A highly critical ruling by a federal judge in New York has called into question the motivation of hospitals that enter into joint operating agreements that bolster their marketshare.
In a 41-page opinion issued last week, U.S. District Judge William Conner in White Plains, N.Y., said the only two hospitals in Poughkeepsie, N.Y., used their 8-year-old joint operating company to illegally fix prices and allocate services in their market.
In fact, the behavior of the two hospitals was so blatantly anti-competitive, according to the judge, that it constituted an automatic, or per se, violation of federal antitrust law.
The hospitals have rebutted the judge's findings and vowed to appeal. Both sides failed in efforts to settle the case out of court.
The only two acute-care hospitals in the city of 30,000--317-bed St. Francis Hospital and 257-bed Vassar Brothers Hospital--in 1992 formed a joint operating company called Mid-Hudson Health.
At that time, the New York health department gave Mid-Hudson certificate-of-need approval to jointly operate capital-intensive services in magnetic resonance imaging, cardiac catheterization and lithotripsy. The hospitals later voluntarily sought and received antitrust clearance from the U.S. Justice Department.
But, according to the state of New York--which acted on complaints from two HMOs allegedly injured financially by the hospitals' behavior--the two hospitals began using Mid-Hudson to jointly fix prices and divide up the market for certain services. Federal antitrust law forbids competing companies from doing either.
The state filed an antitrust lawsuit against the hospitals in 1998 in U.S. district court, alleging violations of both federal and state law. The lawsuit marked the first time that a hospital joint operating agreement had been challenged on antitrust grounds.
The hospitals denied the state's allegations and said they were exempt from federal antitrust law under the "state action immunity doctrine." Under that doctrine, activities that are approved and monitored by a state are exempt from federal antitrust law. The hospitals said that doctrine applied because of the state's initial CON approval.
The hospitals also argued they weren't competitors but a merged organization blessed by the Justice Department. As a single economic unit, they were incapable of conspiring with each other, they said.
The hospitals filed a motion in June 1999 to have the case dismissed in their favor without trial. Three months later, the state of New York filed a motion for summary judgment in its favor.
Connor came down squarely on the side of the state, saying the hospitals committed per se violations of Section 1 of the federal Sherman Act, which bars combinations or conspiracies that unreasonably restrain trade.
He said the hospitals illegally used Mid-Hudson to "unilaterally deterimine a range of prices acceptable to them." And, he said the hospitals' agreement to allocate patients and services between them rather than compete was an illegal attempt to maintain historic utilization rates and revenue at each facility.
Two HMOs--Kingston-based WellCare of New York and Schenectady-based Mohawk Valley Physicians Health Plan--complained to the state attorney general's office about the hospitals' joint operating agreement.
Amy Ertel Bellcourt, spokeswoman for Mohawk Valley, now known as MVP Health Plan, said Conner's decision "supports our belief that the joint negotiating tactics were not in the best interests of consumers in the Hudson Valley."
WellCare spokespersons could not be reached before deadline.
Conner's ruling could spell trouble for dozens of similar joint operating agreements between hospitals that sought the benefits of full-asset mergers without actually merging. In such arrangements, the hospitals typically maintain their historic assets and ownership status but operate as a single organization, sharing new revenue and profits and coordinating services.
Many hospitals have used the joint operating model as a way to collaborate yet work around conflicts in ownership, such as public-private or religious-secular combinations. Critics say their popularity has more to do with working around federal antitrust laws. Hospitals that enter into joint operating agreements aren't required to report those agreements to the federal government for antitrust approval.
Healthcare antitrust lawyer David Marx with McDermott, Will & Emery in Chicago structured some of the earliest "virtual merger" deals among hospitals. He said he believes such arrangements can work.
"But they have to be structured and operated as the functional equivalent of a merger, not a cartel," Marx said. That was the problem in Poughkeepsie.
In his ruling, Connor rejected:
* The hospitals' state action immunity defense, saying the state didn't monitor the hospitals' action enough to warrant federal antitrust immunity.
* The hospitals' argument that they were entitiled to such a "rule of reason" analysis because they were not-for-profit organizations.
* The hospitals' argument that they were owed some deference because the Justice Department had previously cleared their arrangement.
Connor has scheduled a June 5 hearing at which the state likely will propose remedies and penalties.
Spokesman Marc Violette of the New York attorney general's office said the office would seek injunctive relief that would ensure hospital compliance with state and federal antitrust laws.
"We're not seeking to roll the clock back," explained Violette, who added the hospitals' state-approved services would probably remain as they are. But the government will probably prohibit the hospitals from jointly negotiating managed-care contracts or discussing prices and services, he said.
St. Francis spokesman Jon Wojciechowski said the hospitals "respectfully disagree" with the judge's ruling and plan to fight the measures sought by the state.
Vassar Brothers spokeswoman Jeanine Angolet said the hospitals relied on the word of the state health department before collaborating.
"The fickle actions of the state have essentially pulled the rug out from under the hospitals after they have invested millions of dollars in these collaborative activities," she said.