FTC Staff Comment to the Hon. Emil Jones, Jr. Concerning Illinois S.B. 2202 to Allow Physicians to Combine and Jointly Determine Prices in Third Party Health Care Programs

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FEDEIIA'. TRADE C()~fM(S~10N
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APPROVED
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An'" ende :112 :1:".:1·112:l
June 	11, 	1986
The 	Honorable 	Emil Jones, 	Jr.
Senator, 	17th 	District
6~lC Capitol 	Building
Springfield, 	Illinoie 	62706
Dear 	Senator 	Jonesr
The 	Federal Trade 	Commission's 	Chicago 	Regional 	Office 	and
Bureaus 	of 	Competition, 	Consumer 	Protection, 	and Economics 	are
pleased 	to 	have 	the 	opportunity 	to 	respond 	to 	your 	letter 	of 	June
6, 	1986 	requesting 	our 	comment on Senate 	Bill 	2202. 	Our
comments 	are 	limited 	to 	Article 	II 	of 	the 	bill. 	In 	essence, 	the
bill 	would 	authorize 	physicians 	to 	combine 	and 	jointly 	determine
the 	price 	at 	which 	they 	will 	participate 	in PPOs, 	HMOs 	and 	a 	wide
variety 	of 	health 	care 	programs 	offered 	by 	third 	party 	payers.
Thus, 	SB 	2202 	is 	designed 	to 	shield 	activities 	that 	typically 	are
forbidden 	by 	the 	antitrust 	laws. 	By 	eliminating 	the 	application
of 	these 	laws, 	the 	proposed 	legislation 	has 	the 	potential 	to 	harm
competition 	and 	increase 	the 	prices 	consumers 	pay 	for 	health
care. 	As 	we 	discuss 	below, 	it 	is 	unwise 	and 	unnecessary 	to
exempt 	physicians 	from 	antitrust 	scrutiny. 	We 	believe 	that
consumers 	will 	best 	be 	served 	by 	competition 	as 	fostered 	by
existing 	antitrust 	laws, 	and 	that 	these 	laws 	can 	and 	do 	protect
the 	legitimate 	interests 	of. 	health 	care 	providers 	in 	the
marketplace.
Section 	2-1 	of 	sa 	2202 	states 	that 	its 	first 	purpose 	is 	to
permit 	physicians 	and 	their 	representatives 	to 	discuss, 	consider,
comment, 	and 	advise 	upon 	terms 	and 	provisions 	of 	proposed
contracts 	for 	medical 	services. 	But 	the 	bill 	goes 	further. 	SB
2202 	erects 	a 	re9u1atory 	system 	in 	which 	a 	Medical 	Services
Contracting 	Board 	(lithe 	Board") 	licenses, 	supervises, 	and
requ1ates 	the 	activities 	of 	large 	groups 	of 	competing 	physicians
1 These 	comments 	represent 	the 	views 	of 	the 	Chicago 	Regional
Office 	and 	the 	Bureaus 	of Competition, 	Consumer 	Protection,
and 	Eoonomics 	of 	the 	Federal Trade 	Commission 	and 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Federal Trade
Commission 	or 	any 	individual Commissioner. 	The 	Federal
Trade Commission, 	however, 	has 	reviewed 	these 	oomments 	and
has 	voted 	to 	authorize 	their 	presentation.

The 	Honorable Emil 	Jones, 	Jr. 	- 	2 	-
as 	they 	jointly 	negotiate 	how 	much 	to 	charge 	for 	their
services.2 	When 	physician 	groups, 	through 	their 	representatives,
have 	conferred 	and 	reached 	a 	proposed 	accord 	with 	an 	offeror, 	the
Board 	then 	reviews 	the 	contract 	and 	approves 	it 	if 	it 	contains 	no
terms 	prohibited 	by 	the 	bill 	and 	it 	is 	Itreasonable." 	Under 	this
proposed 	system, 	the 	price 	of 	health 	care 	is 	determined 	not 	by
competition 	in 	the 	marketplace 	but 	by 	agreement 	among
competitors, 	subject 	to 	the 	limited 	r.eview 	of 	a 	governmental
authority.
