Antitrust Specialty Hospital Allowed to Pursue Claims In Sherman Act Suit Against Hospitals, MCOs

Health Law Reporter

Thursday, November 1. 2007 

A specialty surgical hospital in Kansas City, Mo., may pursue claims that traditional acute-care hospitals in the city conspired with major managed care organizations (MCOs) to prevent it from obtaining managed care contracts, according to a federal trial court decision unsealed Oct. 17 (Heartland Surgical Specialty Hospital v. Midwest Division Inc. d/b/a HCA Midwest Division, D. Kan., No. 05-CV-2164, ruling unsealed 10/17/07).

Attorneys who talked with BNA said the decision, although a preliminary ruling by a federal trial court, is an important development in the health care antitrust arena. It involves an unusual set of facts, stands as a rare victory for health care antitrust plaintiffs, and, given the continuing tension between full-service acute care hospitals and physician-owned specialty hospitals, could represent just the tip of a larger litigation iceberg, they said.

In its Oct. 1 ruling, the U.S. District Court for the District of Kansas rejected motions for summary judgment seeking to dismiss Sherman Act claims that Heartland Surgical Specialty Hospital brought against the payers and competing providers in the Kansas City-area market. It granted the motions, however, with respect to the Sherman Act claims asserted against one hospital-Carondelet Health System--and with respect to claims alleging tortious interference with prospective business relationships under Kansas law against all of the parties.

In allowing the Sherman Act claims to proceed, the court said there was sufficient evidence--enough to withstand summary judgment--that the four competing acute-care hospitals viewed physician-owned specialty hospitals as a competitive threat and that the hospitals conspired with the two MCOs serving the Kansas City market to get them to exclude Heartland from the MCOs' managed care plans.

The decision specifically rejected summary judgment motions filed by MCOs Aetna Inc. and Coventry Health Care, and hospital defendants Midwest Division Inc. d/b/a HCA Midwest Division, St. Luke's Health System, and Shawnee Mission Hospital of Kansas City. Carondelet remains in the litigation on the rest of the alleged antitrust and civil conspiracy claims, the court said.

The court noted that Heartland previously settled its claims against North Kansas City Hospital and four MCOs: Blue Cross and Blue Shield of Kansas City, United Healthcare Inc., Humana Health Plan Inc., and Cigna Healthcare of Ohio Inc.

Heartland filed its lawsuit in 2005 alleging restraint of trade and a group boycott in the market for acute-care hospital services and for combined services of spine and upper extremity surgery within the Kansas City metropolitan area (14 HLR 596, 5/5/05).

The lawsuit has been hard fought, with the court addressing a succession of disputes and issuing "more than two dozen discovery orders," it said. "Characterizing the pursuit of this litigation as contentious is, at best, an understatement," the court noted.

Provider Conspiracy Claims

Toby G. Singer, with Jones Day in Washington, said the allegations that full service hospitals had conspired to exclude a physician-owned specialty hospital were unusual. "A lot of hospitals unilaterally try to cut deals with payers to exclude specialty hospitals," she said.

The decision is noteworthy, she said, because of its very thorough and comprehensive recitation of the facts underlying the alleged conspiratorial links between the individual defendants. "The court obviously put a lot of time and effort into this decision," she added.

To the extent the hospitals claimed there were valid business reasons for including exclusionary language in their contracts with payers, the court found those reasons "did not seem to hold water." That point, she added, "came through loud and clear."

The court also pointed out that the exclusionary language in many of the contracts applied only to non-acute care hospital-owned facilities, "so their arguments about specialty hospitals siphoning off volume were less credible," Singer added.

Douglas Ross, with Davis Wright Tremaine LLP, Seattle, said the decision stands for the proposition that "hospitals and payers need to be very careful about what actions they decide to take after a specialty hospital opens in their community."

"While it's perfectly appropriate to lobby the government to enact laws that will keep specialty hospitals out, or to oppose the grant of a certificate of need to a specialty hospital in those states that have CON laws, it's a garden variety antitrust violation if hospitals and payers enter into an agreement that the payers won't contract with a specialty hospital," he said.

"Typically, a payer would want to contract with a specialty hospital if that hospital offered lower rates or better service. When a payer refuses even to consider contracting with a specialty hospital it raises a question of why it's acting that way," Ross said.

"In this case, the judge found there was evidence that payers refused to contract with the specialty hospital in reaction to threats from other hospitals that they would stop participating in the payers' networks if the payers contracted with the specialty hospital," Ross added.

Ross said he expects to see a lot more of this kind of litigation. "Specialty hospitals that find they can't contract with payers have every incentive to sue," he concluded.

