United States: FTC Files Administrative Antitrust Complaint Against North Carolina Physician-Hospital Organization For Physician Price Fixing

The Federal Trade Commission (FTC) announced on December 24, 2003 that it had issued an administrative complaint against Piedmont Health Alliance, Inc. (PHA), a physician-hospital organization based in Hickory, North Carolina, and ten individual physicians for jointly fixing prices for PHA’s physician members in violation of Section 5 of the FTC Act. This is the second antitrust investigation against a physician network to surface in western North Carolina in as many years and is reminiscent of the U.S. Department of Justice’s action against Asheville-based Mountain Health Care in December, 2002, which led to that organization’s dissolution.

PHA is a for-profit PHO with approximately 450 physician members in Alexander, Burke, Caldwell and Catawba counties in western North Carolina. According to the FTC, PHA members allegedly make up a substantial majority of the primary and specialty physicians who practice in that service area. The individual physicians charged allegedly participated as voting members of PHA’s board of directors. Frye Regional Medical Center, Inc. (Frye) in Hickory allegedly was instrumental in PHA’s formation in 1994 and its initial operation. In 1996 PHA was expanded to allow Caldwell Memorial Hospital, Grace Hospital and their medical staffs to join PHA.

Frye and its parent, Tenet Healthcare Corporation, have settled FTC charges stemming from Frye’s role in PHA. The proposed consent agreement with Frye is subject to publication in the Federal Register and public comment. According to the FTC, this settlement represents the first case in which the FTC has named a hospital as a participant in an alleged physician price-fixing conspiracy.

The FTC alleges in its complaint that PHA negotiated and collectively set prices for physician services received from payors, including health insurers, HMOs, preferred provider organizations and self-funded employer health plans. It claims that PHA physicians were bound by contract to participate in all contracts that PHA entered and to accept PHA-negotiated prices. Prior to 2001, PHA allegedly established a Contracts Committee to negotiate contracts with payors on behalf of PHA and its members, which contracts were approved by the PHA Board of Directors. In 2001, the FTC claims that the Board of Directors voted to change prospectively its method of contracting with payors for physician services. However, in implementing the new, so-called "modified messenger model," PHA allegedly suggested to its physician members what minimum price levels they would accept under payor contracts and negotiated with payors the overall average price level to be paid to PHA physicians. The FTC claims that pricing and other contract terms were negotiated without transmitting contract offers to PHA physicians for their acceptance or rejection. Moreover, the new contracting method was allegedly not applied to existing payor contracts, contracts in the final stages of negotiation, or many later renewals of existing payor contracts.

If it finds that PHA and named physicians violated Section 5 of the FTC Act, the FTC indicates that the respondents will be barred in the future from, among other things, negotiating with a payor on behalf of any physician (other than a physician respondent’s own group practice). The FTC would also require that for a period of seven years, PHA and the physicians not act as a messenger or participate in any risk-sharing joint arrangement or clinically integrated joint arrangement dealing with any payor.

The FTC’s position may be supported by the Statements of Antitrust Enforcement Policy in Health Care, jointly issued by the U.S. Justice Department and the FTC in August, 1996. One "safety zone" set forth in that document protects certain multiprovider networks of competing providers, including physician-hospital organizations, that involve either substantial clinical integration or substantial financial risk sharing. Either integration or risk sharing may warrant agreement by competing providers on prices if such agreement is designed specifically to produce pro-competitive efficiencies. In this case, the use of a true messenger model would not be legally necessary. On the other hand, PHA will have to meet a high threshold for clinical or financial integration in order to satisfy the FTC under this test.