OPINION
Presented here is a novel twist to the issue of whether physicians, lawyers and other professionals may be liable under the Illinois Consumer Fraud Act.
However, the' Illinois Consumer Fraud Act was amended to prohibit not only unfair competition, but any deceptive act or practice in the conduct of trade .or commerce.
Thus, the issue before the Court: whether the practice of medicine qualifies as trade or commerce for the purposes of the Illinois Consumer Fraud Act. And specifically: whether an alleged agreement between a psychiatric clinic and a hospital to monopolize psychiatric services defrauds medical consumers.
I. Facts
There are three , players involved in this dispute. Defendant St. Mary’s Hospital (SMH) is a non-profit hospital in Quincy, Illinois. Plaintiff Dr. Michael T. Gadson is a psychiatrist. Defendant Dr. Richard L. Newman is a psychiatrist and practices medicine through the corporation “Newman Clinic Ltd.”
Dr. Gadson alleges that on January 1, 1989, he entered into a contract with SMH to serve as the director of the SMH psychiatric “family” unit. Later, after becoming aware of the Gadson-SMH contract, Dr. Newman and his clinic signed a separate contract with SMH to manage all of SMH’s psychiatric units during the term of Dr. Gadson’s contract. The arrangement provided that SMH and Dr. Newman’s clinic would jointly establish “programs” for all inpatient psychiatric treatment at SMH. One program, supervised by Dr. Gadson, would be for adult psychiatry. Another program director would be appointed for a “behavioral medicine” program. Dr. Newman’s clinic would develop specific treatments for patients in the program. Psychiatrists participating in the program would be approved by both Dr. Newman’s clinic and SMH.
Under the arrangement, SMH physicians could refer patients to the program. Psychiatrists from Dr. Newman’s clinic could also refer patients requiring hospital treatment to the program. SMH agreed to pay Dr. Newman’s - clinic $90.00 per day per patient admitted to the program.
Dr. Gadson charges that the arrangement between Dr. Newman and SMH violates the Illinois Consumer Protection Act. First, Dr. Gadson alleges that the arrangement operates as an “undisclosed joint venture and profit center for SMH and Dr. Newman and his Clinic to the exclusion of Dr. Gadson and other potential competing entities, and to the detriment of health care consumers in the area of Quincy, Illinois, served by SMH.”
Second, that under the arrangement, financially responsible patients upon emergency admission to SMH are self-referred by Dr. Newman to himself and other psychiatrists employed at his clinic.
Third, that the arrangement provides “undisclosed financial incentives” to Dr. Newman and psychiatrists of his clinic to admit patients to SMH in order to increase the patient census and revenue of SMH.
Fourth, that the arrangement provides “undisclosed financial incentives” to Dr. Newman and psychiatrists of his clinic for prescribing additional ancillary medical procedures to be performed at SMH thereby increasing SMH revenue, increasing health care costs, and decreasing competition in the Quincy area.
Fifth, that the arrangement provides for undisclosed substitution of employees of SMH with employees of Dr. Newman and his clinic with intent “to generate illegal, unethical, and conflict of interest self-referral of patients covered by Medicare,” Medicaid, public aid assistance, insurance, and financially responsible patients.
Plaintiff Dr. Gadson seeks relief under the Consumer Fraud Act (Count IV), for conspiracy to commit consumer fraud (Count V), and for declaratory judgment and injunction (Count VII).
Defendants SMH and Dr. Newman move to dismiss Counts IV, V, and VII. In the alternative, they move for a more definite statement of Count VII per Fed.R.Civ.P. 12(e).
Additionally, in counts not considered in this motion to dismiss, Plaintiff alleges:
II. Legal Standard on Motion to Dismiss
In ruling on a motion to dismiss, the Court “must accept well pleaded allegations of the complaint as true. In addition, the Court must view these allegations in the light most favorable to the plaintiff.”
