Sixth Circuit Finds Possibility of Conspiracy Among Hospital Network Members

The Sixth Circuit on Tuesday voted 2 to 1 to reverse a district court’s grant of summary judgment under which a defendant hospital network had been found to be a single entity incapable of conspiring with itself in an anticompetitive manner under Section 1 of the Sherman Act. The Medical Center at Elizabeth Place LLC v. Atrium Health System et al., Case No. 14-4166. The Sixth Circuit remanded the case for further proceedings, finding that the evidence raised the possibility of concerted action under the Supreme Court’s precedent in American Needle, Inc. v. Nat’l Football League, 560 U.S. 183 (2010). Of particular note, the majority undertook a factual analysis of defendant’s conduct to resolve the single entity question. In contrast, the dissent examined defendant network’s joint operating agreement and concluded that defendant was a single entity under American Needle.

Plaintiff Medical Center at Elizabeth Place filed suit alleging that the Defendant hospital network sought a monopoly by punishing physicians who did business with Plaintiff and by coercing health insurers to deny Plaintiff access to their networks. Plaintiff is a relatively new physician-owned acute-care hospital in Dayton, Ohio that specializes in acute-care surgical services. Defendant Premier Health Partners (“Premier”) operates four hospitals through a joint operating agreement (“JOA”) in the Dayton area. Premier does not itself provide health care services. Instead, it handles some of the financial business of the Defendant hospitals, including negotiating managed-care contracts. Defendant hospitals share revenues and losses, but maintain separate ownership of their assets, and continue to compete with each other.

The Majority’s Opinion

Section 1 regulates concerted action between two or more entities. To prevail on a Section 1 claim, a plaintiff must prove (1) a contract, combination, or conspiracy; (2) producing adverse, anticompetitive effects in the relevant market; and (3) resulting in injury. The Sixth Circuit here focused on the first prong — the only element addressed by the district court. The majority relied on American Needle in its analysis of “whether [D]efendants’ conduct is the result of two or more entities acting in concert or whether [D]efendants, based on their participation in the [JOA], function as a single entity in the market place.”  In examining whether Premier is a “combination” capable of “concerted activity” subject to Section 1 liability or a single entity incapable of conspiring with itself, the majority undertook a factual review of the network’s conduct with a focus on its intent. The majority stated “[t]he summary judgment record leaves little doubt on the question of the intent of the network to prevent [Plaintiff] from entering the Dayton healthcare market.”   

Citing American Needle, the majority noted that “substance, not form, should determine whether an entity is capable of conspiring under Section 1.” Reviewing the record from summary judgment, the majority focused on evidence of Defendants’ intent to engage in coercive behavior: (i) Plaintiff CEO recounted a conversation with a Premier executive in which the Premier official stated his intent to keep Plaintiff from entering the market; (ii) letters and emails provided evidence of physicians who collaborated with Plaintiff losing office leases in Defendant-owned properties; (iii) letters and emails further provided evidence of physicians threatened with the loss of privileges at Defendants’ hospitals for collaborating with Plaintiff; and (iv) Defendant hospitals’ managed care contracts contained clauses that prohibited the insurers from also contracting with Plaintiff.

The majority characterized Premier’s duties under the JOA as “an attempt to achieve efficiencies in billing and collecting payments, managing physicians and physician groups, property management and other similar duties.” Recognizing that the JOA “provides for some degree of unitary management,” the majority still found that “questions remain as to whether their general corporate actions are guided or determined by separate corporate consciousnesses” under American Needle. As to the JOA’s formula for sharing revenues among the hospitals, the majority noted that such profit and loss sharing cannot be dispositive, or cartels could easily evade Section 1 liability. The majority concluded that “the [D]efendant hospitals clearly did not completely align their interests, economic or otherwise,” as they remained separate legal entities with their own assets, and they continued to compete with each other for physicians and patients.

The majority thus concluded that “[P]laintiff presented evidence of conduct and business operations that raise the possibility of concerted action among [D]efendant hospitals…”

The Dissent

The dissent argued that the majority erred in its application of American Needle by focusing on whether Defendants’ actions unreasonably restrained trade, rather than addressing the first element of a Section 1 claim that “involves a threshold showing that the [D]efendants are separate entities capable of concerted action.” According to the dissent, “[i]nvoking the rule of reason steers focus to [D]efendants’ intent to avoid competition with [P]laintiff and away from the relevant question: whether, under the terms of their [JOA], [D]efendant hospitals and… [Premier], share ‘a complete unity of interest.’”

Like the majority, the dissent noted that American Needle requires a substance-over-form analysis that involves “a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.” However, the majority’s interpretation of this standard that focused on how the Defendants “actually operate” with regard to Plaintiff, is flawed according to the dissent. Instead, the dissent interprets American Needle as requiring an analysis of how the Defendants actually operate amongst each other. Focusing on the terms of the JOA, the dissent concluded that there is a “unity of interest” among Defendants because of the system of shared revenues and the authority given to Premier for the health system activities, including the power to replace each member hospital’s CEO, and control over each member hospital’s strategic plans, budgets, and material debt incurrences.

Conclusion 

All three appellate judges seemed to find that the behavior of Premier and its executives was antitrust provocative.  The “single entity” issue might have been just academic if Plaintiff had brought, in the alternative, a Section 2 attempt to monopolize claim against Premier, which it apparently did not.

While this likely will not be the last word on this case, it serves as an important reminder of the types of operating parameters that are relevant to an American Needle analysis for joint ventures. Particularly in the consolidating health care provider sector, consolidations, joint operating agreements, and joint ventures come in many shapes and sizes, and there are often compromises in ownership and control made in light of other important factors. This appellate decision underscores the importance of antitrust review and compliance, and there are right — as well as potentially antitrust dangerous — ways to conduct competition in this sector.

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