UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

IN THE MATTER OF
PIEDMONT HEALTH ALLIANCE, INC., ET AL.

FTC Docket No. 9314

COMMENTS OF CITIZENS FOR VOLUNTARY TRADE/

THORNTON INSTITUTE FOR HEALTH CARE
AND ECONOMICS RESEARCH

Proposed Decision and Order Announced August 11, 2004

Comments Filed September 10, 2004

Citizens for Voluntary Trade (CVT), a Virginia nonprofit

corporation, though its Thornton Institute for Health Care and
Economics Research, files the following comments in response to
the Federal Trade Commission’s proposed Decision and Order in
the above-captioned case.1
***
On December 23, 2003, the FTC issued an administrative
complaint against Piedmont Health Alliance (PHA) and ten
individual physicians who are shareholders in PHA. The complaint
charged PHA with violating Section 5 of the Federal Trade
Commission Act, 15 U.S.C. § 45, which generally prohibits “unfair
methods of competition” within interstate commerce. Specifically,
the complaint said PHA and the individual physician respondents
(collectively, “the respondents”) conspired to fix prices for

1 The Thornton Institute for Health Care and Economics Research, a division of Citizens
for Voluntary Trade, examines the impact of antitrust and competition laws on the health
care industry. The Institute's members apply the principles of Austrian economics and
rational ethics to contemporary public policy issues in health care. The Institute is named
in honor of Dr. Matthew Thornton (1714-1803), a New Hampshire physician and judge,
and a signer of the Declaration of Independence.
 IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL.

Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

physician services in the Unifour area of North Carolina.2 The

complaint said that PHA represented about 450 physician members
in contract negotiations with various third-party payers (insurers,
HMOs, employers, etc.), and that in doing so, PHA fixed the prices
for its members’ services, thereby depriving the payers of “the
benefits of competition.” The FTC said that PHA coordinated its
price-fixing with three local hospitals. The hospitals settled
separate Section 5 charges with the FTC in a consent order
announced at the same time the PHA complaint was filed.
After initially contesting the FTC’s charges before an
administrative law judge, the PHA respondents eventually opted
to sign a consent order giving the Commission substantially all of
the relief it would have sought at the administrative hearing. The
proposed order prohibits the PHA respondents from negotiating
with payers on any physician’s behalf, facilitating any agreement to
deal or not deal with any payer, or to enter into any voluntary
arrangement that allows physician to negotiate with payers
exclusively through PHA.
***
In this filing, we will address the economic assumptions and
concepts underlying the FTC’s prosecution of the PHA
respondents. Because this matter was not adjudicated before an
independent judge, we will not examine the validity of the factual
allegations made by the complaint. This analysis will proceed as if
the FTC’s facts are correct, but CVT-Thornton Institute makes no
factual conclusions as such.
At the outset, we will define the “free market” or the “market
economy.” The Austrian economist Ludwig von Mises said, “The
market economy is the social system of the division of labor under
private ownership of the means of production. . . . The state, the
social apparatus of coercion and compulsion, does not interfere
with the market and with citizens’ activities directed by the
market.”3 A free market, in other words, is free of all coercion, be it
private or governmental. There is no role for force in a market
economy, even if an initiator of force claims to act “in the public
interest,” as the FTC does here.

2
The Unifour area consists of Alexander, Burke, Caldwell, and Catawba counties.
3
Ludwig von Mises, Human Action, at 257.

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 IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL.

Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

If health care in the United States operated in a free market,

than individual buyers (patients) and sellers (physicians) would
interact free of government intervention. Any intermediaries
between buyers and sellers would exist only if they proved to
facilitate efficient exchange. For example, in a free market, many
physicians would choose to affiliate with a hospital rather than
construct their own dedicated medical facility. Similarly, several
physicians might join together to form a practice group in order to
share costs and patients. On the other side of the ledger, patients
might choose to pay their own health care costs, as they do for food
and other scarce services, or a group of buyers might pool their
resources together in order to collectively purchase health care.
The U.S. health care system, however, does not operate in a free
market. The government extensively intervenes in the marketplace.
The principal form of intervention is the third-party payer. When
Congress enacted the Medicare system in 1965, the government
itself functioned as the payer. Certain patients obtained medical
services but no longer paid for them; the government picked up the
tab. Divorcing demand from the ability to pay had a predictable
effect: The price of medical care dramatically increased. Congress
responded to this, not by admitting error and ending its
intervention, but by authorizing a larger series of incursions upon
the market. This took the form of “managed care”.
Managed care has its origins in the wage and price controls
enacted by the federal government during World War II. Because
market wages were restricted by government fiat, employers
exploited a loophole in the tax system to give their employees
“raises” by providing health insurance benefits (which the
employers could deduct from their taxes as a business expense.) In
the post-Medicare to control prices, Congress adopted more explicit
subsidies to encourage employers to provide health insurance to
their employees, either on their own or through managed care
organizations (MCOs).
The FTC’s own complaint in this case aptly describes the basic
principles of MCOs. Paragraph 10 of the complaint notes that third-
party payersûemployers and MCOsûoffer contracts to physicians
based on the RBRVS, a Medicare formula that fixes prices for
medical services based on Medicare’s determination of the
“average cost” of a given procedure. The RBRVS is not a market

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 IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL.

Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

price, but a price control. It divorces price from cost by reimbursing

physicians the same amount of money per procedure regardless of
actual cost or quality of care.
No free market industry would voluntarily employ the RBRVS
approach to prices. As an illustration of this point, imagine the
furniture industry under an RBRVS scheme. The government
decides all Americans have a “right” to furniture. To contain costs,
the government imposes a uniform fee schedule. For example, all
couches, regardless of quality or cost, will be priced at $100. Would
such a fee schedule lead to greater competition and better quality
products? No. Since the price remains constant irrespective of the
furniture maker’s needs or actions, the market will become
stagnant and reward mediocrity.
MCOs take the Medicare RBRVS methodology and apply it to
the private health care market. Since federal law encourages and
subsidizes MCOs and employer-purchased health insurance,
individual buyers have little incentive to purchase health care on
their own. This allows MCOs to aggregate hundreds and thousands
of buyers into a single purchasing unit that can be leveraged
against physicians to extract the lowest possible price for services.
There is, of course, nothing wrong with buyers voluntarily
combining their purchasing power. This is commonplace in retail,
where buyers often purchase goods from large resellers instead of
manufacturers. Resellers leverage their large customer base to
obtain lower prices from the manufacturers. Supporters of
managed care argue this is precisely what MCOs do. Paragraph 9
of the FTC’s complaint makes this very argument:
[P]hysicians often enter into contracts with payors
that establish the terms and conditions, including fees
and other competitively significant terms, for
providing health care services to enrollees under the
payors’ programs. Physicians entering into such
contracts often agree to reductions in their usual
compensation in order to obtain access to additional
patients made available to them by the payors’
contractual relationships with their enrollees. Such
reductions in physician fees may permit payors to
constrain increases in, or reduce, the premiums they
charge to their customers, or to offer broader benefits

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Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

coverage without increasing premium levels or out-

of-pocket expenditures by enrollees.
The FTC presents an ideal model of how it believes physicians
and payers should interact. All doctors want to see as many
patients as possible, all doctors will accept lower prices per patient,
and all physician price reductions will be reflected in the prices
payers charge individual buyers.
A free market, however, does not behave according to a
centrally-planned model. The FTC’s model ignores the harmful
impact of third-party payers upon buyers and sellers. An MCO
might sound like a retail reseller, but there are substantial
differences between an HMO and Wal-Mart. Continuing the
furniture example, in a free market Wal-Mart might request a
manufacturer reduce the price of its couch from $150 to $130. Wal-
Mart predicts it can sell 20% more couches at the lower price (we’ll
assume that Wal-Mart’s retail markup is the same regardless of the
wholesale price.) The manufacturer might refuse the price
reduction, arguing there is no profit at $130 even with the
additional sales. Wal-Mart, conversely, might refuse to sell the
couch at all at $150, preferring to sell another manufacturer’s couch
at $130.
All of these interactions and calculationsûand the above
example is a simplificationûfigure into a market price. But under
the economic model preferred by the FTC, this calculation is
replaced with government mandates and inaccurate models. In a
world where the government intervenes in the couch market, Wal-
Mart is no longer a private reseller, but a “furniture HMO.” The
government purchases a large quantity of couches at a fixed price,
say $120. Wal-Mart then tells all manufacturers that it will pay no
more than $125 wholesale per couch. Under the FTC’s model, the
manufacturers will sell as many couches as they can at this price,
even though it’s distorted due to the government’s intervention.
But what if the manufacturers decide to reduce outputûsell less
couches altogetherûrather than accept a price they can’t reliably
profit at?
The FTC would label such behavior illegal, because the
manufacturers are “restricting output” as a result of the artificially
lowered price. Along those lines, if several manufacturers banded
together and told Wal-Mart they would not sell any couches for

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Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

less than $140, the FTC would condemn this as price-fixing, using
the government’s arbitrary $120 price as “proof” that the
manufacturers were asking for “above market” prices.
Paragraph 32 of the FTC’s complaint claimed this is what PHA
did: “prices for physician services in the Unifour area have
increased or been maintained at artificially high levels.” (Italics
added.) Artificial compared to what? To the RBRVS, the
government’s arbitrary, non-market price scheme.
The FTC’s concern is understandable, if not sympathetic. If
MCOs paid physician prices that deviated too much upward from
the RBRVS, many physicians would be in a position to reject
Medicare patients altogether. After all, if the furniture maker can
get $160 a couch from Wal-Mart, why would he sell any couches to
the government at $120?
It’s also worth noting that the government could constrain
“artificially high” price levels through fiat. Congress could pass a
law requiring all physicians to charge RBRVS rates to private
MCOs. And taking this argument to a logical endpoint, the
government could set the price for physician services at zero.
Obviously such a price would not attract many physicians, if any.
Such is the consequence, however, of ignoring market principles in
favor of political intervention.
***
But what of the FTC’s view that price-fixing agreements of any
sort are illegal because they restrain “competition”? The complaint
said PHA deprived consumers of “the benefits of competition
among physicians.” This assumes two things: First, that physicians
have a legal duty to compete, and second, that competition would
exist but for PHA’s actions.
The notion that sellers in a market have a legal duty to compete
is coterminous with the FTC’s position that all buyers have a
“right” to competition among sellers. It’s unclear, however, where
this right comes from. The American constitutional system
presupposes the existence of certain individual rightsûlife, liberty,
property, and the “pursuit of happiness.” These rights are a
function man’s existence, and do not depend on any positive act of
the state. Rights, in fact, represent a negative on the state and
society at-large. Rights protect against the initiation of force.

