7th Circuit Affirms Summary Judgment for Dominant Illinois Hospital and its Exclusive Contracts


7th Circuit Affirms Summary Judgment for Dominant Illinois Hospital and its Exclusive Contracts

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Steven J. Cernak

Last fall, the dominant hospital in Peoria, Ill. won summary judgment on the claim by its major competitor that its exclusive dealing agreements were anticompetitive. As we reported then, the opinion provided another analysis of when such common arrangements might violate the antitrust laws. While such 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 later leave it. When conducting the analysis, the district court looked beyond the words in the agreement and focused on how competition works in that market to determine that any foreclosure of the plaintiff was small. In a June 9 opinion by Judge Richard Posner affirming the defendant’s win, the Seventh Circuit agreed, although its analysis was a little different and much shorter.

As we said last fall, 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 by both opinions, however, the evaluation of those agreements will look beyond the words in the agreement to analyze their effect, if any, on competition and the competitive process.

St. Francis is the largest hospital in Peoria 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. 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.

Methodist’s claim of illegal foreclosure – and the district court’s opinion – focused on three contracts between St. Francis and payers where St. Francis was the exclusive in-network provider: a Blue Cross PPO network that was the largest commercial plan in the market; a self-insured PPO network offered by Peoria’s largest employer, Caterpillar; and a PPO network administered by Humana and offered by St. Francis’s parent, which itself was another large Peoria employer. 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 lower 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 district court took a closer look at the actual operation of each of the exclusive contracts in question and found that, despite the words in the agreements, Methodist could—and often did—compete with St. Francis. For instance, the Blue Cross agreement with St. Francis allowed employers who self-funded their programs, but used Blue Cross as an administrator, to include Methodist in their network. Also, Methodist actually did compete for the business of those patients in the St. Francis-exclusive Blue Cross program by lowering its price for “out-of-network commercially insured patients … [to] what those patients would pay if they received the same services at St. Francis.” Finally, the district court pointed out that the Caterpillar program, which for a time was exclusive to St. Francis, later changed to one in which both hospitals provided services. 

In addition, the lower court refused to count any other patients who chose to go outside their networks and obtain services from Methodist as foreclosed 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.

The Seventh Circuit’s opinion affirming the lower court’s grant of summary judgment was short and almost dismissive of Methodist’s claims. Instead of focusing on how Methodist could and did compete for patients during the St. Francis exclusive agreements, as the lower court did, the Seventh Circuit relied on Methodist’s periodic opportunities to become the exclusive provider:

The contracts made by Saint Francis are of fixed rather than indefinite, let alone perpetual, duration; and when they terminate, the insurance companies are free to strike deals with other hospitals—with Methodist, for example.

As the court explained, competition-for-the-contract is a form of competition that is protected, not proscribed, by the antitrust laws. Methodist was able to – and did – participate in that competition. The fact that it lost, presumably because “Saint Francis offered the health insurer a better deal, doubtless based on its offering a broader and deeper range of services than Methodist does,” is not an antitrust violation. 

The Seventh Circuit also seemed skeptical that Peoria consumers were harmed by the exclusive agreements. The panel pointed out that no commercial insurer or other hospital joined in the suit. Also, the U.S. Department of Justice Antitrust Division had declined to bring a suit against St. Francis, despite receiving information from Methodist. In short, the panel saw Methodist as simply “an unsuccessful competitor.” 

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, or any member of Schiff Hardin’s Antitrust & Trade Regulation Group.