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Antitrust wrangle

Texas hospital accused of exclusionary pricing


By Joe Carlson
Posted: March 7, 2011 - 12:01 am ET
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Hospitals with significant market dominance in their local areas may want to review their contracts with insurers in light of recent statements—and now action—on the part of antitrust enforcers with President Barack Obama's administration.

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“Our hope is that we send a message”

—Sharis Pozen, deputy assistant attorney general, U.S. Justice Department
“Our hope is that we send a message” —Sharis Pozen, deputy assistant attorney general, U.S. Justice Department
“Let me be clear,” Assistant Attorney General Christine Varney warned five months ago when announcing an antitrust lawsuit against a Michigan health insurer. “We will challenge similar anti-competitive behavior anywhere else in the United States.”

Next up is Texas, and this time the target is a hospital. A federal judge in the state's northern district is weighing whether to accept a proposed settlement between a market-dominant hospital, United Regional Health Care System of Wichita Falls, and regulators in the U.S. Justice Department and Texas attorney general's office. The settlement would declare a seven-year moratorium on exclusionary contract pricing.

The government alleges that the hospital violated the monopoly provisions of the Sherman Antitrust Act by forcing most of its insurers into contracts under which they would lose large discounts on United Regional's prices if they contracted with competing hospitals in the Wichita Falls market. United Regional accounts for about 90% of the acute-care market.

The result was that United Regional charged much higher prices overall than other hospitals in similar markets, which federal regulators said was a clear example of the kind of conduct by market-dominant players that the Justice Department aims to deter.

“Our hope is that we send a message to firms that are situated similarly to United Regional and engage in these kinds of contract practices,” said Sharis Pozen, deputy assistant attorney general and a chief of staff in the Justice Department's Antitrust Division. “And we hope that consumers get better services and lower prices for their healthcare in this community.”

United Regional President and CEO Phyllis Cowling said its dominant market position was based on the hospital's quality of care and breadth of services, not its contracts with payers.

Cowling specifically denied any wrong-doing, saying executives thoroughly vetted their exclusionary contracts with existing case law, such as the 2007 federal appeals decision in Cascade Health Solutions v. PeaceHealth, which found that a hospital's bundled discounts are illegal only if they result in below-cost pricing.

However, United Regional opted to settle because of the cost of litigation, Cowling said. The hospital spent $2.2 million on attorneys and consultants just to comply with 18 months of government information requests—a sum equal to about 10% of the cost of the hospital's annual outlay of charity care.

“While we may disagree with some of the facts and conclusions of the Justice Department, we're happy with the resolution,” Cowling said. “Our very strong belief was we would rather spend our money going forward providing healthcare to the community than paying for attorneys, quite frankly.”

Compare that sentiment with those of executives at eight-hospital Memorial Hermann Healthcare System, who in March 2010 fought in court—and won—a lawsuit in which investors of a failed physician-owned hospital in Houston alleged the same type of conduct at issue in the United Regional case.

Memorial Hermann won the jury trial in 2010, but that came more than a year after the hospital settled antitrust allegations while not admitting liability in a case brought by Texas Attorney General Greg Abbott (Feb. 2, 2009, p. 6).

In both cases, the hospitals agreed to remove their exclusionary contract provisions for a number of years—five for Memorial Hermann and seven for United Regional.

John Treece, a partner with the antitrust practice with the law firm Sidley Austin, Chicago, said it remains to be seen whether such prohibitions cause medical prices to decline through increased competition, or to increase because of the loss of discounts in exchange for exclusivity.

“The theories are quite old. But because they involve a balancing of near-term pro-competitive benefits and price-lowering effects against a longer-term harm of excluding competition, people can have different opinions about where to draw the line,” Treece said. “Certainly, the Obama administration has signaled that they will be more aggressive than the prior administration in challenging these arrangements.”

In many ways, the cases in Houston and Wichita Falls are the mirror images of the Justice Department's lawsuit in Michigan that accuses dominant insurer Blue Cross and Blue Shield of Michigan of abusing “most favored nation” clauses.

Last October, the Justice Department sued the insurer, saying some of its contracts force hospitals to artificially raise the prices charged to competing insurance companies. Several proposed class-action lawsuits have been filed by citizens and groups mirroring the federal claims, targeting not only the insurer but the hospitals allegedly conspiring with Blue Cross. (Oct. 25, p. 6)

“In Michigan, you have a dominant insurer that uses practices that we believe hurt consumers. And in Texas, you have a hospital that we believe was doing that,” Pozen said.

In Wichita Falls, federal investigators say United Regional has monopoly power in the sale of acute hospital care and outpatient surgical services to commercial payers. The government alleges the hospital's contracting practices resulted in higher overall medical prices, despite the fact that the allegations are premised on discounts.

According to the complaint, United Regional's contracts with several insurers make discounts on pricing contingent on the insurers agreeing not to contract with the hospital's main rival, the 41-bed physician-owned Kell West Regional Hospital, or any other hospital in a specific geographic area. Penalties for contracting with United Regional's competitors ranged from 13% to 27% of prices, the complaint says.

As a result of its market power, the 297-bed United Regional allegedly was able to dictate higher overall prices. The lawsuit says a commercial insurer prepared a report for United that found the hospital charged at least 50% more than the average amounts paid in comparable cities in Texas.

“What I can say about the supposed monopoly in Wichita Falls is, regardless of the presence of these contracts, we do understand we are the market-share leaders,” Cowling said. “We don't believe these contacts allowed us to maintain that market share. We have worked to improve the level of quality and safety for our patients.”


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