Hospitals and insurers may be illegally blocking competitors.

Health-care sector facing increased antitrust scrutiny
By Julie Appleby
Washington Post
April 4, 2011

Amid growing concern about rising health-care costs, the Justice Department is stepping up efforts against hospitals and insurers that it suspects are illegally blocking competitors.

Department officials are not talking, but a recent settlement the government reached with a Texas hospital system has antitrust experts buzzing.

In the first case of its kind since 1999, the department sued United Regional Health System in Wichita Falls for allegedly giving health insurers strong incentives not to do business with rival hospitals. That practice allowed United Regional to keep its monopoly, according to the lawsuit, while also becoming one of the most expensive hospitals in the state.

The hospital disputes some of the findings of the case but agreed late last month to a settlement requiring it to change how it contracts with private insurers.

Antitrust lawyer Matthew Cantor of the New York law firm Constantine Cannon, who was not connected with the case, said the court challenge shows that the Justice Department is “looking at ways in which dominant hospitals or conglomerations of medical practices are conspiring to increase medical costs.”

In the past two years, the department also has settled with a group of Idaho orthopedists over allegations that they conspired to drive up prices and stopped the two biggest Lansing, Mich., insurers from merging, citing “a likelihood of unilateral price increases.”

The Texas settlement comes on the heels of a department lawsuit filed in October against Blue Cross Blue Shield of Michigan over contracts that require hospitals to guarantee the lowest prices to the Blues plan. The department contends that the contracts improperly raise costs for other insurers and their customers. Blues plan administrators say the lawsuit is without merit and are fighting it.

The Wall Street Journal reported that the department has expanded its investigation of such contracts to other insurers, including CareFirst BlueCross BlueShield, which does business in Northern Virginia, Maryland and the District.

Even as they increase enforcement efforts, federal antitrust authorities are planning a more flexible response to select groups of doctors and hospitals that form accountable-care organizations, or ACOs, an experimental model of payment and care authorized by last year’s health law. But, at least initially, ACOs will compose only a tiny fraction of the health-care market; the type of actions that got the Texas hospital in trouble, for example, would remain illegal for ACOs.

Robert Leibenluft, former assistant director for health care in the Federal Trade Commission’s Bureau of Competition under President George W. Bush, sees a pattern in the lawsuits filed in Texas and Michigan: “Increased scrutiny by the DOJ of both health plans and providers who have market power.” He specializes in antitrust law at the D.C. firm Hogan Lovells.

The department’s actions coincide with increasing concern by policy experts over the impact of a decade of consolidation among hospitals, insurers and doctor groups. Some mergers have led to sharp increases in health-care costs, the FTC has found in a number of studies, although not all do.

Justice officials would not comment on the Texas case or others they are working on.

At a conference last May in Arlington, Justice antitrust chief Christine Varney promised an aggressive approach to challenging health-sector mergers and contracts used to keep out new rivals.

The success of the health-care overhaul law approved by Congress, she said, partly depends on “healthy competitive markets free from undue concentration and anti-competitive behavior.”

While watching for those problems, Varney told lawyers at that conference that the department will try not to impede more health-sector partnerships to improve quality and contain costs. Some policy experts say the new emphasis on coordination — encouraged by the health law — could also spur more market consolidation among medical providers in some markets.

“The key,” she said, “is whether we can gain those benefits without sacrificing meaningful competition.”

The Texas case revolved around contracts United Regional offered to insurers starting in 1998, according to the complaint and settlement agreement filed in U.S. District Court on Feb. 25 by the Justice Department and Texas attorney general’s office. The contracts offered insurers steep discounts, but only if they agreed not to contract with other hospitals or outpatient facilities in the area.

At the time, 369-bed United Regional was the only hospital in Wichita Falls, population 100,000. But a group of doctors was working to build a far smaller rival facility, said surgeon Jerry Myers, who led the effort and is now chief executive of the 41-bed Kell West Regional Hospital.

If insurers signed with a rival medical center, the discounts would be dropped and they would have to pay close to full charges.

Such pricing practices aren’t “just about charging higher prices generally, it’s strategically charging prices in a way specifically designed to keep out competition,” said Tim L. Greaney, an antitrust expert and director of the Center for Health Law Studies at St. Louis University.

Within three months of Kell’s opening, United Regional had signed the now-disputed contracts with five health insurers and by 2010 had eight insurers, according to the federal lawsuit. The only insurer in the region that didn’t sign was the largest, Blue Cross Blue Shield of Texas.

Even with the discounts offered to insurers, United Regional became expensive, the complaint alleges. An analysis by a major insurer cited in court documents concluded that payments from insurers for hospital care at United Regional were at least 50 percent higher than average amounts paid in seven other comparable Texas cities. For services offered at both United and Kell, the big hospital’s average per-day rate for care was 70 percent higher.

The hospital disagrees with the way the Justice Department applied the law. “We believe then and now that these contracts were appropriate and legal,” United Regional chief executive Phyllis Cowling said.

Cowling also disputes the department’s cost findings. “We are paid a little bit more by insurers, but I know it’s not 70 percent,” she said. “It’s probably some 10 percent or 15 percent more, based on our numbers.”

The hospital is under orders to remove the exclusionary contract provisions. It will continue to honor the deeper discounts offered to its insurers, even if they sign deals with Kell, Cowling said.

Kaiser Health News (www.kaiserhealthnews.org) is an editorially independent news service of the Kaiser Family Foundation, a nonpartisan health-care policy organization that is not affiliated with Kaiser Permanente.