The Department of Justice (DOJ) announced last week that it and the State of North Carolina have reached a settlement with Carolinas Healthcare System / Atrium Health relating to provisions in contracts between the health system and commercial insurers that allegedly restrict payors from “steering” their enrollees to lower-cost hospitals. The settlement comes after two years of civil litigation, and serves as an important reminder to hospital systems and health insurers of DOJ’s continued interest in and enforcement against anti-steering practices.

WHAT HAPPENED:

  • On June 9, 2016, the DOJ and the State of North Carolina filed a complaint in the Western District of North Carolina against the Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Healthcare System, now Atrium Health (Atrium).
  • In its complaint, DOJ accused Atrium of “using unlawful contract restrictions that prohibit commercial health insurers in the Charlotte area from offering patients financial benefits to use less-expensive health care services offered by [Atrium’s] competitors.”
  • DOJ alleged that Atrium held approximately a 50 percent share of the relevant market and was the dominant hospital system in the Charlotte area. DOJ defined the relevant product market as the sale of general acute care inpatient hospital services to insurers in the Charlotte area.
  • DOJ alleged that Atrium used market power to negotiate high rates and impose steering restrictions in contracts with insurers that restrict insurers from providing financial incentives to encourage patients to use comparable lower-cost or higher-quality providers. Such financial incentives include health plan designs that charge consumers lower out-of-pocket costs (such as copays and premiums) for using top-tier providers that offer better value, or for subscribing to a narrow network of providers.
  • Atrium also allegedly prevented insurers from offering tiered networks with hospitals that competed with Atrium in the top tiers, and imposed restrictions on insurers’ sharing of value information with consumers about the cost and quality of Atrium’s health care services compared to its competitors. These “steering restrictions” allegedly reduced competition and resulted in harm to consumers, employers, and insurers in the Charlotte area.
  • Atrium allegedly included these steering restrictions in its contracts with the four largest insurers who in turn provide coverage to more than 85 percent of commercially insured residents in the Charlotte area.
  • On March 30, 2017, the court denied Atrium’s motion for judgment on the pleadings, finding that the government met its initial pleading burden. Atrium had argued that the complaint failed to properly allege that the contract provisions actually lessened competition or lacked procompetitive effects.
  • More than a year later, on November 15, 2018, DOJ announced that the State of North Carolina and DOJ had reached a settlement with Atrium, which prohibits Atrium from continuing its practices of using alleged steering restrictions in contracts with commercial health insurers. The proposed settlement also prevents Atrium from “taking actions that would prohibit, prevent, or penalize steering by insurers in the future.” The agreement lists certain prohibitions and permissions for Atrium; for example, that Atrium may not enforce existing alleged anti-steering provisions, and must allow payors to be transparent with consumers about price, cost and quality information. However, Atrium is permitted to enforce other contract provisions that protect against carve outs (where an insurer unilaterally removes a health care service from coverage in a health plan), and may restrict payor steering for any co-branded plan or narrow network in which Atrium is the most prominently-featured provider.

WHAT THIS MEANS:

  • Going forward, both DOJ and the Federal Trade Commission (FTC) are likely to investigate similar contract provisions by health systems susceptible to allegations of market power. The resolution of the Atrium matter comes just one month after Senator Chuck Grassley sent a letter to FTC Chairman Joseph Simons, asking FTC to investigate certain allegedly anticompetitive hospital system managed care contracting practices and to assess how prevalent they are in the marketplace. Senator Grassley’s October 10 letter cited to a recent Wall Street Journal article detailing various provisions said to increase health care costs and restrict patient choice, including anti-steering provisions. The letter cited to the then-pending Atrium case specifically. In the wake of the Grassley letter and the Atrium settlement, hospital systems that have entered into alleged anti-steering provisions with payors may need to expect inquiry from the FTC or DOJ.
  • The Atrium settlement follows the resolution of another DOJ challenge to anti-steering provisions. Earlier this year, in American Express, the Supreme Court rejected DOJ’s challenge to the anti-steering rules that the credit card company imposed on merchants. The cases are distinguishable in part due to the difference in market share of defendants. American Express held 26.4 percent of the credit card market, whereas Atrium allegedly holds 50 percent of the relevant market asserted by DOJ.
  • Many watched the Atrium case as an opportunity for further guidance from the courts on the competitive implications of anti-steering practices, but the settlement means practitioners and industry members must continue to wait for judicial consideration of these types of provisions in the health care industry.
  • The Atrium matter serves as a reminder of the agencies’ interest in alleged anti-steering and other restrictive contracting practices. Now is an opportune time for hospital systems to review their managed care contracting practices for potential antitrust risk under the rule of reason, particularly hospital systems with relatively high shares within concentrated service areas or that have contracting provisions with payors representing a majority of the local patient population that could be characterized as allegedly restrictive.

