Dominant Ill. Hospital’s Exclusive Contracts Not Anticompetitive

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Dominant Ill. Hospital’s Exclusive Contracts Not Anticompetitive

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Steven J. Cernak

As detailed in prior alerts, exclusive dealing agreements, while common across industries, raise real antitrust issues for companies with arguably high market shares. While the agreements might yield lower prices for some customers in the short run, all customers might suffer in the long run if competitors are foreclosed from the market and unable to compete. Determining how an antitrust court would evaluate any arrangement requires an analysis that goes much deeper than the words in the agreement or the shares of the market. A federal district court in Illinois recently granted a dominant hospital defendant’s motion for summary judgment regarding an allegedly anticompetitive series of exclusive contracts with payers. That court’s analysis provides guidance for other companies with high market share considering similar agreements.

St. Francis is the largest hospital in the Peoria, Ill. area and offers some services that no other nearby hospital does. Methodist, the area’s second largest hospital, has half the beds of St. Francis, and the few remaining hospitals are much smaller. In 2013, Methodist sued St. Francis alleging that certain exclusive dealing agreements between St. Francis and major payers like Blue Cross substantially foreclosed Methodist’s ability to compete for commercially-insured patients’ business. On September 30, 2016, Judge Sara Darrow granted St. Francis’s summary judgment motion.

Methodist’s claim of illegal foreclosure focused on three contracts between St. Francis and payers where St. Francis was the exclusive in-network provider. The first was a Blue Cross PPO network that was the largest commercial plan in the market. The second was a self-insured PPO network offered by Peoria’s largest employer, Caterpillar. There, St. Francis was the exclusive in-network provider for most of the time period in question, although Caterpillar later offered an HMO exclusive to Methodist for a short time before moving to a single program open to both hospitals. Finally, St. Francis’s parent, another large Peoria employer, offered a plan with Humana as payer in which St. Francis itself was the exclusive provider. According to Methodist’s expert, the foreclosure from these and smaller exclusive contracts topped 50 percent, just above the level at which many courts have found foreclosure to be anticompetitive.

The court took issue with how Methodist analyzed foreclosure:

Methodist seems to argue that if a contract excludes Methodist from a provider network then it has been foreclosed from competing for all the patients covered by that plan, full stop. The undisputed facts of this case suggest that analysis is not correct.

Instead, the court took a closer look at the actual operation of each of the exclusive contracts in question and found that, despite the agreements, Methodist could—and often did—compete with St. Francis.

First, the Blue Cross agreement with St. Francis allowed employers who self-fund their programs but use Blue Cross as an administrator to include Methodist in their network. Blue Cross was not allowed to market this option—but Methodist and other hospitals could. Three employers offered such a plan and Methodist tried unsuccessfully to convince a fourth. According to the court, “Methodist was able to compete to be in the provider network for [Blue Cross’s self-funded PPO plan]. The antitrust laws do not require more.”

Also, Methodist actually does compete for the business of those patients in the St. Francis-exclusive Blue Cross program by operating a matching program: Methodist “waives all charges to out-of-network commercially insured patients above what those patients would pay if they received the same services at St. Francis.” While Methodist described its matching program as mere mitigation, not competition, the court dismissed that characterization as “wordplay.” Methodist seemed to have some success competing in this way: Revenue from these out-of-network patients grew by more than 5 percent each year and, in 2010, resulted in $40M in revenue. 

Second, just because the Caterpillar PPO was a St. Francis exclusive network for a time did not show that Methodist was unlawfully foreclosed. According to the court, the fact that Methodist was able to offer an HMO product to Caterpillar employees and, later, participate in a non-exclusive PPO “shows the market is competitive, and competitive markets are protected by the antitrust laws.”

Finally, the court found that the antitrust laws do not require St. Francis to “compete with itself”; therefore, its St. Francis-exclusive plan with Humana for St. Francis employees meant that that portion of the market was only “lawfully foreclosed” to Methodist.

In addition, the court refused to count as foreclosed from Methodist any other patients who chose to go outside their networks and obtain services from Methodist. When all these patients were no longer considered inappropriately foreclosed, the court found the proper measurement of foreclosure was between 15 percent and 22 percent. The court buttressed its conclusion that Methodist was not unlawfully foreclosed by pointing out that most of these St. Francis exclusive agreements were renegotiated every one or two years.

While Methodist relied heavily on the Third Circuit’s opinion in U.S. v. Dentsply, the court quickly distinguished it. In that case, the dominant defendant completely foreclosed the distributors to its competitors and alternate distribution methods were wholly inadequate. Here, Methodist had the opportunity to—and often did—compete for contracts with the payers, and to offer those programs to employers and patients. Even in the Blue Cross agreements where St. Francis was the exclusive provider, Methodist had the opportunity to—and often did—compete for employers and patients. As a result, the court found “the evidence does not show Methodist is substantially foreclosed from competing for commercially insured patients, and therefore there can be no federal antitrust liability.”

No matter the industry, antitrust courts will take a close look at a series of exclusive agreements entered into by a company with an arguably high market share. As shown here, that evaluation will be fact-intensive as the court looks beyond the words in the agreement to analyze their effect on competition and the competitive process.

Competitors who might have high market shares should consult with experienced antitrust advisers before entering such agreements. To learn more, contact Steve Cernak, Bill Hannay, Greg Curtner, or any member of Schiff Hardin’s Antitrust & Trade Regulation Group.