Last month, the U.S. Department of Justice's Antitrust Division (DOJ) and the North Carolina Attorney General sued Carolinas HealthCare System (CHS) in North Carolina District Court alleging that CHS exercised its dominant market power to prevent insurers from steering patients to its lower-cost competitors. United States of America v. Charlotte-Mecklenburg Hosp. Authority, Case No. 3:16-cv-00311 (W.D.N.C. June 9, 2016). This is the DOJ's second challenge to anti-steering rules and the first in the healthcare sector. Regardless of the outcome, the case may have broad implications for payer-hospital negotiations.

CHS is a not-for-profit hospital corporation with ten general acute care hospitals in the greater Charlotte area. CHS's $8.7 billion revenue in 2014 was more than double that of its closest competitor which owns five general acute care hospitals.

According to the complaint, CHS exercised its market power to contractually impose anti-steering restrictions on insurers in order to protect its revenues. Steering in the healthcare context involves an insurer incentivizing a consumer to use or not use a particular facility or provider. Often, this takes the form of providing a financial incentive for the consumer to use a lower-cost provider or network. According to the complaint, steering induces price competition and threatens high prices and revenues. The challenged provisions include prohibitions of narrow insurance networks that exclude CHS or tiered networks that place competing hospitals into the same top tier as CHS.

The complaint alleges that CHS has market power in the Charlotte area because of its 50 percent market share, extensive range of healthcare services, and insurers' need to include access to CHS in at least some of their provider networks. As further proof of CHS's market power, the DOJ cited CHS's ability to demand higher reimbursement rates and impose restrictions on insurers. The DOJ also quoted a CHS internal document stating that CHS "has enjoyed years of annual reimbursement rate increases that are premium to the market, with those increases being applied to rates that are also premium to the market."

While CHS has not denied including anti-steering provisions in its contracts, it maintains that it has "neither violated any law nor deviated from accepted healthcare industry practices for contracting and negotiation."1 CHS also stated that it is committed to making healthcare more affordable, perhaps foreshadowing to an efficiencies argument on the importance of keeping patients within the system.

On its previous anti-steering challenge—the American Express case—the DOJ succeeded at the district court level, but the appeal is pending, and in December 2015, the Second Circuit temporarily stayed the district court's permanent injunction. In that case, American Express argued that its anti-steering rules were critical to its ability to compete with the bigger players in the credit card industry, Visa and MasterCard, and fund its rewards programs.

Conclusions

The CHS case will likely address whether anti-steering practices are common and whether they result in efficiencies or improve the quality of care. Critics are doubtful that such provisions are widely formalized in writing and question CHS's ability to construct a compelling justification. As discussed in our last article, however, the Federal Trade Commission's (FTC's) recent losses in the hospital merger arena may reflect courts' increased openness to consider efficiency justifications for decisions that seem anticompetitive to regulators. Regardless of the outcome, this case will have broad implications for payer-hospital negotiations and the degree to which either party controls where patients get treated.