South Carolina Doctors Group Barred from Fixing Prices

Under a consent order announced today by the Federal Trade Commission, Preferred Health Services, Inc. (Preferred Health), a physician-hospital organization consisting of more than 100 doctors and the Oconee Memorial Hospital in northwestern South Carolina, has been barred from collectively negotiating and fixing the prices it charges payors on behalf of its doctor members.

According to the FTC, Preferred Health acts as a “contracting representative” for its member doctors, developing pricing contracts that it then presents to health plans and other payors. Because the organization’s doctors make up approximately 70 percent of the independently practicing physicians in and around Seneca, South Carolina, health plans must have access to many of its members to provide services for consumers. Accordingly, the FTC contends, the plans are forced to pay higher, collectively negotiated prices for health care services.

“The FTC will continue to stand strongly for consumers when the evidence shows that rival physicians have negotiated collectively for the fees to charge health plans,” said Susan Creighton, Director of the FTC’s Bureau of Competition. “Such collective negotiation is not only illegal, but may lead to higher health care costs and limited physician access.”

The Commission’s Complaint Allegations

Preferred Health is a physician-hospital organization made up of more than 100 doctors and Onconee Memorial Hospital. The organization does business in the Seneca, South Carolina area of northwestern South Carolina. Under its operating model, Preferred Health acts as a “contracting representative” for its physician members in negotiating with health plans, and as a “collective bargaining unit for the negotiation of managed care contracts.”

While Preferred Health claims that it operates as a “messenger model” – an arrangement that does not facilitate horizontal price agreements for its members – the FTC contends that it does orchestrate such price agreements. In its complaint, the FTC states that in negotiating contracts with payors, Preferred Health uses a physician fee schedule created by its executive director and approved by its board of directors. Doctors who are part of Preferred Health sign a membership agreement that automatically binds them to contracts using the fee schedule approved by the board. If a health plan rejects the agreed-upon fee schedule, the complaint states, the executive director, under the supervision of the board, can negotiate a contract with a “comparable” fee schedule. If this “comparable” fee schedule is approved by the board and the organization’s doctors, the only way a physician member can reject the contract is to leave the organization.

According to the complaint, Preferred Health’s coordination of collective agreements and other terms in dealing with health plans, collective negotiations with health plans, and threatened refusals to deal with health plans that resist its term are all acts and practices that violate Section 5 of the FTC Act. Further, the FTC contends that Preferred Health succeeded in forcing many health plans to raise the fees paid to its member doctors, thereby raising the cost of medical care to consumers in the Seneca area. The FTC alleged that this joint fee negotiation was done with no efficiency-enhancing integration that could justify the joint negotiation of fees.

The Consent Order

The Commission’s consent order remedies the illegal conduct alleged in the complaint by prohibiting Preferred Health from entering into or facilitating any agreement between or among any physicians: 1) to negotiate with payors on any physician’s behalf; 2) to deal, or not to deal, or threaten not to deal with payors; 3) to designate the terms on which to deal with any payor; or
4) to refuse to deal individually with any payor, or to deal with any payor only through an arrangement involving Preferred Health. To reinforce these provisions, the order also bars Preferred Health from helping physicians exchange information regarding whether, or on which terms, to deal with a payor, and contains “fencing-in” relief that will be imposed for three years. This fencing-in relief prohibits Preferred Health from: 1) acting as an agent for any physicians in connection with health plan contracting; or 2) using an agent with respect to contracting.

As in other Commission orders of this type, the Preferred Health order excludes certain types of arrangements from the general bar on joint negotiations. For example, the organization would not be barred from engaging in conduct that is reasonably necessary to form or participate in legitimate joint contracting arrangements among competing physicians in a “qualified risk-sharing joint arrangement” or a “qualified clinically integrated joint arrangement.” Detailed
information about these two types of arrangements can be found in the consent order’s analysis to aid public comment on the Commission’s Web site. For three years after the order becomes final, Preferred Health is required to notify the FTC before entering into these types of arrangements.

Finally, for three years after the bar on entering into messenger arrangements ends, Preferred Health is required to notify the FTC before entering into any arrangements to act as a messenger, or as an agent on behalf of physicians, in negotiating contracts with payors. It also requires Preferred Health to distribute a copy of the complaint and order to its participating physicians and to end at any payor’s request its existing contracts with that payor within one year after the order becomes final. The order will expire in 20 years.

The Commission vote to place the consent agreement on the public record for comment was 4-0-1, with Chairman Deborah Platt Majoras not participating. An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, until March 30, 2005, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, DC 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, consent agreement and order, and an analysis to aid in public comment 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, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No.: PISD - 041-0099)