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 IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL.

Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

The right to competition is inconsistent with the constitutional

recognition of preexisting individual rights. If two sellers choose
not to compete, the potential buyer can claim no legal injury. If two
furniture makers agree not to sell their couches to Wal-Mart for less
than $140 each, Wal-Mart cannot claim any violation of its rights,
because there is no right to obtain the property of another except
through voluntary trade.
Even assuming, arguendo, that a right to competition existed, the
FTC cannot claim that PHA had violated this right, because there is
no evidence “competition”ûas defined by the Commissionûtook
place before PHA’s allegedly illegal conduct.
The crux of the complaint is that PHA’s individual members
had a duty to compete by deciding “unilaterally” whether to accept
or reject a payer’s contract offer. The FTC objects to the physicians
deciding as a group whether to take such actions. But it’s not
“competition” that the FTC seeks, but the unquestioned
acquiescence of PHA’s physicians. In the absence of PHA,
individual physicians would not compete against one anotherûthe
payers would simply offer every physician the same contract, and
each physician would accept or reject it; no individual physician
could meaningfully negotiate with a payer representing hundreds
of buyers. It is the government and the MCOs, not physicians, that
have abolished all meaningful price competition.
The FTC is pursuing a divide-and-conquer strategy on behalf of
the payers: If the physicians cannot band together in their own self-
interest, they can’t prevent payers from imposing price levels
consistent with the government’s RBRVS model. Furthermore, even
if a large number of physicians individually reject a proposed
contract, the FTC can still accuse the doctors of “price-fixing,”
because the antitrust laws permit the government to infer violations
from seemingly innocent conduct. The message to physicians is
clear: Reject a proposed contract under risk of antitrust prosecution.
***
Finally, the FTC’s economic model fails to account for other
government interventions that restrict the supply of medical
services, especially the barriers to entry imposed on medical
training and licensing.

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 IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL.

Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

Since the early 20th century it has been illegal to sell medical
services in the United States without a license from a state board
composed of existing sellers. Licenses are generally restricted to
graduates of medical schools that are also approved by existing
sellers (i.e. the American Medical Association.) These regulatory
schemes allow the government to artificially control the supply of
medical services throughout the market.
In a free market, sellers could offer medical services without
restriction, subject only to the judgment of one’s customers. This is
not a Utopian scenario; it was how American medicine operated for
most of the 19th century:
The [medical] profession was, throughout the
country, unlicensed and anyone who had the
inclination to set himself up as a physician could do
so, the exigencies of the market alone determining
who would prove successful in the field and who
would not. Medical schools abounded, the great bulk
of which were privately owned and operated, and the
prospective student could gain admission to even the
best of them without great difficulty. With free entry
into the profession possible and education in
medicine cheap and readily available, large numbers
of men entered practice.4
Modern medical licensing has little to do with protecting the
public from unqualified physicians, and everything to do with
restricting competition and raising consumer prices. The FTC itself
has attacked licensing schemes that benefit incumbent practitioners
in the funeral services and contact lens industries, yet the
Commission refuses to recognize the negative impact of licensing
in medical services. Yet abolishing medical licensing
requirementsûsomething that is admittedly far beyond the FTC’s
powersûwould do far more to reduce medical costs across-the-
board than would selective prosecutions of alleged “price-fixing”
among relatively small groups of physicians.
***

4
Ronald Hamowy. “The Early Development of Medical Licensing Laws in the United States,
1875-1900.” Journal of Libertarian Studies. Vol. 3, No. 1, at 73 (1979).

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 IN THE MATTER OF PIEDMONT HEALTH ALLIANCE, INC., ET AL.

Comments of Citizens for Voluntary Trade/

Thornton Institute for Health Care and Economics Research

High health care costs in North Carolina and throughout the

nation are the consequence of government policies that inflate
consumer demand while simultaneously restricting supply. The
voluntary actions of 450 physicians in Piedmont, North Carolina
are economically insignificant, and it is wrong for the FTC to
suggest otherwise. Accordingly, CVT/Thornton Institute
recommends the FTC withdraw its proposed consent order and
dismiss its complaint against the PHA respondents.

Respectfully Submitted,

S.M. Oliva
President, Citizens for Voluntary Trade
Co-Chair, Thornton Institute for Health
Care and Economics Research
Post Office Box 66
Arlington, VA 22210
(703) 740-8309

Dated: September 10, 2004