United States: DOJ Anti-Steering Suit Against Carolinas Healthcare Survives Preliminary Motion

On March 30, 2017, in a closely watched case, a federal district court denied the Motion for Judgment on the Pleadings filed by Carolinas Healthcare against the DOJ Antitrust Division and State of North Carolina's Complaint alleging that Carolinas Healthcare insisted on contract provisions with payors that limited or prohibited steering to lower-cost providers. US v. The Charlotte-Mecklenburg Hospital Authority, No. 3:16-cv-00311 (W.D. N.C., Mar. 30, 2017). In its motion, Carolinas Healthcare relied heavily on the Second Circuit decision in United States v. American Express Co., 838 F.3d 179 (2d Cir. 2016), where the Second Circuit had reversed a trial verdict condemning steering restrictions in Amex's contracts with merchants.

According to the Antitrust Division's Complaint, Carolinas Healthcare is the largest hospital system in the Charlotte area, with ten hospitals and a fifty percent share of the inpatient hospital market. The Complaint alleged that Carolinas Healthcare contracts with insurance companies that collectively insure more than eighty-five percent of the commercially insured residents in the Charlotte area. The Complaint further alleged that Carolinas Healthcare successfully inserted contract provisions that ranged from an outright prohibition on insurers steering patients away from Carolinas Healthcare, to granting Carolinas Healthcare the right to terminate the contract for such steering. To the government, regardless of the contract provisions' precise wording, these restrictions consistently created disincentives and deterred insurers from creating tiered networks, the purpose of which is to give consumers lower premiums and out-of-pocket expenses in exchange for choosing from a smaller list of health care providers.

The crux of Carolinas Healthcare's Motion for Judgment on the Pleadings was that the Complaint failed to demonstrate that the contract provisions actually lessened competition, adversely reduced the prices paid, or lacked procompetitive effects. While its Motion was pending with the district court, the American Express appellate opinion came down. Carolinas Healthcare unsurprisingly proffered the opinion as supporting the conclusion that Plaintiffs had not alleged facts sufficient to present a plausible claim of harm to competition.

The district court declined to cut off the government's case at this early stage. The court emphasized that at this stage a complaint would survive if it contains enough facts to state a claim to relief that is plausible on its face. Facial plausibility is present if a complaint contains allegations that allow the court to draw the reasonable inference that the defendant is liable for the conduct alleged.

The district court primarily focused on whether the Complaint alleged anticompetitive effects in the relevant markets. Anticompetitive effects include increased prices, reduced output, or reduced quality. The government could show anticompetitive effects in one of two ways—either an actual effect on competition (direct harm), or sufficient market power to cause an adverse effect on competition (indirect harm).

The district court found that the Complaint contained sufficient allegations of both direct and indirect harm. With respect to direct harm, the district court concluded that the Complaint went beyond "threadbare recitals and conclusory statements" by alleging:

Fundamentally, the court felt that resolution of the direct harm issue is a fact-intensive inquiry. While the result might be different at summary judgement or at trial, the fact-finder would need a full factual record to resolve the issue and must "consider, among other things, the facts peculiar to the health care industry, the effect of the activities on health providers, and the impact of the activities on costs to the ultimate consumer."

Similarly, the district court found that Plaintiffs had alleged sufficient facts to support a conclusion of an unreasonable restraint of trade based upon indirect evidence. The court pointed to allegations of Carolinas Healthcare's fifty percent market share, with more than twice the revenue of its next closest competitor. The Complaint also alleged that Carolinas Healthcare was a must-have participant for insurers' in at least some of their provider networks in order to have a viable health insurance business in the Charlotte area. To the court, the Complaint "is full of reasons to believe" that Carolinas Healthcare's market power has the "potential for genuine adverse effects on competition"—including allegations regarding Carolinas Healthcare's charging prices that are higher than competitive levels and that steering would threaten its position as a high-priced health care provider. Absent the steering restrictions, the Complaint alleged the prospect of lower prices and consumers obtaining care from lower-cost providers.

The district court did not feel bound or influenced by the American Express decision. The court believed that the Second Circuit confronted a different product and a different market, and that its review of the fact-intensive issue involved an opinion issued after trial. To the district court, the Second Circuit's decision turned on an analysis focused on the loyalty of credit card holders to specific cards, which in that context did not support a finding of market power, and which had potentially little applicability to health care markets.

This is an important case for the health care industry. While deciding how vigorously to continue to pursue the case, the new leadership of the Antitrust Division also will need to decide whether to seek Supreme Court review of American Express. Carolinas Healthcare will have to decide whether to endure the expense and uncertainty of preserving its position. Its immediate statement after the decision indicated its intention to see the case through. Further decisions here will be closely watched.

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