The U.S. Department of Justice and the state of North Carolina have filed a civil antitrust lawsuit against one of the largest healthcare systems in the country (http://www.cmcedmasters.com/about-cmc.html).
The governments allege that Charlotte, North Carolina-based Carolinas Healthcare System (CHS) is using “unlawful contract restrictions that prohibit commercial health insurers in the Charlotte area from offering patients financial benefits to use less-expensive healthcare services offered by CHS’s competitors.”
At issue are alleged steering restrictions which CHS imposed in its contracts with insurers “to impede insurers from providing financial incentives to patients to encourage them to consider utilizing lower-cost but comparable or higher quality alternative healthcare providers, ” according to the complaint filed on June 9, 2016.
Steering and Tiering
Steering is a method by which insurers offer consumers healthcare service options in the hope that patients will collaborate with insurers to reduce healthcare expenses. For example, if an insurer offers a financial incentive to use a lower-cost provider or lower-cost provider networks then that could be called “Steering.”
Or, if insurers present to consumers lower premiums or out-of-pocket expenses if they agree to choose from a select network of lower-cost providers—then that may be “Steering.”
Government Allegations
CHS, according to the government’s complaint, took advantage of insurer steering in order to increase its patient volume and revenues. “CHS encourages insurers to steer patients toward itself by offering health insurers modest concessions on its market-power driven, premium prices.”
However, continues the complaint, CHS forbade insurers from allowing CHS’s competitors to do the same. “CHS prevents insurers from offering tiered networks that feature hospitals that compete with CHS in the top tiers, and prevents insurers from offering narrow networks that include only CHS’s competitors. By restricting its competitors from competing for—and benefitting from—steered arrangements, CHS uses its market power to impede insurers from negotiating lower prices with its competitors and offering lower-premium plans.”
CHS also allegedly imposed restrictions in its contracts with insurers that impeded insurers from “providing truthful information to consumers about the value (cost and quality) of CHS’s healthcare services compared to CHS’s competitors. CHS’s restrictions on insurers’ price and quality transparency are an indirect restriction on steering, because they prevent patients from accessing information that would allow them to make healthcare choices based on available price and quality information.”
Because, says the government, CHS’s steering restrictions prevented competitors from attracting more patients through lower prices, CHS’s competitors had less incentive to lower prices and become more efficient.
As a result, alleges the government, CHS reduced competition in the marketplace.
In some instances, the government alleged, the contract language prohibited steering outright. For example, says the government, CHS secured a contractual obligation from one insurer that it “shall not directly or indirectly steer business away from” CHS. In other instances, the contract language gives CHS the right to terminate its agreement with the insurer if the insurer engages in steering.
According to the complaint, “These steering restrictions have had, and will likely to continue to have, the following substantial anticompetitive effects in the relevant product and geographic market, among others:
- protecting CHS’s market power and enabling CHS to maintain at supracompetitive levels the prices of acute inpatient hospital services;
- substantially lessening competition among providers in their sale of acute inpatient hospital services;
- restricting the introduction of innovative insurance products that are designed to achieve lower prices and improved quality for acute inpatient hospital services;
- reducing consumers’ incentives to seek acute inpatient hospital services from more cost-effective providers; and
- depriving insurers and their enrollees of the benefits of a competitive market for their purchase of acute inpatient hospital services.”
Beyond North Carolina
A win for the Justice Department could establish an important legal precedent as hospitals nationwide might have to remove contract provisions that limit competition.
Fiona Scott Morton, a Yale University economics professor who previously helped enforce antitrust laws as a deputy assistant attorney general for the Justice Department, is now an economics professor at Yale University’s School of Management. She told the Charlotte Observer that if the DOJ prevails, hospitals across the country would likely feel compelled to remove contract provisions that tend to reduce competition and increase health care prices.
Carolinas Healthcare System
CHS is a large general acute-care hospital located in downtown Charlotte. It also operates nine other general acute-care hospitals in the Charlotte area. It has more than 900 care locations which includes more than 7, 500 licensed beds, employs nearly 60, 000 people and accounts for almost 12 million patient interactions each year.
