United States: Administrative Law Judge Upholds U.S. Federal Trade Commission’s Complaint Against North Texas Specialty Physicians

In a 97-page initial decision made public November 16, 2004, Administrative Law Judge (ALJ) Michael Chappell found North Texas Specialty Physicians (NTSP) to be in violation of Section Five of the U.S. Federal Trade Commission (FTC) Act by engaging in a horizontal price-fixing conspiracy in the physician services market in the Fort Worth, Texas, area. FTC Dkt. No. 9312. This case is significant because it is the first fully adjudicated price-fixing complaint brought by the FTC against a provider network joint venture. Since 2000, the FTC has entered into more than 20 consent decrees resolving price-fixing allegations against provider networks, but NTSP is the first network to require the FTC to prove its case in court.

This litigation triumph will likely embolden the FTC, which has become increasingly aggressive in recent years in pursuing price-fixing cases against provider networks. However, it does not signal the end of the provider network model. The FTC has long recognized the ability of provider networks to negotiate jointly with payors if they are financially or clinically integrated. In a recent joint statement, Improving Health Care: A Dose of Competition, the FTC and the U.S. Department of Justice encouraged provider networks to improve quality and patient care through clinical integration, which would allow networks to negotiate jointly with payors.

This case may also provide encouragement to provider networks accused of price-fixing to challenge the FTC in court. In recent consent decrees, the FTC has sought increasingly broader and tougher remedies of the challenged conduct. However, the ALJ here specifically rejected the FTC’s request for a broader injunction against "related conduct" as overreaching and unnecessary. Neither the FTC nor NTSP have indicated whether they intend to appeal the ruling. If an appeal is filed, it is expected that the FTC will appeal the form of the remedy.

NTSP is a provider network comprised of approximately 500 physicians practicing in the Fort Worth, Texas, area with approximately 20 percent of the physicians practicing as primary care physicians and 80 percent practicing as specialists in numerous fields. NTSP negotiates risk and non-risk contracts for its physician members. NTSP does not operate as a clinically integrated organization for non-risk contracts, and its member practice groups have distinct economic interests. NTSP was originally formed in 1995 to facilitate risk contracting for its member specialists, but it subsequently broadened its membership to include primary care physicians and its operations to include non-risk contracting. The FTC did not challenge NTSP’s risk contracting.

For its non-risk contracting, NTSP would periodically poll each of its members on the minimum prices they were willing to accept on payor contracts. Based on that data, NTSP determined an average minimum price level for all member physicians, which was communicated to all of its physicians. NTSP refused to messenger any contract offers from payors that fell below this minimum price threshold or any offers that did not propose identical rates across all physician specialties (for example, 130 percent of RBRVS for every CPT code). Payor offers meeting these conditions were messengered to member physicians, who then individually decided whether or not to participate in the contract. Under their participating physician agreements, member physicians could not negotiate directly with payors unless NTSP first failed to reach an agreement with the payor. In addition, NTSP obtained powers of attorney from many of its physician members authorizing it to negotiate with specific payors for non-risk contracts on their behalf. The FTC alleged NTSP used these minimum price levels and powers of attorney to negotiate higher prices from payors and therefore engaged in an illegal price-fixing conspiracy among competing physicians that raised prices. The ALJ ultimately agreed.

The ALJ concluded the FTC was required to define a relevant market. In doing so, the ALJ rejected the FTC’s position that it was unnecessary to "define markets or assess market power when conduct is clearly anticompetitive… ." This is a significant ruling because it increases the FTC’s burden of proof and may make it more difficult for the FTC to prove future cases. Therefore, this may represent an issue the FTC will appeal in order to avoid, in its view, a bad precedent. Notwithstanding the FTC’s position, the ALJ determined there was sufficient evidence introduced at trial to define the relevant market as physician services available to patients in Fort Worth, Texas. The ALJ also found that NTSP physicians made up a large percentage of the Fort Worth area physicians.

The ALJ then examined all of the facts and circumstances to determine whether NTSP’s actions were a result of an agreement among its members. There was no evidence that any of the NTSP physicians consulted with each other when setting their minimum price levels in response to NTSP polls or that any member knew what another physician was going to do in response to a non-risk payor offer. However, a horizontal conspiracy was found based on the following facts:

• the NTSP physicians provided NTSP with the minimum prices they would accept on non-risk contracts, specifically for NTSP’s use in negotiating non-risk contracts;

• NTSP used this price information to obtain more favorable rates or contract terms from payors; and

• NTSP sought a uniform rate for all of its specialties.

The ALJ found that the coordinated activity allowed NTSP to obtain higher prices or more favorable contract terms from payors than what the payors had initially offered to NTSP physicians. Even though there was insufficient proof that NTSP actually achieved supracompetitive pricing, a price-fixing conspiracy is unlawful even if the set prices are "reasonable." While not deciding whether to use a per se or "quick look" analysis of the conduct, the ALJ noted that there were no procompetitive effects or efficiencies justifying the conduct.

The ALJ also found it unlikely that there would be significant spillover benefits from NTSP’s risk business to its non-risk business. NTSP lacks data on the patients seen under non-risk contracts and is prevented from implementing organized processes for these patients. Moreover, the ALJ found NTSP did not need to set minimum contract rates in its non-risk contracts in order for any efficiencies from its risk contract business to spillover to its non-risk contract business.

The ALJ issued basic cease-and-desist relief. According to the order, NTSP must cease and desist from negotiating non-risk contracts and facilitating the exchange of information among physicians concerning the terms on which any physician is willing to deal with a payor. However, nothing in the order prohibits NTSP from entering into risk contracts or messengering purely factual information describing the terms and conditions of any payor offer for non-risk contracts, including objective comparisons with terms offered by other payors. NTSP must also allow each payor with a non-risk contract to terminate its contract without penalty. Finally, NTSP must engage in typical notice and compliance activities over the next three years. The injunction will be in effect for 20 years.

This remedy limited the broader relief requested by the FTC against "related conduct," including injunctions requiring NTSP to messenger all payor offers to its members and requiring NTSP to terminate all payor contracts. The ALJ found such relief overreaching and unnecessary. This decision may, therefore, help provider networks negotiate more favorable consent decrees with the FTC or encourage networks to challenge the FTC in court if they feel the FTC’s proposed remedy is too broad and burdensome. For this reason, the FTC may appeal this issue to the full Commission.

The ALJ’s initial decision is subject to de novo review by the full Commission on its own motion or at the request of any party. The initial decision will become final within 30 days unless either NTSP files a timely notice of appeal or the Commission places the case on its own docket for review. Any appeal would likely be heard by the Commission by May 2005, with the Commission’s Final Order being issued by December 2005. If NTSP appeals the Commission’s Final Order to the U.S. Court of Appeals for the Fifth Circuit, the final decision probably will not be issued until 2007.

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