No Resuscitation of Hospital’s Exclusive Dealing Antitrust Suit against Competing Hospitals and Physicians

The Third Circuit reminds, “[i]n antitrust suits, definitions matter.” Last week, in applying that maxim, the court affirmed a lower court’s dismissal of a suit filed by a hospital against a competing hospital and physician group, in which the plaintiff hospital alleged that defendants engaged in an illegal exclusive dealing arrangement by referring patients to a third hospital rather than to the plaintiff hospital. In its decision, the Third Circuit clarified an antitrust plaintiff’s burden when alleging a Sherman Act Section 1 claim with no allegation of market power, holding that anticompetitive effects must then be shown on the relevant market as a whole, not only on a small subset of the market. Deborah Heart & Lung Center v. Virtua Health, Inc., Case No. 15-2032 (3rd Cir. Aug. 17, 2016).  

Background

Deborah Heart and Lung Center (“Deborah”) is a charity hospital in New Jersey that, among other services, is licensed to perform advanced cardiac interventional procedures (“ACIs”). Virtua Memorial Hospital (“Virtua”) competes with Deborah in the market for medical services, but during the relevant time period was not licensed to perform ACIs. The Cardiology Group PA (“CGPA”) was a group of 12 cardiologists, none of whom were initially licensed to perform ACIs. From 1992 until 2005, CGPA referred many of its patients in need of ACIs to Deborah through physician leases. In 2005, the relationship between Deborah and CGPA began to unravel, and CGPA entered into an exclusive agreement to provide all necessary cardiology services to Virtua. CGPA then terminated the physician leases with Deborah, and in 2007 entered into new ones with doctors at Penn Presbyterian Hospital (“Penn”) in Philadelphia.

Prior to 2007, approximately 85% of CGPA’s ACI transfers went to Deborah. After 2007, it fell to approximately 30%. Deborah alleged that the goal of the new physician leases between CGPA and Penn was to drive Deborah out of business. Deborah further asserted that the arrangement constituted an illegal restraint on trade that resulted in harm to competition because it forced some consumers to obtain ACIs at Penn when they might otherwise have chosen Deborah.

Third Circuit’s Decision

The Third Circuit identified four elements that an antitrust plaintiff must prove: (1) concerted action, (2) anticompetitive effects in the relevant market, (3) that the concerted action was illegal, and (4) that the concerted action was the proximate cause of plaintiff’s injury. The district court held that Deborah failed to present sufficient evidence to raise a genuine issue of material fact as to the second element. The Third Circuit agreed.

To proceed to trial with its allegation of an illegal exclusive dealing by CGPA and Virtua with Penn, the Third Circuit held that Deborah needed to present sufficient evidence of anticompetitive effects in the relevant market. Anticompetitive effects can be shown by demonstrating actual anticompetitive effects (such as increased price, reduced output, or deteriorated quality of goods or services), or by establishing defendants’ market power (the ability to raise prices above what would prevail in a competitive market).

There were two, uncontested, relevant markets at issue: A relevant market for emergency ACIs that covered three New Jersey counties, and a relevant market for non-emergency ACIs that covered those same counties plus two more in New Jersey and part of Philadelphia. At the summary judgment hearing, Deborah’s counsel explicitly stated that they agreed with those market definitions. Within those market definitions, Deborah was unable to argue market power; the relevant market included multiple hospitals and hundreds of cardiologists, with CGPA representing less than 8% of cardiologists for emergency ACIs and less than 5% for non-emergency ACIs.

Thus, instead of market power, Deborah’s only option to demonstrate anticompetitive effects was to show actual anticompetitive effects. Here, the market definitions agreed to by Deborah determined the outcome of the case in favor of defendants. In its argument for actual anticompetitive effects, Deborah focused only on CGPA’s patients and Virtua’s emergency patients, ignoring all other patients in the 3- and 5-county relevant markets. The Third Circuit reasoned that, even if there were anticompetitive effects for the subset of patients focused on by Deborah, “such a showing is insufficient to demonstrate the type of anticompetitive effects on the overall market necessary to prove a Section 1 claim” (emphasis added). The court also found that a “significant minority” of CGPA patients continued to be treated at Deborah even after the allegedly anticompetitive arrangement. As the Third Circuit concluded, “Deborah staked its ground for the instant dispute and its failure to occupy enough of that ground is fatal to its claims.”

Conclusion

In the health care field, policy makers and antitrust enforcers have been supportive, in the absence of market power, of exclusive, limited, and tiered networks as mechanisms to restrain health care expenditures. Sometimes, the courts have taken different views of such initiatives, as evidenced by the checkered history of the FTC’s challenges to hospital mergers. Here, the Third Circuit’s decision is another strong precedent, similar, for example, to the result in Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d 57 (1st Cir. 2004). In Stop & Shop, plaintiffs had argued that Blue Cross’s creation of a closed pharmacy network was a per se violation of the antitrust laws. The First Circuit upheld the district court’s directed verdict for defendants, finding that the closed network was an exclusive dealing arrangement entitled to a rule of reason analysis, and that plaintiffs had not met their burden to establish the relevant product and geographic markets. Cases along these lines continue to raise the bar for plaintiffs attempting to challenge tiered or otherwise restricted networks as illegal exclusive dealings where the relevant market is likely to be broad, and consequently establishing anticompetitive harm in those markets as a whole is challenging.

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