An 1890s Law Keeps Health Care From Advancing Into the 1990s

The conventional wisdom about managed care is that it has been a boon to the free market. Managed care has brought competition to the health care sector. By assembling pools of patients and then negotiating discounts with providers, managed care has allowed health care to behave more like any other industry. Managed care has capitalized on the strengths of the competitive market and finally brought some sanity to the health care industry.

The conventional wisdom is wrong.

The health care sector is feeling the effects of government regulation now more than ever. In fact, the lack of a free market in the new health care arena is curtailing the freedom of patients to receive the medical care their doctors think they need.

This odd twist of fate is not the doing of managed care. It is the result of an 1890 antitrust law. Section 1 of the Sherman Act of 1890 prohibits any concerted action that unreasonably restrains competition. Because of this statute, independent physicians cannot collectively negotiate with managed - care plans. If they did, it would be labeled "price-fixing" or "restraint of competition." A good example of this: If two independent surgeons agreed to ask for the same terms from a managed - care plan, it would be considered "naked price-fixing" and therefore illegal.

The effects of the statute play out this way. Managed care enters a community. It controls a large pool of patients. The managed - care plan approaches physicians piecemeal -- literally medical office by medical office -- and defines the terms of the contract between payer and physician. The plan says it will cover a menu of medical procedures and will pay a certain amount. It dictates to the doctors when and how they can perform treatments and provide care. These dictates are specific, from the indications for admitting patients to the hospital to how long they can be treated there, from when doctors can do surgery to when they can order an X-ray or a blood test without paying a penalty.


Physicians need access to the pool of patients to remain solvent. Moreover, independent physicians cannot form their own negotiating blocs to provide counter-offers. There is thus no give and take between doctors and the managed-care plan. The managed-care plan simply dictates how medicine will now be practiced in that community, and physicians--if they want to continue to be doctors--have no choice but to accept. Talk about market power.

As the Sherman Act is enforced by the Justice Department and the Federal Trade Commission, if physicians form their own networks that include more than 30% of the doctors or specialists in an area, they could face fines or go to jail. But there is no penalty for a single managed-care plan controlling more than 30% of the doctors in one area. The 30% rule has also limited physicians' abilities to form their own managed-care networks to compete directly with the standard managed care plans.

To get around the law, doctors could merge into "single entities," such as group practices or independent practice associations, that agree not to compete with one another and share profits and risk. It's unrealistic for all physicians to join a single-entity group practice that shares profit and risk, so these groups tend to be small and still lack negotiating power. Besides, the 30% rule applies so these fragmented groups do not change the fundamental dynamic of managed care being allowed to control much more of the physician market than physicians themselves are allowed to control.

Back in 1890, or even 1970, this all made sense. Doctors controlled medical care. If independent physicians were allowed to collude on prices, there would be no competition. Prices would rise and patient care would likely suffer. But times have changed. Doctors are no longer the sole controllers of health care. Payers call the shots. What were once medical decisions are now administrative decisions.

There is movement afoot in Congress to ease the rules currently hindering physicians from forming their own managed-care plans. Under a proposed Republican restructuring of Medicare, these physician-led managed care plans could directly contract with the massive government programs. This is a step in the right direction but it does nothing to ease the restrictions on physician groups that preclude them from negotiating as a bloc with current managed care plans.

In order to make health care truly a part of the free market, independent doctors must be allowed to form their own networks to collectively negotiate with payers. The 30% rule should be abolished, and doctors should be allowed to band together for the purposes of negotiation without being forced to become a single entity.


With these changes, what are now dictates of the payer would become negotiations between physicians and the payer. If a managed-care plan says it will not cover a certain procedure, physicians would have the power to say that they will take their business elsewhere. If a managed-care plan says that after open-heart surgery a patient is only allowed three days in the hospital, for example, heart surgeons could band together and respond that this is not good medicine and negotiate a contract with a payer to allow five days in the hospital. Any managed-care plan that wanted to provide heart surgery for its patients would have to participate in this negotiation about the quality of care.

The networks could be based on geography or specialty. Regional medical associations could do the negotiating or specialty associations could step up to the table. The important thing is that under a reformed or exempted Sherman Act, doctors would be in a position to act effectively as agents for their patients.

Under a reformed Sherman Act, competition truly would exist in the health care sector. Managed-care plans would compete for patients on the basis of service and price. Doctors would be able to negotiate with managed-care plans from a position of equality, thereby applying market pressure to provide better health care. Some doctors would form spin-off networks that would accept lower prices in exchange for higher volume, thus allowing the market to keep overall health care costs down. Doctors could more easily form their own HMOs to compete directly with managed care plans. There would be more freedom of choice for everyone and efficiency would increase throughout the health care arena.

To make health care a part of the free market, it is time to bring the Sherman Act of 1890 in line with the realities of 1990s medicine.

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