Administrative Law Judge Upholds FTC Complaint Against North Texas Specialty Physicians

In an initial decision filed on November 8, 2004, and announced today, Administrative Law Judge (ALJ) D. Michael Chappell upheld a Federal Trade Commission complaint filed last year against a physicians’ group practicing in Fort Worth, Texas. In the complaint, the FTC alleged the physicians’ group engaged in illegal anticompetitive practices to the detriment of Fort Worth health care consumers. The Commission charged North Texas Specialty Physicians (NTSP) with restraining trade by conspiring to fix prices in certain contracts its doctors entered into to provide medical services to the patients of health plans. Following an administrative trial, the ALJ ruled in favor of the FTC, writing in his initial decision that, “The government proved its case . . .,” and that, “the appropriate remedy [is] an order to cease and desist.”

North Texas Specialty Physicians

NTSP is a nonprofit corporation funded through fees paid by participating physicians. Organized in 1995, it is currently composed of approximately 600 physicians, of whom about 130 are primary-care physicians. Its board of directors consists of participating physicians elected to three-year terms by the members of each of NTSP’s sections. A physician may participate in NTSP-payor contracts by granting NTSP the authority to arrange for his or her services to be provided to consumers covered by the payors.

The Complaint

In its administrative complaint, announced on September 17, 2003, the FTC alleged that NTSP broke the law by negotiating agreements among its participating physicians on price and other terms, refusing to deal with payors except on collectively agreed-upon terms, and refusing to submit payor offers to participating physicians unless the terms complied with NTSP’s minimum-fee standards. The Commission alleged that nearly all of NTSP’s participating physicians participate in some non-risk contracts, and that,“with respect to these non-risk contracts, NTSP often has sought to negotiate for, and often has obtained, higher fees and other more advantageous terms than its individual physicians could obtain by negotiating individually with payors.”

In the complaint, the FTC also charged that NTSP’s polling practices are illegal. NTSP polls its participating physicians to determine the minimum fee they would accept for medical services provided under an NTSP-payor agreement. Once this information is collected, NTSP then calculates the averages of the reported minimum acceptable fees and reports these measures to its participating physicians, confirming to the participating physicians that these will be the minimum fees that NTSP collectively will entertain when negotiating any contract with a payor. The complaint alleged that the exchange of prospective price information among otherwise competing physicians reduces price competition and enables the participating physicians to achieve supra-competitive prices.

The complaint further charged that NTSP sometimes begins contract discussions with payors by identifying the fee minimums determined by its participating physicians, and states that it will not enter into an agreement with any payor unless the payor agrees to satisfy these fee minimums. The complaint alleged that in other instances, payors have proposed agreements to NTSP that did not satisfy the organization’s fee minimums. In those cases, NTSP allegedly required the payors to resubmit their proposals, or otherwise actively bargained to obtain the fees they wanted. As a result, payors sometimes were forced to accept the higher fees.

The complaint also alleged that NTSP discouraged payors and participating physicians from negotiating directly with one another. In at least one instance, the complaint stated that, after fee negotiations with a particular payor broke down, NTSP allegedly orchestrated the removal of NTSP physicians from other arrangements with that payor. The FTC charged that the payor was forced to yield to NTSP’s pressure and contract with the participating physicians at higher prices.

Finally, the complaint charged that none of NTSP’s negotiating practices significantly increase efficiency, because its participating physicians are not integrated in ways that would increase the quality and reduce the cost of health care in the Fort Worth area. The complaint alleged that because of NTSP’s practices: price and other forms of competition among the participating physicians were unreasonably restrained; prices for physician services were increased; and health plans, employers, and individual consumers were deprived of the benefits of robust competition among physicians.

The Initial Decision

In his initial decision, the ALJ stated that, “In this case, Complaint Counsel [FTC staff] has proven that Respondent [NTSP] engaged in horizontal price fixing through its negotiation, on behalf of its member physicians, of economic terms of non-risk contracts with health plan services for the provision of physician services.” To remedy this “unfair method of competition,” the ALJ issued an order “requiring Respondent to cease and desist from collective price fixing in its negotiation of non-risk contracts.” In addition, he stated that “to the extent that there are any existing, current non-risk contracts between NTSP, negotiated on behalf of its member physicians, and any health care payor, Respondent must take actions . . . to allow termination of any such existing contracts.”

The ALJ further stated that NTSP “has not met its burden of proof of demonstrating that the challenged conduct has a procompetitive effect on competition,” and that NTSP’s price-fixing of non-risk contracts “does not have a valid efficiency justification” and “is not reasonably necessary to create any efficiencies.” He accordingly ruled that the conduct alleged in the complaint violated Section 5 of the FTC Act. Nothing in the order, however, should be construed as prohibiting any agreement or conduct by NTSP “that is reasonably necessary to form, or participate in, or take any action in furtherance of a qualified risk-sharing joint arrangement or qualified clinically-integrated joint arrangement,” he wrote.

Finally, the ALJ ordered NTSP – for three years – to notify the Secretary of the FTC within 60 days before entering into any arrangement with any physician under which it would act as a “messenger, or as an agent on behalf of the physician, with payor regarding contracts.” He also defined the manner in which NTSP must distribute the order and notify the FTC before changing its structure in any way and stated that the order will terminate in 20 years.

The Appeals Process

The judge’s initial decision in this matter is subject to review by the full Commission on its own motion or at the request of any party. The initial decision will become the final decision of the Commission 30 days after it is served on NTSP, unless either NTSP files a timely notice of appeal or the Commission places the case on its own docket for review.

Copies of the public version of the initial decision by the administrative law judge are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580.

(FTC File No. 021 0075; Docket No. 9312)