Gomez v. Illinois State Board of Education,
III. Analysis
(A). “Trade or Commerce”
Defendants SMH and Dr. Newman first argue that the Illinois Consumer Fraud Act does not apply because the medical profession does not engage in “trade or commerce.” The fact that a wrongdoer must engage in “trade or commerce” to be liable under the Act is well established. For instance, the stated purpose of the Illinois Consumer Fraud Act, as set forth in its preamble, is “[t]o protect consumers and borrowers and businessmen against fraud or deceptive acts or practices in the conduct of any trade or commerce ....” Ill.Rev.Stat. ch. 121V2, 11261 (1991) (emphasis ours). The following practices are prohibited by the act:
§ 2. Unfair methods of competition and unfair or deceptive acts or practices, including but not limited to the use or employment of any deception, fraud, false pretense, false promise, misrepresentation or concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such material fact, ... in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby. In construing this section consideration shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to Section 5(a) of the Federal Trade Commission Act.
Id. ¶ 262 (emphasis ours). The statutory definitions of “trade” and “commerce” are given as the “advertising, offering for sale, sale, or distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value wherever situated, and shall include any trade or commerce directly or indirectly affecting the people of this State.” Id. 11261(f).
(1) Illinois caselaw
The Court notes that Illinois courts have not squarely faced the issue of whether a business arrangement between a hospital and psychiatric clinic constitute “trade” or “commerce” under the Act. In
Frahm v. Urkovich,
Relying on
Frahm, Feldstein v. Guinan,
In
Lyne v. Arthur Andersen & Co.,
However, these three cases may be distinguished from the case at bar for two reasons. First,
Frahm
and
Feldstein
interpreted the Illinois Consumer Fraud Act prior to amendments to the Act which were enacted on January 1, 1990. Before the amendments, the Illinois Consumer Fraud Act required proof of a “public injury” to state a cause of action. After the amendments, the Act provides that “Proof of a public injury, a pattern, or an effect on consumers generally shall not be required.” Ill.Rev.Stat. ch. 121V2, ¶ 270a(a) (1991).
See also Hardin, Rodriguez & Boivin Anesthesiologists, Ltd. v. Paradigm Ins. Co.,
Feldstein
and
Frahm
thus have dubious application to the current Illinois Consumer Fraud Act. The legal analysis in each of these cases is connected to the notion that a defendant only violates the Act if his or her actions affect the public at large.
Feldstein,
for example, was a suit over a single employment contract between the physician and a hospital. The court, in reaching its conclusion, stated: “[although the practice of medicine may have a business aspect, the commercial phases of medicine which
directly affect the public
are not at issue here.”
Feldstein,
By contrast, our Plaintiff Dr. Gadson alleges a direct effect on the public medical consumer. Paragraphs 25c, 25d, and 25i of Count IV of Dr. Gadson’s complaint allege a scheme whereby St. Mary’s provides undisclosed financial incentives to Newman to admit patients for treatment at St. Mary’s. Assuming these allegations are true, this self-referral scheme would increase the cost of health care to consumers in the Quincy, Illinois area. See Council on Ethical and Judicial Affairs, Conflicts of Interest —Physician Ownership of Medical Facilities, 267 JAMA 2366, 2367 (1992); David Hemmenmway et al., Physicians’ Responses to Financial Incentives, 322 New England J. Med. 1059, 1062 (1990). Thus, even to the extent a “public effect” is required under the Illinois Consumer Fraud Act, Dr. Gadson has stated a case with the potential to have far reaching effects on the general medical consumer.
Second, and more importantly, these three cases were only tangentially related to the business aspects of the legal and medical professions. The distinction between the business aspects medicine and the “actual practice of medicine” or the non-business aspects of medicine is crucial. For, as will be developed later, business aspects of medicine is not exempt from the Illinois Consumer Fraud Act.
The distinction between the business and non-business aspects of medicine arose in the context of federal anti-trust law.
Goldfarb v. Virginia State Bar,
The analysis in
Frahm
depended heavily on
Goldfarb. Frahm,
Thus, under Frahm, if a lawyer’s activities amount to the “practice of law,” they are exempt from the coverage of the Illinois Consumer Fraud Act. Unfortunately, the court never defined the phrase “actual practice of law.” Given that the Frahm court quoted Goldfarb, this Court assumes that the determination of a minimum fee schedule for attorneys is not the “practice of law,” but instead is a “business aspect” of law, subject to regulation. We further interpret Frahm to mean that the “practice of law” exception includes activities directly related to the lawyer’s professional training or where the lawyer is already subject to regulation from his or her professional organizations.
This definition of the “practice of law” is implicit in
Frahm
and explicitly spelled out in
Lyne.
