Antitrust Alert: DOJ Challenges Hospital’s Contracts with Insurers in First Monopolization Case since 1999
On February 25, 2011, the U.S. Department of Justice Antitrust Division filed its first monopolization case since 1999. DOJ, along with the Texas Attorney General, allege that United Regional Health Care System used exclusionary contracts to maintain its monopoly in the inpatient and outpatient hospital markets in Wichita Falls, Texas. The parties simultaneously entered into a consent decree settling the charges, which were filed in the United States District Court for the Northern District of Texas.
The action deserves attention from business because DOJ has taken a relatively aggressive position on what price discounting by a large company may be unlawful because it deprives smaller rivals of access to revenues from customers that send their business to the larger firm. This also is the first monopolization case filed the Obama Justice Department, which was critical of its predecessor's not having pursued them more vigorously.
United Regional is the largest hospital in the Wichita Falls MSA, which comprises the north Texas counties of Archer, Clay, and Wichita. It was formed in October 1997 by the merger of Wichita General Hospital and Bethania Regional Health Care Center, then the only two general acute-care hospitals in Wichita Falls.
The only other hospitals in the Wichita Falls MSA are much smaller: Kell West Regional Hospital in Wichita Falls; Electra Memorial Hospital in Electra, 30 miles west of Wichita Falls; and Clay County Memorial Hospital Henrietta, 15 miles east of Wichita Falls. Electra Memorial and Clay County Memorial offer a narrower range of inpatient and outpatient surgical services than either United Regional or Kell West. Several outpatient facilities also are nearby.
Allegations of monopoly power
DOJ alleges that United Regional has monopoly power in general acute-care inpatient hospital services and outpatient surgical services sold to commercial health insurers in the Wichita Falls MSA. According to DOJ, United Regional's share of hospital services sold to commercial payors is approximately 90%, based on discharges. Commercial payors consider United Regional a "must have" hospital in their networks, because it is the largest hospital and the only provider of certain services such as cardiac surgery, obstetrics, and high-level trauma. DOJ also states that United Regional is one of the most expensive hospitals in Texas.
Pricing penalty. DOJ challenges United Regional's contracts with commercial health insurers that contain "exclusionary" pricing provisions, imposing a significant pricing "penalty" if an insurer contracts with the nearby competing facilities. The United Regional contracts offer a substantial discount off billed charges if United Regional is the only local hospital or outpatient surgical center in the insurer's network, but much smaller discounts if the insurer contracts with any of United Regional's competitors.
According to DOJ, United Regional adopted exclusionary provisions in its contracts with commercial payors in direct response to competitive threats from Kell West and the nearby outpatient facilities. Within months after Kell West opened in 1999, United Regional had obtained five exclusionary contracts from commercial payors. As of 2010, United Regional had exclusionary contracts with eight commercial payors.
A statement released by United Regional justifies the contract provisions as "discounts corresponding to a plan's expected volume commitments and at the election of the plan." The statement also noted that with one exception these agreements have been in place for over ten years.
Below cost prices. DOJ further alleges that United Regional's prices are below its incremental cost to provide services. If United Regional were simply a more efficient hospital with lower incremental costs, deep discounts would not necessarily be unlawful. If below cost, one could infer the prices were set so low to exclude competitors. DOJ asserts the prices are "anticompetitive if they would prevent equally or more efficient competitors from attracting additional customers."
To determine whether United Regional's prices are below its incremental cost, DOJ makes a calculation that attributes the entire discount to United Regional's "contestable volume" of patients (the patients that United Regional would be at risk of losing if a payor contracted with other providers). DOJ concludes that the contestable volume is about 10% of the patients United Regional received from its exclusive payors. The contestable volume is low because competitors have limited service offerings and because many patients choose United Regional even though competitors offer the same services. When DOJ applies the entire discount to the contestable volume, it concludes that United Regional's prices are far below any measure of incremental cost because the discounts are large relative to the contestable volume.
This DOJ price-cost test is a variation on the Ninth Circuit's approach in Cascade Health Solutions v. PeaceHealth. In the PeaceHealth case, to determine whether prices are below cost, the court held that the full amount of the discounts should be allocated to the competitive set of products and compared to the defendant's incremental cost. In the United Regional case, DOJ does not allocate the discount over the set of competitive services, but over a smaller volume – the contestable volume.
Alleged anticompetitive effects
According to DOJ, these agreements have foreclosed competing providers from access to sources of revenue and thereby allowed United Regional to charge monopoly prices for general acute care hospital services and outpatient surgeries.
The patients served under United Regional's contracts with its exclusive payors account for a disproportionate share of United Regional's revenues. DOJ alleged that had even 10 percent of these patients been able to switch to Kell West, where they would have paid less, Kell West's profits would have increased 40 percent. With additional patients and profits, nearby hospitals could have more vigorously competed against United Regional, DOJ said. On the other side of the balance, DOJ stated these exclusive provisions had no procompetitive justification.
The consent decree prohibits United Regional from conditioning prices or discounts to commercial payors on whether those payors contract with other providers. The consent decree also prohibits United Regional from preventing payors from entering into agreements with its competitors or taking any retaliatory action if they do. The consent decree further prohibits United Regional from offering "conditional volume discounts" or market share discounts. (Conditional volume discounts are discounts on the condition that the volume of that payor's purchases from United Regional meet or exceed a threshold.) However, United Regional may renegotiate its payor contracts with 270 days' notice.
Under the consent decree, United Regional otherwise may offer above-cost, volume-based prices to different payors. According to DOJ, a discount is above incremental cost if the discounted price for each service line, expressed as a percentage of billed charges, is greater than United Regional's cost-to-charge ratio as reflected in Medicare cost reports.
The proposed final judgment is subject to a 60-day comment period, after which the court may enter the final judgment upon a finding that it serves the public interest.
This case is notable because the government is objecting to a practice that is often used by hospitals and other health care providers to compete. Providers typically offer discounts in return for preferred or exclusive status in a health plan network, and health plans rely on the threat of exclusion from a network to get lower prices from providers. In the United Regional case, DOJ alleges that the discounts were anticompetitive because used to maintain a monopoly. The allegation that United Regional's prices were below cost is critical to this conclusion.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Toby G. Singer
Margaret A. (Peggy) Ward
Silicon Valley / Washington
+1.650.739.3976 / +1.202.879.3488
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