U.S. Department of Justice Sues North Carolina Hospital System for Insisting on Anti-Steering Provisions in Insurance Reimbursement Contracts

by Sheppard Mullin Richter & Hampton LLP

On June 9, 2016, the Antitrust Division of the United States Department of Justice (“DoJ”) filed a complaint against the Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Health Care System (“CHS”) in the United States District Court for the Western District of North Carolina. (United States of America and State of North Carolina v. Charlotte Mecklenburg Hospital Authority). The complaint accuses CHS of using “contract restrictions that prohibit commercial health insurers in the Charlotte area from offering patients financial benefits to use less expensive health care services offered by CHS’s competitors.” (Complaint, Preamble) In effect, the complaint is attacking a type of widely used contracting provision in which acute care hospital systems seek to prohibit insurance company payors from using “steering” restrictions, which would otherwise be used to steer their insured patients to lower cost health care providers, including lower-cost hospitals, in exchange for lower premiums in so-called “narrow network” insurance plans. The complaint then alleges that CHS has an approximately 50% share of the market for acute inpatient hospital care in the Charlotte metropolitan area, allegedly conferring market power on CHS.

The complaint is potentially significant for a number of reasons. First, it is a comparatively rare example of a federal antitrust agency claim directly against a health care provider that does not involve a challenge to a proposed merger or acquisition transaction. While litigation between health care providers and health care insurance carriers is no longer rare, and is on the increase, government antitrust cases involving allegedly improper insurance contract provisions are not common. The only recent example of a federal agency antitrust claim against either a carrier or provider involving reimbursement contracts is fairly recent litigation by the Antitrust Division against the Blue Cross entity in Michigan for insisting on a particular type of “most-favored-nation” clause which, among other things, required hospitals contracting with Blue Cross to charge other payors more than they charged Blue Cross. See United States v. Blue Cross Blue Shield of Michigan, 809 F. Supp. 2nd 665 (E.D. Mich. 2011).

DoJ contends that this market power has enabled CHS to negotiate high reimbursement rates for treating insured patients, and CHS has apparently established itself as the most expensive hospital in Charlotte according to the Complaint. To protect its market position, CHS has allegedly imposed steering restrictions in its contracts with insurers. Moreover, CHS has allegedly prohibited  insurers from allowing CHS’s competitors to do the same.

CHS also allegedly prevents insurers from offering networks that feature hospitals competing with CHS in the top tiers of reimbursement, and also allegedly prevents insurers from offering narrow networks that include only CHS’s competitors. Finally, CHS is accused of imposing restrictions in its insurance contracts designed to impede insurers from providing truthful information to consumers about the value, cost and quality of CHS’s health care services compared to CHS’s competitors.

It is also noteworthy that while the economic theory of DoJ’s case is an alleged abuse of single firm market power by the largest hospital in Charlotte, North Carolina, the case is not brought in whole, or even in part, under Section 2 of the Sherman Act. Instead, it is pleaded exclusively as an allegedly anticompetitive agreement in violation of Section 1 of the Sherman Act between CHS and various insurance carriers.

Without identifying any specific offending provisions in any contracts with particular insurers, the complaint alleges instead only generally that some form of steering restriction exists in CHS’s contracts “with all four of these insurers.” (Complaint, ¶16.) Some contracts allegedly contain contract language “prohibiting steering outright,” while others allegedly give CHS the right to terminate its agreement with the insurer if the insurer “engages in steering.” Id. The only description of actual negotiations is a single allegation that for “years insurers have tried to negotiate to remove steering restrictions . . . .” (Complaint, ¶26.)

Finally, the government understandably makes no suggestion that the allegedly illegal agreements should be subject to any per se legality standard. The relationship between the major carriers and CHS is clearly a vertical one, in which the plans are alleged to purchase services from CHS for their insureds, and therefore clearly a vertical relationship subject to the rule of reason.

If this matter is not resolved quickly, the discovery could be very interesting. Since the rule of reason applies, discovery will likely involve seeking evidence about whether negotiations between the plans and CHS explicitly made the existence and form of anti-steering provisions part of a larger economic negotiation over the terms of any reimbursement agreement. For example, while it remains to be seen how CHS intends to defend the case, it seems likely that as part of a rule of reason analysis, arguments will be made that these anti-steering provisions are efficient and enable CHS to provide better care at equal or lower cost.

In any event, the Complaint obviously serves as a useful reminder of potential risks created by demands for contractual provisions seeking to exclude competing providers from insurance reimbursement by provider entities that can plausibly be accused of possessing market power in a local geographic health care market. The risk thereby created must now be seen as not only involving potential antitrust claims by competing providers (which has already occurred elsewhere), but involving claims by federal antitrust enforcement agencies as well.

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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