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Henry Ford Allegiance Settles Antitrust Claims Alleging Coordinated Marketing Scheme

Feb.13.2018

The Antitrust Division recently settled civil antitrust claims against Henry Ford Allegiance Health (Allegiance) for agreeing with a competitor to allocate marketing territories. In a complaint filed in June 2015 in the Eastern District of Michigan (Case No. 5:15-cv-12311), the DOJ and the Michigan Attorney General (the Government Plaintiffs) alleged that four hospital systems agreed not to market their services in each other’s territory. The complaint came after Allegiance’s merger talks with two other health systems (including one of the other defendants in the suit) ended and about five months before Allegiance agreed to be acquired by Henry Ford. This case highlights several important considerations for in-house hospital counsel and their outside legal advisors as hospitals are drawing a lot of scrutiny from federal antitrust enforcers.

Background

The Government Plaintiffs alleged that Allegiance’s agreement with Hillsdale deprived patients of key information regarding healthcare choices and denied Hillsdale County employers the opportunity to develop relationships with Allegiance that could have improved the quality and choice of their employees’ medical care. The Government Plaintiffs also contended that because Allegiance’s marketing activities included free medical services, such as vascular screenings, physician seminars, and health fairs, Hillsdale patients and physicians were deprived of free medical services. 

Evidence of an agreement between Allegiance and Hillsdale allegedly included emails, Board reports, and marketing plans referencing the agreement not to market in each other’s territories, and a written apology by Allegiance to Hillsdale after it sent marketing materials to Hillsdale County residents in violation of the agreement. According to the DOJ, Allegiance’s CEO even mailed a Swiss flag to Hillsdale’s CEO as a symbol of their marketing truce. 

Under the settlement with the DOJ, which still must be approved by the court, Allegiance is prohibited from agreeing with other healthcare providers to limit marketing or to divide any geographic territory and from communicating with other providers about its marketing activities (subject to limited exceptions). Allegiance is also required to hire an antitrust compliance officer, conduct annual antitrust training, and maintain a log of all communications with competitors concerning marketing efforts. The settlement, which has a five-year term, permits the DOJ and the Michigan AG to inspect Allegiance’s files from time to time and to interview Allegiance’s officers, directors, and employees about any matters contained in the settlement. Moreover, Allegiance has agreed to pay $35,000 to the State of Michigan and $5,000 to the DOJ for government legal fees and costs. 

Analysis

Agreements among competitors to divide sales territories or assign customers are almost always illegal, and potentially criminal, because they constitute agreements not to compete. Such agreements are presumed to create higher prices and, in the healthcare space, limit patients’ healthcare options. Here, the government did not allege a territorial agreement for hospital services, which would almost certainly be summarily condemned, but instead accused the defendants of an agreement not to market in another hospital’s territory. The Government Plaintiffs alleged the marketing agreement was per se illegal, but the complaint also alleged that the agreement would have been deemed unlawful under a “quick look” rule of reason analysis. The distinction between an agreement not to compete in a service, and an agreement not to compete in marketing that service, might have saved the defendants from more severe penalties and potentially criminal charges. 

Allegiance settled with the DOJ on more onerous terms than the other defendants in this case. Previously, the other defendants agreed to fully cooperate in the government’s investigation, to appoint an antitrust compliance officer, and to undergo compliance inspection by the Government Plaintiffs. Unlike Allegiance, they were not required to maintain a log of their communications with competitors about marketing and were only required to pay $5,000 to the State of Michigan, not any fees to the United States.

The Allegiance agreement is also more stringent than the settlement in a similar case brought by the DOJ in 2016 against Charleston Area Medical Center and St. Mary’s Medical Center. In that case, the DOJ also alleged that the hospitals unlawfully agreed to allocate territories for marketing competing healthcare services. In the settlement, the hospital systems agreed to appoint an antitrust compliance officer and undergo compliance inspection, but were not required to maintain a log of their communications with competitors concerning their marketing or pay any fees. Notably, the agreement was reached in the midst of an FTC challenge to a proposed merger between St. Mary’s and Cabell Huntington Hospital, which was subsequently voluntarily dismissed by the FTC. 

Take-Aways

The Allegiance case illustrates for lawyers advising hospitals the value of maintaining current, continuous, and robust antitrust compliance programs. The Michigan hospital defendants allegedly carried out an agreement that lasted nearly a decade, during which time hospital executives engaged in an active program to avoid marketing in each other’s home territories. Such agreements can arise from a well-intentioned but incorrect belief by business executives that competitive restrictions serve legitimate healthcare objectives because they can reduce hospital costs. Hospital counselors can use this case as an object lesson in the value of compliance audits and training, and one that emphasizes that the line between criminal and civil liability on the one hand, and permissible collaboration on the other, can sometimes require consultation with antitrust counsel. 

The case also illustrates the need to educate hospital executives on the legal guidelines for collaborations with competitors. There are many collaborative activities among hospitals that involve shared service initiatives that deliver value to patients at reduced costs for the participating hospitals. Antitrust counselors to hospitals should advise their clients on the differences between appropriate collaborative agreements that deliver benefits that could not be achieved without an agreement with a competitor and those that simply restrict competition with no corresponding consumer benefit. 

Finally, the Allegiance case serves as a reminder that it is important for hospitals seeking a merger partner to conduct due diligence and negotiate appropriate contractual representations and covenants about a merger partner’s compliance with antitrust laws. The DOJ’s suits in both this case against Allegiance and the prior case involving St. Mary’s were filed around the time these hospitals were involved in merger activity, potentially creating antitrust exposure and liability for their acquirers.

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