On February 25, 2011, the United States Department of Justice (DOJ) announced that it settled an antitrust enforcement action against United Regional Health Care System of Wichita Falls, Texas (United Regional) in which the agency alleged that United Regional had monopolized one or more markets for hospital services by entering into agreements with health insurers not to do business with United Regional’s competitors. The DOJ and the Texas Attorney General filed a complaint along with a proposed settlement agreement in the U.S. District Court for the Northern District of Texas. According to the DOJ’s press release announcing the settlement, this is the first monopolization case under Section 2 of the Sherman Act that the DOJ has brought to challenge traditional unilateral anti-competitive conduct since 1999.
The complaint alleges that, starting in 1998, United Regional began requiring commercial health insures to enter into contracts that effectively prevented them from contracting with United Regional’s competitors in violation of Section 2 of the Sherman Act. Under these contracts, health insurers would earn substantial discounts for agreeing not to do business with United Regional’s competitors. The DOJ pointed to several alleged market conditions that supposedly resulted in the contracts excluding United Regional’s competitors. First, according to the DOJ, United Regional is the largest hospital in and around Wichita Falls, Texas by a considerable margin and allegedly has monopolies in two specific markets in Wichita Falls: one in the market for general acute-care inpatient hospital services, where it has a share of approximately 90 percent of the market, and another in the market for outpatient surgical services, where its share is more than 65 percent. Second, the DOJ alleged that United Regional is the region’s only provider of other essential services, including cardiac surgery, obstetrics, and high-level trauma care. According to the DOJ, as a result of United Regional’s significant market shares and vital services, United Regional is “a must-have hospital for any insurer that wants to sell health insurance in the Wichita Falls area.” Third, the DOJ contended that the discounts were so substantial that insurers had no reasonable economic alternative but to refrain from doing business with competing hospitals. And finally, the DOJ pointed to evidence suggesting that these contracts lead to higher prices, purportedly 70 percent higher than in the Dallas-Ft. Worth area.
The complaint further alleges that as a means of maintaining its monopoly, once the commercial insurer signed an agreement with United Regional, the insurers were forced to pay higher prices if they chose to contract with any nearby competing hospital facility. Due to the steep financial penalty imposed on insurers, most chose to contract exclusively with United Regional. Competing hospitals and facilities were unable to obtain agreements with most insurers and could not effectively compete in the relevant markets.
To alleviate the DOJ’s concerns, United Regional agreed to refrain from using any contracts with commercial health insurers that unlawfully inhibit an insurer’s ability to contract with one of United Regional’s competitors. Specifically, United Regional can no longer condition its prices or discounts on whether the insurer contracts with other health-care providers. In addition, United Regional is proscribed from taking any retaliatory actions against an insurer that enters into a contract with a rival.
Though United Regional agreed to the provisions of the settlement agreement, it did not agree with the DOJ’s interpretation of the facts. On the same day the DOJ filed suit, United Regional posted on its website a message from its president, stating, "[t]hese specific contracts do not affect anyone covered by Blue Cross and Blue Shield of Texas, the region’s largest commercial payer, or anyone covered by Medicare or Medicaid. Also, these contracts comprise a very small amount of United Regional’s overall revenue." Moreover, United Regional claimed in a press release that "there appears to be little, if any, correlation between the involved contracts and United Regional’s growth of the last few years. Instead, evidence shows that our progress is the result of many strategic and operational factors." In support of the agreement, Christine Varney, Assistant Attorney General in charge of the DOJ’s Antitrust Division stated that the “settlement prevents a dominant hospital from using its market power to harm consumers by undermining its competitors’ ability to compete in the marketplace.”
This case is significant for a few reasons. First, the DOJ has not brought a monopolization claim under Section 2 of the Sherman Act in roughly eleven years. The antitrust enforcers at the DOJ in the Obama administration suggested that they would take a much more proactive approach to enforcing Section 2 than their counterparts in the prior administration. In fact, the antitrust world witnessed a fairly public and not-so subtle rift between the Obama and Bush administrations over Section 2 enforcement. Shortly before leaving office, DOJ officials in the Bush administration issued a report concerning Section 2 enforcement. The report suggested that, in the wake of recent Supreme Court decisions curtailing the reach of Section 2, the DOJ would not aggressively pursue these types of cases. Shortly after taking office, the DOJ officials responsible for antitrust enforcement in the Obama administration criticized and rescinded the report, which raised expectations that the DOJ would pursue Section 2 claims if only to make the point that Section 2 enforcement is not a dead-letter.
Second, the case addresses anticompetitive conduct in the health care industry, which has been a focus for the Obama administration generally. Even though markets for health care services tend to be geographically fragmented along regional or local lines, this case and the DOJ’s recent case against Blue Cross Blue Shield of Michigan (for using most-favored-nation clauses in hospital contracts) show that the federal antitrust enforcers still will aggressively pursue antitrust violations in markets for health care services.
Third, the DOJ challenged United Regional’s conduct as a form of de facto exclusive dealing. This case sheds some light on how the DOJ will analyze cases in which the exclusivity is encouraged or achieved through discount incentives as opposed to explicit contractual provisions requiring outright exclusivity. The DOJ contended that the contracts harmed competition even though the contracts only affected roughly 35 percent to 40 percent of United Regional’s business, which is a smaller percentage of foreclosure than was seen in earlier DOJ exclusive dealing cases, like Dentsply. Still the DOJ argued that the foreclosure was enough to prevent smaller, recent market entrants from gaining traction in the marketplace, keeping prices above competitive levels.
In analyzing the conduct, the DOJ, among other things, used a “discount-attribution” test, which examines whether discounting may result in below-cost pricing by taking all discounts across a line of products or services and applying the aggregate amount only to prices charged for contestable sales – i.e., the sales for which a defendant actually faces competition. Under the discount-attribution test, according to the DOJ, the contestable sales were made at below-cost prices, which could harm competition by keeping equally-efficient providers from competing for the contestable sales. For this and other reasons, the DOJ challenged the contracts as anticompetitive tools used to maintain United Regional’s alleged monopoly position.