From a 	policy 	perspective 	we 	find 	SB 	2202'S 	proposed
regulatory 	scheme 	to 	be 	very 	troubling. 	Illinois 	can, 	of 	course,
impose 	regulation 	that 	displaces 	competition 	and, 	under 	the
"state 	actionll 	doctrine, 	effectively 	immunize 	the 	private 	parties
subject 	to 	such 	regulation 	from 	liability 	under 	the 	federal
antitrust 	1aws. 3 	As 	a 	general 	principle, 	however, 	we 	believe
that 	it 	is 	unwise 	to 	create 	special 	antitrust 	rules 	for 	specific
industries. 	Exemption 	from 	the 	antitrust 	laws 	should 	only 	be
granted 	when 	there 	is 	compelling 	evidence 	that 	competition 	is
unworkable. 	We 	are 	aware 	of 	no 	such 	evidence 	here. 	In 	fact, 	it
is 	becoming 	increasingly 	clear 	that 	competition 	has 	an 	important
role 	to 	play 	in 	the 	health 	care 	field. 	As 	health 	care 	costs 	have
escalated, 	both 	private 	interests 	and 	po1icymakers 	at 	all 	levels
of 	government 	have 	shown 	an 	increasing 	tendency 	to 	adopt 	a
competitive 	approach 	to 	help 	promote 	a 	more 	efficient 	health 	care
system. 	This 	increasing 	reliance 	on 	competition 	suggests 	that
now 	is 	not 	the 	time 	to 	reduce 	competition 	by 	creating 	special
antitrust 	exemptions 	for 	competitors 	in 	health 	care markets.
2
3
Section 	2-7 	of 	sa 	2202 	states 	that 	annual 	representation
licenses 	shall 	be 	granted 	to 	not-for-profit 	corporations,
associations, 	societies, 	or 	foundations 	that 	retain 	30% 	or
more 	of 	the 	perSons 	licensed 	to 	practice 	medicine 	within 	the
geographic 	area 	consisting 	of 	one 	or 	more 	contiguous
Illinois 	counties.
Pursuant 	to 	the 	state 	action 	doctrine, 	the 	federal 	antitrust
laws 	do 	not 	apply 	to 	acts 	taken 	by 	a 	state 	as 	sovereign 	if
it 	chooses 	to 	displace 	competition 	with 	regulation. 	A state
may 	displace 	competition 	in 	a 	particular 	market 	by 	enacting
a 	statute 	that 	clearly 	articulates 	and 	affirmatively
expresses 	such 	a 	policy 	and 	by 	providing 	active 	governmental
supervision 	of 	the 	private 	parties' 	activity. 	See,~,
Southern 	Motor 	Carriers, 	Inc. 	v. 	United States,-rDS 	S. 	Ct.
1721 	(198S)~ California 	Retail 	Liquor 	Dealers 	Association 	v.
Midcal 	Aluminum§ 	Inc., 	445 	U.S. 	97 	(1980); 	Parker 	v. 	Brown,
311 u.s. 	341 	(1 	13).
~

The 	Honorable Emil Jones, 	Jr. 	- 	3 	-
The 	benefits 	that 	competition 	can 	bring 	to 	the 	health 	care
sector 	are 	nowhere 	more 	evident 	than 	in 	the 	development 	of
innovative 	contracts 	for 	the 	provision 	of 	medical 	services.
These 	contractual 	arrangements 	have 	arisen 	as 	a 	result 	of 	strong
consumer 	demand 	for 	cost-effective 	forms 	of 	health 	care. 	There
is 	no 	question 	that 	the 	competition 	generated 	by 	preferred
provider 	organizations, 	health 	maintenance 	organizations 	and
similar 	arrangements 	can 	reduce 	medical 	costs. 	Indeed, 	just 	last
year 	the 	State 	of 	Illinois 	endorsed 	such 	competition 	with 	the
Health 	Care 	Reimbursement 	Reform 	Act 	of 	1985. 	This 	progress
could 	now 	be 	undone 	by 	the 	state-regulated 	price 	fixing 	permitted
by 	SB 	2202. 	It 	is 	our 	belief 	that 	the 	delivery of 	medical
services 	is 	more 	likely 	to 	respond 	to 	consumer 	demand 	if 	health
care 	is 	allowed 	to 	remain 	freely 	competitive 	under 	the 	antitrust
laws. 	Competition, 	nurtured 	by 	the 	increasingly 	vigorous
antitrust 	enforcement 	in 	the 	health 	care 	sector, 	offers 	the 	best
prospect 	for 	affordable 	and 	accessible 	health 	care 	in 	Illinois.
