July 08, 2016
6 min read

Physician mergers, antitrust law are often complicated for individuals, groups

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With rapid changes in U.S. health care delivery, particularly with mergers of hospitals and insurance companies, physicians are concerned. One inquiry relates to whether physician groups can similarly merge to increase practice efficiency, gain size advantages in negotiations and protect physician incomes. In this column, we explore antitrust laws and how they apply to physicians and physician groups.

The goal of antitrust laws, which have been applied unevenly across different industries by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC), is to avoid monopolies, price controls and collusive practices that impede competition and reduce quality. These laws apply not only to companies, but also to physicians and physician practices, which are considered to be economic inputs a monopolization of which can lead to both reduced market efficiency and quality.


Lawrence H. Brenner

Lawrence H. Brenner

In 1870, business tycoon John D. Rockefeller created the Standard Oil Company. With the help of his lawyer, Rockefeller also created a business trust arrangement that organized Standard Oil into a large company that could hold shares of other oil companies. In 1911, the U.S. Supreme Court ruled Standard Oil constituted an illegal monopoly. According to the ruling, Standard Oil had consolidated horizontally and vertically, destroying competitors in the oil industry.

The Sherman Antitrust Act, a landmark federal statute, was passed in 1890. It prohibits business conduct federal regulators consider anti-competitive and requires the federal government investigate and break up trusts, which are business contracts whereby one party entrusts a property interest to another party. Trusts have been used for centuries to protect and hold resources, such as inherited property for the benefit of one’s children. The Sherman Act refers to trusts as a type of legal instrument whereby several large businesses are combined to exert complete control over a market, much as Standard Oil had done.

An innocent monopoly, ie, one achieved by merit, such as the enormous market clout of Amazon.com over the retail industry, is entirely legal. An act by the monopolist that seeks to restrain trade or supply, however, will trigger federal action. The Sherman Act is not designed to protect competitors from large businesses nor to prevent businesses from takeovers by larger and more powerful competitors. It is designed to prevent consumer abuse through monopolistic price setting or restricting supply of services or goods.

Impact on professional practice

The Sherman Act was expanded by additional legislative action that followed its passage. For example, the Clayton Antitrust Act was passed in 1914, adding certain activities (price discrimination with the intent to create a monopoly, exclusive dealing agreements tying agreements and business mergers or acquisitions that create the risk of reduced market competition) to the list defined in the Sherman Act. Attempts by large health care insurers to merge, for example, are viewed by the government in light of the strictures of the Clayton Act. Violations of the antitrust laws can create major criminal and civil liability.

Relevant to physicians is Section 1 of the Sherman Act, which states: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal.” It was generally assumed professions, such as the practice of law or medicine, would be exempt from antitrust considerations. The 1975 U.S. Supreme Court ruling in Goldfarb v Virginia State Bar would change that assumption.

In 1971, Goldfarb and his wife sought to buy a home. To conduct a title search, they learned an attorney had to be hired and a fixed fee of 1% of the home’s price would apply. Shopping around for cheaper lawyers proved fruitless, as all the lawyers contacted cited the minimum price to be charged for a title search. That price had been established by the Virginia State Bar Association, which licensed all lawyers in the state.


After completing purchase of the home, Goldfarb sued the state and county bar associations. The defendants argued the price was merely advisory and the state bar’s power over Virginia attorneys did not amount to compulsion. The case reached the U.S. Supreme Court which ruled price-fixing is per se illegal, as the practice was deemed so manifestly anti-competitive that it does not have to be intentional or feasible and its market impact is irrelevant.

Since this decision, the trend in law firm fees has been toward hefty increases, leading some scholars to question that while the Supreme Court may have thought it was increasing competition and thereby lowering prices, the ruling did the opposite, as it removed controls and led to price increases.

