Philadelphia Reflections

Sometimes, Even the Supreme Court Looks Negligent

If the United States Supreme Court makes a mistake, it remains pretty much a mistake in residence until the Court itself re-examines the matter. It would be indelicate for anyone else to cite a list of examples for this observation, so they are customarily taken up one at a time, at considerable expense. The desirable re-examination with the greatest consequence to Healthcare would be the 1982 decision in State of Arizona v. Maricopa County Medical Society.

Maricopa County is where Phoenix is located in Arizona, and its County Medical Society was one of the pioneers in what was then called Foundations for Medical Care. These were organizations in which local physicians took the lead in organizing and managing health insurance for the local community. The rules and policies of the Foundations were conceived and implemented by physicians, who were dismayed by the consequences of defects in health financing they could see in daily practice. Except for this physician dominance, it would be fair to say that Foundations for Medical Care were about the same as what we now call HMOs. It is also true these physicians were impatient with both the government and the health insurance companies, who seemed to resist helping the sick poor by implying it might violate some per se technicality aimed at business corporations. As the lame excuse would have it, our hands are tied. The obvious fact is someone in Arizona didn't like physicians or didn't like what they were threatening to do.

An agreement among competitors to lower prices for the poor, is after all not exactly the same anti-competitive behavior, as a "contrivance" to raise prices for your own benefit. It seemed most unfortunate to lump it together with its opposite as "per se" violations, requiring no examination of the evidence to distinguish the two. And furthermore, on the topic of regulating business corporations, it is not exactly an enumerated Constitutional power of the federal government, to amend the Constitution by treating all corporations as essentially identical or lowering prices the same as raising them. The whole anti-Foundation movement sounds pretty spurious.

At the same time, "Foundation" physicians believed they could see opportunities for reducing waste in the local hospitals which would only be exploited if physicians were in charge because physicians could sense the cost/benefit more readily than anyone else. Having recently returned from the Korean War, these doctors knew medical care could be excellent even without such a thing as health insurance, and indeed even if hospitals were only a collection of tents. Perhaps a few of them were overly influenced by the TV serial, "MASH", whose central theme is that if doctors take the lead and do the right thing, much can be forgiven. That's a sort of Hollywood restatement of the latitude of ancient Courts of Equity, charged with finding a way to achieve Justice --to cover a situation where obvious harm exists, but no law exactly addresses it.

Accordingly, the "better sort" of the doctor in Arizona believed they perceived the respectable doctors would readily agree to care for the poor at lower rates, whereas the shirkers in their midst would ruin things for everybody by refusing to do a fair share of pro bono work. Like labor unions, the doctors greatly resented the free rider phenomenon.

The idea of a two-class system of medical care was also abhorrent to them, however; if there wasn't enough money to spread around, a "good" doctor would just agree to lower his fees unilaterally. This moral quarrel often conflicts American business, which takes the view that it doesn't really matter what costs or taxes or burdens are imposed by the government. What matters to big business is that all competitors need to abide by the same handicaps. When handicaps are roughly equal, the difference between success and failure is -- talent. But the contrast between that and the antitrust position of individual tradesmen has never been satisfactorily defined.

To a considerable degree, talent rising to the top summarizes the aspirations of the anti-trust statutes, where it regularly becomes a source of both suppression and escalation of prices. Physicians are ultimately expected, not least by their colleagues, to find their highest duty is fiducial to the patients' best interest, particularly when the main conflict is merely a financial one. A corporation, by contrast, has a primary duty to its shareholders, who can sue them if they put benevolence ahead of profit. A corporation is a contract between the State and the shareholders, quite the reverse of the duty of government to its individual citizens. In the antitrust arena, the contrast between citizen and corporation is jumbled. Particularly in the case of the per se violations, the difference between a business corporation and a medical society is quite wide enough to justify considerable professional latitude. As it is not, in the case of insurers, and as it only partly remains, in the case of hospitals. Anti-trust statutes could have a real value in distinguishing borders between individual tradesmen and various groupings of them, but so far the distinctions are far from reasonable. The Maricopa Medical Society responded with perhaps excessive enthusiasm to the challenge of making local sense out of a price-fixing dilemma, but it was never given the opportunity to make its case.

