UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION

In the Matter of

TEXAS SURGEONS, P.A.,
AUSTIN SURGICAL CLINIC ASSOCIATION, P.A.,
CENTRAL TEXAS SURGICAL ASSOCIATES, P.A.,
and
SURGICAL ASSOCIATES OF AUSTIN, P.A.
professional associations, and
AUSTIN SURGEONS, P.L.L.C.,
BRUCE McDONALD & ASSOCIATES, P.L.L.C.,
and
CAPITAL SURGEONS GROUP, P.L.L.C.,
professional limited liability corporations.

Docket No.

COMPLAINT

Pursuant to the provisions of the Federal Trade Commission Act, as amended, 15 U.S.C.  41 et seq., and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that the Texas Surgeons, P.A. ("Texas Surgeons"), Austin Surgeons, P.L.L.C. ("AS"), Austin Surgical Clinic Association, P.A. ("ASCA"), Bruce McDonald & Associates, P.L.L.C. ("BM&A"), Capital Surgeons Group, P.L.L.C. ("CSG"), Central Texas Surgical Associates, P.A. ("CTSA"), and Surgical Associates of Austin, P.A. ("SAA"), hereinafter sometimes referred to as "respondents," have violated Section 5 of the Federal Trade Commission Act, 15 U.S.C.  45, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues this complaint stating its charges as follows:

RESPONDENTS

1. Respondent Texas Surgeons is a for-profit professional association organized, existing, and doing business under and by virtue of the laws of the State of Texas, with its office and principal place of business at 4007 Marathon Blvd., Austin, Texas 78756. At all times relevant to this Complaint, the shareholders of respondent Texas Surgeons have included 26 or more general surgeons.

2. Respondent AS is a professional limited liability corporation organized, existing, and doing business under and by virtue of the laws of the State of Texas, with its office and principal place of business at 3901 Medical Parkway, #200, Austin, Texas 78756. At all times relevant to this Complaint, respondent AS has included at least three general surgeon shareholders practicing general surgery in the Austin area through respondent AS.

3. Respondent ASCA is a for-profit professional association organized, existing, and doing business under and by virtue of the laws of the State of Texas, with its office and principal place of business at 2911 Medical Arts Street, Austin, Texas 78705 At all times relevant to this Complaint, respondent ASCA has included at least four general surgeon shareholders practicing general surgery in the Austin area through respondent ASCA.

4. Respondent BM&A is a professional limited liability corporation organized, existing, and doing business under and by virtue of the laws of the State of Texas, with its office and principal place of business at 4007 Marathon Blvd., Austin, Texas 78756. At all times relevant to this Complaint, respondent BM&A has included at least three general surgeon shareholders practicing general surgery in the Austin area through respondent BM&A.

5. Respondent CSG is a professional limited liability corporation organized, existing, and doing business under and by virtue of the laws of the State of Texas, with its office and principal place of business at 3705 Medical Parkway, Austin, Texas 78705. At all times relevant to this Complaint, respondent CSG has included at least seven general surgeon shareholders practicing general surgery in the Austin area through respondent CSG.

6. Respondent CTSA is a for-profit professional association organized, existing, and doing business under and by virtue of the laws of the State of Texas, with its office and principal place of business at 2300 Round Rock Avenue, Round Rock, Texas 78681. At all times relevant to this Complaint, respondent CTSA has included at least three general surgeon shareholders practicing general surgery in the Austin area through respondent CTSA.

7. Respondent SAA is a for-profit professional association organized, existing, and doing business under and by virtue of the laws of the State of Texas, with its office and principal place of business at 1015 East 32nd Street, Austin, Texas 78705. At all times relevant to this Complaint, respondent SAA has included at least four general surgeon shareholders practicing general surgery in the Austin area through respondent SAA.

8. At all times relevant to this Complaint, the general surgeon shareholders of respondents AS, ASCA, BM&A, CSG, CTSA, and SAA ("respondent medical practice groups") have collectively comprised at least 24 of the 26 or more general surgeon shareholders of respondent Texas Surgeons. The few general surgeon shareholders of respondent Texas Surgeons who do not practice within any of the six respondent medical practice groups are solo practitioners.

9. At all times relevant to this Complaint, the shareholders of respondent Texas Surgeons have constituted the majority of general surgeon private practitioners serving the adult population in the Austin area. All such shareholders practice within the counties of Travis and Williamson. For purposes of this Complaint, the "Austin area" is no larger than the counties of Travis, Williamson, Hays, Bastrop, and Caldwell, including about 1,105,000 residents.