CHS is the dominant hospital system in the area, with, according to the complaint, approximately a 50% share of the relevant market, and 2014 revenue of approximately $8.7 billion. Its closest competitor, Novant, has less than half of CHS’s revenue.
The Insurers
Four insurers provide coverage to more than 85% of the commercially insured residents of the Charlotte area. They are: Aetna Health of the Carolinas, Inc., Blue Cross Blue Shield of North Carolina, Cigna Healthcare of North Carolina, Inc., and United Healthcare of North Carolina, Inc.
The insurers contract to purchase acute inpatient hospital services from hospitals within the geographic area where their enrollees are likely to seek medical care. An insurer selling health insurance plans to individuals and employers in the Charlotte area must, according to the government, have CHS as a participant in at least some of its provider networks, in order to have a viable health insurance business in the Charlotte area.
Market Dominance
As the big dog in the area, CHS, says the government, has market power with commercial insurers due to its size, comprehensive range of services, large market share, and insurers’ need to include access to CHS’s hospitals—as well as its other facilities and providers—in at least some of their provider networks in insurance plans that cover people in the Charlotte area.
“Through this market dominance, CHS has the ability to charge prices to insurers that are higher than competitive levels across a range of services, and to impose on insurers restrictions that reduce competition. CHS has long had a reputation for being a high-priced healthcare provider.”
While not a smoking gun, CHS executives are aware of their market dominance.
According to the complaint, CHS’s internal strategy group recognized that CHS “has enjoyed years of annual reimbursement rate increases that are premium to the market, with those increases being applied to rates that are also premium to the market.”
In 2013, CHS’s internal strategy group surveyed a dozen of CHS’s senior leaders, asking them to list the biggest risks to CHS revenue streams. Nine of the twelve leaders polled identified the steering of patients away from CHS as one of the biggest risks to CHS’s revenues.
Because of its geographic reach, the government says, competition from providers of acute inpatient hospital services located outside the Charlotte area would “not likely be sufficient” to prevent a hypothetical monopolist provider of acute inpatient hospital services located in the Charlotte area from profitably imposing small but significant price increases for those services over a sustained period of time.
“Thus, the restrictions help to insulate CHS from competition, by limiting the ability of CHS’s competitors to win more commercially-insured business by offering lower prices.”
“For years, insurers have tried to negotiate the removal of steering restrictions from their contracts with CHS, but cannot because of CHS’s market power.”
“Americans should be able to choose a healthcare provider that gives them and their families the most cost-effective and appropriate treatment, ” Principal Deputy Assistant Attorney General Renata B. Hesse, head of the Justice Department’s Antitrust Division, said in prepared remarks.
CHS Digs In
CHS says the kinds of contract restrictions it negotiates with insurers are common nationally.
In a statement released to the media, CHS said it will contest the allegations, which the health system characterized as “a dispute over certain language” in contracts with insurance companies.
“Our arrangements with insurers are similar to those in place between insurers and healthcare systems across the country. We have neither violated any law nor deviated from accepted healthcare industry practices for contracting and negotiation, ” said the CHS statement.
The system is gearing up for a big fight by hiring the law firm of David Boies, one of the nation’s best known litigators. Boies represented Al Gore in front of the U.S. Supreme Court in 2000 and won the recent gay marriage case.
Government Demands
The United States and the State of North Carolina request that the Court:
- adjudge that all of the steering restrictions in the contracts between CHS and any insurer violate Section 1 of the Sherman Act;
- enjoin CHS, its officers, directors, agents, employees, and successors, and all other persons acting or claiming to act on its behalf, directly or indirectly, from seeking, agreeing to, or enforcing any provision in any agreement that prohibits or restricts an insurer from engaging, or attempting to engage, in steering towards any healthcare provider;
- enjoin CHS from retaliating, or threatening to retaliate, against any insurer for engaging or attempting to engage in steering; and
- award Plaintiffs their costs in this action and such other relief as the Court may deem just and proper.
Anytime the law firm of David Boies is involved, the case may end up in the Supreme Court and decide important public policy issues regarding providers, payers, surgeons and patients.
