Who Killed Private Practice?

The Courts, The Federal Trade Commission, and Managed Care Take Control of Medicine

Under today’s health care system many doctors are unable to survive financially. They are fleeing private practice to become employees of hospitals. Currently, more than half of practicing physicians are employed by hospitals or integrated delivery systems. On the other hand hospitals are very profitable and are able to pay physicians generously even though they lose between $150,000–$250,000 per year for the first three years on each doctor that they buy.¹ How did this state of affairs come about?

The answer can be found in a landmark Supreme Court decision, Goldfarb (1975)² that reduced medicine from a profession to a business. In Goldfarb the learned professions of medicine and law lost their antitrust exemptions. The Supreme Court considered them “ordinary purveyors of commerce,” no different from any other business. Henceforth, doctors would no longer be bound by a code of ethics. The Federal Trade Commission would regulate medicine, and writing and enforcing rules. Managed care would implement the FTC rules. For practical purposes the terms managed care and FTC can be used interchangeably. In this brave new world of health care costs were expected to plummet.

The ink was barely dry on the Goldfarb decision when the FTC without warning sued the American Medical Association over its ethical standards.³ The FTC believed that AMA’s professional standards could prevent unfettered free market competition from being applied to health care.

The FTC’s goal was to remove two sections from the AMA Principles of Medical Ethics. One section prohibited advertising and one basically was a restatement of the Hippocratic Oath which declared simply and clearly that a physician should always act on behalf of patients and refrain from harming patients.

AMA leadership responded quickly and forcefully to the suit stating: “The [FTC] complaint is directed at the AMA Code of Medical Ethics more than 100 years old. It is ironic that the FTC should attack a code devised and operated as a standard of conduct in the best interests of professionalism. Advertising is the very antithesis of professionalism. Physicians should not solicit patients. A patient should go to a doctor on the basis of need, not on the basis of advertising. We think there is enough hucksterism in this country without hucksterism in medicine.”⁴

The FTC attorneys were unmoved by the AMA arguments. Their position can best be summarized by the contemptible and cynical views espoused by influential Duke University law professor Clark Havighurst, a leading supporter of the FTC takeover of health care who proclaimed that ethical canons are nothing more than naked restraints of trade.⁵

The AMA lost the lawsuit filed against it by the FTC. It never had a remote chance of winning. Under the star-chamber proceedings of administrative law, prosecutor, judge, and jury are all basically one and the same. A commentator at the time said: “The FTC was out to get the doctors.” Thirty-five years later the FTC is still out to get the doctors.

The AMA continued the fight against the FTC in the courts all the way up to the U.S. Supreme Court where it lost by one vote. This meant that if the AMA continued to promulgate its Principles of Medical Ethics its leaders would be subject to stiff fines and jail sentences. The AMA is often criticized, unfairly in my opinion, for not vigorously defending physicians, medical ethics, and the private practice of medicine. The AMA did everything in its power to oppose the FTC but could not prevail against the overwhelming power of the government.

The Failure of Vertical Integration with Doctors as Employees to Lower Health care Costs

The Goldfarb and the FTC v. AMA decisions have had enormous implications for physicians. While the AMA had previously advocated for the principles of professionalism, clinical autonomy, and free choice of physician, the FTC position was based on market competition, bureaucratic oversight, and integration of finance and delivery. Advertising was at the heart of the distinction between professional and commercial behavior.⁴

Under FTC doctrine, financial incentives replaced ethical standards. The theory was that financial incentives could be used to induce doctors to give less care to patients. The strategy was simple. Doctors should be at financial risk. The less doctors spend on patient care the more they get paid. The more they do for patients, the less they get paid. This strategy lay behind the failed gatekeeper HMO model of the 1990s and the current Medicare Advantage model both of which place doctors at financial risk. A public backlash doomed gatekeeper HMOs and, it turns out that Medicare Advantage doesn’t save money. It actually costs the government (taxpayers) 14% more than standard Medicare.⁶

Because the FTC believes that fee-for-service is the primary cause of high health care costs, it has promoted the model of large integrated hospital systems such as Kaiser Permanente, the Cleveland Clinic, and the Mayo Clinic where physicians practice as employees. The FTC believes that large organizations are more efficient than solo or small group practices in lowering costs.

The FTC does not cite any studies that show risk sharing clinically integrated medical groups lower costs because there aren’t any. There have been numerous studies dating all the way back to the 1970s comparing the costs of staff model HMOs with those of standard fee for service plans that show no savings with HMOs.⁷

Furthermore the FTC admits that there is no modern case law that addresses clinical integration. So what does the FTC rely on to promote clinically integrated hospital systems? The FTC says it relies on its own advisory letters, speeches, and guidelines. In other words the FTC’s justification for the rules that it promulgates are based on its own biased opinions!

