Citizens for Voluntary Trade

September 18, 2002

Mr. Donald S. Clark, Esq.

Office of the Secretary
Federal Trade Commission
600 Pennsylvania Ave., N.W., Room 159-H
Washington, DC 20580

Re: Proposed consent agreement In the Matter of System Health Providers, Inc., and Genesis
Physicians Group, Inc., FTC File No. 011 0196.

Dear Mr. Secretary:

If I knew nothing about today’s world but the nature of our politicians and the
philosophy represented by the medical profession, I would predict an inevitable,
catastrophic clash between the two: between the government and the doctors. On
purely theoretical grounds, I would predict the destruction of the doctors by the
government, which in every field now protects and rewards the exact opposite of
thought, effort, and achievement.1
—Dr. Leonard Peikoff, April 14, 1985

For 37 years, the United States government has waged a war against physicians. The
declaration of war came in the form of Medicare and Medicaid. These programs offered a new
vision for healthcare—consumers could demand and receive medical services without having
to pay for them. By severing the capitalist link between supply and demand, the government
produced a nation of healthcare gluttons. In 1952, U.S. healthcare expenditures were less than
5% of Gross Domestic Product; today that figure is well over 20% and rising exponentially. This
rise in costs is directly attributable to the government’s interference in the healthcare
marketplace.

In 1973, the government added fuel to the fire by passing legislation to create health
maintenance organizations, or HMOs. These quasi-private entities were supposed to contain
the excessive costs generated by previous failed government interventions. Instead, they made
the problem far worse. Dr. Richard Parker, a Dallas physician and senior writer for the Ayn
Rand Institute, succinctly describes the true nature of HMOs:
2000 F Street, N.W. VoluntaryTrade@aol.com
Ste. 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 HMOs are government-created and taxpayer-subsidized entities that pay
physicians and hospitals predetermined, per-capita fees, regardless of what medical
services are actually provided. Under HMO capitation, physicians and hospitals
no longer have a financial incentive to do all that is necessary to treat a patient's
illness. Rather, their incentive is to minimize the care provided. In HMOs, a
physician's pay is tied not to the services he renders, but to the services he does not
render.
The essence of the HMO system is rationing. Normally, the more services a
business can provide to its market, the more successful it is. That used to be true of
medicine too, when doctors were paid fees for the services they provided. It is not
true today. Now, the government's "solution" to the problem its interventions
have caused is to create a perverse system under which the providers of medical
care look for ways to withhold their services.
There are numerous ways in which government encourages the proliferation of
HMOs. Grants and loans are given to them; Medicare and Medicaid increasingly
make contracts with them; certain employers must offer HMOs plans to their
employees; and unlike HMOs, independent physicians are prevented, by antitrust
law, from joining together to bargain with employers for health-care contracts. 2

It is this last method—the use of antitrust law against physicians—that is at issue in the
present case now before the FTC. But it is impossible to consider the principles and effects of
the proposed consent agreement without examining the entire context. The FTC is unwilling to
do this. Indeed, this case was brought under a “per se” theory that, in the FTC’s mind, absolves
them of any obligation to examine context or actual facts. Since the “public interest” requires a
rigorous analysis of the FTC’s principles and methodology, the following comments are offered
in response to the proposed settlement.

The facts of this care are fairly simple. Genesis Physicians Group consists of
“approximately” 1,250 physicians practicing medicine in the “eastern part of the Dallas-Fort
Worth metropolitan area.”3 In 1995, GPG formed System Health Providers, a medical
management company. Since 1998, GPG has been the sole owner of SHP stock.4

From 1996 to 1999, GPG engaged in collective bargaining with insurance companies on
behalf of its members. These actions were taken under “risk-sharing arrangements” where,
presumably, some clinical and financial integration of the member physicians’ practices took

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 place. These arrangements were consistent with Federal Trade Commission policy, which
permits collective bargaining only under “risk-sharing” arrangements.5

GPG’s risk-sharing activities failed miserably. They resulted in “significant losses” to the
physicians, and the risk-sharing entity formed by GPG was forced to file for bankruptcy
protection in 1999. Thereafter, GPG and SHP began to engage in collective bargaining via non-
risk-sharing arrangements.6 In other words, the physicians maintained their individual
practices while using a common agent to negotiate with HMOs and other insurance companies.
This practice is prohibited by the FTC, because it is considered per se illegal price fixing.
Consequently, the FTC began its investigation of GPG and SHP, resulting in the consent
agreement now before the public record.