Richard D. Raskin, with Sidley Austin LLP in Chicago, agreed that this will be an important case to watch. "This case represents a rare plaintiffs victory--at least at the summary judgment stage-in an antitrust case alleging exclusion from a managed care plan," he said.

"Like most cases of this type, this one involves an excluded provider that alleges a conspiracy among its competitors. But here the plaintiff also alleges that it was excluded due to a conspiracy among health plans. Horizontal conspiracies among health plans have rarely been alleged, and even more rarely upheld, so this will be an important case to watch as it proceeds to trial," Raskin said.

He said "a key question will be, 'What is the incentive for health plans to conspire to exclude a surgical hospital?" Raskin added that, "even if all of the plans are facing threats of secession by the hospitals, it would not seem like there would be a need for them to conspire with each other."

"The case is also significant because the court may be required to determine if or when so-called 'network configuration' contractual provisions--provisions in which a payer agrees with an incumbent network provider not to admit additional providers to the network unless specified criteria are satisfied-constitute an unlawful restraint of trade," he added.

Group Formed in 2003

According to the court, Heartland was founded in 2003 by some 25 physicians who opened a facility with 49 beds and seven operating rooms, recovery suites, treatment rooms, and both MRI and CT scanners.

Heartland claimed that it was able to deliver many of the same services usually obtained from traditional acutecare hospitals and that it could do so safely and efficiently. Heartland cited shorter hospital stays for patients who underwent spinal-fusion procedures, and lower overall infection rates than those found at acute-care hospitals.

After it opened, however, the court said there was evidence that representatives of the Kansas City-area hospitals, after realizing that Heartland would place financial pressure on local hospitals if successful, met informally with insurance company executives on a number of occasions to discuss strategies for addressing Heartland's entry into the market.

These representatives arrived at, according to one MCO official's statement, an "understanding, unwritten but understood" that MCOs would not extend managed care contracts to physician-owned, as opposed to hospital controlled, specialty hospitals, the court added.

Heartland's complaint alleged that evidence of the conspiracy came from the MCOs themselves, who admitted to Heartland officials that they had "succumbed to the pressure of the coordinated conduct of the Hospital Defendants--the largest suppliers of acute care services in the area--and agreed to deny Heartland in-network contracts," the lawsuit said.

Allegations Sufficient

The court began its analysis by asking whether Heartland's economic theory underlying the alleged conspiracy was viable, concluding that it was "straightforvard, and not novel." Heartland alleged that the hospitals engaged in a conspiracy "to respond to the competitive threat that Heartland and other specialty hospitals posed," the court said.

Heartland also alleged that each MCO participated in the conspiracy "to assure the MCOs that competitor MCOs would not have a more attractive network of physicians and facilities to sell to employers should Heartland be included in a competitors' network," it added. "By working together with the Hospital Defendants to exclude Heartland, the MCO Defendants were able to negotiate lower reimbursement rates to the hospitals," it said.

"In exchange for the MCO Defendants' cooperation and participation, the Hospital Defendants agreed to lower reimbursement rates from the MCO Defendants. An MCO's profitability appears to be dependent on two factors: recruiting employer groups to subscribe to the MCO's network and negotiating the lowest possible reimbursement rates to be paid to the hospitals in the MCO's network. Both factors are at play in Heartland's theory," it concluded.

In refusing to dismiss the lawsuit, the court cited a series of interactions and reviewed a complex array of contractual interrelationships among the MCOs and provider defendants, ultimately concluding that there was sufficient evidence to support an inference of collusion between them that was, in turn, sufficient to defeat the defendants' motions for summary judgment.

The court found weak direct evidence of a conspiracy, but ample indirect evidence.

Actively Excluded

"The uncontested facts show that the Hospital Defendants opposed specialty hospitals and pursued legislative means to inhibit their development. The uncontested facts further show that the Hospital Defendants vigorously discouraged the MCO Defendants from contracting with specialty hospitals," it said.

"Viewed in a light most favorable to Heartland, the uncontested facts also establish that the MCO Defendants chose not to 'panel' Heartland based on the opposition of the Hospital Defendants," it added.

In addition, Heartland offered evidence that the hospitals "met publicly and discussed the competitive threat of specialty hospitals ... [and] communicated their desired approach for dealing with specialty hospitals to the MCO Defendants," the court said. Such communications could be interpreted by a jury "as veiled threats" that the MCO were required to either cooperate or risk losing the Hospitals from their networks, the court added.

"In conclusion, the facts, when taken in a light most favorable to Heartland, support a reasonable inference that the MCO Defendants had to have realized that if one MCO permitted Heartland to be an in-network provider, then that MCO would have a more expansive network than the other MCOs, which would be more attractive to employers and insureds," the court said.

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