Published Internally

Hospital v. Hospital Lawsuits

Recent years have seen a growing trend of hospitals turning against competing hospitals through antitrust lawsuits to address their financial losses suffered in a highly competitive market. These plaintiff hospitals are challenging the legality of exclusive contracts competing hospitals have with independent physician associations ("IPAs") and/or managed care organizations ("MCOs"). Unlike the more typical antitrust complaint in the health care context, in which a physician or group of physicians has challenged practices excluding them from providing care at a hospital or payer network, these plaintiff hospitals argue that their competitor’s exclusive contracting practices have squeezed them out of a significant portion of managed care contracts that bring critical patient volume,especially with regard to private-pay patients.

Examples of these types of cases include St. Luke’s Hospital v. California Pacific Medical Center, et al., (California Superior Court; complaint filed January 14,1999) (case settled in October 2000), Wuesthoff Health Systems v. Health First (Florida Circuit Court; complaint filed July 1999) (case settled December 2000), and Rocky Mountain Medical Center v. St. Mark’s Hospital (Utah District Court; complaint filed August 22,2000) (Rocky Mountain lost a motion for a preliminary injunction in October 2000). Some plaintiff hospitals also have charged their competitors with illegal tying arrangements — using their strength in a particular service to force health plans to contract for all services to the exclusion of other hospitals. Such was the allegation in St. Joseph’s Hospital of Atlanta v. Northside Hospital, Inc. (Georgia Superior Court; complaint filed May 9,2000) (Northside’s motion to dismiss was denied in January 2001). This trend of hospital v. hospital litigation may be troublesome because these cases are surviving dispositive motions.

The challenged exclusive contracts between hospitals and IPAs or MCOs, sometimes cast as group boycotts by plaintiff hospitals as in Rocky Mountain Medical Center v. St. Mark’s Hospital often are considered to be exclusive dealing arrangements, a type of vertical non-price restraint of trade that may be challenged under Section 1 of the Sherman Act,15 U.S.C.§ 1, or state law equivalent. (In many cases, tying arrangements involve an analysis similar to exclusive dealing arrangements.) Section 1 prohibits unreasonable contracts,combinations, or conspiracies in restraint of trade. Agreements between separate economic actors that have the effect of substantially and unreasonably reducing competition in a particular market may violate Section 1.

Legal Standard

Courts look at agreements in restraint of trade under one of two methods of analysis depending on the nature of the agreement: (1) the per se rule, or (2) the rule of reason. Some practices, such as price-fixing among direct competitors, are so offensive that they are deemed per se illegal and are condemned without further analysis by the courts. On the other hand, conduct that does not injure competition on its face, such as agreements on non-price terms of dealing among suppliers and their customers ("vertical non- price restraints"), requires a more detailed analysis under a standard called the rule of reason.

Rule of Reason Standard. Courts recognize that vertical non-price restraints, including exclusive dealing arrangements, have the potential for procompetitive effects and, therefore, have analyzed them under a rule of reason standard. The essential inquiry under a rule of reason analysis is how the challenged conduct affects competition in a relevant market. If the court finds that the restraint is reasonably necessary to achieve procompetitive effects, those benefits are balanced against the anticompetitive effects to determine the net effect on competition. The rule of reason is the most common mode of analysis in Section 1 cases.

Exclusive dealing arrangements are unreasonable only when they result in a substantial portion of the market being foreclosed to other competitors, causing adverse competitive effects in that market. Courts generally focus on the structure of the affected market,applying the so-called "qualitative substantiality" test, to determine unreasonableness of the restraint for cases arising under Section 1. The restraint will be considered unreasonable under the antitrust laws only when a significant fraction of business and patients in a market is made unavailable to a plaintiff hospital as a result of exclusive contracting.

Nature of the Arrangement. The most common exclusive dealing arrangements require IPAs or MCOs to "purchase" hospital services for a period of time exclusively from one hospital. The arrangement usually consists of an agreement forbidding the IPA or MCO from contracting with the hospital’s competitors and, as such, potentially causes anticompetitive effects by foreclosing or freezing out competing hospitals from effective access to the IPA’s patients or the MCO’s subscribers. The actual contract provision can take on many forms. For instance, the challenged contract in Rocky Mountain Medical Center v. St. Mark’s Hospital allegedly called for a 20 percent rate increase, penalizing MCOs that contracted with competing hospitals. In Wuesthoff Health Systems v. Health First, Health First allegedly provided steep discounts, as opposed to penalties, to illegally coerce insurers to exclude Wuesthoff from their networks. Whether foreclosure resulting from an exclusive arrangement ultimately amounts to an antitrust violation depends on a number of factors.

Application of the Rule of Reason

Foreclosure Rate. To determine whether the fraction of the market foreclosed to competitors is significant, a two-step analysis is appropriate. First, the baseline foreclosure rate — the fraction of managed care contracts and number of patients in a market actually foreclosed to the plaintiff hospital as a result of exclusive contracts by a competing hospital — is determined. Foreclosure means the excluded hospital has no way of gaining access to and treating a particular pool of patients because they subscribe to health plans whose enrollees are exclusively treated by a competing hospital. Oftentimes, defendant hospitals have exclusive arrangements with several MCOs in a relevant market, all of which must be taken into account to determine the foreclosure rate. Such was alleged to be the case in Rocky Mountain Medical Center v. St. Mark’s Hospital, where St.Mark’s allegedly forced several MCOs to agree to penalties if they contracted with competitor Rocky Mountain. In St. Joseph’s Hospital of Atlanta v. Northside Hospital, Inc., Northside allegedly signed exclusive arrangements with five major health insurers in the relevant market, allegedly foreclosing St.Joseph’s from 70 percent of the managed care market. Generally, a foreclosure rate of at least 30 percent to 40 percent must be found in order to have a violation of the antitrust laws.