II

The FTC considers physician collective bargaining to be an illegal restraint of

competition. In this particular case, the Commission’s objections fall into three broad areas.
First, the FTC claims physicians are improperly denying HMOs their ability to offer
comprehensive insurance plans to consumers; second, the physician’s actions allegedly
increased consumer costs; and third, the physicians generally conspired to prevent competition
from taking place. I will deal with these objections in order.

In paragraph 11 of its complaint, the FTC states, “In order to be competitively marketable
in the Dallas area, a payor’s health insurance plan must include a large number of primary care
physicians and specialists who practice in the Dallas area.” Since GPG’s membership
constituted a large number of such physicians, the implication is that GPG is obligated to
provide services to any HMO that wants to compete in the Dallas market. There is, however, no
reciprocal obligation on the HMOs to deal equitably with the physicians. An HMO need only
state its requirements, and the physicians must comply; if they don’t, the FTC considers the
physicians in violation of the antitrust laws.

SHP, as the negotiating arm of GPG, is painted as the villain here. The FTC accuses SHP
of “discouraging” GPG physicians from accepting contract offers.7 This is the extent of SHP’s
alleged illegal conduct—discouragement. SHP is not accused of using coercive means to
prevent GPG doctors from accepting any contract offer. It is difficult to fathom a context in
which an attempt to voluntarily persuade individuals to take (or not take) an action can be
declared illegal on its face, as the FTC has done here.

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 The FTC claims that denying physicians the right to fully negotiate is justified by a need
to lower consumer costs for healthcare. The FTC says it is “unreasonable” to compete in a
manner that increases the price of physician services. It’s unclear what evidence, if any, exists to
prove the FTC’s argument. It is not in dispute that healthcare costs in the United States have
risen significantly. But the cause of increased costs is not physicians negotiating for greater
compensation, but government intervention in the healthcare market. The percentage of GDP
spent on U.S. healthcare only began to exponentially increase after the government created
Medicare and Medicaid. As intervention increased, so too did costs. At every turn, however, the
government has tried to deflect blame for its mistakes by casting aspersions on free-market
ideas. This case is just part of that pattern.

There’s no reason to believe consumers would directly benefit from lower physician
compensation. In fact, consumers will likely suffer. Consider the FTC’s statement in paragraph
8 of the complaint:

Physicians often contract with health insurance firms and other third-party
payors, such as preferred provider organizations. Such contracts typically establish
the terms and conditions, including price terms, under which the physicians will
render services to the payors’ subscribers. Physicians entering into such contracts
often agree to lower compensation in order to obtain access to additional patients
made available by the payors’ relationship with insureds. These contracts may
reduce payor costs and enable payors to lower the price of insurance, and thereby
result in lower medical care costs for subscribers to the payors’ health insurance
plans.

This is what the FTC wants to take place—physicians taking less money and seeing more
patients. But is that what doctors want? More tellingly, is that what consumers want? If doctors
are seeing more patients and being paid less for each, it would logically follow that their motive
to provide the best service to each individual patient would diminish, not increase. Not only
does the physician lack the possibility of profit (since HMOs pay regardless of the services
provided), but given the time constraints of seeing a greater number of patients, it’s likely that
individual care will be compromised. Yes, the consumers’ direct costs might be lower in the
short-term, but if the result is incomplete care, it can actually increase long-term costs.

(All of this also assumes that the HMOs won’t simply pocket the savings from reducing
physician fees. The FTC provides no analysis of that issue, even though it’s well known that
HMO administrative costs are the more likely cause of higher consumer premiums.)

This leads to the third issue, competition. The FTC says consumers benefit from
competition. I agree. But what the FTC is protecting here is not “competition” in any

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 recognizable form. The FTC is fixated solely on short-term pricing. While prices can serve as
one indicator of competition, it is not the only element, nor often the most important. In this
case, price competition is barely relevant at all. But once again, the FTC decided against
performing a contextual analysis, which led to conclusions ultimately unsupported by facts.

Defining competition as a function of price is quite static. It presumes there’s an ideal

price level that exists. In this case, the FTC presumes that price level to be Medicare’s Resource
Based Relative Value System. RBRVS is a wholly subjective system, not answerable to capitalist
supply-and-demand, but accountable only to officials administering the program. While RBRVS
rates might occasionally reflect market pricing levels, this is purely coincidental. At its core,
RBRVS is a government-imposed price control that reflects political power, not free market
principles.