10. Except to the extent that competition has been unreasonably restrained as alleged herein, the six respondent medical practice groups, as well as the solo practitioner general surgeons within respondent Texas Surgeons, have been, and are now, in competition with each other and with other general surgeons and medical practice groups that include general surgeons in the Austin area.

JURISDICTION

11. Each respondent is a "corporation" within the meaning of Section 4 of the Federal Trade Commission Act, as amended, 15 U.S.C.  44.

12. The acts and practices of the respondents, including those alleged herein, are in or affect commerce within the meaning of Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C.  45.

COMPETITION AMONG PHYSICIANS

13. General surgeons and other physicians often enter into professional service contracts with third-party payers, including health maintenance organization and preferred provider organization plans, that are designed to lower the costs of medical care for subscribers. Such professional service contracts typically establish the terms and conditions under which the physicians will render services to the subscribers of the third-party payers' health care plans, including terms and conditions of physician compensation. In order to gain contracts with third-party payers and thereby obtain access to their subscribers, physicians frequently agree to reductions in their compensation and to procedures for reviewing the utilization of medical resources. By lowering costs in this manner, third-party payers are able to reduce the cost of medical care for their subscribers.

14. Absent agreements among competing physicians or medical practice groups about the terms they will accept from third-party payers, and absent an arrangement where collective negotiations with third-party payers are reasonably necessary to obtain significant efficiencies through the arrangement, competing physicians and medical practice groups independently decide whether to enter into professional service contracts with third-party payers, and on the terms and conditions they will accept.

THE ACTS AND PRACTICES OF THE RESPONDENTS

15. Respondent Texas Surgeons, acting as a combination of its general surgeon shareholders and the six respondent medical practice groups, and in conspiracy with such general surgeon shareholders and medical practice groups, has, among other things, facilitated, created, and implemented express or implied agreements among its general surgeon shareholders and the six respondent medical practice groups to: (a) fix prices and other terms of dealing with third-party payers; (b) collectively threaten to refuse to deal with third-party payers; (c) collectively refuse to deal with third-party payers; and (d) deal with third-party payers only on collectively determined terms.

16. In or around June 1995, ten solo practitioner general surgeons in the Austin area formed an independent practice association named Capital Surgeons, P.A. (a predecessor to respondent Texas Surgeons), and, in or around September 1996, seven of these general surgeons formed respondent CSG and the other three formed respondent AS. Capital Surgeons, P.A., changed its name to Texas Surgeons, P.A., soon after Blue Cross Blue Shield of Texas ("Blue Cross") announced general surgery rate reductions in February 1997 (to become effective April 1, 1997). Soon after Blue Cross implemented its general surgery rate reductions on April 1, 1997, all fifteen of the general surgeons practicing through respondents ASCA, BM&A, CTSA, and SAA joined respondent Texas Surgeons as shareholders (two solo practitioner general surgeons joined respondent Texas Surgeons later in 1997).

17. Since the expansion of respondent Texas Surgeons, representatives of the six respondent medical practice groups collectively have comprised respondent Texas Surgeons' board of directors. As described below, respondent Texas Surgeons, including its board of directors, has served as a vehicle for the six respondent medical practice groups (as well as the few solo practitioner shareholders of respondent Texas Surgeons) collectively to negotiate higher rates with two major third-party payers in the Austin area -- Blue Cross and United HealthCare of Texas.

18. The collective rate negotiations described below did not involve either significant financial risk sharing or the creation of other significant efficiencies through respondent Texas Surgeons, and therefore were not reasonably necessary to obtain any significant efficiencies.

RESPONDENTS' COLLECTIVE RATE
NEGOTIATIONS WITH BLUE CROSS

19. In February 1997, Blue Cross notified its Austin area physician network that it was converting to a new physician reimbursement system for certain of its health plans. Blue Cross explained in this notice that, as part of this conversion and in order to help it compete for subscribers, it was reducing payment rates for certain physician categories, including general surgeons, effective April 1, 1997, and that payment rates for primary care physicians would increase.

20. In the summer of 1997, respondent Texas Surgeons' president informed Blue Cross about its general surgeon shareholders' collective dissatisfaction with Blue Cross's general surgery rate reductions that went into effect April 1, 1997. Respondent Texas Surgeons' president identified himself as the authorized spokesperson for respondent Texas Surgeons and began negotiating higher rates on behalf of the general surgeon shareholders. During these rate negotiations, which extended to early 1998, respondent Texas Surgeons' president negotiated according to the collective decisions of the: (1) six respondent medical practice groups, made during Texas Surgeons' board of directors meetings or through other mechanisms; and (2) general surgeon shareholders of respondent Texas Surgeons, made during one or more shareholder meetings or through other mechanisms.

