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Antitrust issues confronting physicians

By Philip Lebowitz, Esq.

Recent dramatic increases in medical malpractice insurance rates have caused physicians to look for a rational and effective response. At Frankford Hospital in Northeast Philadelphia, for example, twelve orthopedic surgeons opted not to renew their malpractice insurance for surgery after their rates for this year nearly doubled to more than $100,000 each. Without the surgeons, Frankford’s trauma unit had to direct patients to other hospitals. Frankford administrators resolved the crisis by providing some money toward the premiums and by promising to work with the surgeons on the malpractice-premium issue.

The Frankford surgeons have stated that each physician or physician group decided on its own not to renew its surgery malpractice insurance. The question is whether such actions may be taken collectively—by a group of unaffiliated doctors acting together under a common plan. The short answer is no, they can’t. But this is a complex legal issue with many gray areas that provide some opportunity for physicians to act.

The reason that pure collective action would be improper is that it could violate the federal antitrust laws. Although the antitrust laws seem more suited to breaking up Microsoft than preventing two doctors from discussing their insurance costs, at least from the government’s viewpoint, there is a relationship between health care professionals and the antitrust regulatory system.

The antitrust laws have existed since 1890 and are designed to protect competition. These laws rely on the fundamental principle that genuine competition in the marketplace will yield better products or services and lower prices. The theory is that, if free competition is preserved, competitors will improve their products or services and lower their prices to attract customers from competing businesses.

There are two basic antitrust provisions: First, a prohibition on monopolies or monopolization—the “anti-trust” aspect that gives this body of law its name (this is the provision used to go against Microsoft); and second, a prohibition on contracts, conspiracies or agreements that unreasonably restrain trade or limit competition. Physicians jointly discussing their insurance costs would arguably fall within this second aspect of the antitrust laws. This provision, Section 1 of the Sherman Act, only is concerned with collective conduct. Thus, conduct that when done by an individual is perfectly lawful may not be when done with others.

Action by surgeons in response to increased malpractice rates may have as its goal, not simply to force the malpractice insurers to lower their rates, but to gain the attention of the public and the legislature to the problems giving rise to increased malpractice premiums such as large jury verdicts and an overburdened CAT Fund. Even where there is a public policy objective, however, attempts at economic coercion can be held unlawful.

How do the antitrust laws apply to the need to take some action against the suffocating malpractice rates? First, physicians must realize that in the eyes of the antitrust laws, many of them are competitors, just as if they had hardware stores next to each other. Ultimately, this is a factual question—for example, gynecologists do not compete with orthopaedic surgeons—and non-competing physicians can do whatever they want together. But to be safe, surgeons in a given market area should consider themselves arguably to be competitors.

Second, if physicians lower their level of malpractice coverage and reduce their premiums, presumably they are creating a negative economic impact on malpractice insurance carriers, since insurers hope to make a percentage of profit on each dollar of premium. Therefore, insurance companies who experience the effect of this action will be viewed as suffering a sufficient injury to warrant invoking the antitrust laws.

Third, the goal is lower insurance rates. Therefore, regardless of higher motives, such as bringing to light the social policy implications of excessive rates on the quality of health care, physicians will likely fall into the pattern of groups of professionals, who would like to take some unified action either to lower the cost of something they must purchase or raise the price paid for something they provide. The answer from the cases already decided is that a group action—such as an agreement among all surgeons to reduce their insurance level—cannot be done without risking an antitrust enforcement action.

So what can be done?

First, any action that is truly unilateral is permitted because the antitrust laws only prohibit certain kinds of joint actions or certain conduct by monopolists. Since most physicians or physician groups do not fall into the second category, only joint activities are problematic. So whatever any physicians may individually decide to do regarding their malpractice insurance renewal or other action—so long as it is truly their independent decision—will likely not have antitrust consequences.

One key question that often arises is to what extent a series of individual actions will be deemed one joint action. A 1999 case decided by the U. S. Court of Appeals for the Fourth Circuit sheds some light on this question.

The case, Merck-Medco Managed Care, LLC v. Rite Aid Corporation, was brought by Merck-Medco, which had been awarded a contract by the State of Maryland to manage the prescription drug benefit program for state employees on the condition that it could assemble a state-wide network of pharmacies that would agree to fill prescriptions at Merck-Medco’s discounted rate. Several pharmacies refused to join Merck-Medco’s network and, when Merck-Medco was unable to assemble a network to meet the state’s requirements, it sued the pharmacies claiming they had formed an agreement to illegally boycott its network. In support of its claims, Merck-Medco pointed to an advertisement placed by Rite Aid in the Baltimore Sun and Washington Post explaining its refusal to join the network, various conference calls among the pharmacy chains, statements by corporate officers and over 450 instances of contact between defendants over a four-month period.