In paragraph 10 of the Complaint, the FTC says, “In general, it is the practice of payors in
the Dallas area to make contract offers to individual physicians or groups at a fee level specified
in the RBRVS, plus a markup based on some percentage of that fee (e.g., “110% of 2001
RBRVS”).” If that’s the practice of some HMOs, then that’s fine. But why must it be the practice
of every HMO and physician in the United States? Can the FTC offer an objective justification
for restricting price levels to government-mandated terms? The respondents in this case are
being punished, not for their failure to compete, but for the fact they competed at all. They
asked for compensation at levels above RBRVS standards. If the HMO decided to pay the
higher prices, than the FTC should not intervene, because competition was being well served.
If, on the other hand, the FTC is simply acting to preserve the artificial price levels imposed by
RBRVS, it should say so, and stop trying to hide behind free-market principles.

III

As the quote from Dr. Parker noted above, HMOs are government-created and
sponsored entities. They are, in effect, cartels, the very kind of organization the FTC is supposed
to “protect” the public interest from. HMOs do not operate according to capitalist principles,
yet the FTC stubbornly asserts that the physicians are the party that’s not competing.

The most outrageous statement made in the FTC’s complaint comes in paragraph 12,
where it describes the “messenger model.” Under FTC fiat, physicians may not collectively
bargain as a matter of right, but they may employ “messengers” to serve as a one-way conduit
of information. The messenger can transmit an HMOs offer to a group of doctors, but the
doctors may not, as a group, use the messenger to communicate to the HMO. As the FTC puts
it, “Such a messenger may not, however, consistent with a competitive model, negotiate fees and

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 other competitively significant terms on behalf of the participating physicians, or facilitate the
physicians’ coordinated responses to contract offers by, for example, electing not to convey a
payor’s offer to them based on the messenger’s opinion on the appropriateness, or lack thereof,
of the offer (italics added).”

Competition is not a “model.” It’s not something you assemble from a store-bought kit
using rubber cement. Competition is a dynamic process that is built on a process of trial-and-
error. Competition requires individuals have the ability to create options, not just accept
whatever arbitrary choice is handed them. Most importantly, competition permits failure, and
in fact often requires it, in order to prove the validity of successful ideas. As dynamist author
Virginia Postrel puts it, “Competition strengthens the legitimacy of the rules that survive.”

The FTC is not interested in legitimacy. They certainly aren’t interested in competition. If
they were, they would permit the physicians in this case to try a new model that didn’t conform
to the FTC’s single, static vision. If the FTC believes that its model will produce superior results
for consumers, than it has nothing to fear from physician collective bargaining. If the
Commission is right, the doctors will soon find themselves without any patients as a result of
asking for too much money. If the doctors are right, the physicians will be better paid and more
effective, resulting in superior consumer service.

But therein lays the problem. The FTC will never admit their model is wrong. Indeed, the
FTC can’t even concede the possibility that they’re wrong. The Commission’s legitimacy does
not come through competition, but through the application of coercive force. As long as the FTC
is consistent in applying objectively baseless criteria, few are inclined to complain. After all, the
whole rationale for the “per se” standard is that, after applying a penalty often enough, you can
simply assume a given isolated fact supports one particular conclusion.

Of course, the per se rule is hardly scientific. It’s not even science. Yet economics is a
science, and the FTC cannot violate the laws of economics to suit its momentary whims. If the
FTC has proof that their “competitive model” works, than it should present it to the public. The
model must be open to criticism, feedback, and allow for individuals with differing theories to
present and implement alternatives. At the end of the day, the facts of reality will adjudge the
winner. Competition is a process governed by reason, not force, and not whim.

In this case, we have proof that the FTC’s competitive model is flawed—the FTC’s own
complaint. In paragraph 15, the Commission confesses that GPG’s pre-1999 attempts to do the
FTC’s bidding and implement a risk-sharing model “resulted in significant losses.” In other
words, the FTC’s model failed. Physicians did not benefit. Consumers did not benefit. The only

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 way the physicians could successfully profit from their work was to try a different model, one
that got them prosecuted by the FTC for, ironically, failing to compete.

The proposed agreement prevents GPG and SHP from ever questioning the FTC’s
economic judgment again. The respondents are barred from attempting any arrangement that
might be construed as non-risk-sharing collective bargaining. The respondents are barred from
even discussing such arrangements or exchanging information on price-related issues. This is a
brazen violation of the physicians’ First Amendment right to free speech. The FTC tries to get
around that by claiming that this is “commercial speech” that the courts afford less protection
to, especially when the government can show a “compelling interest.”

