FTC Milestone: A New Age Dawns for the FTC’s Competition Work

As anyone of a certain age can attest, the 1970’s were all about change. Hairstyles and hemlines were obvious signs, but in the world of antitrust, change came in the form of applying competition standards to the “learned professions,” and new thinking about the role of competition in helping contain health care costs.

Professionals as Competitors
Two Supreme Court decisions from the 1970’s fundamentally changed the application of competition policy to professional services: Goldfarb* v. Virginia State Bar, which swept away the learned professions exception to the antitrust laws, and National Society of Professional Engineers v. United States, which struck down the Society’s ban on competitive bidding. The latter case contained this sweeping directive from the Court:

The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain—quality, service, safety, and durability—and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers. Even assuming occasional exceptions to the presumed consequences of competition, the statutory policy [contained in the Sherman Act] precludes inquiry into the question whether competition is good or bad. (435 U.S. 679, 695 (1978)).

In keeping with the times, the FTC also turned its attention to restrictions on competition adopted by professional associations, including the country’s largest professional group, the American Medical Association. In December 1975, the Commission filed an administrative complaint against the AMA, charging that the association’s “Principles of Medical Ethics” unreasonably restrained trade by banning advertising and solicitation, among other things. Although the contested provisions did not directly set prices among the members, the FTC found that “ethical principles of the medical profession have prevented doctors and medical organizations from disseminating information on the prices and services they offer, severely inhibiting competition among health care providers.” 94 F.T.C. at 1005-06.

For instance, based on the extensive record developed in the administrative trial, the Commission found that the AMA’s ban on advertising prevented doctors from providing the public with truthful information about the price, quality, or other aspects of their service (such as office hours, acceptance of Medicare assignment or credit cards, or house-call services). The Commission noted that a ban on truthful advertising especially disadvantaged HMOs, an emerging health care plan format that needed to advertise precisely because they were unfamiliar to consumers. While acknowledging that self-regulation designed to prevent false or deceptive advertising is generally procompetitive, the Commission rejected the AMA’s argument “that the best way to interdict false and deceptive advertising and overreaching by physicians is to proscribe practically the full spectrum of advertising and solicitation activities.”

The Second Circuit affirmed the Commission’s final order with minor modifications, 638 F.2d 443. By the time the case reached the Supreme Court, AMA had abandoned any claim that its conduct was lawful. The only issues it contested were jurisdictional issues and the Court’s 4-4 vote meant those rulings would stand. 455 U.S. 676 (1982)

By the early 1980’s, when the Supreme Court ruled in Arizona v. Maricopa County Medical Society that an agreement among physicians to set maximum prices charged to policyholders was a per se violation of the Sherman Act, antitrust law had come to view professionals much like any other competitor. In the decades to come, the Commission would apply competition principles to challenge other horizontal restraints that were likely to harm consumers by restricting competition among professionals. By some estimates, well over one hundred FTC cases can trace their origin to the AMA case.

Building a Foundation by Digging into Data
While FTC competition lawyers prepared the case against the AMA, staff elsewhere at the Commission embarked on an ambitious research agenda, conducting industry-wide studies and issuing public reports on health care competition policy. These reports analyzed the disadvantages of certain regulations and advocated for market-based solutions designed to infuse more competition into health care markets as one means to reduce health care price “inflation.”

In particular, FTC staff closely examined the effect of regulatory restrictions on competition. In one ground-breaking study, the Bureau of Economics compared not only relative prices but also relative quality of optometric services across differing regulatory environments. This 1980 Report countered arguments that advertising forced professionals not only to lower prices but also to degrade service in order to meet competition. Based on various measures of quality developed jointly with national eye care professional organizations (thoroughness of the exam; accuracy of the prescription, and workmanship of the glasses), FTC staff found compelling evidence that regulations restricting truthful, non-deceptive advertising did not enhance service quality. Rather, the study found that prices were lower in cities where some optometrists advertise, but that the quality was about the same as compared to cities that did not allow advertising.

Meanwhile, staff in the Bureau of Consumer Protection examined the effects of state laws barring pharmacists from advertising the prices of prescription drugs. In 1975, BCP issued a report on Prescription Drug Price Disclosure, which was cited by the Supreme Court in striking down such laws under the First Amendment. See Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, 425 U.S. 748, 754 n.11, 765 n. 20 (1976). Another BCP study examined the effects of state “anti-substitution” laws, which prevented pharmacists from dispensing a lower-cost generic drug unless the physician specifically prescribed the drug by its non-proprietary name. Staff Report to the Federal Trade Commission on Drug Product Selection (1979). FTC staff worked with the FDA to draft a model state law to assist states in reforming their regulations to encourage competition and facilitate consumer access to lower cost generic drugs.

Add to the list of notable FTC developments of the 1970’s: the birth of the Bureau of Competition’s Health Care Division. This group of lawyers and investigators has been responsible for much of the FTC’s competition work in health care over the past four decades—from stopping group boycotts by providers and issuing industry guidance on health care collaborations to litigating pay-for-delay cases.

Unlike bellbottom jeans and shag haircuts, the FTC’s health care initiatives during the 1970’s were no fad .The Commission’s litigation and research efforts during this decade laid a strong foundation for analyzing competition and consumer protection issues in health care markets in the decades to come. Today, the Commission continues to promote competition in health care markets, prevent false and deceptive health claims, and ensure consumers have good information to make choices about health care products and services.

*Lewis Goldfarb was an attorney in the FTC’s Bureau of Consumer Protection when he and his wife sought bids for a title examination that under Virginia law could only be performed by an attorney. When all the bids came back at the minimum fee suggested by the Fairfax County Bar Association, the Goldfarbs brought this antitrust suit, claiming the minimum fee schedule constituted illegal price fixing. 

For further reading

Carl F. Ameringer, The Health Care Revolution: From Medical Monopoly to Market Competition, University of California Press (2008).

Everything Old is New Again: Health Care Competition in the 21^st Century, speech by former Chairman Timothy J. Muris, November 7, 2002

Thoughts on ‘Leveling the Playing Field’ in Health Care Markets, speech by former Chairman Robert Pitofsky, February 13, 1997