A recent decision of the United States Court of Appeals for the Sixth Circuit signals that hospitals collaborating under joint operating agreements may face increased exposure to antitrust challenges. Last month a divided panel ruled in The Medical Center at Elizabeth Place, LLC v. Atrium Health System that four hospitals operating as a single network and sharing revenues and losses under a joint operating agreement might be viewed as economically distinct actors capable of conspiring with each other for purposes of considering a competitor's antitrust claims.1 The Sixth Circuit consequently reversed a summary judgment and returned the case to the trial court for determination.
Elizabeth Suit Against Premier Hospital System
The Medical Center at Elizabeth Place (Elizabeth), a 26-bed, physician-owned, for-profit hospital in Dayton, Ohio, sued Premier Health Partners (Premier), which operates four Dayton-area hospitals under a joint operating agreement (JOA). Under the JOA, the hospitals share revenues and losses pursuant to a mutually agreed-upon formula, but the hospitals remain distinct legal entities.2 Each hospital maintains a separate corporate identity, with its own assets, tax returns, CEO and Board of Directors. Premier does not provide healthcare services, but operates the hospitals and handles certain joint financial responsibilities, including negotiating managed care contracts for each of the participating hospitals.
Elizabeth claimed that Premier and its member hospitals conspired to keep Elizabeth from competing in the Dayton-area hospital market through its contracts with insurers and physicians. The alleged anticompetitive conduct included:
- Coercing commercial health insurers covering approximately 70% of the area's consumers to refuse to contract with hospitals outside of Premier's network, thereby preventing Elizabeth from addressing a large part of the Dayton market;
- Threatening physicians who affiliate with Elizabeth, including by terminating physicians' office space leases and by withholding referrals; and
- Threatening punitive measures or financial incentives to persuade physicians to refuse to admit patients to Elizabeth.
If engaged in by competing entities, the conduct alleged by Elizabeth could be a group boycott, which is a per se violation of the antitrust laws.3 The antitrust laws are generally more accepting of vertical restraints, such as exclusivity provisions and incentives to steer business, and such conduct will be judged under the more fact-intensive "rule of reason." Therefore, whether Premier was a single entity or a collaboration of competitors was important in how the case would proceed and in the burden of proof carried by Elizabeth.
Single Entity or Colluding Competitors?
Under the longstanding Supreme Court Copperweld precedent,4 a parent and its wholly owned subsidiary are incapable of conspiring with each other to unlawfully restrict competition because they have a "complete unity of interest" and are not separate economic actors. As such, they are viewed as a "single entity" under the antitrust laws. This principle is not limited to a parent and its wholly owned subsidiary: More recently, in American Needle, Inc. v. National Football League, the Supreme Court applied the Copperweld doctrine to address whether parties to a joint venture were a single entity.5 In that case, the Court held that the NFL was not a single entity, because it joined together entities (football teams) that previously made independent decisions and had individual financial interests that diverged from the joint venture's interests.
Relying heavily on American Needle, the Sixth Circuit considered whether Premier functioned as a single entity for antitrust purposes. This requires courts to "look beyond labels to recognize underlying collusion among competitors,"6 so that where a single legal entity is controlled by a group of competitors and functions as a vehicle for concerted activity, it may be illegal. As both the federal antitrust agencies have cautioned and courts have held, simply labeling a combination of competitors a "joint venture" will not automatically insulate anticompetitive conduct from scrutiny.7
The district court had held that Premier was a single entity incapable of conspiring, and dismissed Elizabeth's antitrust claims. On appeal, the Sixth Circuit reversed, finding that the Premier hospitals did not function as a single entity, but instead maintained separate identities under the JOA and were capable of acting as competitors colluding to eliminate another competitor. The Sixth Circuit remanded the case to the lower court to decide whether the hospitals in fact engaged in illegal collusion.
The Sixth Circuit's decision is surprising given the degree of financial integration and the negotiation of managed care contracts by Premier on behalf of the participating hospitals. The Court appears to have been strongly influenced by evidence that the Premier hospitals viewed themselves as competitors. Instead of entirely coordinating their interests, the Court found that the hospitals continued to act as independent entities that incorporated separately, held assets separately, and competed with each other for patients. Notably, the Court cited findings and interview statements from a consulting firm retained by Premier as evidence that the hospitals pursued individual goals and continued to compete after entering into the JOA.8 These statements included:
- "[Premier] does not think of itself as an integrated organization";
- "[Premier] Partners compete with each other for market share"; and
- "[t]he brand is the hospital, not [Premier]."9
The Court also gave considerable weight to evidence that health insurers boycotted Elizabeth due to provisions negotiated into each of the individual managed care contracts that prevented insurers from adding new hospitals to their networks—conduct that the Court declared anticompetitive on its face. Elizabeth also provided evidence that each insurer knew that other insurers' contracts included these provisions, and monitored each other's compliance with them.
With the significant increase in antitrust scrutiny of provider mergers over recent years,10 joint venture vehicles provide an opportunity to achieve efficiencies without the risk of a merger challenge. Prior to the Sixth Circuit's decision, many healthcare market participants have taken comfort in the idea that a joint operating agreement with sufficiently centralized control and financial integration will provide collaborating entities with a good degree of protection against antitrust challenges by third parties, such as that in the Premier case. The Sixth Circuit's decision, however, suggests that the analysis may be more complex.
The Premier case also highlights the importance of how collaborating entities view themselves vis-à-vis a joint venture, and the creation of documents that reflect these views. Joint venture participants and their advisers should be careful that internal documents or other materials do not suggest positions inconsistent with the common purpose of the venture.
It remains to be seen whether the Sixth Circuit's approach will be adopted by other circuits, or whether other courts will take a different view. Nonetheless, this opinion sends a warning that entities collaborating under a joint agreement should not assume that the agreement alone will provide shelter from antitrust scrutiny.