The Department of Justice's (DOJ) case against Carolinas Healthcare System's (CHS) anti-steering contract clauses has survived initial attempts by CHS to dismiss the case. Despite the reversal of the DOJ's win in the American Express case late last year (which addressed anti-steering provisions in AmEx merchant contracts), the DOJ will have the opportunity to conduct discovery and develop evidence of the competitive impact of the CHS anti-steering provisions on healthcare markets in Charlotte, North Carolina. The CHS case could have important consequences for the ability of health insurers to develop and promote narrow networks, tiered models and other innovative products in markets with large, significant provider systems.
The use of tiered or narrow networks offered in exchange for lower premiums and/or copays has emerged as a means for insurers to incentivize consumers to utilize lower-cost providers, which arguably promotes competition in hospital markets and ultimately may control healthcare costs. As discussed in a previous Health Update article, the DOJ and the North Carolina Attorney General sued CHS in June last year, alleging that CHS exercised its market power by insisting on contract terms that prevented major insurers from steering patients to lower-cost hospitals.
CHS's contract terms restrict insurers' ability to exclude CHS hospitals from narrow networks or to incentivize patients to use CHS competitors in tiered networks. CHS's contracts also prevent insurers from providing information to enrollees about the cost and quality of healthcare services provided by CHS and its competitors. CHS was able to obtain these terms, according to the DOJ, due to the fact that its market share exceeds 50% in the Charlotte, NC region.
CHS sought to obtain a judgment on the pleadings, arguing that its anti-steering provisions had the procompetitive effect of ensuring access to a broader patient population, and that the DOJ had failed to allege any anticompetitive harm from the provisions. CHS's arguments were boosted late in 2016 when the DOJ's earlier win in the American Express case was overturned on appeal. CHS argued that the Second Circuit's finding that AmEx's nondiscrimination provisions (which prevented merchants from steering customers to forms of payment that cost less for merchants to accept) were not anticompetitive also should apply to the CHS anti-steering provisions.
The Decision Held That CHS's Anti-Steering Clauses Can Violate Antitrust Laws
Last month, Judge Robert J. Conrad, Jr. held that the DOJ had sufficiently alleged that CHS's use of anti-steering clauses can violate the antitrust laws. United States of America v. Charlotte-Mecklenburg Hosp. Authority, Case No. 3:16-cv-00311 (W.D.N.C. Mar. 30, 2017). In his decision, however, Judge Conrad stressed the DOJ's relatively light burden at this early juncture in litigation. He emphasized that the DOJ was not yet required to actually prove competitive harm, only to make allegations that (if true) would cause such harm. The Court acknowledged that CHS had "raised serious and robust questions about the purposes, effects and legality of its contractual steering restrictions and steering restrictions generally," but noted that those questions could not be resolved fully until after full discovery.
Judge Conrad resisted CHS's assertions that the American Express case was in any way controlling in the CHS case. First, coming from a different judicial circuit, the decision is not binding on the North Carolina court. Second, the American Express case was fully developed and went through a seven-week bench trial at which detailed evidence was presented and tested, so it could not be compared to CHS's motion for judgment on the pleadings before discovery. Finally, and possibly most importantly, although American Express considered provisions that were aimed to prevent customer steering, the healthcare industry is very different from the credit card industry, and the competitive dynamics and impacts will necessarily be different.
In the credit card industry, the Second Circuit found that customer loyalty resulted from competitive benefits rather than from market power; credit card companies had a "legitimate interest" in restricting steering; and steering posed "no monopolistic danger." The American Express opinion did not address whether customer loyalty in the healthcare field is evidence of market power that permits a hospital to unilaterally increase prices.
Despite distinguishing the healthcare industry from the credit card industry, the Court still stressed that CHS may have procompetitive justifications for its restrictions and that the DOJ had not yet proved its case. Further, the DOJ is still considering whether to appeal the American Express decision to the Supreme Court, so there may be a further opportunity for developments on the legality of anti-steering provisions under the antitrust laws. For now, hospitals and insurers should continue to monitor the CHS case, which may have broad implications for the degree to which either can control where patients get treated.