FTC Charges Piedmont Health Alliance And 10 Physicians with Price Fixing

The Federal Trade Commission has issued an administrative complaint against Piedmont Health Alliance, Inc. (PHA), a physician-hospital organization (PHO) in North Carolina, and ten individual physicians who participated centrally in PHA’s allegedly unlawful activities for allegedly fixing prices for the services of its physician members. The FTC complaint charges that the respondents’ anticompetitive conduct harmed consumers in four North Carolina counties and violated Section 5 of the FTC Act. Frye Regional Medical Center, Inc. (Frye), an acute care hospital in Hickory, North Carolina, and its parent company Tenet Healthcare Corporation, a California-based for-profit corporation, have settled FTC charges concerning their role in PHA’s allegedly unlawful activities.

The FTC alleges that PHA, a for-profit PHO with approximately 450 physician members, collectively set the prices it demanded for physician services from payors, thereby eliminating price competition among these physicians in the “Unifour” area of Western North Carolina, which comprises Alexander, Burke, Caldwell, and Catawba counties. According to the FTC’s complaint, PHA’s physician members signed agreements that bound them to participate in all contracts PHA entered and to accept PHA-negotiated prices. The FTC alleges that PHA’s Contracts Committee negotiated contracts, including physician fees, with payors on behalf of PHA and its members, and that all contracts were approved by PHA’s Board of Directors. Since 1994, PHA jointly negotiated and entered into more than 50 payor contracts on behalf of its physician members.

The FTC’s complaint also states that, starting in 2001, PHA began using what PHA calls a “modified messenger model” to enter into contracts with some payors. Competing physicians sometimes use a “messenger” to facilitate their contracting with payors, in ways that do not constitute unlawful agreements on prices. Legitimate messenger arrangements can reduce contracting costs between payors and physicians, but without involving or facilitating coordinated responses by the physicians.

In this case, however, the FTC alleges that the approach employed by PHA was not a legitimate messenger model, and instead represents coordinated behavior by PHA and its physicians. In particular, the complaint alleges that PHA sent preexisting, PHA-negotiated contract prices to its physician members, which many used to develop their individual prices; negotiated with payors on the overall average price levels to be paid to PHA physician members under PHA’s contracts with payors, and then set fee schedules based on those price levels; and collectively agreed on other contract terms. The FTC further alleges that PHA told its members that the new contracting method would not apply to existing PHA payor contracts or contracts in the final stages of negotiation, many of which have since been renewed or negotiated without being processed through PHA’s so-called “messenger” model.

The FTC’s complaint also names 10 individual physicians: Peter H. Bradshaw, S. Andrews Deekens, Daniel C. Dillon, Sanford D. Guttler, David L. Harvey, John W. Kessel, A. Gregory Rosenfeld, James R. Thompson, Robert A. Yapundich, and William Lee Young III. According to the FTC, these physicians were voting members of the PHA Board, participating in decisions to approve or reject proposed contracts with payors; authorize negotiations with payors; authorize the development of, and approve physician fee schedules for negotiations; terminate contracts between PHA and payors; approve recommendations of the PHA Contracts Committee concerning payor contracts and contract terms; and determine whether payors could obtain an exception from PHA’s requirement that payors agree to refuse to deal with non-PHA physicians. The FTC’s complaint states that the physician respondents directly profited from PHA’s price-fixed contracts.

The FTC’s complaint further states that the respondents’ conduct has restricted trade and hindered competition in the Unifour area, in violation of the FTC Act, by unreasonably restraining prices for physician services and maintaining them at artificially high levels. The FTC alleges that consumers and payors in the Unifour area have been harmed by PHA’s anticompetitive actions, and that PHA’s collective negotiation on behalf of its physician members has not been, and is not, reasonably necessary to achieving any efficiency-enhancing integration.

Complaint and Consent Order with Frye and Tenet

The FTC alleges that Frye was instrumental in PHA’s formation, expansion, and operation. The FTC’s complaint states that in 1993, Frye’s Chief Executive Officer (CEO) formulated a plan to create a PHO that would include Frye and physicians who practiced at Frye. Frye’s Board of Directors allegedly authorized Frye’s CEO to use Frye funds to develop the PHO. In 1994, PHA was incorporated, and Frye’s Chief Operating Officer (COO) initially directed PHA’s operations. The FTC’s complaint states that Frye subsequently coordinated the inclusion of two other hospitals – Caldwell Memorial Hospital and Grace Hospital – and their respective medical staffs in the PHO, and has invested substantial funds in the project. According to the FTC, Frye’s Chief Financial Officer and COO served as PHA’s principal contract negotiators from 1994 to 1996. Frye’s representative on the PHA Board also participated in the Board’s actions regarding payor contracts and physician fees.

This settlement with Frye and Tenet represents the first case in which the FTC has named a hospital as a participant in an alleged physician price-fixing conspiracy. As noted above, the complaint’s allegations emphasize the central role played by Frye in acting to implement and facilitate the fixing of prices that PHA physicians charge payors for services rendered.

The proposed consent agreement prohibits Frye and Tenet from entering into or facilitating any agreement between or among any physicians practicing in the Unifour area: (1) to negotiate with payors on any physician’s behalf; (2) to deal, not to deal, or threaten not to deal with payors; (3) on what terms to deal with any payor; or (4) not to deal individually with any payor, or to deal with any payor only through an arrangement involving PHA. The proposed agreement also requires Frye and Tenet to cease receiving payments under the allegedly unlawful fee schedules in PHA’s payor contracts for their employed physicians who are PHA members. However, the proposed agreement permits Frye to participate in various potentially procompetitive joint ventures with physicians in the Unifour area.

The Commission vote to accept the proposed consent agreement as to Tenet Healthcare Corporation and Frye Regional Medical Center, Inc. and authorize the filing of an administrative Part III complaint as to all other respondents was 5-0. An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, until January 22, 2004, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, DC 20580.

NOTE: The Commission issues a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the respondents have actually violated the law. The administrative complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing by an administrative law judge.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the PHA complaint, and the Tenet complaint and proposed consent agreement, 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, D.C. 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, D.C. 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.

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