A federal appeals court ruled last week that a Louisiana public hospital did not violate antitrust laws when it demanded managed-care contracts that excluded a competing surgery center. Healthcare lawyers said the decision could provide the ammunition hospitals have been seeking in their fight with physician joint ventures.
In a case that slogged through the legal system for five years, a three-judge panel from the 5th U.S. Circuit Court of Appeals in New Orleans unanimously affirmed a January 2001 ruling by U.S. District Judge A. J. McNamara that 215-bed North Oaks Medical Center in Hammond, La., did not practice predatory behavior or attempt to monopolize the Hammond outpatient surgery market.
North Oaks is a public hospital owned by the Hospital Service District No. 1 of Tangipahoa Parish. It's managed by Brentwood, Tenn.-based Quorum Health Resources, a division of Dallas-based Triad Hospitals. The Surgical Care Center of Hammond, which does business as St. Luke's Surgicenter, alleged in its 1997 antitrust lawsuit that North Oaks and Quorum violated Sections 1 and 2 of the Sherman Antitrust Act, which forbid unreasonable restraints of trade and monopolies or attempted monopolies. St. Luke's also accused North Oaks and Quorum of breaking state laws governing unfair trade practices.
St. Luke's claimed that the hospital attempted to monopolize the outpatient surgery market by using its market power to shut out St. Luke's physician-owned ambulatory surgery center from managed-care contracts. The surgery center accused North Oaks of illegally tying its outpatient services with its inpatient services in those contracts.
Dan Mulholland, a healthcare antitrust attorney with the Pittsburgh office of Horty, Springer & Mattern, said the 5th Circuit decision shows that hospitals can protect themselves from physician-owned competitors and don't have to cooperate with competing centers that siphon away business and revenue.
"The 5th Circuit basically said Judge McNamara was right: The surgery center never defined what the relevant market was and without that they can't prove a monopoly or prevail in this kind of suit," Mulholland said. "Community hospitals now have a way of dealing with this competition and in most cases don't have to fear antitrust lawsuits by surgery centers. The appeals court ruled this is legitimate conduct."
In court filings, St. Luke's alleged that North Oaks was attempting to create a monopoly and would close them down by excluding them from managed-care contracts. The trial judge ruled that North Oaks' 42% to 44% share of the outpatient surgery market was not dominant and did not pose barriers to new competitors because St. Luke's earned a 25% market share its first year in business.
"If we were monopolists, we were pretty sorry at it," Mulholland said. "If they were right they would have been out of business a long time ago. But they're still there. The corpse breathes."
Officials at St. Luke's declined to comment.
St. Luke's is a joint venture between local physicians and King of Prussia, Pa.-based Universal Health Systems, which purchased its 56% interest from Baton Rouge, La.-based Amedysis.
North Oaks spokeswoman Michele Sutton said the hospital is pleased by the appellate ruling.
"It was obvious that the three judges on the appeals court agreed with the conclusion of the trial court that North Oaks competed fairly with the specialty surgery center for patients," Sutton said. "We defended against these claims because of the threat presented by the surgery center and its attempt to siphon profitable outpatient surgeries from the hospital."
North Oaks originally relied on a state action immunity defense in the case. That doctrine holds that organizations and activities supervised by the state are immune from federal antitrust complaints. But in a case that went all the way to the U.S. Supreme Court, the hospital lost on that argument, sending the case back to trial court.
The district court did not find that North Oaks either practiced predatory behavior or found it likely that it could achieve monopoly power in outpatient surgery. The three-judge panel also found that Quorum and North Oaks couldn't have conspired to monopolize under the Sherman Act because a corporation and its agent are incapable of conspiring with themselves.
The appeals court refused to remand the case for trial on St. Luke's claim of exclusive dealing and illegal tying relationships. The court said St. Luke's failure to define the relevant geographic market "also proves fatal to its tying claim. The exclusive dealing allegations fail for the same reason," the judges wrote in their 15-page decision.
Toby Singer, a healthcare antitrust lawyer with the Washington office of Jones, Day, Reavis & Pogue, said the 5th Circuit ruling should please hospitals. "The court said the exercise of permissible business judgment is not predatory conduct," Singer said. "This is something hospitals can point to."
Singer said North Oaks' contracts weren't exclusive but did offer lower prices to HMOs dealing solely with them. "And that's the essence of competition," she said.