When does an insurer’s hard-core negotiation strategy cross the line and become an antitrust violation? The District Court of Rhode Island considered this question in denying a summary judgment motion in an antitrust case brought by Steward Health Care System against Blue Cross Blue Shield of Rhode Island, sending the case to a trial on the merits. The District Court’s 101-page summary judgment decision provides insights into the kinds of conduct that may give rise to antitrust concerns, despite “less-than-clear antitrust doctrines and precedents.” Steward Health Care Sys., LLC v. Blue Cross & Blue Shield of R.I., No. 1:13-cv-00405 (D.R.I.).
The facts here are complex but important. After Landmark Medical Center, a community hospital in Rhode Island, was forced into receivership due to financial troubles, the court appointed a special master to solicit bids from prospective purchasers of Landmark’s assets. BCBS was the primary source of Landmark’s revenues, accounting for about 70% of Rhode Island’s commercially insured. A key prerequisite to any deal was an acceptable arrangement between the purchaser and BCBS on reimbursement rates.
Steward, a for-profit hospital system that owns several hospitals in Massachusetts, entered into a contract to acquire Landmark. In its Massachusetts operations, Steward receives compensation on a per-member-per-month basis rather than a fee based on individual services, sharing risk and cooperating with insurers. Steward’s vision for expanding into Rhode Island was to offer a new, atypical healthcare provider model to Rhode Island based on similar principles.
Internal BCBS documents revealed that BCBS executives had expressed concern about accountable care organizations (ACOs) and risk-based contracting, which they believed could strip some or all of an insurance company’s traditional functions, and the profits associated with insurance companies bearing risk. BCBS referred to these issues as “disintermediation” and the process of “providers becoming payers,” and viewed them as existential threats. BCBS executives involved in this strategic planning also were directly involved in negotiations with Steward concerning the Landmark contract.
Negotiations between Steward and BCBS experienced several roadblocks and eventually failed. BCBS insisted that Steward agree to meet quality metrics that Steward believed were unattainable for Landmark, and would not consider alternative proposals. BCBS also refused to accept Steward’s proposed rate increases that amounted to 95% of the average rate that BCBS paid the other Rhode Island hospitals, with a chance to earn an additional 5%.
Eventually, BCBS applied to the Rhode Island Department of Health for a material network modification to exclude Landmark and sent a letter to its subscribers stating that it anticipated Landmark going out of network. As negotiations continued to stall, BCBS removed Landmark from its network. Steward ultimately walked away from the Landmark deal.
Once Steward withdrew from the process, Prime acquired Landmark. Notably, Prime was able to negotiate a contract with BCBS that included provisions that BCBS had rejected when presented by Steward. Following Prime’s acquisition of Landmark, Steward sued BCBS.
Refusal to Deal
Steward’s principal claim was that BCBS abused its market power as a purchaser of healthcare services to block Steward’s entry into the Rhode Island healthcare and health insurance markets in violation of Section 2 of the Sherman Act. It did so, according to Steward, by refusing to negotiate reasonable terms with Steward for the continued participation of Landmark in the BCBS network, which BCBS knew would thwart Steward’s attempt to purchase Landmark.
While calling the decision a “close call,” the Court found that Steward had sufficient factual evidence to create a trial-worthy issue around whether BCBS’s conduct amounted to illegal exclusionary conduct as opposed to lawful, vigorous competition, and denied summary judgment.
At the outset, the Court emphasized that there are no bright-line rules or requirements for exclusionary conduct, and such behavior may manifest differently in different markets. The Court rejected arguments by BCBS that in order to find that it had violated the antitrust laws under a “refusal to deal” theory, there must have been a prior course of dealing between BCBS and Steward. (BCBS subsequently sought leave to appeal to the 1st Circuit Court of Appeals on this issue, but the Court also rejected this request.) It was sufficient that there was evidence that BCBS acted in a manner that made no economic sense in the absence of an intent to exclude Steward from the market.
Key aspects of the evidence cited by the Court to support its decision to allow the case to proceed to trial were:
- BCBS terminated a long-standing and presumably profitable contract with Landmark while in negotiations with Steward.
- BCBS took a uniquely hard-core approach to the negotiations. It took the unprecedented steps of notifying subscribers and doctors that the Landmark contract was due to expire and, if the Department of Health (DOH) approved its network modification, would go out of network and then for the first time followed through on its threat and removed Landmark from its network.
- BCBS was clearly aware of the impact its actions would have on Steward’s attempted purchase of Landmark, according to comments in internal documents and confirmed in depositions.
- BCBS sacrificed short-term profits in order to terminate the Landmark agreement. There were detailed internal BCBS analyses projecting significant losses from allowing Landmark to go out of network, and showing that these were greater than the projected financial impact of acceding to Steward’s requests in the rate negotiations.
- Potentially evidencing bad faith, BCBS negotiated rates with other hospitals significantly higher than those in place with Landmark, and Steward’s proposed rates were below or at the average rates in place with other hospitals. Although there were disputes about the extent to which Landmark was comparable to other hospitals, these were issues to be resolved at trial.
Steward also alleged that BCBS violated Section 1 of the Sherman Act by engaging in a conspiracy with Lifespan, which also was interested in acquiring Landmark, and Thundermist, a major primary care provider in the Woonsocket area. As in most antitrust conspiracy cases, there was no direct evidence of an explicit agreement between BCBS, Lifespan and Thundermist to exclude Steward. Rather, Steward relied on circumstantial evidence to support its claims.
In particular, the Court discussed instances of joint conduct that could give rise to the inference that BCBS, Prime and Thundermist acted together to exclude Steward:
- BCBS, Thundermist and Lifespan worked together to develop and present a “treat and transfer” plan for Landmark as an alternative to an acquisition by Steward, under which Landmark would cease to offer the full range of acute care inpatient services and these patients would be treated at Lifespan hospitals.
- Lifespan agreed to rate concessions in negotiations between BCBS and Lifespan going on at the same time as the Steward/BCBS negotiations. These concessions allegedly were granted in exchange for increased patient volume, which presumably would come from Landmark when the “treat and transfer” plan was implemented.
- Thundermist decided to move obstetrical patient referrals from Landmark to Women’s & Infants Hospital (a Care New England facility) and not to sign a memorandum of understanding (MOU) to be an affiliated provider with Landmark/Steward. These decisions were made in the context of payments from Lifespan to Thundermist and communications indicating BCBS’s knowledge and support of these actions, as well as the likely impact on Landmark.
After reciting the evidence, the Court opined that the indicators pointing to a conspiracy were numerous, supported by a record “replete with assurances, conversations, and exchanges of value.” Ultimately, the Court held that Steward had provided more than enough evidence that tends to exclude the inference of independent conduct, and a reasonable juror could conclude that the conduct of the players here amounted to an illicit agreement to keep Steward out of Rhode Island.
Healthcare markets have witnessed significant concentration through mergers and acquisitions for both payers and providers. As a result of this concentration, many areas of the country, like Rhode Island, are left with a dominant payer or hospital system without which market participants cannot do business. In this context, any actions by a dominant payer or dominant provider that may be perceived as an attempt to block a rival’s entry will be viewed with skepticism. What may be normal hardball commercial conduct for a party without market power could be an antitrust violation where the party is dominant, particularly where there is evidence of an anti-competitive motive for the conduct.