Commission Finds That North Texas Specialty Physicians Illegally Fixed Prices

In a unanimous administrative opinion and order made public today, the Federal Trade Commission ruled that North Texas Specialty Physicians (NTSP), an association of independent physicians in the Forth Worth, Texas area, illegally fixed prices in its negotiations with payors, including insurance companies and health plans. The Commission opinion, authored by Commissioner Thomas B. Leary, affirmed a November 2004 ruling by Administrative Law Judge (ALJ) D. Michael Chappell, with some modifications, and issued an order that requires the respondent association to cease and desist from the illegal conduct and to terminate pre-existing contracts with payors for physician services.

The Commission Opinion

The Commission concluded that NTSP’s contracting activities with payors “amount[s] to unlawful horizontal price fixing.” The opinion states that, through a variety of mechanisms, NTSP was able to orchestrate price agreements among its physicians. The evidence in the case, the Commission found, “shows not only negotiation activity in aid of a collective agreement on a minimum fee schedule, but also specific enforcement mechanisms – such as the powers of attorney and collective withdrawal from payor networks – in order to coerce agreement from payers.” These actions, when viewed as a whole, the Commission wrote, “leave no doubt that the overriding purpose behind NTSP’s conduct was to fix prices.”

The Commission specifically addressed Respondent’s claims on appeal and found that: (1) the FTC does have jurisdictional authority to review alleged anticompetitive conduct by NTSP, because it is a corporation that is “organized to carry on business for its own profit and that of its members”; (2) NTSP’s argument that its physicians are not “members” under Texas law is invalid because it “elevates form over substance”; (3) NTSP satisfies the interstate commerce jurisdictional requirement, because its actions to maintain fee levels, if successful, could be expected to affect the flow of interstate payments from out-of-state payors to NTSP physicians; (4) NTSP is not a “sole actor” when it negotiates on behalf of the competing physicians who control it, but rather, under antitrust law, is the agent for the group, and thus, the member physicians conspired to fix prices even though they did not communicate directly with one another; and (5) NTSP’s claims of teamwork, spillover, and other efficiencies were not legitimate and not supported by the evidence.

In response to the cross appeal of Complaint Counsel, the Commission held that the ALJ incorrectly found it was necessary to define a relevant market in a case of this kind. The Commission also found that the ALJ’s order was inappropriately narrow in some of its core provisions and contained two unwarranted provisos.

“This is not really a close case,” the Commission concluded. “NTSP’s conduct is similar to conduct that has been held per se unlawful and summarily condemned in other contexts. . . . [W]e have analyzed the conduct under our more flexible Polygram framework, and considered each of Respondent’s defenses in depth. Our ultimate conclusion is the same.” A brief description of the Commission’s legal analysis in issuing the decision and order is provided below.

Legal Analysis

The Commission opinion states that an “outright per se condemnation” of NTSP’s conduct could be supported by application of the Supreme Court’s 1982 opinion in Arizona v. Maricopa County Medical Society. The Commission notes, however, that in its later 1999 California Dental Ass’n v. FTC opinion, the Supreme Court “urged caution in the application of the per se label to conduct in a professional setting . . . .” The Commission also notes that “since Maricopa, we have a better understanding of the potential integration efficiencies” of associations like NTSP. Accordingly, after the first administrative trial of a physician association case in over 20 years, the Commission adopted the more flexible methodology of its own recent opinion in the Polygram Holdings, Inc. case and the opinion of the D.C. Circuit Court that upheld Polgram on appeal.

The Polygram approach allows for a more extensive consideration of Respondent’s defenses. Accordingly, the Commission notes, “we have available in this case an extensive record on which to buttress our conclusions about the likely effects of Respondent’s conduct.” The opinion emphasizes, however, that the Polygram methodology “is not the same thing as a full blown rule of reason inquiry.” Once the Commission has found that “Respondent’s proferred justifications for NTSP’s inherently suspect conduct are not legitimate . . . it is not necessary to go on and find actual adverse market effects.”

Case Background

NTSP had approximately 480 physician members at the time of trial in April 2004, including over 100 primary care physicians, and others in 26 medical specialties. These physicians have distinct economic interests and many compete with one another.

NTSP’s main functions are to negotiate and review contract proposals for the services of its members, to review payment issues, and to act as a lobbyist for the interests of its members. NTSP has negotiated both risk-sharing contracts (where doctors are typically reimbursed on a dollar-per-patient basis) and non-risk sharing contracts (which provide “fee-for-service” payments). The challenged conduct involved only the negotiation of non-risk sharing contracts, which were more common for NTSP.

In negotiation of its non-risk sharing contracts, NTSP engaged in conduct designed to enhance the collective bargaining power of its members. This conduct included the use of member polls on prospective fees, and communication of the results to members, in a way that affected payment levels in non-risk sharing contracts. In addition, NTSP’s agreement with its members granted NTSP the right of first negotiation with payors and inhibited independent negotiations by individual physicians. NTSP’s illegal conduct also included refusals to deal and refusals to forward payor offers to member physicians that NTSP itself deemed unacceptable.

The administrative complaint against NTSP was filed in September 2003. The Initial Decision in favor of Complaint Counsel was issued in November 2004. Both NTSP and Complaint Counsel subsequently appealed to the Commission. The Commission found that the practices described above taken together amounted to illegal price fixing, and entered an order that would prohibit them.

The Commission Order

The opinion and order approved by the Commission upholds the initial decision of the ALJ and adopts the findings of fact and conclusions of law as those of the Commission, except where they are inconsistent with the Commission’s opinion and order. The order requires that NTSP cease and desist from engaging in the anticompetitive price-fixing conduct alleged in the complaint. The conduct barred includes “entering into, adhering to, participating in, maintaining, implementing, or otherwise facilitating any combination, conspiracy, agreement, or understanding between physicians with respect to their provision of physician services: (1) to negotiate on behalf of any physician with any payor; (2) to deal, refuse to deal, or threaten to refuse to deal with any payor; (3) regarding any term, condition, or requirement upon which any physician deals, or is willing to deal, with any payor, including, but not limited to price terms; or (4) not to deal individually with any payor, or not to deal with any payor through any arrangement other than Respondent.”

In addition, the order prohibits exchanging, or facilitating the exchange or transfer, of any information among physicians concerning their willingness, or lack thereof, to deal with or not deal with a payor, and prohibits any attempts to engage in the conduct described above. It also bars NTSP from pressuring or inducing anyone to engage in such conduct. Finally, the order contains reporting and distribution requirements to ensure that NTSP complies with its terms and requires NTSP to terminate any preexisting contract with any payor to provide physician services, with extensions allowed under certain circumstances. The order will terminate in 20 years.

In order to avoid interference with potential efficiencies, the order does not prohibit any agreement involving conduct that is reasonably necessary to further a qualified risk-sharing joint arrangement or a qualified clinically integrated arrangement among physicians. The order also allows NTSP to act as a messenger or an agent on behalf of physicians for contracts with payors, but for three years NTSP is required to notify the Commission in advance before doing so.

The Commission vote approving issuance of the opinion and order was 4-0.

Copies of the Commission’s opinion and order 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. 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, DC 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 Docket No. 9312)