21. Respondent Texas Surgeons' collective negotiations with Blue Cross ultimately led to a rate agreement in February 1998 that increased general surgery rates (on average) more than 29% over the pre-existing rates. At various times during the collective rate negotiations, Blue Cross attempted to negotiate on an individual basis with the six respondent medical practice groups or their shareholders. Each consistently rebuffed, refused, or did not respond to Blue Cross's multiple attempts to initiate individual rate negotiations and indicated that they would only negotiate through respondent Texas Surgeons.

22. Respondent Texas Surgeons sent Blue Cross in September 1997 a package containing contract termination notices for each general surgeon who was at that time a shareholder of respondent Texas Surgeons. Respondent Texas Surgeons' cover letter stated that the contract termination notices were due to Blue Cross's "unacceptable" fee schedule. All 26 of these contract termination notices were on Texas Surgeons' letterhead, had the same date of authorship, and contained identical wording.

23. In November 1997, aware of possible antitrust liability due to its ongoing collective rate negotiations, respondent Texas Surgeons requested that Blue Cross sign a letter waiving Blue Cross's right to file a private antitrust action against either respondent Texas Surgeons or any of its shareholders, regarding the Texas Surgeons-Blue Cross rate negotiations. Because Blue Cross refused to waive its antitrust rights, the six respondent medical practice groups decided to involve a third-party agent in an effort to continue their agreements to collectively negotiate rates and to deal with Blue Cross only on collectively determined terms. The six respondent medical practice groups agreed that their third-party agent would convey to Blue Cross only the highest of the various rate authorizations that he obtained from each of the six respondent medical practice groups, and the third-party agent did so. Blue Cross rejected that collective rate proposal.

24. On December 1, 1997, due to dissatisfaction with Blue Cross's rate offers and the perceived pace of collective rate negotiations, the general surgeon shareholders of respondent Texas Surgeons effected their contract terminations as originally noticed to Blue Cross in September 1997. To apply further pressure on Blue Cross, respondents announced the Blue Cross contract terminations of their general surgeon shareholders in a prominent advertisement in the major Austin daily newspaper on December 14, 1997.

25. Thereafter, respondent BM&A advised two solo practitioner general surgeons that the BM&A general surgeons would no longer provide back-up surgical coverage for any of their patients if they continued to deal with Blue Cross. Both had expanded their hours to cover Blue Cross general surgeries and were key performers within Blue Cross's small remaining panel of Austin area general surgeons. In or around early February 1998, both submitted contract resignation notices to Blue Cross in order to preserve their back-up coverage arrangements with respondent BM&A.

26. After Blue Cross's receipt of resignation notices from the two solo practitioners (as described in Paragraph 25), and after some difficulty in securing the timely services of a general surgeon for a Blue Cross emergency room patient, Blue Cross concluded that it needed to reach a rate agreement with respondent Texas Surgeons as soon as possible to avoid inadequate general surgery coverage for Blue Cross subscribers in the Austin area.

27. In or around early 1998, with full knowledge of antitrust prohibitions on competitors engaging in collective rate negotiations, respondent CSG negotiated and completed, on behalf of all six respondent medical practice groups, a collective rate agreement with Blue Cross. The respondent medical practice groups completed this collective rate agreement after respondent Texas Surgeons had received notice that its activities were subject to antitrust investigation. After Blue Cross agreed to increase its rates as demanded by the respondents, all of the general surgeon shareholders of respondent Texas Surgeons that had terminated their Blue Cross contracts rejoined the Blue Cross physician panel by early March 1998.

28. The collective rate increases extracted from Blue Cross by respondents caused Blue Cross to extend those increased rates to surgeries usually performed by Austin area physicians other than general surgeons. Blue Cross keeps all surgeons at the same rate levels to enhance provider relations.

RESPONDENTS' COLLECTIVE RATE
NEGOTIATIONS WITH UNITED

29. In October 1997, United HealthCare of Texas-Central Texas Region ("United") notified its participating physicians in the Austin area that, effective January 1, 1998, physician fees, including general surgery fees, would be reduced. Fee reductions for surgeries usually performed by physicians other than general surgeons went into effect and remain in effect in the Austin area, but the proposed (and comparable) fee reductions for surgeries usually or frequently performed by general surgeons never went into effect. Instead, as described below, Austin area general surgery fees for United's various plans increased at least 12% to 40% above the rates that United announced in October 1997.

