Antitrust Challenge to Narrow Network Products – 7th Circuit Rules in Favor of Exclusive Agreement

by Ruder Ware
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The health care market has recently seen a resurgence in narrow network products.  To a significant degree, the resurgence of these products has been driven by the need for managed care plans looking for new avenues to help reduce the cost of care.  Traditionally, health care plans have been able to manipulate risk through exclusion of pre-existing conditions and exclusion on covered services.  Health care reform ended much of the opportunity to utilize these methods to reduce costs.  In their place many products in the market contain some sort of limitation on the provider network, either through creation of an exclusive arrangement with a system or network, or through creating more than one level of provider with preferred providers costing less in out-of-pocket expenditures to beneficiaries.

Limited or narrow network products create winners and losers.  The winners are the networks who successfully negotiate a level of exclusivity in their arrangement with one or more health care plans.  The losers are the system or networks who are taken out of the market as a result of an exclusive provider arrangement or other limitation.  Network adequacy requirements tend to push exclusive arrangements toward the larger systems that are able to fulfill the entire spectrum of care.  A larger system can provide “one stop shopping” covering at least the required core elements.

In some instances, exclusive dealing arrangements can be anti-competitive and can also be challenged under state and/or federal antitrust laws.  The critical issue is whether the exclusive arrangement unreasonably restricts competition in the market.  Restriction on competition is the central concept promoted by the antitrust laws.  A smaller system or provider network may challenge an exclusive arrangement as being anti-competitive.  Case law interpreting the antitrust laws in connection with narrow or limited network products is not incredibly well developed, at least as applied to the specific facts involved in the health care insurance market.  There are some cases that provide guidance on specific concepts that are applicable in the health care market, but for the most part the law in this area is still developing.  That is why a case decided by the 7th Circuit Federal Court of Appeal holds such significance.

The case Methodist Health Svcs. Corp. v. OFS Healthcare System, d/b/a Saint Francis Med. Ctr., Case No. 16-3791 (7th Cir. June 9, 2017) was brought by a smaller system that had been taken out of the market by a larger system that negotiated an exclusivity provision in its contract with one of the major health insurance plans in the region.

The smaller system, Methodist Health Services Corporation brought suit challenging a contract between Saint Francis Medical Center and major health care insurers in the market.  Together, Methodist and Saint Francis make up the majority of the health care market in the Peoria, Illinois area.  The suit brought by Methodist alleged that the exclusive contract created an unreasonable restraint of trade because it significantly impeded the ability of Methodist to enter private commercial insurance contracts.

The exclusive contracts created two tiers of providers: in-network providers and out-of-network providers.  Beneficiaries were responsible for more out-of-pocket costs when using out-of-network providers.  Saint Francis took the restriction to yet another level by specifically prohibiting the insurers from making Methodist an in-network provider.  More than half of the commercial insurance contracts in the market were alleged by Methodist to include this type of restriction.

The 7th Circuit Court of Appeals was hearing none of the arguments that Methodist made.  Instead, the Court focused on the fact that Saint Francis offered a more complete range of services that Methodist was unable to offer through an exclusive arrangement.  Additionally, the Court emphasized the short term nature of the contract between Saint Francis and applicable insurers.  The Court found that the short term nature of the contracts (most had a one year term) created very little restriction on competition.  In fact, the Court opined that the short term nature of the exclusive arrangements permitted excluded providers to negotiate each year.  This actually was seen as promoting competition in the market rather than impeding competition.  The Court left open whether longer term exclusive arrangements might create legitimate restrictions on trade.  The Court also placed a lot of weight on the ability of Saint Francis to offer a variety of services that could not be offered by Methodist or any other provider in the market.

Judge Posner authored the decision and seemed to find nothing anticompetitive resulting from Saint Francis’ ability to leverage its more complete array of services.  The Court also found that Methodist was not restricted from creating a competitive array of services that are required to achieve network adequacy.

The case is far from a decisive repudiation of potential antitrust claims that challenge narrow network products.  Certainly, the right facts could establish more convincing arguments that the exclusive nature of a contract restricts trade.  Every market contains different dynamics and antitrust cases tend to be factually based on the nature of competition in the market.  At the same time, the 7th Circuit Court of Appeals opinion illustrates the difficulty in bringing antitrust cases in many markets.  It will be interesting to see how various Federal court circuits apply the antitrust laws to narrow network products in other jurisdictions.  Given the dynamics in the health care market, suits in other jurisdiction are virtually inevitable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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