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DOJ and North Carolina Challenge Anti-Steering and Tiering Provisions in Managed Care Contracts

The Department of Justice’s antitrust division (the “DOJ”) and the State of North Carolina (“NC”) jointly sued, on June 9, 2016, Carolinas HealthCare System (“CHS”), the largest healthcare system in North Carolina, over anti-steering restrictions in its managed care contracts that the DOJ believes limits competition. In its complaint, the DOJ and NC claim that CHS used its market power to impose unlawful restrictions in its contracts that prevent “commercial health insurers in the Charlotte area from offering patients financial benefits to use less-expensive healthcare services offered by CHS’s competitors,” thereby violating Section 1 of the Sherman Act and harming the Charlotte community. The DOJ and NC seek to enjoin CHS from: (a) enforcing the steering restrictions in its insurance contracts, and (b) retaliating or threatening to retaliate against any insurer for engaging or attempting to engage in steering.

In the complaint, the DOJ and NC define steering as “a method by which insurers offer consumers of healthcare services options to reduce some of their healthcare expenses.” Such steering may be implemented through the creation of a tiered network system in which lower-cost, high-quality providers are in a top tier, and higher-cost and lower-quality providers are in a low tier, with out-of pocket costs being lower to consumers for the use of higher tier providers.

In a post-Affordable Care Act environment in which we have seen increased use of tiered network design and narrow network products by both insurers and employers, steering restrictions and anti-tiering provisions are sought by some providers for reasons that may include an effort to preserve volume as price concessions are made.

Providers relying on such contractual protections will need to keep a close eye on the unfolding of this case.

According to the complaint, four of CHS’s major contracts contain steering restrictions and anti-tiering provisions. The complaint alleges that CHS imposed on insurers steering restrictions that prevent insurers from offering tiered networks that feature competitive hospitals in the top tier, that prevent insurers from offering narrow networks that include only CHS’s competitors, and that impede insurers from providing truthful information to consumers about the value of CHS’s healthcare services compared to its competitors. The DOJ and NC have taken the position that CHS, through these restrictions, is using “its market power to impede insurers from negotiating lower prices with its competitors and offering lower-premium plans.” They argue that if there were no steering restrictions, the insurers would be able to find lower-cost options for consumers compared to what is currently available. The complaint alleges that CHS maintains an approximately 50% share of inpatient hospital services in the relevant geographic market comprised of the Charlotte area, which allows it to exert market power to obtain these steering restrictions in its managed care contracts.

This is a case to be watched closely, particularly by large health care systems and other providers that may have market power and may rely on similar provisions in their negotiations with payors.

Allie Shalom is co-author of this article.

© 2019 Foley & Lardner LLP

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About this Author

C. Frederick Geilfuss II, Health Care Attorney, Foley Lardner Law Firm
Partner

C. Frederick Geilfuss II is a partner and health care lawyer with Foley & Lardner LLP. Mr. Geilfuss counsels health systems, hospitals, medical clinics, rehabilitation agencies, nursing homes, and other health care providers on general operational concerns, regulatory and business matters. He has many years of experience in health care acquisitions, integrated delivery service issues, managed care contracting, defense of providers against government enforcement actions, finance, real estate, administrative and medical staff issues, physician recruitment, fraud and...

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Alexis Bortniker, Health Care Attorney, Foley Lardner Law Firm
Partner

Alexis Bortniker is a senior counsel and health care lawyer with Foley & Lardner LLP. Her practice focuses on transactional and regulatory matters with an emphasis on counseling health systems, hospitals, and other providers in managed care and physician contracting. Ms. Bortniker is a member of the firm’s Health Care Industry Team.

Previously, Ms. Bortniker was an associate with Choate Hall & Stewart LLP where she gained experience working directly with health care organizations on regulatory and corporate compliance issues, including the development of internal policies and procedures and the review of contracts and employment relationships.

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