Department of Justice Heightens Focus on Health Care, Challenges North Carolina Hospital’s Patient Steering Restrictions

Contract restrictions required by a major hospital system that prohibit commercial health insurers from offering financial incentives for patients to use less expensive healthcare services offered by the hospital’s competitors are the focus of the Justice Department’s recent antitrust complaint against the Charlotte-Mecklenburg Hospital Authority (d/b/a Carolinas Healthcare System, CHS).

According to the June 9 complaint, CHS is the dominant hospital system in the Charlotte area, with nine hospitals and approximately 50 percent share. Its next closest competitor has only five hospitals and less than half of CHS’s revenue, and the next closest competitor after that has less than one tenth of CHS’s revenue. According to the DOJ, in addition to market share, CHS allegedly has market power because it is large, offers a comprehensive range of healthcare services, is a must-have for insurance plans, has profitably charged supra-competitive prices to insurers, and has successfully imposed restrictions on insurers that reduce competition.

The DOJ further alleges that CHS is using “anti-steering” provisions to insulate itself from competition by other health care providers. “Steering” refers to an insurer offering consumers financial incentives to use lower cost health care providers in order to lower their health care expenses. The complaint outlines two common steering methods, including tiered networks – whereby lower cost or higher quality providers are placed in a top tier and consumers are incentivized to use top tier providers – and narrow networks, which cost consumers less in exchange for a smaller set of provider options. DOJ alleges that CHS uses steering provisions to drive volume to its own facilities, but forbids insurers from steering to its competitors. The complaint also charges that CHS indirectly restricts steering in its contracts by impeding insurers from providing truthful information about the cost and quality of CHS’s healthcare services compared to CHS’s rivals. This prevents patients from accessing information that could lead them to choose a provider other than CHS.

The complaint against CHS is notable in a few respects. First, the antitrust agencies are focusing even more resources on the health care sector, despite an already active health care enforcement docket. This is a rule of reason case and will require extensive economics work and complaining witnesses to prove anticompetitive effects. In this regard, the government will have to counteract potential defense arguments that hospitals agreeing to reduce their rates are entitled to bargain over the degree of steering they will get in return for such price concessions, and that insurers who want the freedom to steer to other providers may be afforded different prices. One issue in the case could be whether insurers have effectively been coerced into signing the restrictive agreements via a refusal on the part of CHS to contract on any other basis. Second, DOJ is demonstrating continued focus on “contracts that reference rivals,” pursuing entities that use their market power to harm consumers by diminishing competitive threats. The recent case against Blue Cross Blue Shield of Michigan’s use of a most favored nation clause struck a similar theme, as did the DOJ’s case against American Express, currently on appeal to the Second Circuit. Third, the complaint was brought under Sherman Act Section 1, which requires an agreement as part of the charge, but DOJ only sued one party to the contract. This follows the DOJ’s practice of challenging the party it alleges is the source of the consumer harm instead of all potential defendants. The implicit premise of the case, though, is that the health plans that are parties to the alleged restrictive agreements are thereby technically parties to the unlawful agreements.

If you have any questions about contracting practices in light of this recent development, please feel free to contact the authors of this alert.