Tying, Tiering, Steering and Gag Clause Issues Front and Center Again

We previously reported on several cases involving successful antitrust challenges to proposed hospital mergers involving Hackensack Meridian Health System and Englewood Hospital in Bergen County New Jersey; RWJ Barnabas Health and Saint Peter’s Healthcare System in Middlesex County, New Jersey; HCA Healthcare and Steward Health Care System in North Central Utah; and LifeSpan and Care New England in Rhode Island.

In each of these cases, the successful challenge was brought by the Federal Trade Commission and was principally based on Section 7 of the Clayton Act which prohibits certain mergers or acquisitions where the effect may be to substantially limit competition or create a monopoly.

Also recently, in the aftermath of completed merger transactions, complaints have been filed by purchasers of health care services alleging that the merged entity has acquired monopoly power and has exercised that power to foreclose competition by existing and/or potential competitors thereby resulting in, among other things, supra-competitive pricing, all in violation of Sections 1 and 2 of the Sherman Act, which prohibit contracts and combinations in restraint of trade or commerce and monopolization or attempts at monopolizing any aspect of interstate trade or commerce.

The most recent of these cases involves a complaint filed by the City of Brevard, North Carolina on its own behalf and on behalf of a class that Brevard seeks to certify collectively (“Plaintiffs”). The complaint has been filed against HCA Healthcare Inc., HCA Management Services, Mission Hospital and various other affiliated entities (collectively, “HCA” or “Defendants”). HCA has not yet answered the complaint. (A separate suit involving the same basic issues was filed in state court in North Carolina in August 2021 and on July 27, 2022, the city of Asheville, North Carolina and Buncombe County also filed a similar suit in federal court.)

In the complaint, Brevard, which operates a self-funded health insurance plan for its employees and their families, alleges that the Defendants have injured Plaintiffs and members of the class through an anti-competitive “scheme” involving the illegal maintenance and enhancement of monopoly power in the market for inpatient acute care services and the market for outpatient care.

Brevard seeks to have the class certified and for the court to find that the Defendants have monopolized, and continue to monopolize, the relevant markets in violation of Section 2 of the Sherman Act, and have unlawfully restrained trade in the relevant markets in violation of Section 1 of the Sherman Act, and that Brevard and the class members have been damaged in their business and property and should be awarded treble damages and reasonable attorney’s fees.

The complaint further alleges that the Defendants dominate the relevant services market in at least two geographic areas — the Asheville, North Carolina region consisting of a number of counties in and around Asheville and an outlying region consisting of a number of counties further from Asheville.

The background as set forth and alleged in the complaint is as follows:

  • In 1995 Mission Health System merged with St. Joseph’s Hospital, Mission’s only significant competitor. As a result, Mission became the dominant provider of services with substantial monopoly power in the relevant market.
  • Notwithstanding its monopoly power, from 1995 until 2016 Mission was immunized from antitrust liability on account of having entered into a certificate of public advantage (COPA) with North Carolina. Under the COPA, Mission was permitted to operate with monopoly power in exchange for submitting itself to certain state oversight including price regulation to prevent it from charging monopoly prices or otherwise abusing its market power by agreeing to limit health care costs and control prices of health care services.
  • In 2016, following years of lobbying by Mission executives, the state repealed the COPA leaving in place an unregulated Mission with monopoly power, no longer immunized from Sherman Act liability.
  • Thereafter in January 2019, Mission sold its assets to HCA.

According to the complaint, HCA now controls more than 85% of the market for general acute care services in the Asheville region based on patient volumes and more than 70% in the outlying region. As a result, commercial insurers and self-funded payors have no choice but to include HCA’s Mission Hospital system in their insurance plans.

Also as alleged in the complaint, one reason HCA found Mission attractive as a business opportunity is that, beginning around 2017, Mission, under its immediate pre-buyout executive management team, had embarked on a “continuing, multifaceted coercive scheme designed to foreclose competition from rivals, to maintain or to enhance its monopoly power and ultimately to charge supra-competitive prices.”

This anticompetitive conduct purportedly began before HCA’s acquisition of Mission, and HCA then “supercharged” the scheme after it acquired Mission. According to the Plaintiffs, the scheme includes, among other anticompetitive features:

  • “all or nothing” tying arrangements requiring health insurance plans to contract with all of Mission’s (and later HCA’s) general acute care and outpatient services as a bundle, i.e., take everything together or nothing at all;
  • exclusive dealing requirements in the form of anti-steering and anti-tiering provisions, which prevent insurance companies from steering insureds to less expensive and/or higher quality options as a means to promote competition and reduce prices;
  • “gag” clauses that have deliberately impeded price transparency, inhibiting employers from knowing the prices they pay for health care and thus determine how best to reduce costs; and
  • other anticompetitive conduct relating to the negotiation of pricing for health care services.

As asserted in the complaint, by prohibiting health plans from “mixing and matching” different sets of providers, an “all or nothing” tying requirement, when imposed by a dominant provider, anticompetitively and artificially impairs the ability of both actual and potential rival providers of the tied products and/or services to compete with the dominant provider’s products and/or services. Likewise, tying impairs the ability of health plans to assemble networks of the highest quality, lowest cost providers to offer to employers.

As further described in the complaint, anti-steering and anti-tiering provisions anticompetitively and artificially drive business away from less expensive and/or higher quality providers and thereby impair the ability of actual and/or potential rival providers to compete or to use price or quality as a means of gaining patients and market share.

