After fending off a motion for judgment on the pleadings in March 2015, a small hospital in Peoria, Illinois lost on summary judgment in its $300 million antitrust suit alleging illegal exclusive dealing and attempted monopolization against its largest competitor. On Friday, a federal district court ruled that the exclusive arrangements between defendant hospital and health insurers did not prevent plaintiff hospital from competing in the market. Methodist Health Svcs. Corp. v. OFS Healthcare System, d/b/a Saint Francis Med. Ctr., No. 1:13-cv-01054 (C.D. Ill. Sept. 30, 2016). This decision has the potential to become a significant precedent regarding the use of exclusive contracts, particularly when employed by parties with alleged market power.
In 2013, Methodist Health Services Corporation (“Methodist”) filed suit, accusing its largest rival, Saint Francis Medical Center (“Saint Francis”), of entering into contracts with payers that required those payers to exclude Methodist from their networks. Methodist alleged that those contracts unreasonably restrained trade by substantially foreclosing Methodist’s ability to compete for commercially insured patients. Saint Francis and Methodist “dominate” the Peoria, Illinois market for inpatient medical services. Saint Francis offers many high-end, tertiary services that other hospitals in Peoria, including Methodist, do not offer. Of the six hospitals in the relevant geographic market, Saint Francis is the largest and Methodist—at half the size of Saint Francis—is the second largest. The district court granted summary judgement for Saint Francis on all claims.
The district court set the stage for its decision by providing an overview of the health care delivery and payment system. At issue in this case were the network exclusivity terms for commercial insurers. The largest commercial payer in the relevant market is Blue Cross Blue Shield (“BCBS”). The BCBS PPO, with 32% of all admissions and 34% of all payments, is exclusive to Saint Francis. The BCBS HMO, which is exclusive to Methodist, only has 1.6% of all admissions and 2.1% of all payments. Methodist offers a matching program to BCBS PPO patients that eliminates the cost-incentive for patients to stay in-network at Saint Francis rather than going out-of-network to Methodist. Humana, the second largest commercial payer in the area, does not include Methodist in its network. Health Alliance Medical Plans (“HAMP”) is also exclusive to Saint Francis. The second largest source of commercially insured patients in the area is Caterpillar, the region’s largest employer. Caterpillar’s self-insured PPO used to be exclusive to Saint Francis, and its self-insured HMO was exclusive to Methodist. In 2010 and 2011, Caterpillar decoupled the tertiary services offered only by Saint Francis from the other services offered by both Saint Francis and Methodist, and opened its self-insured PPO and HMO networks to include both hospitals.
Methodist’s expert submitted a report purporting to demonstrate that Saint Francis’ exclusive contracts substantially foreclosed Methodist from competing in the market for commercially insured patients in the Peoria area. The report contended that in 2009, Methodist was foreclosed from 54% of the market by the three plans that excluded Methodist (the BCBS PPO-29%, the Caterpillar PPO-12%, and the Humana plan-13%). Similarly, the report asserted that in 2012, Methodist was foreclosed from 52% of the market (based on the exclusivity in the BCBS PPO-34%, the Humana plan-10%, the HAMP plan-6%, and a very small Aetna plan).
Methodist alleged that Saint Francis has market power due to its provision of tertiary services (making it a “must have” hospital), and that it used that market power to coerce commercial payers into excluding Methodist from their provider networks.
District Court’s Analysis
Exclusive dealings under Section 1 of the Sherman Act are analyzed under the rule of reason, and are condemned only if the agreement results in substantial foreclosure of competition. The district court adopted the Third Circuit’s standard, whether its “probable effect is to substantially lessen competition in the relevant market” (citing ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 268 (3d Cir. 2012). Exclusive dealing claims under Section 2 of the Sherman Act are analyzed in a similar manner, however the threshold quantitative showing (roughly 40-50% foreclosure for a Section 1 claim) may be less for a Section 2 claim.
A threshold issue in any antitrust case is the determination of the relevant market in which trade is allegedly restrained. Saint Francis argued that the relevant product market should include both commercial and government payers. Consistent with other cases and the antitrust agencies’ mode of analysis, the district court agreed with Methodist that the two are not interchangeable, and thus the relevant product market should be limited to commercial payers.