30. In early November 1997, United received a letter from respondent Texas Surgeons stating that, due to United's "unacceptable" fee reductions for 1998, all of the general surgeon shareholders of respondent Texas Surgeons were terminating their individual contracts with United effective January 1, 1998. The letter listed the names of all 27 general surgeon shareholders of respondent Texas Surgeons at that time.

31. Also in early November 1997, respondent Texas Surgeons' president and acting vice president told United officials that the general surgeon shareholders of respondent Texas Surgeons would rescind their collective termination notices if United were to increase its general surgery fees at least 20% above United's then current 1997 fee schedule.

32. A United official responded that United preferred to negotiate with the general surgeon shareholders of respondent Texas Surgeons (or their six respondent medical practice groups) on an individual basis. The president and acting vice president of respondent Texas Surgeons rejected that option. When the United official retorted that the general surgeon shareholders were under individual contracts, the Texas Surgeons president responded that he would be willing to produce individual termination letters, if so desired by United.

33. Respondent Texas Surgeons' president further advised United that: (1) the general surgeon shareholders were very interested in announcing through a local newspaper advertisement the collective termination of their United contracts, but that they would hold off if United were to agree to engage in a speedy collective fee negotiation; and (2) he had already told some employees of a large Austin area employer under contract with United that the Texas Surgeons shareholders were planning to drop out of United's network effective January 1, 1998. The respondents knew that United would likely consider public awareness of respondents' collective termination notice as imperiling United's ability to renew the many employer contracts that were expiring beginning in January 1998, and that loss of these contracts would cause heavy subscriber enrollment losses for United.

34. United explored the possibility of creating a panel of Austin area general surgeons that did not include any general surgeon shareholders of respondent Texas Surgeons. United concluded that: (1) general surgeon shareholders of respondent Texas Surgeons were needed to maintain adequate general surgery coverage; (2) any attempt to negotiate with them on an individual basis would likely fail; and (3) it had no realistic alternative other than to begin collective fee negotiations.

35. Prior to the start of collective fee negotiations on November 19, 1997, respondent Texas Surgeons required United to sign a letter waiving United's right to file a private antitrust action against respondent Texas Surgeons or any of its general surgeon shareholders, regarding the Texas Surgeons-United fee negotiations. Respondent Texas Surgeons' president, who attended and led the collective fee negotiations that day, was in frequent telephone and fax contact, and deliberated collectively, with representatives of the six respondent medical practice groups who were assembled together to facilitate collective fee negotiations with United.

36. At the November 19, 1997 collective fee negotiations, respondents demanded and received an agreement from United to pay substantially higher fees for 1998 and 1999. Thereafter, in December 1997, respondent Texas Surgeons sent United a letter on Texas Surgeons letterhead, on behalf of all of the general surgeon shareholders, revoking their November 1997 collective termination notice.

37. The 1998 fees that the respondents extracted from United under its various plans are at least 12% to 34% higher, and their 1999 fees are at least 27% to 40% higher, than United's originally proposed fee schedule that went into effect in 1998 for (and that continues to apply to) surgeries usually performed by physicians other than general surgeons.

EFFECTS

38. The acts and practices of the respondents as described herein have had the purpose or effect, or the tendency and capacity, to restrain competition unreasonably in the provision of services by private general surgeon practitioners in the Austin area and to injure consumers in the following ways, among others:

a. to deprive consumers, including individuals, employers (including the State of Texas Employees Retirement System), and third-party payers, of the benefits of competition;
 
b. to fix or increase the payments or co-payments that individual patients, their employers, and third-party payers make for the services of general surgeons, and, in the case of Blue Cross managed care plans, for surgeries performed by physicians other than general surgeons;
 
c. to fix the terms and conditions upon which general surgeons would deal with third-party payers, including terms of compensation, and thereby to raise the prices that individuals and employers pay for health plans offered by third-party payers; and
 
d. to increase by over one million dollars the amount that Blue Cross, United, their individual subscribers, and employers paid from January 1, 1998 through December 31, 1999 to the six respondent medical practice groups, general surgeon shareholders of respondent Texas Surgeons, and other Austin area physicians.

VIOLATIONS

39. The acts and practices of the respondents as described above are to the prejudice and injury of the public and constitute unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C.  45. The acts and practices of the respondents, as described above, are continuing and will continue or recur in the absence of the relief requested.

WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this day of , , issues its complaint against said respondents.

By the Commission.

Donald S. Clark
Secretary

Seal