Federal Court Grants Summary Judgment Against Health Plan's Antitrust Challenge to Hospital Combination in Pennsylvania

On July 22, 2003, the U.S. District Court for the Middle District of Pennsylvania granted summary judgment to defendant Susquehanna Health Systems ("SHS"), dismissing an antitrust challenge to the combination of three hospitals in Lycoming County in north-central Pennsylvania.

In 1994, North Central Pennsylvania Health System ("NCPHS") and Providence Health System ("PHS") formed SHS as a nonprofit organization "to manage the delivery of healthcare services." Prior to the advent of SHS, NCPHS' Williamsport Hospital, and PHS' Divine Providence Hospitals were competitors in Lycoming County. Further, PHS' Muncy Valley Hospital also serves this area. Under the SHS agreement, the parties "share equally in the risks and rewards of the joinder," and SHS "sets common charges for all hospitals in the Alliance." Additionally, the medical staffs for Williamsport and Divine Providence merged, the hospitals share such things as malpractice insurance, personnel, and pension plans, and plans have been made to construct one facility for all inpatient and outpatient services between the years 2010 and 2015. In 1996, NCPHS, PHS, and SHS entered into another agreement whereby NCPHS and PHS agreed to merge their physician groups into one entity to be known as Susquehanna Physician Services ("SPS"). The hospitals had previously entered into a consent agreement with the Pennsylvania Attorney General under which SHS was obligated to achieve certain cost savings, and to pass those onto consumers for 5 years.

Plaintiffs HealthAmerica Pennsylvania, Inc., Coventry Health & Life Ins. Co., and Coventry Healthcare Management Corp. challenged SHS on the grounds that it is "nothing more than a joint operating arrangement," making NCPHS' and PHS' joint price setting a per se violation of Sherman § 1. The court disagreed. It pointed to evidence of "substantial centralized authority in [SHS]," and found that under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), SHS and its member hospitals constitute "a single entity legally incapable of conspiring to fix prices for managed care organizations."

Plaintiffs also argued that the joint price setting of SPS for physician services violated Sherman § 1. The Court held that because SPS is a wholly-owned subsidiary of SHS, under Copperweld these entities are legally incapable of conspiring. The plaintiffs also challenged the formation of SPS under Sherman § 1 "because the object of the merger was anticompetitive." The court rejected this argument, noting that because each physicians group was under SHS' control at the time of the creation of SPS, "an internal decision by [SHS] to restructure two physician groups under its control does not violate Section 1."

Additionally, the court dismissed on standing grounds plaintiffs' remaining Section 1 claims, which involved SHS' physician network that dealt with self-insured parties. Finally, the court rejected plaintiffs' Clayton § 8 claim on the grounds that under Copperweld, the hospitals are not competitors because they "function as a single entity."

Plaintiffs had apparently dropped a charge that the combination of the hospitals violated Section 7 of the Clayton Act. The court said that a claim that the initial formation of the hospital system violated Section 1 could have been pursued, but that the complaint before the court did not properly allege such a theory.