Federal Judge Rules That Integrated Healthcare System Comprised of Separately Owned Hospitals Incapable of Conspiring Under Section One of The Sherman Act
In recent years, some competing hospital systems have achieved the benefits of merging without a change in ownership of their assets by undertaking highly integrated joint ventures so that the combination essentially becomes a single enterprise with a complete unity of interest. Such “virtual mergers” can be appealing because they avoid issues of religious, cultural or philosophical differences between the parties or minimize problems relating to changes in the ownership of assets. A significant antitrust issue for such arrangements is whether the parties are sufficiently integrated so that they are considered a single entity under Section One of the Sherman Act, or whether they are exposed to the risk that an unhappy competitor, payer, physician or other plaintiff might sue the participating members for engaging in a conspiracy in restraint of trade. The United States District Court for the Southern District of Ohio issued an opinion on Oct. 27, 2014, that will reassure integrated hospital alliances that it is likely that they will be treated as a single entity under Section One and that will also be instructive to other health care entities in that it discusses the characteristics of a “single enterprise” joint venture.
This case was filed by a small urban hospital against a large multi-county hospital system comprised of four of the five largest hospitals in the Dayton, Ohio, metropolitan area. In an opinion denying the defendants’ motion to dismiss in 2012, Judge Timothy S. Black ruled that there were factual issues that needed to be resolved before he could determine whether the defendant hospitals operated as a single entity. Medical Center at Elizabeth Place, LLC v. Premier Health Partners, 2012 WL 37764444 (S.D. Ohio Aug. 30, 2012). More than two years and undoubtedly a substantial amount of litigation fees and expenses later, Judge Black issued a sealed opinion on Oct. 20, 2014, granting the defendants’ motion for summary judgment, and he subsequently released a redacted opinion to the public.
Medical Center at Elizabeth Place (“MCEP”) is a 26-bed adult-care hospital owned by a group of physicians and Kettering Health Network, a hospital system in Dayton. Premier Health Partners (“Premier”) was formed in 1995 when MedAmerica Health Systems (Miami Valley Hospital in Dayton) and Sisters of Charity Health Care, Inc. (Good Samaritan Hospital in Dayton) entered a joint operating agreement (“JOA”). The parties did not merge so that Good Samaritan could maintain its Catholic identity but delegated operational, strategic and financial control to Premier. Atrium Medical Center in Middletown, Ohio, about 20 miles south of Dayton, joined Premier in 2005, and Upper Valley Medical Center in Troy, Ohio, about 20 miles north of Dayton, joined Premier in 2008. Of most significance to the court, the JOA created by contract a unity of economic interests because all income or loss from the participants’ activities was combined into a single net income.
MCEP alleged that the four hospital defendants had a collective market share of 55% of general inpatient surgical services and that the defendants, acting through Premier, conspired to eliminate MCEP from the market. MCEP claimed that Premier coerced managed care plans to deny MCEP access to the plans’ networks or to reimburse MCEP at below market rates and also discouraged physicians from affiliating with MCEP.
The defendants moved for summary judgment on a number of grounds, but Judge Black’s decision focuses on the defendants’ contention that they are a single entity for purposes of the conduct challenged by MCEP. MCEP contended that the defendants are not a single entity because (1) they do not share ownership assets, (2) they perceived themselves as actual or potential competitors, (3) they had made statements in public disclosures that indicated they were separate entities and (4) some of the defendants had engaged in independent conduct. Judge Black rejected each of these arguments and also found that even if the defendants are separate economic entities, Premier constitutes a legitimate joint venture that is incapable of conspiring under Section One of the Sherman Act.
1. Separate ownership
In Copperweld Corp v. Independence Tube Corp., 467 U.S. 752 (1983), the Supreme Court ruled that a parent and its subsidiary constituted a single entity under Section One and were therefore incapable of conspiring. While the court cautioned that its decision in Copperweld only applied to a corporate parent and its wholly owned subsidiary, the court observed that “substance, not form, should determine whether a separately incorporated entity is capable of conspiring under Section One.” 467 U.S. at 773 n. 21. More recently, in American Needle, Inc. v. National Football League, 560 U.S. 183 (2010), the Supreme Court noted that the application of Section One “does not turn simply on whether the parties involved are legally distinct entities. Instead, we have eschewed such formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.” Id. at 191. While the court in American Needle determined that a joint venture formed by the 32 NFL teams to market their intellectual property and trademarked items was not a single entity under Section One, that result was dictated by the fact that the teams remained separate profit-seeking entities and continued to compete both on and off the field.