As for gag clauses that prevent the dissemination of price information essential to any well-functioning competitive market, the Plaintiffs assert that these clauses impair the ability of rival providers both to attract business and for health plans to assemble the highest quality, lowest cost menu of in-network providers.

In the complaint, Brevard lays out a factual predicate for its conclusions that the Defendants have monopoly power in the relevant product and geographic markets and have engaged in conduct that violates antitrust law.

For example, with regard to Brevard’s assertion concerning “all or nothing” contract clauses and illegal tying, Brevard pleads that in 2017 during Mission’s negotiations with Blue Cross, Mission asked for “exorbitant price increases” for general acute care and outpatient services, and further insisted on the inclusion of services from HCA covering both inpatient and outpatient care in all of what it argues are the relevant geographic markets.

When Blue Cross did not agree to Mission’s “all or nothing” demand for all these services, Mission took itself out of the Blue Cross network for these services in these markets, including the “must have” Mission Hospital-Asheville. According to Brevard, Mission’s actions meant that the 260,000 people in Western North Carolina insured by Blue Cross could not seek care at Mission facilities unless they paid much higher “out of network” prices out of their own pockets.

With regard to anti-steering and anti-tiering, the complaint simply alleges without additional factual detail that Defendants have limited health plans’ ability to use steering or tiering language, as a condition of those plans’ obtaining access to Defendants’ “must have” Mission Hospital-Asheville; that “such limitations include, at a minimum, limits on insurers’ ability even to provide information about less expensive providers that compete with HCA; and that “investigative reporting” has shown that HCA has a history of using anti-steering, anti-tiering or similarly restrictive contractual language in its contracts with health plans in other states and regions.

In regard to “gag clauses”, the complaint asserts that the Defendants abused their monopoly power by requiring the inclusion of these clauses in agreements with payors, clauses that prevent payors from revealing the terms of those agreements. This in turn has prevented competitors, insurers and consumers from understanding in a transparent manner the pricing and other terms and arrangements being used by the Defendants and has inhibited the ability of employers to control health care costs by obscuring their price increases and anticompetitive contracts from regulators and the public.

In considering Brevard’s complaint and its request for relief, it is important to recognize that the question whether an organization has monopoly power and whether it has exercised it in a manner that violates the Sherman Act are questions not susceptible to easy answer as they involve, in addition to the facts and circumstances present in a particular case (as to which the parties almost always disagree), determinations — many requiring substantial economic analysis, concerning, among other things:

  1. the relevant product and geographic markets;
  2. the parties’ market shares and whether a party is a dominant provider;
  3. whether the dominant provider is a “must have” provider for purposes of insurers and other payors being able to assemble an adequate network;
  4. whether the behavior of the dominant provider substantially forecloses competition;
  5. whether, in the case of a challenged tying agreement, there are two separate products or services involved;
  6. the impact of the foreclosure on the market power of the dominant provider;
  7. whether a “rule of reason” or a “per se” standard is applicable; and
  8. whether there are any pro-competitive benefits.

Issues involving steering and tiering and gag clauses were at the heart of the government’s lawsuit against Atrium Health. United States v. Charlotte-Mecklenburg Hosp. Auth., 248 F. Supp. 3d 720, 724 (W.D.N.C. 2017), a case which was ultimately settled. The “not free of doubt” contested questions involved among others, questions concerning what constitutes an anti-competitive effect — were there in fact higher prices, reduced output,  etc. on account of the alleged anti-steering, anti-tiering and gag clauses.

Another ongoing case involving similar issues under the Sherman Act, which case has been litigated for nearly 10 years and is likely to continue into the future, is Sidibe v. Sutter Health. In the federal lawsuit the Sidibe-plaintiffs are enrollees in commercial plans that contract with Sutter Health. The plaintiffs assert that Sutter, a large multi-hospital system in North Central California violated Sherman Act Sections 1 and 2 via “all or nothing”, anti-steering, anti-tiering and gag clauses. Most recently, that case was decided in favor of Sutter following a jury trial in the Northern District of California. The plaintiffs have filed a notice of appeal. (There was a similar case filed against Sutter by different plaintiffs alleging violations of California’s Cartwright Act, which case was settled in 2021 with Sutter agreeing to pay $575 million in damages.)

As is typical, the Sutter case most significantly involves plaintiffs’ allegation that certain “all or nothing” clauses in Sutter’s contracts constitute illegal tying arrangements under the Sherman Act. The gist of the complaint is that if a health plan wanted to contract with a Sutter hospital located in a geographic market in which that hospital has monopoly power, it was required to contract with Sutter hospitals in geographic markets in which there was competition thereby enabling Sutter to capture market share and charge supra-competitive prices as a condition of having access to the “must have” hospital in the other market.

The key issues have been (i) the definition of the relevant geographic markets, (ii) questions regarding Sutter’s market share and whether it had willfully acquired or maintained monopoly power or attempted to do so as distinguished from the development of such power by providing better services; and (iv) whether acute care services provided by a hospital in one geographic market and the same acute care services provided by that hospital in an different geographic market can be considered separate products for purposes of establishing an illegal tying arrangement.

The case proceeded from the District Court to the Court of Appeals and this March, a nine-person jury delivered a unanimous verdict concluding that Sutter did not engage in anticompetitive conduct, did not use illegal tying arrangements, did not force insurers to agree to anti-steering and anti-tiering contract terms and did not cause insurers to pay higher rates or he ultimate consumers to pay higher premiums.

As noted above, the plaintiffs have filed a notice of appeal.