wal-Mart then tells all manufacturers that it will pay no more than $125 wholesale per couch. Under the FTC’s model, the manufacturers will sell as many couches as they can at this price, even though it’s distorted due to the government’s intervention. But what if the manufacturers decide to reduce outputûsell less couches altogetherûrather than accept a price they can’t reliably profit at? The FTC would label such behavior illegal, because the manufacturers are “restricting output” as a result of the artificially lowered price. Along those lines, if several manufacturers banded together and told Wal-Mart they would not sell any couches for


IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. Comments of Citizens for Voluntary Trade/ Thornton Institute for Health Care and Economics Research

less than $140, the FTC would condemn this as price-fixing, using the government’s arbitrary $120 price as “proof” that the manufacturers were asking for “above market” prices. Paragraph 32 of the FTC’s complaint claimed this is what PHA did: “prices for physician services in the Unifour area have increased or been maintained at artificially high levels.” (Italics added.) Artificial compared to what? To the RBRVS, the government’s arbitrary, non-market price scheme. The FTC’s concern is understandable, if not sympathetic. If MCOs paid physician prices that deviated too much upward from the RBRVS, many physicians would be in a position to reject Medicare patients altogether. After all, if the furniture maker can get $160 a couch from Wal-Mart, why would he sell any couches to the government at $120? It’s also worth noting that the government could constrain “artificially high” price levels through fiat. Congress could pass a law requiring all physicians to charge RBRVS rates to private MCOs. And taking this argument to a logical endpoint, the government could set the price for physician services at zero. Obviously such a price would not attract many physicians, if any. Such is the consequence, however, of ignoring market principles in favor of political intervention. *** But what of the FTC’s view that price-fixing agreements of any sort are illegal because they restrain “competition”? The complaint said PHA deprived consumers of “the benefits of competition among physicians.” This assumes two things: First, that physicians have a legal duty to compete, and second, that competition would exist but for PHA’s actions. The notion that sellers in a market have a legal duty to compete is coterminous with the FTC’s position that all buyers have a “right” to competition among sellers. It’s unclear, however, where this right comes from. The American constitutional system presupposes the existence of certain individual rightsûlife, liberty, property, and the “pursuit of happiness.” These rights are a function man’s existence, and do not depend on any positive act of the state. Rights, in fact, represent a negative on the state and society at-large. Rights protect against the initiation of force.


IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. Comments of Citizens for Voluntary Trade/ Thornton Institute for Health Care and Economics Research

The right to competition is inconsistent with the constitutional recognition of preexisting individual rights. If two sellers choose not to compete, the potential buyer can claim no legal injury. If two furniture makers agree not to sell their couches to Wal-Mart for less than $140 each, Wal-Mart cannot claim any violation of its rights, because there is no right to obtain the property of another except through voluntary trade. Even assuming, arguendo, that a right to competition existed, the FTC cannot claim that PHA had violated this right, because there is no evidence “competition”ûas defined by the Commissionûtook place before PHA’s allegedly illegal conduct. The crux of the complaint is that PHA’s individual members had a duty to compete by deciding “unilaterally” whether to accept or reject a payer’s contract offer. The FTC objects to the physicians deciding as a group whether to take such actions. But it’s not “competition” that the FTC seeks, but the unquestioned acquiescence of PHA’s physicians. In the absence of PHA, individual physicians would not compete against one anotherûthe payers would simply offer every physician the same contract, and each physician would accept or reject it; no individual physician could meaningfully negotiate with a payer representing hundreds of buyers. It is the government and the MCOs, not physicians, that have abolished all meaningful price competition. The FTC is pursuing a divide-and-conquer strategy on behalf of the payers: If the physicians cannot band together in their own selfinterest, they can’t prevent payers from imposing price levels consistent with the government’s RBRVS model. Furthermore, even if a large number of physicians individually reject a proposed contract, the FTC can still accuse the doctors of “price-fixing,” because the antitrust laws permit the government to infer violations from seemingly innocent conduct. The message to physicians is clear: Reject a proposed contract under risk of antitrust prosecution. *** Finally, the FTC’s economic model fails to account for other government interventions that restrict the supply of medical services, especially the barriers to entry imposed on medical training and licensing.


IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. Comments of Citizens for Voluntary Trade/ Thornton Institute for Health Care and Economics Research

Since the early 20th century it has been illegal to sell medical services in the United States without a license from a state board composed of existing sellers. Licenses are generally restricted to graduates of medical schools that are also approved by existing sellers (i.e. the American Medical Association.) These regulatory schemes allow the government to artificially control the supply of medical services throughout the market. In a free market, sellers could offer medical services without restriction, subject only to the judgment of one’s customers. This is not a Utopian scenario; it was how American medicine operated for most of the 19th century: The [medical] profession was, throughout the country, unlicensed and anyone who had the inclination to set himself up as a physician could do so, the exigencies of the market alone determining who would prove successful in the field and who would not. Medical schools abounded, the great bulk of which were privately owned and operated, and the prospective student could gain admission to even the best of them without great difficulty. With free entry into the profession possible and education in medicine cheap and readily available, large numbers of men entered practice.4 Modern medical licensing has little to do with protecting the public from unqualified physicians, and everything to do with restricting competition and raising consumer prices. The FTC itself has attacked licensing schemes that benefit incumbent practitioners in the funeral services and contact lens industries, yet the Commission refuses to recognize the negative impact of licensing in medical services. Yet abolishing medical licensing requirementsûsomething that is admittedly far beyond the FTC’s powersûwould do far more to reduce medical costs across-theboard than would selective prosecutions of alleged “price-fixing” among relatively small groups of physicians. ***


Ronald Hamowy. “The Early Development of Medical Licensing Laws in the United States, 1875-1900.” Journal of Libertarian Studies. Vol. 3, No. 1, at 73 (1979).


IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL. Comments of Citizens for Voluntary Trade/ Thornton Institute for Health Care and Economics Research

High health care costs in North Carolina and throughout the nation are the consequence of government policies that inflate consumer demand while simultaneously restricting supply. The voluntary actions of 450 physicians in Piedmont, North Carolina are economically insignificant, and it is wrong for the FTC to suggest otherwise. Accordingly, CVT/Thornton Institute recommends the FTC withdraw its proposed consent order and dismiss its complaint against the PHA respondents. Respectfully Submitted,

S.M. Oliva
President, Citizens for Voluntary Trade Co-Chair, Thornton Institute for Health Care and Economics Research

Post Office Box 66 Arlington, VA 22210 (703) 740-8309 Dated: September 10, 2004


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