Relying on this precedent, Judge Black noted that the fact that the defendants each owned their own health care assets was not determinative as to whether Premier functioned as a single entity. As Judge Black recognized, the crucial issue is whether the joint entities are “controlled by a single center of decision making” or whether their joint conduct “deprives the marketplace of independent centers of decision making.” Judge Black ruled that the contractual control delegated to Premier under the JOA was sufficient to conclude that Premier is a single entity not subject to Section One, relying on the 11-year old decision in Health America Pennsylvania, Inc. v. Susquehanna Health Sys., 278 F.Supp.2d 423 (M.D. Penn. 2003), which held that two formerly competing hospitals that had entered into an alliance had ceased being competitors and were a single entity by virtue of the contractual control granted by the alliance agreement.
2. Other evidence that Premier is comprised of independent economic entities
MCEP presented evidence that the defendants continued to think of themselves or acted as independent competitors, but the court concluded that none of this evidence contradicted the court's conclusion that the defendants "are not competitors because they are not separate economic actors - all of the money goes to one bottom line - the Network Net Income." For example, MCEP presented evidence that employees of the participating hospitals perceived their institutions to be competing with each other. Relying on a consultant’s handwritten notes of group interviews conducted as part of the development of a strategic plan, MCEP contended that some employees felt that the Premier partners did not collaborate or act as a single system, did not have an identity as a collaborative group, did not think of themselves as an integrative organization and competed with each other for market share. Judge Black ruled that this summary of opinions of anonymous speakers constituted hearsay and speculation that could not withstand a motion for summary judgment. Moreover, Judge Black determined that even if these opinions had been true, they were not determinative for antitrust purposes and could not overcome the plain implications of the JOA. The court concluded that the defendants are not “pursuing separate economic interests” and that even if employees within the “divisions” of Premier perceived that they were sometimes competing, the members of Premier all had a unity of economic interest because they were all contributing to a single bottom line.
MCEP also pointed to certain statements made in public disclosures (IRS Form 990s and bond documents) that suggested that the four members of Premier operated separate health care systems. Judge Black observed that while some of the statements indicated that the participants were separately owned, or made independent decisions in some limited areas, none of them contradicted the JOA and its delegation of ultimate power and authority to Premier over the system’s activities and decision making, and nothing overcame the fact that all of the participants’ income or loss combined into a single bottom line.
MCEP also relied on evidence that Premier did not always conduct itself as a single, cohesive entity. For example, some important payer contracts were entered separately by each of the participating hospitals, rather than a single, negotiated contract applying to the entire Premier system. Judge Black found that evidence unpersuasive because the income from the payer contract all becomes Network Net Income under the JOA and because Premier ultimately holds the authority to negotiate and enter contracts, regardless of whether they are entered by the network or in the name of an individual hospital.
Another internal document that MCEP asserted showed independent decision making acknowledged that “historically and through today, all system hospitals operated independently regarding orthopedic strategy.” Judge Black ruled that these documents only showed that the hospitals’ orthopedic plans are not the same and that the hospitals' medical staffs are separate and have individual credentialing processes, but Premier remained the ultimate decision maker. Again, the court relied heavily on the fact that all income and losses go to Premier in concluding that it is a single entity.
3. Joint venture
Alternatively, Judge Black ruled that even if the members of Premier were considered to be separate entities for antitrust purposes, Premier operated as a legitimate joint venture under Texaco, Inc. v. Dagher, 547 U.S. 1, 6, (2006). Judge Black noted that the hospital participants, through the JOA, “agreed to pool their resources and share their risks of and from [the system’s] activities.” (quoting Dagher, 547 U.S. at 3). Each Premier member contractually placed its health care activities under the control of Premier and ceased competing against the others. Under those circumstances, the court ruled that Premier is a single entity and that the challenged conduct, i.e., managed care contracting and physician relations, is a core function of the Premier health system, constituting unilateral conduct under Section One.
Section 7 of the Clayton Act will continue to apply to the formation of hospital alliances, and Section Two of the Sherman Act will apply to hospital alliances that engage in monopolization or attempted monopolization. However, most antitrust challenges to hospital and other health care networks are pursued under Section One, and the Premier decision provides an additional level of confidence that properly integrated health systems are not going to be subjected to antitrust scrutiny under Section One for their unilateral business decisions. The Premier decision also provides guidance to other competitors contemplating joint ventures and particularly emphasizes the importance of total financial integration in determining whether or not a particular cooperative arrangement is subject to Section One.
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