At one time, local healthcare costs were suppressed by imposing competition on the hospitals, holding insurance administrators to be mindless clerks to pay the bills, not as cup-bearers of fairness in a naughty world. Needless to say, the hospitals and health insurers had long chafed at the ability of physicians to switch hospitals freely, and the patients to switch insurers, whereas Arizona's Attorney General seemed to suspect some vague return to Robin Hood notions of a special right to defy the law. Somehow the ancient concept of professional latitude has been supplanted as inconvenient to the goals of competitors. In certain parts of the country, big business is already expanding its financial control of hospitals and insurers, into acting as agents for assuring high-quality medical care, while suppressing its cost. On Wall Street, such behavior is quickly seen and labeled as "talking up your book of business". With the defeat of physicians by the Maricopa decision, plus the withdrawal of big business owners from identifiable management roles, the way was soon opened for hospitals and insurance companies to assert unrestrained control of their own finances. Thirty years later, hospitals and insurers are now universally merging, and applying selective controls over admitting pliant physicians as their employees. The Affordable Care Act is the mechanism by which the government interjects a new layer of control, thereby converting the government itself into the new hidden battlefield. It seems a very far cry from leaving medical decisions in the hands of physicians and their patients, to choose treatments, and to agree on their price.

Sen. John Sherman

The Attorney General of Arizona, himself a colorful character, soon brought suit for an anti-trust violation, since price-fixing was a declared per se violation or identification of the absence of competition. These were additions made to the Sherman Anti Trust Act by earlier Supreme Courts, who found an Act first written on the back of an envelope was lacking in regulations. Further strictures were imposed by the Clayton Anti-Trust Act, but these both might be remedied by subsequent Congresses, and thus lacked appropriate majesty. The crucial consequence was that the District Court of Arizona found it quite unnecessary to hold a trial or hear the evidence. The Court found against the doctors entirely on the basis of a motion for summary judgment. The matter then passed through the Court of Appeals to the Supreme Court, which on the theory that price fixing is price fixing, on a vote of 4 to 3, upheld the Arizona suit. All the way from a writ of summary judgment in a district court, to the United States Supreme Court, without formal examination of the facts. If either of the two absent members eligible to vote, had voted, it is certainly mathematically possible for the decision to have gone the other way.

Perhaps, strictly on lawyerisms, that was safely correct. But in terms of the effect on medical care, it won the war for control of hospitals and the insurance companies which began with Abraham Flexner's beatification of college-educated physicians. Somehow Maricopa was interpreted to mean that a hospital or an insurance company might do many medical things which were forbidden to organizations run by physicians. The consequence is Foundations run by physicians are under constant threat of what might happen to them if they do what HMOs are now seen to be doing every day. The whole Clinton health fracas revolved around this particular case and its implications. From the physician point of view, if you had medical training, you had been disqualified from running a Health Maintenance Organization, because a change of leadership seems to shift the antitrust issue to a different level within two identical organizations. And that was true even if the physician had been trained for the role, while the administrator had not.

What was particularly galling was to be tarred with the brush of antitrust, whereas others could describe identical behavior as self-disciplined and in the public interest. Self-imposed financial restraint was taunted and abused by aspirants for the same job with the same temptations, with multi-million dollar incomes, but without adherence to the same code of ethics. The emerging joke is that after the Clinton Healthcare Plan's uproar, the public decided they disliked HMO's intensely, mainly because they couldn't choose their own doctor, and the doctor was being hampered in doing what seemed professionally best for the patient. None of these legal issues had significantly arisen for physician-run HMOs. While of course, that outcome might appear, such disputes would be settled by physicians, using medical arguments, followed by a change in management if the medical community at large, widely disagreed with the decision. The only substantial difference was that doctors were running one organization but subservient in the other, and the Courts had found that whenever doctors were in charge it amounted to price-fixing between competitors. As matters eventually turned out, the hospitals resolved this battle by converting nearly all practicing physicians into their employees, and the war has now shifted to who will control hospitals.

It now remains for some case to be found and carried to the Supreme Court which might allow an examination of the facts of this matter, perhaps remanding the case back to the District Court to hold a trial. That would seem a bare minimum after thirty years, even though now it might no longer address precisely the same issue. Somehow, a way must be found to examine which of two rather extreme theories of the Wild Wild West needs to be laughed off. Either we must re-examine whether, always and everywhere, price-fixing is such an undiluted evil it never requires an examination of the evidence. Or whether the absence of identifiable harm introduces a balancing need to question such judgments when made under professional circumstances.

While on the subject of mixing business practices with professional standards, we might as well direct judicial attention to the unfair and probably (equal justice) unconstitutional tax preference for employers who purchase health insurance for their employees, to enjoy a huge corporate tax saving themselves by doing so. Not merely for the benefit of the employees, which is much discussed, but a usually much greater financial benefit for the shareholders when the corporate tax level is high enough. An unnecessary grievance is created for millions of self-employed and unemployed people who lack this tax shelter, and also for the owners of usually much smaller business enterprises, who must compete with them.