The parties disagreed over the meaning of foreclosure from competition. Methodist argued that if a contract excludes Methodist, then it has been foreclosed from competing for all patients covered by that plan. The district court rejected Methodist’s all-or-nothing approach.
The district court held that foreclosure must be analyzed at each level in the distribution chain—competition between hospitals for payer contracts, competition between payers for customers (usually employers), and competition between hospitals for individual patients. Ultimately, the district court found that a jury would not be permitted to conclude that Saint Francis’ exclusive contracts substantially foreclosed competition in the Peoria inpatient health care market.
Essentially making a Daubert motion, Saint Francis challenged Methodist’s expert’s foreclosure calculations. Methodist argued that any dispute as to its expert’s calculations is factual in nature, and thus must be decided by a jury. The district court disagreed, holding that if the expert’s figures included patients who, as a matter of law, are not foreclosed from Methodist based on undisputed facts, then the jury may not consider them.
The district court chipped away at Methodist’s foreclosure claims by concluding that certain categories of patients, as a matter of law, were not foreclosed from Methodist and should not have been included in the foreclosure calculations: i) patients actually treated at Methodist (even if Methodist was out-of-network for those patients); ii) patients covered by BCBS PPO self-insured plans (even if those plans ultimately excluded Methodist, because there was nothing in the contract between Saint Francis and BCBS requiring exclusivity for the PPO self-insured plans); iii) OSF employees covered by Humana because OSF has no legal duty to compete with itself (OSF is the parent of Saint Francis, and previously sold its commercial plan to Humana with the condition that Humana keep Saint Francis as its exclusive in-network provider); and iv) Caterpillar employees, because Caterpillar’s contracting history (designed to offer its employees a choice between the hospitals) demonstrated that the health insurance market is competitive. After excluding those categories of patients, the district court found that, at most, Methodist was foreclosed from the BCBS PPO patients that were members of non-self-insured plans—only 20% and 22% of the market for 2009 and 2012, respectively.
The district court also weighed additional factors impacting foreclosure. First, it noted that the contracts at issue were short in duration; most lasting just one or two years. Second, there were several alternative means for Methodist to reach commercial patients, including its match program.
The district court dismissed Methodist’s reliance on the Third Circuit’s decision in United States v. Dentsply Intern., Inc., 399 F.3d 181 (3d Cir. 2005). Dentsply was a manufacturer of artificial teeth with a national 75-80% market share. Dentsply’s written corporate policy prevented the distributors of Dentsply’s teeth to sell competing manufacturer’s teeth. The Third Circuit found Dentsply’s practice illegal, holding that the alternative distribution channels that did not involve the distributors were not adequate for Dentsply’s competitors. The district court here noted that Dentsply had significantly more market power in its relevant market than Saint Francis, and that Dentsply’s exclusive dealings completely foreclosed competitors, whereas Methodist was not significantly foreclosed. Significantly, Dentsply’s exclusionary practice had no legitimate business purpose and was designed to harm rivals. The district court distinguished that from Saint Francis’ exclusive contracts which did have a legitimate business purpose—they provide a more predictable patient volume for Saint Francis and the payers agree to the exclusivity in exchange for avoiding an open-network premium. Finally, the district court noted that the small and concentrated Peoria market allowed Methodist to know which major employers it could target to increase its self-insured business. In contrast, the large geographic market in Dentsply made it difficult for small manufacturers to operate without access to the distributor’s network.
The district court held that a jury could not conclude that Methodist was substantially foreclosed from the inpatient market as a matter of law and that the Sherman Act claims must fail.
The district court quickly assessed, and again ruled for Saint Francis, the outpatient surgical services market claims. First, the district court found that Methodist did not provide any separate evidence or analysis of foreclosure in the outpatient market, instead arguing that it is the same as the inpatient market—a position that was too speculative. And second, assuming it is the same as the inpatient market, as discussed above, the district court already found the levels of foreclosure on which Methodist relied to be insufficient as a matter of law.