Courts also examine other competitive factors existing in the market because the foreclosure rate taken on its own may significantly overstate the size and effect of the foreclosure, depending upon other factors.

Other Factors to be Considered in Determining Anticompetitive Effect. Unless the foreclosure rate is so great that it invariably indicates that competing hospitals are frozen out of the market, other factors measuring actual anticompetitive effects, such as the existence of alternative channels of access (e.g. other IPAs and MCOs that are not obligated under exclusive contracts) that would allow plaintiff hospitals to reach the market, may be important. If viable alternative channels of access to business and patients do exist, the likelihood is reduced that the challenged exclusive dealing arrangements would have anticompetitive effects. In St. Luke’s Hospital v. California Pacific Medical Center, et al., California Pacific Medical Center allegedly had exclusive contracts with Brown &Toland, the largest IPA in the San Francisco area, for certain commercial HMO patients. The exclusive contract allegedly resulted in a foreclosure rate of 60-65 percent of commercial HMO patients who received hospitalization in the San Francisco area. The contract allegedly prohibited Brown &Toland from contracting with other hospitals, and because of the alleged dominance of Brown &Toland in the market, St.Luke’s argued that it was shut out of a critical volume of commercial pay patients in the area. Similarly, in St. Joseph’s Hospital of Atlanta v. Northside Hospital, Inc., Northside allegedly had inked exclusive arrangements with the five largest health insurers in the market, leaving little else for competing hospitals.

Additionally, duration and terminability of the exclusive dealing arrangement have to be weighed. The shorter the duration of the foreclosure and the easier the contract is to terminate, the more likely it is to be found reasonable. At-will exclusive dealing arrangements are increasingly viewed to be valid under the antitrust laws.

The existence of entry barriers for the IPA and MCO markets come into play when analyzing actual competitive effects. For example, if new IPAs and MCOs can be formed or existing IPAs and MCOs enter the market, the foreclosure rate becomes less significant, because entry by additional IPAs and MCOs indicates there are alternate methods of access to patients. In St. Luke’s Hospital v. California Pacific Medical Center, et al., however, the exclusive contract allegedly prohibited defendant California Pacific Medical Center from contracting with other IPAs to form competing health plans to serve the market. This contract provision allegedly made it unlikely that competing IPAs would enter or succeed against the dominant Brown &Toland.

The competitiveness of the market at the hospital level is important. If competing hospitals in the market are thriving, it can be an indicator that the foreclosure resulting from exclusive contracting has a less significant effect on the market. Actual expansion or growth in the market share of another hospital in the market could be evidence that a defendant hospital’s exclusivity arrangements do not have a significant impact on competition. Moreover, overall trends toward growth or decline in competition at the hospital level are relevant because they can be a barometer of the market's vulnerability to foreclosure.

Finally, procompetitive effects justifying the exclusive arrangement often are considered. The procompetitive business justifications for an exclusive dealing arrangement must be balanced against anticompetitive effects to determine the net effect of the restraint on the market. Here, defendant hospitals might argue that the exclusive contract was necessary to manage the cost of care or promote quality of care in the relevant market. Whether or not procompetitive justifications are enough to offset the anticompetitive effects of the restraint depends upon the particular facts and circumstances of each case.

Defendant Hospital’s Market Power. An increasing number of courts are unwilling to find vertical non-price restraints unlawful under the rule of reason analysis unless the defendant possesses market power. If the defendant hospital enjoys enough of a share of network patients in the market or provides key services that are unavailable at other hospitals, it can be argued that it has the ability to cause anticompetitive effects in the marketplace as a hospital that wields market power. In St. Joseph’s Hospital of Atlanta v. Northside Hospital, Inc., Northside was charged with unfairly using its dominant position in the area’s obstetrics market to force exclusive contracts with MCOs for all services and with barring St.Joseph’s from contracting with those payers, except for cardiac surgery in certain areas of Atlanta. The determination of whether a hospital has market power involves a detailed inquiry into specific competitive conditions of a particular market.

Conclusion

The changing climate in the health care industry has fueled this trend of hospitals suing competing hospitals to ease financial losses. Managed care, selective contracting, market concentration as a result of mergers and consolidations in the industry, and lower government reimbursements as a result of the Balanced Budget Act of 1997 are all contributors to this trend. Many of these recent hospital-against-hospital cases are still in the early stages of litigation, while others have settled, making an analysis of court decisions quite difficult. Generally, however, plaintiff hospitals are surviving motions to dismiss and motions for summary judgment. Whether these plaintiffs ultimately will prevail on the antitrust claims remains to be seen. Nevertheless, hospitals need to take into account the real and costly possibility of defending against antitrust suits challenging any actions that may exclude a competing hospital.

Further Information

This Health Care Commentaries is a publication of Jones,Day,Reavis & Pogue and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general informational purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.