Probably the best-known expert to refute the FTC’s position is Harvard Business School Professor Regina Herzlinger. In her two books Market Driven Health Care⁸ and Who Killed Health Care?⁹ She cites example after example of how vertical integration has not worked to lower costs in the private sector.

Then she shows how non-profit, vertically-integrated hospitals that own doctors have not achieved economy of scale and lowered costs. On the contrary both horizontally and vertically-integrated hospitals have formed monopolies, stifled competition, and like all monopolies raised costs to the consumer. Herzlinger points out how hospitals price gouge and funnel their profits into cash reserves, massive building programs, advertising, and huge salaries for their top administrators. The St. Louis metropolitan area alone is home to four not for profit hospital networks- two with assets of over $4 billion, one with assets of over $6 billion and one with assets over $11 billion.¹⁰

At outpatient surgery-centers the facility fees are much lower than what they are at hospitals. In one area of the country a dominant hospital system charged 4 to 10 times as much for a colonoscopy as local competitors.¹ Similar savings exist at outpatient imaging and laboratory centers. Hospital-owned physicians are paid more by insurance companies for various diagnostic and procedural codes than are their independent counterparts.

Hospitals pay lip service to the concept of competition but in actual practice don’t want competition from smaller, more efficient, and less expensive facilities. They try to buy them out in order to eliminate competition. Or they engage in economic credentialing by denying hospital privileges to physicians who treat patients or have a financial interest in these competing facilities. AMA and MSMA policy strongly opposes economic credentialing.

One might think that the health insurance companies would oppose these anti-competitive practices of the hospitals because they result in higher prices for their customers. For the most part they don’t. In my opinion, there is an implicit collusion between the insurance and hospital industries. The insurance companies and hospitals are both primarily interested in maintaining their power and their profits not in lowering costs for the public. During the recent economic recession when even large well-established corporations had difficulty surviving, the insurance and hospital industries remained very profitable.

Since the FTC holds that clinically integrated groups like the Mayo Clinic and the Cleveland Clinic that accept risk are more efficient, it was only natural that many physician-owned clinically integrated groups would petition the FTC for approval to collectively bargain. Because of its arbitrary and confusing rules, only rarely have they been successful. Most physician-owned integrated groups were forced to file consent agreements that they engaged in price fixing.¹¹ The FTC’s rejections of physician sponsored clinically integrated groups is another example of its deep-seated hostility towards doctors.

The Federal Trade Commission was founded in the early part of the 20th century in the Woodrow Wilson administration to break up the concentration of power and money in large corporations or trusts as they were called at the time.¹² The modern FTC has turned the FTC’s original purpose completely upside down and violated its tradition and historic mission by promoting mega health insurance companies and massive hospital networks, contending without any empirical evidence that they are more efficient in cutting costs.

If the FTC really represented consumers it would start filling anti-trust suits against insurance companies and hospital networks not doctors. The waste and inefficiencies produced by physicians practicing in small independent practices pales in comparison to the massive waste and inefficiencies produced by these two bloated monopolistic industries.

Conclusion

Let us sift the ashes and take stock of what has gone on health care over the past 35 years under the aegis of the FTC. In the 1970s prior to the Goldfarb decision, there were 25 million uninsured Americans and health care amounted to approximately 7% of gross national product-not too different from other Western industrialized countries.^13,14 Then policy wonks, academics, economists, lawyers, consumers, and the courts all decided we had a health care crisis (which was actually non-existent). These elitists thought something had to be done. So they turned health care over to the FTC. Today health care amounts to about 17% of GNP, far more than any other industrialized nation, and there are approximately 50 million uninsured Americans.¹³ Health care costs continue to skyrocket to the point where most experts believe the current trajectory is unsustainable.

There is one take-away message from the carnage wrought by the FTC. In medicine, if a study or treatment shows negative results, it is usually discarded. Not so with FTC bureaucrats. They go on and on citing various rules, statutes, learned treatises, and quoting from each other in order to buttress their failed theories. They pay no attention to the actual results of their actions. After all why should they? They’re the law and they call the shots.

Despite its failures the FTC takes no responsibility for the current health care mess. It continues to promote the bankrupt policies of managed care. There were other free market solutions to controlling health care costs. Corporate employers who initially welcomed managed care can no longer afford spiraling premiums for their employees. They are turning to insurance programs that utilize high deductibles and health savings accounts where individuals exercise some control over how their own health care dollar is spent. There were many who favored this approach years ago.

The public never gave its consent to a tiny group of all-powerful unaccountable bureaucrats to run health care. This is Big Brother at its worst. It’s time that the American people, including physicians, started holding the FTC and managed care accountable for their role in causing our worsening health care crisis as well as being responsible for the unnecessary demise of the ethical private practice of medicine.

Biography

Arthur H. Gale, MD, MSMA member since 1976, is a Missouri Medicine Contributing Editor. He practices Internal Medicine in St. Louis.

Contact: agalemd@aol.com