Although similar conduct by competitors can be unilateral, an agreement to boycott can also be inferred from the business conduct of the parties. In this case, Merck-Medco showed initially a pattern of “conscious parallelism,” in which the parties’ behavior is parallel and they are conscious of each other’s conduct in making their decisions. This parallel conduct was not enough to show an agreement to boycott without certain “plus factors,” such as motive and opportunity to conspire, conduct contrary to defendants’ business interests but rational if agreement existed, and departure from normal business practices. Ultimately, an antitrust plaintiff must exclude the possibility that the alleged conspirators acted independently or based on legitimate business purposes.

Although the court found that certain “plus factors” did exist, primarily the motive and opportunity to conspire, it also found after examining the practices of each defendant, that each pharmacy company’s decision not to participate was made on the basis of its own individual business interests, notwithstanding its knowledge of the decisions of other companies. The evidence considered by the court not sufficient to demonstrate a conspiracy included negative reactions by all defendants to the Merck-Medco plan announcement, one defendant announcing it was “up in arms,” a statement of an association of chain drug stores that “if the Maryland deal went through it would kill us,” an advertisement by Rite Aid asking public employees to contact the Governor or their union to seek to change the plan and listing the names of other pharmacies that had refused to participate (which Rite Aid said it had learned from newspaper articles), and statements by certain defendants’ executives that Medco “would not have a network.”

Ultimately, the Court held that those examples were not enough to preclude that defendants’ actions were unilateral. In particular, the court was careful to preserve the right of defendant companies to reject business proposals they felt were commercially unreasonable without being subject to antitrust liability based on a low quantum of proof of conspiracy.

The Merck-Medco decision emphasizes the importance of each physician or integrated physicians group practice making a decision based upon its own independent economic (or political) interest. If each physician’s decision is so based, activities that communicate its decision, such as newspaper advertisements, conversations with other doctors, or meetings at which the problem is discussed generally, will not likely convert that individual action to prohibited group activity.

Moreover, once physicians decide on their own what action they will take—for example, to renew their malpractice insurance at a level that restricts their ability to practice their prior specialty—that action will have consequences for other doctors, hospitals and patients that the physician may address in proper ways. Taking the clearest example, if a surgeon who normally is on trauma call will not be taking call going forward, the physician can communicate that information to other doctors, hospital administrators and patients who will be affected by those actions.

Taking this subsequent activity a step further, if physicians independently change their practice, resulting in adjustments in coverage of trauma call or specialized procedures or treatments, these decisions may require a degree of coordination beyond what any individual can provide to ensure that patients’ needs are met without disruption. In the recent situation at Frankford Hospital, there was a need to divert patients to other trauma units that would be able to handle the extra load. In order to facilitate the handling of the effect of whatever actions individual doctors decide to take, it would be appropriate for area physicians to collect information regarding the number of physicians of a particular specialty at specific locations who will be no longer performing particular services.

But it is important from an antitrust perspective that this legitimate purpose for collecting information not slide over into an unlawful purpose—such as providing the mechanism by which all may agree to take a particular boycott-type action. Therefore, the collection of information is best performed by a third party or entity, such as a medical society or an accounting firm. It is also important that that third party not communicate the information it receives back downstream to other providers. That entity could disseminate the information, in as general and aggregated a form as possible, to those who would need to know that information to make the staffing and coverage decisions required as a result of whatever individual actions are taken.

One additional related type of conduct is immune from the antitrust laws and therefore may be done as a group, even a group of competitors.

There is an exception to the antitrust laws for actions taken to petition the legislature to pass new laws (or to repeal old ones) or otherwise communicate with or obtain action from the government. This is called the Noerr-Pennington doctrine (after the cases in which it was established). The principle is based on each individual’s First Amendment right to speak and to associate with others to petition the government. This First Amendment right has priority over the antitrust laws, even if group action is taken to encourage government action that will prevent competition. For example, coordinated conduct to prevent an entity from obtaining a Certificate of Need to open an ambulatory surgery center was immune from the antitrust laws.

So, groups of competing physicians could sign a petition asking the legislature to change the CAT Fund, raise malpractice minimum levels or any other proposal. They could all together rent a big hall in Harrisburg and invite legislators to hear what they have to say, or file a joint complaint with the Department of Insurance. But two things cannot be done: (1) Groups may not engage in boycott or price-fixing activity that will have an effect on a non-governmental entity, such as an insurance company, thinking it is justified because in the end they are really seeking a change in legislation. (2) Groups cannot use a meeting set up for legitimate Noerr-Pennington purposes to agree to do other things not directly related to petitioning the government. Attempting to use market power to influence the government through economic means may subject physicians to antitrust liability.

Thus, the cornerstone of any response to the malpractice crisis must either be in the nature of group lobbying activities or individual decisions that may be preceded or followed by limited forms of coordinated activities. Physicians of the same specialty must be cognizant at all times of the need not to reach agreements that limit each other’s individual economic actions, but they may raise a significant issue to a level of public awareness and they can take advantage of the opportunity to coordinate a response to individual actions that is consistent with good professional practice.

Philip Lebowitz, Esq., is chair of the Health Care Services Practice Group in the Philadelphia office of Pepper Hamilton LLP, a multi-practice law firm.

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