The United States Department of Justice Antitrust Division filed a complaint and a consent judgment on February 25, 2011, charging a Texas hospital system with unlawful monopolization through a policy of offering steep discounts in exchange for exclusivity. United States v. United Regional Health Care System (N.D. Tex. Feb. 25, 2011). This action showcases the Antitrust Division’s commitment to bringing non-merger antitrust actions, particularly in the health care area. It also underscores that, even where a contracting program is offering discounts, it can be risky for companies with large market shares if the contracts become de facto exclusives.
In United Regional Health Care System, the Antitrust Division alleged that the defendant had market power in its local market. The Division also alleged that the defendant had systematically entered into contracts with health insurers that effectively excluded competition.
According to the complaint, the contracts offer a substantially larger discount off billed charges (e.g., 25 percent) if United Regional is the only local provider in the insurer’s network; and the contracts provide for a much smaller discount (e.g., 5 percent off billed charges) if the insurer contracts with one of United Regional’s rivals as well. Allegedly, the contracts were effectively exclusive because, even though United technically offered a non-exclusive option, the non-exclusive option was not commercially feasible. Notably, the Antitrust Division alleged that, in each instance, it was United Regional that required the exclusionary provisions in the contract—it was not a matter of the insurers instigating the arrangement in order to exert leverage.
The Antitrust Division charged that the contracting practice was exclusionary because the contracts:
- Effectively foreclosed other competing hospitals from the most profitable health insurance contracts;
- Led to higher prices and reduced quality by delaying and preventing new entry, limiting price competition, and preventing competitors from differentiating themselves based on quality;
- Were effectively “below cost” contracts because, considering only the volume of services that rivals could contest, no rival could effectively compete; and
- Lacked a valid, precompetitive business justification.
The United Regional Health complaint demonstrates that the government will continue to focus on health care issues in antitrust. The complaint also emphasizes the Obama administration’s emphasis on enforcement in non-merger matters. While the first year under Assistant Attorney General Christine Varney did not yield many non-merger matters, the past 12 months have seen several new non-merger cases filed. Given that it often takes the government 18 months to two years to develop a case, these cases may be the fruits of the emphasis on non-merger enforcement.
The complaint is also an important reminder to companies with large market shares to exercise caution when entering into contracts that are actually, or de facto, exclusive. While exclusive contracts are often procompetitive and lawful, some issues for companies with large market shares to consider in drafting them include:
- The length. Contracts that are shorter in duration will raise fewer antitrust concerns.
- The incentives. Contracts should not offer discounts that, if applied only to the product where the company has a dominant share, would result in the company selling below cost.
- Who is asking. If the customer requests exclusivity, that is generally a helpful fact.
- What is in it for the customer. It is always important to ask why the customer would want to enter into this type of contract. If the customer willingly signs, then the practical risk of liability is diminished. If the customer feels coerced, the likelihood of a government investigation or litigation increases.
If you have any questions about the matters raised in this Legal Update, please contact Richard Steuer.
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