Leaving aside the judiciary’s mistakes for the moment, it is wrong to characterize the
respondents’ actions as commercial speech, a category that more accurately describes
advertising. What these physicians were doing was an act of political speech. Through their
actions, they were challenging the FTC’s fundamental assumptions about the healthcare
market. They were criticizing the government’s actions and proposing an alternative. For their
efforts, they were treated like criminals by the Commission and forced to sign a settlement at
the barrel of a (proverbial) gun. The FTC made no effort to convince the physicians to adopt
their “messenger model.” Instead, when challenged on the merits, the FTC responded with
brute force. In essence, the Commission has criminalized a policy discussion. In doing so, the
FTC has suppressed political debate in this country, the most naked form of tyranny possible aside
from outright murder.

As a matter of social policy, the FTC is trying to undo the very nature of contract law
itself, and in the process reduce physicians to the status of feudal serfs. In a capitalist market,
every individual has the right to voluntarily contract with other individuals on mutually
agreeable terms. Such a system requires a complete separation of economics and state. The
government must protect the integrity of private contracts, but it cannot decide what
contractual outcomes are permissible. Doing so negates the concept of competition on a
fundamental level. The system encouraged by this consent agreement is one of status over
contract. It arbitrarily assigns HMOs and insurance companies a government-protected right to
rule over physicians. If physicians want to withhold their services from an HMO, the FTC will
compel the doctors to submit.

Competition is ultimately about the exchange of information and ideas. The FTC’s
actions in this case prevent this. The Commission bans physicians from exchanging information
in the hopes that it will bestow legitimacy on their centrally planned regulatory schemes. But no
false idea can survive indefinitely. The FTC’s attempt to completely replace capitalism in the
medical profession will likely fail; even if the FTC manages to completely abolish physician

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 rights, the doctors retain the final option of simply withholding services and retiring en masse.
At that point, the FTC will be left holding the bag, unless they resort to direct physical force to
compel physicians to render services. But at that point, even the FTC would be forced to admit
they are promoting fascism, not capitalism.

IV

The government’s war on physicians must end. Forty years of failed socialist policies is
enough. Every time the FTC prosecutes a physician group, they are admitting the failure of
government to “solve” the problem of rising healthcare costs. Indeed, these prosecutions are
deliberately designed to deflect the blame from the true cause—government intervention—to a
convenient and politically powerless scapegoat, the physicians. The war on physicians has
severely limited the ability of doctors to generate wealth, and it’s reduced the level of services
available to the individual consumer. The only groups that have benefited from current policy
are the HMOs and bureaucratic agencies, including the FTC.

At a minimum, the FTC must abandon the “per se” rule with all deliberate speed. This
abomination of a standard is the equivalent of a “zero tolerance” policy that expels a high
school student for having a butter knife in her car (sadly, that’s a true story.) The “per se” rule
only benefits the FTC by relieving the agency of its duty to think before it acts. This is not
acceptable behavior from an agency assigned quasi-judicial powers under the United States
Constitution. Before the FTC even considers stripping American citizens of their fundamental
rights, it has a sacred obligation to not only provide a comprehensive, coherent standard of
proof; it must prove the alleged illegal conduct using facts, not conjecture or speculation.

On a more fundamental level, the FTC has got to realize that it doesn’t have all the
answers. The FTC does not practice medicine. The commissioners do not treat patients, interact
with HMO administrators, or research the latest innovations. The FTC has absolutely no
intellectual or moral right to dictate how the medical profession is to structure its relationships.
Every government intervention has led to more problems, which in turn leads the regulators to
redouble their failed efforts, which ultimately trap producers and consumers in a vicious cycle
of regulation.

This consent agreement is a mistake. No thinking human being could look at the facts of
this case and arrive at the FTC’s conclusion. The idea that these physicians should be punished
for asserting their right to direct the trade of their medical services is obscene. The agreement
should be withdrawn, and the FTC should immediately dismiss this case and apologize to the

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org
 respondents. Any action short of that would violate the FTC’s oath to uphold the Constitution
of the United States.

Respectfully Submitted,

S.M. Oliva
President
Citizens for Voluntary Trade

NOTES

1 Leonard Peikoff, Medicine: The Death of a Profession, in THE VOICE OF REASON: ESSAYS IN OBJECTIVIST THOUGHT 293 (Ayn Rand 1989).
2Richard Parker, M.D., HMOs and “Patients Rights”: Rationing Medicine (July 10, 2001)
<http://www.aynrand.org/medialink/hmosrationingmedicine.shtml>.
3 Complaint, ¶ 6.
4 Complaint, ¶ 14.
5 See, generally, FTC-DOJ Statements of Antitrust Enforcement Policy in Healthcare (1996).
6 Complaint, ¶ 15.
7 Complaint, ¶ 18.

2000 F Street, N.W. VoluntaryTrade@aol.com

Suite 315 (202) 223-0071
Washington, DC 20006 http://VoluntaryTrade.org