Type: Client Alerts
A federal trial court rejected a hospital’s antitrust claims that it was substantially foreclosed from the market by its rival’s exclusive contracts with payors. The court concluded that foreclosure in healthcare services markets must be evaluated at multiple levels of competition. Although the decision focuses on the healthcare market from a provider's perspective, it also offers useful insights for payors:
- Exclusive payor-provider contracts are presumptively permissible where they foreclose less than 30-40% of the relevant market;
- Only unlawful foreclosure is relevant from an antitrust perspective. Even if an exclusive contract restricts competition in some respects, there may still be competition for the exclusive contracts themselves and at other levels of the distribution chain;
- In markets in which payors or providers have significant market shares, exclusive contracts should be carefully evaluated before implementation.
Methodist Health Services Corporation (“Methodist”) brought federal and state antitrust claims in the U.S. District Court for the Central District of Illinois against its chief rival in Peoria, Illinois, Saint Francis Health System (“St. Francis”). St. Francis is the largest of the six hospitals in the Peoria area and provides the most advanced services of any hospital in the area. Methodist, the second largest hospital in Peoria, alleged that it was substantially foreclosed from competing for commercially insured patients as a result of contracts between St. Francis and major commercial payors that prohibited the payors from including Methodist as an in-network provider in certain plans. This substantial foreclosure, Methodist alleged, violated both Sections 1 and 2 of the Sherman Act and analogous state antitrust law provisions.
Several exclusive contracts were central to Methodist’s market foreclosure claims. For example, St. Francis had an exclusive contract with the largest payor in the market for its PPO product. Significantly, however, Methodist operated a matching program, under which it waived out-of-network charges above what the patient would have paid on an in-network basis at St. Francis. As a result, the cost of receiving treatment at Methodist was the same as it would be at St. Francis from the patient’s perspective. Other St. Francis contracts similarly restricted plan members’ use of Methodist for in-network treatment.
The central issue on St. Francis’ motion for summary judgment was whether St. Francis’s exclusive contracts foreclosed Methodist from a substantial share of the relevant market. The Court determined that the relevant market was the sale of inpatient and outpatient hospital services to commercially insured patients in the Peoria area. Importantly, the Court excluded government payors from the market on the grounds that business from commercially insured patients is “far more profitable” for hospitals. The Court rejected St. Francis’ efforts to expand the definition to include all patients and payors, in part, because St. Francis had admitted in its answer that government payors’ reimbursements are lower than those from private payors and that “patients covered by government payors are not adequate substitutes for commercially insured patients.”
With the relevant market defined, the court proceeded to characterize what it considered the proper meaning of “foreclosure” from competition. Methodist argued that an agreement between a payor and St. Francis that excluded Methodist from a network foreclosed Methodist from competing for the patients covered by that plan. The Court flatly rejected that view based on undisputed facts that suggested multiple “layers” of competition. The court identified competition among hospitals to win payor contracts and to be included in their networks, competition between payors to sell their plans to customers, and competition at the retail level between hospitals to attract individual patients. The court noted that competition at all of these levels of the distribution chain is relevant to assessing whether substantial foreclosure occurred.
St. Francis’ primary summary judgment argument was that multiple layers of market competition, which the court had now recognized, provided Methodist with more opportunities to compete than Methodist suggested. Methodist’s opposition focused on competition to provide services to commercially insured patients and rested largely on its expert’s conclusion that St. Francis’s exclusive contracts foreclosed 52-54% of the market for inpatient services. (The court analyzed inpatient services and outpatient services separately, but ultimately rejected Methodist’s outpatient services claims on the same grounds as the inpatient claims.) Under the usual analysis of exclusive dealing claims, foreclosure of less than 30-40% of the market is presumptively unlikely to raise antitrust concerns, and Methodist’s calculations comfortably exceeded that lower bound. The court, however, carefully parsed Methodist’s expert report with its layers of competition in mind, and found that a much smaller percentage of the market was unlawfully foreclosed.
Methodist’s expert had included as foreclosed: (1) patients who were treated as out-of-network patients at Methodist through the matching program; (2) patients with a self-insured Administrative Services Only (“ASO”) plan through their employer; and (3) patients who work for St. Francis. First, the court swiftly concluded that patients actually treated by Methodist could not reasonably be considered foreclosed from Methodist. Second, ASO plan patients were not foreclosed because the relevant ASO plans permitted employers to include Methodist as an in-network provider. In fact, at least three employers did include Methodist in their ASO network and Methodist competed for, but did not win, business from others. The court also noted that Methodist could have but did not market itself to self-insured employers, and its “failure to vigorously go after potential business is not St. Francis’ fault.” Third, St. Francis had no duty to compete with itself by opening up plans for its own employees to competing hospitals like Methodist.
After eliminating these instances of what the court found to be lawful foreclosure, the court concluded that the actual unlawful foreclosure caused by St. Francis’ contracts was not more than 20-22% of the market, materially below the 30-40% threshold that would presumptively raise antitrust concerns. These actual foreclosure figures, combined with the fact that Methodist could still compete for out-of-network patients via its matching program and the fact that it could compete for the exclusive payor contracts every year or two years, would, as a matter of law, preclude a jury from finding that Methodist was substantially foreclosed from competition in the relevant market.
Methodist could compete to win contracts with payors, to win business directly from self-insured employers, and for patients through its matching program. Because of this existing competition, which Methodist sought to gloss over, a jury would not be permitted to conclude that St. Francis’ exclusive contracts violated the antitrust laws. This carefully reasoned opinion provides excellent insight into how a court will analyze antitrust claims challenging exclusive payor-provider contracts in the market for providing healthcare services. The case also importantly illustrates that government payors, or perhaps other less profitable payors, may be excluded from the relevant market.
Client Alert 2016-267