After a seven-week bench trial in an enforcement action by the U.S. Department of Justice (DOJ) and 17 state attorneys general, U.S. District Judge Garaufis (Eastern District of New York) held that American Express Co.’s (Amex’s) “anti-steering” rules (Non-Discrimination Provisions or NDPs) are an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act.  The NDPs in Amex’s agreements with merchants prevent merchants from attempting “to induce or ‘steer’ a customer” from paying with non-AmEx credit cards by, for instance, offering discounts or incentives to customers paying with other cards, even though “the cost of [such] transaction[s] [would likely] be lower for the merchant.”  At bottom, the court’s holding centered on its conclusion that “these NDPs create an environment in which there is nothing to offset [Amex’s incentive] to charge merchants inflated prices [to process transactions, which] results in higher costs to all consumers who purchase goods and services from these merchants.”

In the initial step of its rule-of-reason analysis—DOJ’s burden to demonstrate that the NDPs “have had an ‘adverse effect on competition as a whole in the relevant market,’” which may be met by “establishing that [Amex] had sufficient market power to cause an adverse effect on competition”—the court focused first on market definition, then market power and anticompetitive effects.

Regarding the relevant market, Amex argued that it includes both debit and credit cards.  It distinguished United States v. Visa, where the Second Circuit held that credit cards and debit cards are distinct relevant markets, in light of “the dramatic growth in customers’ use of debit cards” since that 2003 decision.  The court disagreed, finding that “debit cards have not become reasonably interchangeable with [credit] cards or network services in the eyes of credit-accepting merchants, who are the relevant consumers in this case.”  Rather, the court employed a market definition comprising only credit cards, where AmEx holds a 26 percent share.  The court did, however, reject DOJ’s argument for an even smaller submarket, i.e., credit card services for only travel and entertainment merchants (where Amex’s market share is even higher), based on its finding that DOJ failed to show that credit card companies are able to charge discriminatory prices to those merchants.

The court went on to conclude that “Amex’s NDPs have adversely affected competition in the [relevant] market, and [Amex] possesses sufficient market power to cause such effects.”  The court found that Amex “enjoy[s] significant market share in a highly concentrated market with high barriers to entry, and are able to exercise uncommon leverage over their merchant-consumers,” for instance by “imposing significant price increases . . . without any meaningful merchant attrition.”  The court also found actual adverse effects on interbrand competition (i.e., that the NDPs “render[] low-price business models untenable, stunt[] innovation, and result[] in higher prices”), reasoning that the NDPs “deny[] merchants the opportunity to influence their customers’ payment decisions and thereby shift spending to less expensive cards[, such that the NDPs] impede a significant avenue of horizontal interbrand competition in the [relevant] market.”

In the second step of its rule-of-reason analysis—Amex’s burden “to offer evidence of the pro-competitive effects of their agreement”—Amex argued that its NDPs “are reasonably necessary (1) to preserve [their] differentiated business model and thus [their] ability to drive competition in the network services market, and (2) to prevent merchants from ‘free-riding’ on [their] investments in [their] merchant and cardholder value propositions.”  The court ultimately disagreed, holding that “these purported justifications do not offset, much less overcome, the more widespread and injurious effects of the NDPs on interbrand competition in the relevant market.”  Accordingly, the court found a Section 1 violation without reaching the third step of a rule-of-reason analysis (DOJ’s potential burden “to prove that any ‘legitimate competitive benefits’ proffered by [Amex] could have been achieved through less restrictive means”).

Despite holding the NDPs illegal and recognizing that, “[i]f necessary, the court will itself craft an injunction that implements the Decision and renders [Amex’s] contractual provisions compliant with the antitrust laws,” the court expressed reluctance to “intervene in [this] highly complex and high-stakes industry” by requiring “wholesale abandonment” of Amex’s merchant regulations.  So, the court—averring that “the parties themselves are likely best equipped to determine how [Amex’s] merchant regulations might be rewritten” in a manner that preserves their pro-competitive aspects (i.e., “preserving a positive point-of-sale experience for [Amex’s] cardholders[] and protecting their products from actual mistreatment, mischaracterization, or denigration by merchants”) issued a scheduling order giving the parties 30 days to propose a remedial order.

The case is U.S. et al. v. American Express Co. et al., 1:10-cv-04496-NEG-RER (E.D. N.Y., Feb. 19, 2015); the decision, scheduling order and other case documents are available here.