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Exclusive Agreement Between Hospital and Insurance Plan Does Not Violate Section 1

The Seventh Circuit refused to revive an exclusive dealing claim by one hospital against its competitor because of an exclusivity agreement with an insurance plan. Judge Richard Posner wrote the short opinion strongly reiterating in the health insurance context the established principle that a competitor trying to attack vertical agreements under Section 1 of the Sherman Act will have an uphill struggle under the Rule of Reason. The case is Methodist Health Services Corp. v. OSF Healthcare System d/b/a Saint Francis Medical Center, No. 16-3791 (7th Cir. June 19, 2017).

Methodist sued Saint Francis claiming that it could not attract a sufficient number of patients because of the exclusive contracts between Saint Francis (the largest hospital in the area) and large Blue Cross Blue Shield insurance plans. The District Court dismissed Methodist’s claims on summary judgment, and the Seventh Circuit affirmed.

Judge Posner, writing for a unanimous panel, held that the procompetitive benefits of the exclusive deal arguably outweighed the anticompetitive effects, finding the vertical exclusivity agreement to be economically efficient. An insurance company or plan can get better rates from a hospital in exchange for exclusive contracts, benefiting the plan and its customers. The court took considerable comfort in the short duration of the agreement as well. Anticompetitive effects are curtailed when an exclusive agreement lasts a short period of time. In this case, Methodist has a shot at outbidding Saint Francis every few years when the exclusive contracts expire, leaving Blue Cross “free to strike deals with other hospitals” including Methodist. Indeed, it is well established that “competition-for-the-contract is a form of competition that antitrust laws protect rather than proscribe, and it is common.”

The Circuit Court also recognized that there was no evidence of the exclusive dealing arrangement actually harming Methodist. Instead, the evidence showed that Methodist was an “unsuccessful competitor” because it lacked special inpatient services required by insurance plans and patients. The Court was similarly not convinced by Methodist’s contention that other insurers and smaller hospitals were harmed by the exclusive deal because they never joined Methodist’s suit. In the end, “Methodist doesn’t have any theory of how Saint Francis’s exclusive contracts could have caused prices to rise.”

The takeaway is straightforward, but important. Without direct proof of harm to competition, not simply a specific competitor, short exclusive dealing contracts between a hospital and insurance plan do not violate Section 1. The Methodist case is yet another example that a competitor plaintiff faces a very significant evidentiary burden to prove that a vertical agreement is anticompetitive under the rule of reason.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

David Garcia Sheppard Mullin complex civil litigation attorneyantitrust law
Partner

David Garcia is a partner in Sheppard, Mullin, Richter & Hampton LLP's Century City office, where he is also the Office Managing Partner. He is a litigator with a broad background in complex civil litigation for major U.S. companies, including extensive class action and multidistrict litigation experience. His practice focuses  principally on antitrust litigation and counseling with particular emphasis on the entertainment industry, provider side healthcare mergers and the intersection between antitrust and intellectual property in litigation and joint ventures.

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Nadezhda Nikonova, Antitrust and Trade Regulation Attorney, Sheppard Mullin
Associate

Nadezhda Nikonova is an associate in the Antitrust and Trade Regulation Practice Group in the firm's San Francisco office. Her practice focuses on high-technology cartel and monopolization cases. She has special experience working with expert witnesses and applying sophisticated economic analysis to antitrust law.

Ms. Nikonova earned her J.D. from the University of California, Berkeley School of Law (Boalt Hall), where she was awarded the Certificate in Business Law. During law school, she was the Editor-in-Chief of the Berkeley Business Law Journal, clerked at the Federal Trade Commission’s Bureau of Competition, and served as a research assistant to revise an antitrust law textbook.

Ms. Nikonova formerly worked as an economic analyst with expert witnesses on antitrust litigation and merger clearance matters. She received her B.A. summa cum laude in economics and psychology from UCLA.

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