If there was ever a question as to whether physicians were covered by the Goldfarb decision, that issue was resolved by Arizona v Maricopa County Medical Society, issued by the Supreme Court in 1982. Maricopa County Medical Society (MCMS) member physicians agreed to a maximum fee the physicians would accept as full payment for health services provided to policyholders of certain insurance plans. Some 70% of the physicians belonged to the MCMS; the rest belonged to the Pima Foundation. Members of both organizations had agreed to the price-setting.

B. Sonny Bal

B. Sonny Bal

Arizona sued both medical societies in federal court, alleging an illegal price-fixing conspiracy in violation of the Sherman Act. After the U.S. District Court and the Ninth Circuit Court had declined to hear the complaint, the Supreme Court granted review. In a 4-3 split decision that would have lasting impact for the medical profession, the court said an agreement on maximum fees for specific medical services constituted a per se antitrust violation. Scholars have criticized the Arizona ruling as overly broad, decided in the absence of any factual record before the court regarding the efficiencies and advantages of collaborative physician contracting. The ruling is also at odds with other Supreme Court decisions that have applied a “rule of reason” in judging anti-competitive conduct in other industries rather than the harsher per se standard.

Impact of antitrust enforcement

In the 1990s, the FTC and DOJ issued clarifying statements concerning the enforcement of anticompetitive statutes to physicians and medical practices. These statements are non-binding on courts but provide some clarity about acceptable practices regarding physician mergers and business consolidation. With the emergence of managed care, the statements were modified as individual medical networks and business practices were scrutinized by the federal government.

The result of various legal challenges and regulatory statements is physicians in the United States have little latitude or power in creating networks unless they are employed by large medical groups. The rules applying to health care insurers are decidedly more favorable, leading to intense consolidation in that industry. So far, the federal government has shown little interest in restricting the mergers of health care insurance carriers or in responding to complaints that such mergers may be anticompetitive.

As it stands today, physician practices are at a distinct disadvantage in negotiating prices with insurance companies who control large swaths of the market. Market and regulatory pressures increasingly favor information technology, quality measures and safety protocols imposed upon physician practices at a significant cost. The smaller community hospitals are equally vulnerable to market and price pressures, as these are forced into less profitable contracts by the predatory practices of large insurance carriers. Some community hospitals have closed their doors, while others have had to divest their businesses to large hospital companies to gain purchasing clout.

Although health care executives and shareholders have benefitted tremendously, physician incomes have been stagnant or in decline for the past 2 decades. The imbalance has had effects beyond monetary considerations, as insurers are now powerful enough to intrude on clinical decision-making by issuing rules and mandates tied to physician and hospital reimbursement. Contracts offered to physicians and medical groups are now so one-sided that no other industry would tolerate them. Provisions, such as medically necessary care or unilateral revision of contract terms, are frequently included and have led to increasing tension between medical practice overheads and monetary reimbursement.


Future reforms

With the rise of information technology and consumerism in health care, physician consolidation is indeed desirable so physicians can properly identify the best business practices, efficiencies and strive for optimal quality consistent with professional standards. The formation of physician networks, however, is hampered by the existing regulatory and legal framework that is heavily prejudicial to physicians. Physician investment in health care information technology, for example, is a costly and time-intensive endeavor, the benefits of which mostly accrue to insurance companies rather than improve physician reimbursement or even affect patient care.

A number of reform suggestions have been discussed in the political arena, such as insurance portability and removal of inter-state barriers to health care insurance markets. The ideal solution is for the federal government to revisit the per se illegality framework the Supreme Court established in its divided Arizona decision and permit physician mergers as long as such consolidation meets the rule of reason, similar to the standards applied to mergers in the health care insurance industry. Absent such reform, physician employment with hospitals, most of whom will have to consolidate into large hospital chains, will be the only surrogate for physician networks or groups that can offer market efficiencies and the quality demanded by an increasingly vocal health care consumer demographic.

Disclosures: Bal and Brenner report no relevant financial disclosures.