As most people know, agreements between competitors to fix prices or allocate or divide markets are clear violations of the antitrust laws and can result in serious penalties. In industries as diverse as foreign exchange benchmarks, chemicals, LCD displays and school milk delivery, the U.S. antitrust authorities have vigorously prosecuted offenders, often obtaining headline-grabbing fines and jail time for the individuals involved.
Perhaps less well known is that the Sherman Act prohibits agreements that restrain competition in many forms that may not rise to the level of blatantly anticompetitive price-fixing or bid-rigging. The recent action against four Michigan hospitals serves as a reminder of the potential reach of the antitrust laws.
Lawsuit against Michigan Hospitals
On June 25, 2015, the U.S. Department of Justice (DOJ) and the Michigan Attorney General's Office filed a civil lawsuit against four Michigan hospital systems—Hillsdale Community Health Center of Branch County; W.A. Foote Memorial Hospital, d/b/a Allegiance Health; Community Health Center of Branch County; and ProMedica Health System, Inc.—for unlawfully agreeing to allocate territories for the marketing of competing healthcare services. Simultaneously, the DOJ and Michigan Attorney General (AG) filed a proposed settlement with three of the four defendants. Allegiance is not included in the proposed settlement, and litigation against Allegiance will continue.
The four hospitals operate the only general acute-care facilities in each of four adjacent counties in south-central Michigan, and compete with one another to provide many of the same healthcare services. Hospitals generally compete for "customers"—considered broadly as including patients, employers and insurers—on factors such as price and quality of services. Accordingly, marketing strategies aimed at patients, physicians, and employers about a hospital's quality and services are commonly employed by hospitals to increase patient volume and market share. Marketing includes advertisements, mailings to patients, health fairs, health screenings and outreach to physicians and employers.
The complaint alleges that Hillsdale orchestrated agreements with each of the other three hospital systems—Allegiance, ProMedica and Branch, which are its closest competitors—to limit marketing of competing healthcare services. It also alleges that senior executives of the four hospitals developed and enforced a series of bilateral agreements.
The complaint describes in detail the agreements between Hillsdale and each of the other three hospitals and provides examples of hospital conduct consistent with the agreements. For example, the complaint alleges that the Hillsdale and Allegiance agreement, which was in effect since at least 2009, prevented Allegiance from conducting marketing activities for competing services in Hillsdale County, so that Allegiance allegedly excluded Hillsdale County from its marketing campaigns for oncology, cardiovascular and orthopedic services in 2013 and 2014. In addition, around 2012, Hillsdale prevented Allegiance from conducting free vascular screenings in Hillsdale County, where Hillsdale periodically charges for such services. The complaint also alleges that, in 2014, Allegiance discouraged one of its newly employed physicians from offering a seminar in Hillsdale County regarding services for which it competed with Hillsdale.
The Hillsdale/ProMedica and Hillsdale/Branch agreements allegedly also prevented the hospitals from marketing oncology and other services in each other's counties. In one instance cited in the complaint, a senior ProMedica hospital executive supposedly assured Hillsdale's CEO that he would look into taking down a ProMedica billboard located across from a physician's office in Hillsdale County after Hillsdale's CEO complained. The complaint also cites deposition testimony from Branch's CEO regarding the parties' "gentleman's agreement" not to market anything but new services in the other hospital's county. Branch allegedly educated its employees about a "gentlemen's agreement" to market only new services in the other hospital's county, distributed internal media release guidelines in 2013 referencing this agreement, and prohibited Branch from sending media releases to the Hillsdale Daily News.
The DOJ and Michigan AG alleged that these agreements are per se illegal allocation agreements that deprived patients, physicians and employers of information to make important healthcare decisions, and in particular deprived patients of Hillsdale County's free medical services, including health screenings and physician seminars. The regulators further assert that Allegiance's agreement with Hillsdale denied Hillsdale's employers the opportunity to receive information and develop relationships that could have allowed them to improve the quality of medical care for their employees.
Although the proposed settlement does not require Hillsdale, ProMedica or Branch to pay monetary fines (apart from $5,000 each to the Michigan AG toward the costs of the investigation), the terms will restrict their conduct going forward. The proposed settlements prevent each hospital from agreeing with any healthcare provider to prohibit or limit marketing or to allocate geographic markets or territories. The settlement also would prohibit each hospital from having any communications with any of the other defendants about marketing in its or the other defendant's county, with limited exceptions.
In addition, the proposed settlements include several provisions to ensure compliance with the agreement, which will impose considerable administrative costs. Each hospital is required to appoint an Antitrust Compliance Officer, who must obtain certification from each officer, director, and marketing manager at the level of director and above that he or she has read and will abide by the terms of the settlement. The Antitrust Compliance Officer also is required to train such individuals annually on the meaning and requirements of the settlement and antitrust laws, and for a period of five years following the date the settlement is approved by the Court, the hospitals must annually certify that they have complied with its terms.
The settlement provides for government oversight and monitoring of compliance. Each hospital is required to grant access, upon reasonable notice, to records and documents relating to the settlement; must make employees available for deposition; and must provide other written information and reports relating to the settlement, upon request. Finally, the settlement also requires the settling hospitals to assist the government in the ongoing case against Allegiance.
The Michigan case reinforces that antitrust regulators will vigorously prosecute agreements not to compete, even if they do not rise to the level of criminal price-fixing activities. The case demonstrates that antitrust regulators will closely scrutinize business agreements between competitors—even those that are relatively informal "gentlemen's agreements"—and serves as a reminder that all participants in the healthcare market must be careful of all interactions with competitors, including, in particular, agreements relating to marketing activities.
Failure to heed this reminder can get expensive quickly. In addition to the costs of defending through an investigation and litigation, the wrong sort of cooperation with competitors carries the risk that a hospital's conduct will remain in the regulatory spotlight going forward. The compliance and monitoring provisions increase administrative costs, as well as legal costs in any ongoing litigation against nonsettling parties.
Any government action carries a potential risk of follow-on private lawsuits, although in this case the anticompetitive impact from the conduct may be more difficult to establish, and the affected markets may be too small to attract plaintiff attorneys.