Large health systems or physician groups with substantial market share in a particular geographic area—so-called “dominant” providers—must deal with a number of antitrust issues associated with, among other things, managing relationships with physicians and other providers and, of course, negotiating with payors.  Similarly, dominant payors also face potential antitrust exposure in several areas, including most favored nation clauses (MFNs), and other arrangements they may have with providers.  For example, the Department of Justice (DOJ) is currently challenging Blue Cross Blue Shield of Michigan’s use of MFNs.

Recently, however, there have been a growing number of geographic areas that contain both a single, dominant provider system and a single, dominant payor.  These markets may be considered a “bilateral monopoly” because both the buyer and seller appear to have market power.  From an antitrust perspective, a bilateral monopoly is of course preferable to a unilateral monopoly.  If there is only one hospital system in a particular area and several non-dominant payors, one would expect that rates would be higher than if there were a single dominant payor that had more leverage with the providers.  Therefore, the mere fact that such a bilateral monopoly exists does not itself give rise to an antitrust issues.  In fact, the DOJ and Federal Trade Commission (FTC) (collectively, the “Agencies”) recognize in the Horizontal Merger Guidelines that “powerful buyers” here, insurance companies, can discipline a seller that has market power.

What may create some antitrust issues—and where the Agencies may become concerned—is where a provider and payor decide to cooperate in certain ways that are intended to harm each others’ rivals.  A recent case involving payor Highmark Inc. (“Highmark”) and the University of Pittsburgh Medical Center (UPMC) is a good example of where arrangements between providers and payors can create significant antitrust risk.  Highmark and UPMC formed a reciprocal exclusive dealing agreement to keep each others’ competitors out of their respective markets.  UPMC agreed to use its power in the provider market to prevent Highmark competitors from gaining a foothold in the Allegheny County market for health insurance; in exchange, Highmark agreed to help strengthen UPMC and weaken its financially troubled chief competitor, West Penn Allegheny Health System (“West Penn”), triggering a lawsuit and DOJ investigation.  Highmark then announced plans to acquire West Penn, positioning it as a stronger competitor against UPMC and effectively ending the DOJ investigation and litigation.

Whether a “vertical” merger between a provider and payor would trigger a challenge by one of the Agencies would depend on whether alternatives in both segments would remain post-merger.  A merger involving a dominant provider and dominant payor would likely be subject to at least a substantial investigation, if not a challenge.

The Agencies continue to keep a close eye on healthcare, including recent challenges to hospital mergers (St. Luke’s/ProMedica) and to conduct by payors (BCBS of Michigan) and providers (United Regional).  We can expect that bilateral monopolies, especially those that contain exclusive dealing arrangements, will not be an exception.