The central issue in
Frahm
was whether the attorney misrepresented a material fact in the course of his representation with the client, that is, the issue of “attorney malpractice.” The court stated: “In essence, plaintiffs seek a broad interpretation of the Act (Illinois Consumer Fraud Act) which would impose statutory liability for misconduct amounting to
professional malpractice.” Id.
The medical and legal professions are afforded immunity from the Consumer Fraud Act primarily, because, unlike other commercial services, medical and legal bodies are regulated by governmental bodies. See Guess [v. Brophy,164 Ill.App.3d 75 ], 115 Ill.Dec. [282] at 285, 517 N.E.2d [693] at 696 [(1987)] (“the legal profession is subject to a policing more stringent than that to which purveyors of most commercial services are subject”).
Lyne,
Feldstein
also lacked a “business” or “commercial” effect, but for a markedly different reason than
Frahm.
To be sure,
Feldstein
dealt with a “business” contract between a hospital and a physician. However, as noted by the court, this arrangement was completely insulated from the public at large: “The
commercial phases of medicine
which directly affect the public are not at issue here.”
Feldstein,
(2) FTC Guidelines
Illinois legislative history also provides little guidance on interpreting the intent of the Illinois Consumer Fraud Act.
1
Therefore, the Court, as directed by Illinois law, must consult decisions of the Federal Courts and of the Federal Trade Commission under the Federal Trade Commission (FTC) Act to determine the intent of the Act.
See
IIl.Rev.Stat. ch. I2D/2, ¶ 261 (1991);
People v. All American Aluminum and Construction Co., Inc.,
The FTC guidelines provide: “Unfair methods of competition in or affecting commerce, are declared unlawful.” 15 U.S.C. § 45(a)(1) (1988). Unlike Illinois caselaw
(Frahm
and
Feldstein)
which recognize an exception to the Illinois Consumer Fraud Act for the practice of law or medicine, the FTC regulates both professions.
2
Indeed, Congress has repeatedly rejected proposals to strip the FTC of the power to regulate professions. In 1982, Congress voted down an amendment which would have provided: “(c) Section 5(a)(2) of the Federal Trade Commission Act (15 U.S.C. § 45(a)(2)) is amended by inserting immediately after ‘except’ the first time it appears the following: ‘practitioner of a profession whose members are licensed and regulated by a State as a condition of independent practice
The legislative history behind the failed amendments also supports the FTC regulation of the medical profession. Senator Warren Rudman spoke out against the proposed 1982 amendments arguing that the FTC had only proceeded against the business practices of the medical profession, including kickbacks from laboratories to referring physicians. Id. at S31,379-80. He suggested that to revoke FTC’s authority to scrutinize professional practices would be “to abdicate a national responsibility and is nothing short of absurd.” Id. at S31,380. Senators Gorton and Heinz noted that if the exception were passed it would “create a privileged class” and “unnecessarily increase the costs of health and other professional services to all Americans.” Id. at S31,381, S31,385. Senator William Proxmire noted that the only supporter of the exception was the AMA. Id. at S31388. He cited the opposition of then President Reagan, the Wall Street Journal, and other professional organizations and concluded: “[T]he overwhelming public response is that this broad exemption is wrong: It is bad economics, bad politics and, most importantly, it is simply unfair.” Id. at S31,389.
The FTC has also unequivocally stated that state-regulated professions are not exempt from the coverage of the FTC Act.
In re Wilson Chemical Co.,
However, perhaps the most relevant indication that the professions are not immune from FTC coverage comes from federal courts. Federal courts have repeatedly indicated that FTC and other anti-trust regulations apply to the commercial aspects of the medical profession.
Summit Health Ltd v. Pinhas,
— U.S. -,
Defendants Dr. Newman and SMH argue the above cases are not applicable because the challenged activities in
AMA
and
Indiana Federation of Dentists
do not relate to contracts for medical services. In
AMA,
for example, the AMA’s authoritative interpretations of the AMA guidelines were found to violate § 5 of the Federal Trade Commission Act because they restricted competitive advertising and solicitation among physicians.