Moreover, 	we 	see 	very 	little 	to 	be 	gained 	by 	the 	sacrifice
of 	competition 	in SB 	2202, 	because 	physicians 	do 	not 	need
protection 	from 	competitive 	market 	forces 	in 	order 	to 	make
informed 	business 	decisions. 	Nothing 	in 	the 	antitrust 	laws
prohibits 	physicians 	from 	informing 	themselves 	of 	the 	advantages
and 	disadvantages 	of 	particular 	health-care 	contracts. 	Indeed,
under 	the 	antitrust 	laws, 	physicians 	already 	are 	free 	to 	discuss
and 	evaluate 	such 	contracts. 	What 	the 	antitrust 	laws 	do 	prohibit
are 	agreements 	among 	competitors 	to 	fix 	prices 	or 	to 	coerce
customers 	into 	dealing 	on 	certain 	terms. 	See, 	r.T.C. 	v. 	Indiana
Federation 	of 	Dentists, 	54 	U.S.L.W. 	4531 	(June 	2, 	1986)
(affirming 	101 F.T.C. 	57 	(1983)): 	Arizona 	v. 	Maricopa County
Medical 	Society, 	457 	U.S. 	332 	(1982): 	Michigan 	State 	Medical
Seely, 	101 F.T.C. 	191 	(1983). 	Since 	anticompetltlve 	activities
do 	not 	further 	physicians' 	understanding 	of 	proposed 	contracts
and 	physicians' 	discussions 	of 	these 	arrangements 	are 	already
permitted, 	SB 	2202 	appears 	unnecessary 	to 	its 	basic 	purpose.
Finally, 	while 	SB 	2202 	is 	unnecessary 	to 	help 	inform
physicians, 	the 	bill 	could 	represent 	a 	significant 	hazard 	by
actually 	increasing 	their 	exposure 	to 	antitrust 	liability. 	The
bill 	seeks 	to 	preserve 	the 	offeror's 	choice 	between 	SUbmitting 	to
regulation 	or 	taking 	advantage 	of 	competition. 	The Board's
authority 	to 	review 	contracts 	is 	limited 	to 	those 	which 	the
offeror 	has 	chosen 	to 	negotiate 	with 	the 	physicians'
representative. 	Some 	offerors 	may 	be 	reluctant 	to 	deal 	with 	an
entity 	that 	possesses 	the 	market 	power 	of 	a 	large 	combination 	of
competitors. 	But 	the 	bill 	authorizes 	physicians 	to 	meet 	and
discuss 	with 	their 	representative 	the 	terms 	of 	any 	contract 	that
might 	affect 	them. 	Their 	potential 	power 	to 	seek 	higher 	prices

The 	Honorable Emil 	Jones, 	Jr. 	- 	4
will 	give 	physicians 	a 	strong 	incentive 	to 	combine 	behind 	the
society or 	association 	that 	represents 	them. 	Hence, 	the 	bill
encourages 	communications 	and 	meetings 	among 	physicians, 	thereby
facilitating 	agreements 	among 	these 	competitors, 	even 	when 	the
state 	has 	chosen 	not 	to 	regulate 	the 	result. 	These 	meetings 	will
not 	be 	protected 	from 	antitrust 	scrutiny 	because 	the 	activity
fails 	to 	satisfy 	the 	state 	action 	doctrine's 	requirement 	that
competition 	be 	affirmatively 	displaced 	by 	regulation.4
Illinois 	has 	taken 	important 	steps 	to 	strengthen 	competitive
forces 	in 	the 	health 	care 	sector. 	All 	evidence 	indicates 	that
this 	new 	competition 	can 	produce much-needed 	gains 	in 	efficiency
and 	cost 	control. 	111inolS 	should 	not 	retreat 	from 	these
promising 	efforts 	by 	insulating 	physicians 	from 	competition 	in
the 	marketplace 	and 	exempting 	them 	from 	the 	antitrust 	laws, 	which
foster 	and 	protect 	that 	competition. 	We 	appreciate 	this
opportunity 	to 	provide 	our 	views 	on SB 	2202.
Very 	truly 	yours,
~~~~
william 	C. 	MacLeod
Director
CHICAGO 	REGIONAL 	OFFICE
4 	The 	fact 	that 	the 	Board 	monitors 	physicians' 	communications
is 	inadequate 	to 	provide 	antitrust 	protection 	when 	the 	Board
is 	powerless 	to 	control 	the 	result. 	As 	the 	Supreme Court
warned 	in California 	Retail 	Liguor 	Dealers Assn. 	v. 	Midcal
Aluminum, 	Inc., 	445 	U.S. 	97, 	106 	(1980), 	a 	state 	cannot
frustrate 	the 	national 	policy 	in 	favor 	of 	competition 	by
casting 	a 	"gauzy 	cloak 	of 	state 	involvement" 	over 	what 	is
essentially 	private 	anticompetitive 	conduct.