It might be argued that double taxation of corporations inevitably provides the loophole of double tax-exemption, and even this would often understate the discrepancy because of the differences in marginal rates. Lack of participation in this double tax benefit is arguably the main obstacle to extending employee health insurance to others or even substituting a superior health payment methodology. Now seventy years old, this grievance can be regarded, not only as having dubious evasions at its historical origin, but has resisted multiple efforts for repeal, and distorts the relative lifestyles of the two main participants in the workforce: small, and large, businesses. Henry Kaiser claimed he once had difficulty attracting employees to his West Coast war industries because of wartime wage and price controls, an excuse which should have ended the practice in 1945. Lack of a review-and-reconstruction of this bizarre lobbying product could potentially distort the application of the Affordable Care Act, in ways which are impossible to foresee. Indefinite enshrinement of the legal principles in this tangle, particularly the indefinite postponement of its resolution, could reverberate for more decades. The fringe-benefits circumvention, for example, has since grown entirely out of control, while it is fiercely defended by business and union interests. As it grows, however, the inequity to the self-employed and unemployed by remaining excluded from it, also grows.

Summary of the Maricopa Case

From a legal standpoint, the most uncomfortable feature of the case of the Maricopa Medical Society is that it went all the way to the Supreme Court without any trial of the facts or real opportunity for the defendants to present their case. That is, the whole HMO movement was effectively removed from the hands of physicians by a motion for summary judgment, on a Supreme Court decision, 4 to 3. It would be interesting to learn the attitudes of the remaining two Justices who recused themselves, but who could have reversed it.

To hold a trial of the facts by remanding the case for trial, would seem to be one easy way to introduce the defense which the doctors would have made. It could be improper to suggest to their lawyers what the defense should now be because new officers of the Medical Society might hold different opinions. The Medicaid Act was passed in 1965, requiring state consent for a jointly administered program. By 1972, Arizona was the only remaining state not to have agreed to Medicaid, which by then was widely recognized as the worst run and most underfunded medical program in America. In 1982, Arizona adopted a small portion of Medicaid, and it was only in 1988 that it fully adopted the program. In 2001, Arizona's governor was offered 7.9 billion dollars over four years, as matching money for the insurance exchange feature of the Affordable Care Act, which by then heavily absorbed the Medicaid program. The Governor recommended to the Legislature that they accept the offer because at least it was "better than Medicaid". There can be little doubt the Legislature of Arizona was adamant on the issue. And the Medicaid program is certainly better funded than it formerly was. But the central feature of Medicaid's HMO remains that of the Maricopa decision: its policies and administration are not directed by physicians. On the issue of whether the control should rest with payers or professionals, payers prevailed.

What were the doctors expected to do with sick poor people? No doubt, there was a wide divergence of opinion, but it must have seemed likely to someone, only a handful of saintly volunteers would now step forward, and none of them would be willing to pay hospitals their list prices. There is some truth to the last part. The doctors felt it would only work by shaming a substantial majority of their own members into accepting the cases at discount prices, and the only weapon they had was to make it a condition for membership in the medical society. That might once have been a powerful incentive, but the systematic undermining of its powers has now made it more questionable whether it could still succeed in its original plan. At the time of the first trial, there was probably enough slack in hospital revenue to cover the indigent need. With a changing economy, the premise needs to be tested more hesitantly.

Under these contentious circumstances, surely the Supreme Court could, even now, find some words to devise a better outcome. Price fixing is a per se violation of the act, and there is little doubt that all HMOs now fix prices. Only a physician-run HMO can be accused of "fixing" prices too low for competitive reasons, although it has always been arguably how strongly they would naturally compete for indigent patients. The Supreme Court may be reluctant to overrule the price-fixing part because of the spill-over effect of a century of custom, and the Arizona politics of this case are surely thorny.

As time passes, the Maricopa case is fast becoming as dignified by long-standing, as the price "fixing" notions were when it all started. Surely, at least the Court could find some clarifying language about physician-run HMOs as obiter dicta . The response of the non-physician-run HMOs was to exploit the opportunity to eliminate the competition of physician-run groups within the price-fixed arena. In the meantime, however, the public has found HMOs run by non-physicians have become contentious in the extreme, whereas the earlier physician-run Foundations for Medical Care were tolerated by most physicians, and embraced by quite a few. The matter is one of the important threads in the Obamacare controversy, so the Supreme Court has an opportunity to improve quite a few situations by writing a clarifying paragraph or two.

Originally published: Sunday, April 12, 2015; most-recently modified: Wednesday, June 05, 2019