AMA,
(B) Fraud or Deceptive Practices
As noted above, the Illinois Consumer Fraud Act prohibits “Unfair methods of competition and. unfair or deceptive acts or practices_” Ill.Rev.Stat. ch. 121V2, ¶ 261 (1991). Defendants argue that an allegation of an unfair trade practice is not enough to state a cause of action under the Illinois Consumer Fraud Act after the Illinois Supreme Court decision in
Laughlin v. Evanston Hospital,
However, the Court finds that Plaintiff Dr. Gadson has alleged deceptive practice. We note that many deceptive acts are specifically charged:
1125. Newman and his Clinic engaged in unfair and deceptive methods of competition and in deceptive acts and practices by committing one or more of the following acts or course of conduct: {See allegation contained in a-i, which include undisclosed financial incentives, conflict of interest, self-referrals, increased billings through hospitalizations and ancillary procedures where the conflict of interest is undisclosed, compounded by an intent to eliminate competition.)
Plaintiffs Complaint Count IV, If 25 (a-i). The fact that these undisclosed referrals and other financial incentives state a case under the Illinois Consumer Fraud Act was established in
Sullivan’s Wholesale Drug Co. v. Faryl’s Pharmacy, Inc.,
Defendants argue that Sullivan’s does not apply because the $90 fee rebated to the Newman Clinic for hospital in-patient treatment is not a kickback but is a reimbursement for services. Newman’s physicians actually perform much of the medical treatment to the patients they refer to SMH. Therefore, Defendants’ claim that the $90 fee arrangement is riot misleading to the patients, but instead is a fee-for-service compensation for services that Newman’s doctors provide.
Although the Court acknowledges this distinction, it is not supported by the holding in
Sullivan’s. Sullivan’s
overruled a summary judgment decision in favor of the defendant nursing home. The court held that the issue of whether _the nursing home’s practice of keeping 15%. .of.the profits was patently deceptive was a Question of fact to be resolved by the trier of fact. The actual “deception” in
Sullim/n/s
had nothing to do with whether the compensation was a fee-for-service arrangement. Rather, the arrangement was deceptive because the nursing home patients were not aware of the 15% kickback arrangement.
Id.
at 1075-77,
The same type of “deception” exists in the case before the Court. Defendants SMH and Dr. Newman have provided no evidence that SMH or Dr. Newman’s clinic supplied information about the $90.00 fee arrangement to the psychiatric patients who were enrolled in the “programs”. Therefore, the rule of Sullivan’s is dispositive in the instant case.
In addition, other forms of “deception” may exist if the Court assumes the truth of allegations that the undisclosed agreement between SMH and Dr. Newman’s clinic increases health care costs to consumers. This deception may be visualized as it applies to insurance payments. If the parents of a troubled teenager have insurance
Similarly, the type of contractual arrangement between SMH and Dr. Newman’s clinic increases the propensity for affirmative misstatements (“deception”) made by the doctor. Medical studies confirmed the danger of this abuse:
Our results add to the existing literature suggesting that physicians given appropriate motivation (fee for service reimbursement) and appropriate circumstances (less than full capacity of patients) can manipulate demand for care and consequently patient use of services, (footnotes omitted). This study substantiates, with direct evidence, the observation made by Wilenski and Rossiter (footnote omitted) that physicians induce or initiate demand for care.
Hickson, Altemeir and Perrin, Physician Reimbursement by Salary or Fee for Service: Effect on Physician Practice Behavior in a Randomized Prospective Study, 3 Pediatrics 349-50 (Sept.1987). Thus, given the wide range of deception that is alleged, the Court allows Plaintiff Dr. Gadson the opportunity to prove his case.
(C) Standing
Defendants SMH and Dr. Newman next argue Plaintiff Dr. Gadson lacks standing to enforce violations of the Illinois Consumer Fraud Act. They claim that Dr. Gadson is not a person or a business who suffered “damage as a result of a violation of this [the Illinois Consumer Fraud] Act.” Ill.Rev.Stat. ch. 1211/2, If 270a(a) (1991). The Court does not agree.
The proper test for standing was enunciated in
Downers Grove Volkswagen v. Wigglesworth Imports, Inc.,
The Court finds that Plaintiff Dr. Gad-son’s pleadings meet this test. In paragraph 25 of Count IV of his complaint, Dr. Gadson alleges harm to the medical consumers in the Quincy area because of SMH and Dr. Newman’s fraudulent and deceptive practices. Dr. Gadson also notes that his own business has been damaged as a result of these actions. These pleadings satisfy the “liberal construction” of the pleading requirements as stated in Wigglesworth. Id.
