Third Circuit Reinstates $67 Million Antitrust “Refusal to Deal” Suit Against Blues

The Third Circuit reinstated an antitrust suit brought by a medical device seller that alleged Blue Cross Blue Shield Association and five of its member insurance plan administrators shut out the seller by conspiring to deny coverage for its device. LifeWatch Services Inc. v. Highmark Inc. et al., Case No. 17-1990 (3rd Cir. Aug. 28, 2018). Critical to the Third Circuit’s reversal of the lower court’s dismissal of the suit was market definition. In this buyer-side conspiracy case, where the seller alleged a concerted refusal to deal by purchasers of its product, the relevant market is comprised of buyers who are seen by the seller as reasonably good substitutes for each other regarding the purchase of its product. Thus “[a] concerted refusal to deal with all sellers of telemetry monitors, regardless of its equality, may still restrain competition in the alleged market for the purchase of outpatient cardiac monitors.” The lower court had instead focused on the market for the seller’s product.

Background

Plaintiff LifeWatch Services, Inc., (“LifeWatch”) sells telemetry monitors, a type of outpatient cardiac monitoring device. Other outpatient cardiac monitors include Holter monitors, event monitors, and insertable monitors. Several medical studies have found telemetry monitors to be effective and, in certain cases, medically necessary and superior to other treatments. Some large private insurers, as well as Medicare and Medicaid, provide coverage for telemetry monitors.

The Blue Cross Blue Shield Association (the “Association”) owns the right to the Blue Cross and Blue Shield trademarks and tradenames and licenses them to insurers nationwide, including defendants Wellpoint, Inc., Horizon Blue Cross Blue Shield of New Jersey, Blue Cross and Blue Shield of Minnesota, BlueCross BlueShield of South Carolina, and Highmark, Inc.[1] (collectively the “Blue Plans” and together with the Association, “Blue Cross”). The Association maintains a model medical policy that recommends to the Blue Plans which services, treatments, and devices to cover. For many years, the model policy has recommended not covering telemetry monitors, such as the one sold by LifeWatch, explaining that they are not medically necessary or are investigational.

LifeWatch first sued for $67 million in Pennsylvania federal court in 2012, alleging that the Blue Plans, together with the Association, conspired to deny coverage of its telemetry device despite scientific evidence supporting the benefits of the device. In 2017, the Pennsylvania court dismissed the case for failing to allege anticompetitive effects. 248 F. Supp. 3d 61, 648-49 (E.D. Pa. 2017). The district court reasoned that the plaintiff failed to allege “competition-reducing” conduct because each Blue Plan treats all telemetry providers equally. Instead, it found that Blue Cross’s actions were a legal exercise of its substantial buying power and ability to bargain aggressively.

Third Circuit’s Analysis

On appeal, accepting the factual allegations in the complaint as true, the Third Circuit held that LifeWatch plausibly stated a claim and has antitrust standing. First, the court found that the plaintiff sufficiently relied on circumstantial evidence of an agreement by alleging both parallel conduct and something “more” or a “plus factor.” For parallel conduct, the plaintiff’s complaint quoted provisions of the Association’s model policy that recommended denying coverage for telemetry monitors and then asserted that the Blue Plans adopted the recommendation with near uniformity. The court explained that the parallel conduct alone would not be sufficient to survive a motion to dismiss. However, the court found that the plaintiff also alleged “more” with claims that the Blue Plans agreed with each other to substantially comply with the model policy and that the Association enforced compliance through audits and sanctions for non-compliance. The court further explained that Blue Cross’s argument that the Blue Plans independently made the decision to deny coverage because they viewed the device as not medically necessary, investigational, or both, was undercut by the fact that other large insurers provide coverage for it and several medical studies have found them to be effective.

The Third Circuit then considered the plaintiff’s alleged national market for the purchase of outpatient cardiac monitors. It found that the complaint alleged competition among all four types of outpatient cardiac monitors such that they are in the same market, rather than a market limited only to telemetry monitors as argued by Blue Cross. Although the different types of monitors vary in price, method of data capture, and mechanism, the complaint alleged that they all capture the same type of data for the same purpose. The court found that the principal harm alleged by LifeWatch was that Blue Cross shifted demand from telemetry monitors to the other types of monitors. Blue Cross had argued that the differences between the types of cardiac monitors mean they are not reasonably interchangeable and thus cannot be in the same market. But the court explained that differentiation is often present among competing products in the same market. Critically, the court went on to explain that on the question of market definition, the district court had a more fundamental problem. To define the relevant market where the alleged conspirators are the buyers, the market must be comprised of buyers who are seen by the seller as being reasonably good substitutes for each other. Thus, the relative interchangeability is for buyers of the outpatient cardiac monitors. The court found that the complaint plausibly stated that the Blue Plans compete with other insurers, but not with individual customers, in a national market for the purchase of outpatient cardiac monitors.

With the appropriate market definition, the Third Circuit then found that the plaintiff sufficiently pled anticompetitive effects. It noted that the district court’s finding of no anticompetitive effects was due to its error in focusing on a telemetry-monitor-only product market. Instead, the Third Circuit explained that a concerted refusal to deal with sellers of telemetry monitors could restrain competition in the alleged market for the purchase of outpatient cardiac monitors.

Likewise, with the appropriate market definition, the Third Circuit also found that the plaintiff sufficiently alleged antitrust injury to have antitrust standing. The complaint pled a causal link between LifeWatch’s lost profits and the Blue Plans’ concerted denial of coverage for telemetry monitors. Again, defendants’ argument that there was no competition-reducing conduct because all telemetry monitor providers were treated equally failed because that position relied on the incorrect market definition.

Finding that LifeWatch plausibly pled a Sherman Act Section 1 claim, the Third Circuit remanded. The Third Circuit also left open for the district court to consider whether Blue Cross is exempt from liability under the McCarran-Ferguson Act. The Third Circuit did not address this as it had not been addressed by the lower court due to its dismissal on other grounds.

While there are other antitrust challenges pending against the Blue Cross Blue Shield Association and its members, principally a multi-district action in Alabama, to our knowledge, this is the first appellate “green light” to proceed on a challenge to the Association’s model medical policy and its implementation.

Endnotes

1 The case against Highmark, Inc. was dismissed in 2016 after the parties reached a settlement.

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