Lithotripsy venture leads to price-fixing charges

Constant vigilance needed to avoid problems

A joint venture involving lithotripsy services in the Chicago area has resulted in price-fixing charges against 35 urologists and an order from the government to end the arrangement. Lawyers familiar with the case say it should be seen as a warning to risk managers that some joint ventures can go astray if the arrangement is not monitored carefully.

The case involved an arrangement that, on the surface, is not unusual. Thirty-five Chicago-area urologists formed a company called Urological Stone Surgeons and jointly invested in a litho tripsy machine. The lithotripter was operated by Parkside, one of eight local providers of lithotripsy services in the Chicago area. Another litho tripsy machine was purchased by Stone Centers of America, which was owned by Urological Stone Surgeons and an additional 66 urologists. That machine was operated by Parkside at another location.

The 99 owners of Urological Stone Surgeons and Stone Centers of America represented about 45% percent of the urologists in the Chicago area, and about two-thirds of the lithotripsy procedures in metropolitan Chicago were performed at Parkside with the two machines owned by the urologists. The arrangement continued for about three years until the Federal Trade Commission (FTC) filed a complaint on April 6, 1998, charging the urologists with a price-fixing scheme that eliminated fair competition for lithotripsy services in Chicago.

While there is nothing wrong with jointly investing in lithotripsy machines or other equipment, the case shows how providers can violate anti-trust laws by going one step further to agree on prices, says Bruce Schneider, JD, a partner with Stroock & Stroock & Lavan in New York City. He specializes in anti-trust issues and is familiar with the Chicago case.

"The problem in this case emanated from the further agreement with respect to pricing for lithotripsy services," he says. "Under the Depart ment of Justice and FTC guidelines, providers are permitted to come together to purchase particularly expensive items, but they [the federal regulators] aren't going to permit ancillary agreements that are restraints of trade."

Doctors agreed to $2,000 fee

The urologists involved with the lithotripsy venture hired a common billing agent, a step that was not problematic on its own. But then the urologists apparently took a big step over the line into anti-trust. Urological Stone Surgeons informed its prospective investors, all of whom were urologists, that it would do its best to collect a $2,000 professional fee for each lithotripsy service performed at Parkside. The urologists, in return, agreed to accept the amount established by its billing agent and to use that billing agent for all lithotripsy services provided at Parkside. The billing agent, on behalf of all the urologists at Parkside (including non-investors), negotiated contracts with purchasers of lithotripsy services for either a uniform discount from charges or a uniform bundled or global fee that included the urologists, anesthesiologists, and technical components.

That was the part of the arrangement leading to the FTC charges of price-fixing. The order issued on April 6 declares that the urologists conspired to set a single professional fee for lithotripsy in the Chicago area, in violation of antitrust laws. The FTC ordered the urologists to end the arrangement, notify all shareholders and prospective shareholders for the next four years, and distribute a copy of the complaint and order to each third-party payer contracting for litho tripsy services.

When the urologists agreed to have the billing agent seek a uniform $2,000 fee for each urologist using the lithotripsy machines, that part of the deal prohibited the physicians from independently billing patients, Schneider says.

"The effect was to reduce competition among urologists, not just for the lithotripsy itself but for other professional services like anesthesia that were bundled into that fee," he says. "The lesson here is that while competing health care providers can jointly invest in a facility or equipment, they cannot build on to that with further agreements to then fix prices, or boycott some third party payers, or any other activity that is not integral to the joint venture."

Dangerous referrals

Another problem in the case was that the urologists were referring patients to lithotripsy services in which they invested, says Anne Maltz, RN, JD, also an attorney with Stroock & Stroock & Lavan in New York. The self-referral issues were more problematic in this case than they might for radiologists, for instance, because the doctors were referring patients for a service in which they had a direct financial interest. When radiologists jointly own imaging equipment, however, the referral usually comes from an internist or someone else not directly benefiting from the referral.

Maltz also points out that the FTC was troubled by the huge market share involved in the lithotripsy arrangement - half of the area urologists and two-thirds of all the lithotripsy services. That exacerbated the degree to which consumers and third-party payers were affected by the price-fixing arrangement, she says.

"Aside from setting the professional fee, the size of the market share by this arrangement deserves some consideration," Schneider says. "It's not necessarily a problem to have that much of the market, but I suspect they wouldn't have encountered such a problem if they only had 2% of the market share. The size means they had the ability to influence prices."

He notes that providers in rural areas may have access to only one lithotripsy machine, which may be owned by the only two urologists in town. That's not necessarily anti-competitive, but those doctors would have to be careful of how they set their own prices for the service. That's where they could get in trouble.

And it's not enough that the urologists charge the same fee for the same service. If the urologists in Chicago had arrived at a $2,000 fee independently and by normal competitive practices, that would not violate anti-trust laws. The problem was that they agreed upfront to charge the $2,000 fee.

"It involves a concept known as 'conscious parallelism,'" Schneider explains. "It takes something more than just knowing that your competitor is charging a certain price, so you will, too. The FTC has to think that you might have charged less for a service but you didn't because you knew that none of your competitors would undercut you with a lower price.

"If you all end up at the same price through fair competition, fine. If it's because you know your buddy won't charge any less if you don't, that's an implicit price-fixing agreement."

Proper role for billing agent?

Another problem involved the way the billing agent acted to collect a $2,000 professional fee for the lithotripsy services. The agent is allowed to act as a "messenger," but it cannot act as the common enforcer for a fee agreed to by all the participants.

When negotiating fees with a health maintenance organization, for instance, providers can use a common billing agent who deals with the HMO as a neutral party to get them a reasonable deal. (The agent can't be one of the providers acting as group negotiator.) The messenger may get a price that's applicable to all the involved parties, but each provider remains an independent party who can participate in that arrangement or not. Theoretically, each provider can go back to the HMO separately and ask for more money.

"In this case, you had a billing agent not acting within the messenger model but saying that this is what everyone will charge and enforcing it through a common billing structure," Schneider says. "Clearly, these urologists went too far."