(D) Declaratory Judgment and Injunction
Defendants SMH and Dr. Newman next argue that Count VII of Plaintiff’s complaint, seeking a declaratory judgment per 28 U.S.C. § 2201 (1988), should be dismissed or stricken because there is no actual controversy. The Court agrees that the pleading is ambiguous and also notes that Plaintiff has not responded to Defendants’ arguments.
Count VII is ambiguous for several reasons. First, Plaintiff alleges in paragraph 24 of Count VII that the action for declaratory judgment and injunction is brought pursuant to federal statute 28 U.S.C. §§ 2201, 2202 (1988). However, on page 14 of Plaintiff’s “Brief Opposing Defendant’s Motions to Dismiss and/or to Strike,” Plaintiff characterizes Count VII as based on state law (the Illinois Consumer Fraud Act).
Second, and more importantly, Plaintiff Dr. Gadson is not a signatory of the contract between SMH and Dr. Newman’s clinic. It is thus unclear how Dr. Gadson has standing to contest the contract in ques
Third, there has been no controversy alleged which can be addressed by a declaratory judgment.
IV. Conclusion
The Illinois Consumer Fraud Act was promulgated to prevent consumer fraud at all levels. Since the adoption of the Act, only two entities have been specifically exempted the Act: agents of the media (Ill. Rev.Stat. ch. 1211/2, ¶ 270b(3) (1991)); and real estate agents and brokers (Id. ¶ 270b(4)). No legislative provision was ever offered to immunize the medical profession from inclusion in the Act.
Nor does this Court think the medical profession should be given special treatment in the “business aspect” of the medical profession. Physicians and hospitals sell medical services and goods to a wide range of consumers. For the courts to create an exception would, in the words of Senators Gorton ánd Heinz “create a privileged class” and “unnecessarily increase the costs of health and other professional services to all Americans.” 128 Cong.Rec. 881,888.
However, the Court notes that there are significant differences between the medical profession and other service industries. The medical profession, unlike other service industries, is governed by a host of regulations and professional training requirements which set professional standards in every area from admission to the profession to proper surgery techniques. For these “non-business” aspects, the medical profession has expertise to set the proper professional standards.
But the instant case falls outside the expertise of the professional regulations of the medical community. It involves a dispute in a contract entered into between a hospital and a psychiatric clinic. This contract allegedly deceives an entire community of medical consumers. We therefore will allow Plaintiff the opportunity to prove his case under the Illinois Consumer Fraud Act.
Ergo, Defendants’ motion for a more definite statement is ALLOWED as to Count VII of Plaintiffs complaint. Plaintiff has ten days from the date of entry of this opinion to respond or the Court will strike Count VII.
Defendants’ motion to dismiss is DENIED as to Counts IV and V of Plaintiff’s complaint.
Notes
. The Court ordered both parties to submit responsive briefs on the subject of the legislative history of the Illinois Consumer Fraud Act. No clear evidence supports the claim that contractual arrangements between professionals were intended to be included or excluded from the Act. Nevertheless, the Court does note that the scope of the Act was dramatically increased in recent years. Originally, the Act was limited to deception or fraud in the "sale or advertisement” of any “merchandise." IIl.Rev.Stat. ch. 1211/2, ¶ 262 (1971) (amended 1973). The 1973 Amendments greatly expanded the scope of the original act to prevent "unfair competition" or "unfair or deceptive acts or practices ... in the conduct of any trade or commerce.” Ill.Rev. Stat. ch. 1211/2, ¶ 262 (1991). Proponents of the new amendments commented that the new Act was "very broad ... it encompasses just about every conceivable transaction ...” Tr. Senate Debates, June 30, 1973, at 265-66. We also note that the Act was intended to be liberally construed. IIl.Rev.Stat. ch. 121‘A, ¶ 271a (1991).
. Defendant argues that FTC regulations do not apply to SMH because it is a non-profit corporation that is immune from the Act. This analysis is based on the contention that the term “corporation” as defined in 15 U.S.C. § 44 (1988), does not include non-profit organizations which are organized for and actually engaged in business for only charitable purposes. However, even assuming that SMH is a non-profit organization (a blanket assertion made without proof by the Defendant, especially when not all non-profit corporations are exempt,
see F.T.C. v. National Comm’n on Egg Nutrition,