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Fourth Circuit Court Finds “Plausible” DOJ’s Assertion That Anti-Steering Provisions Violate Section 1 of Sherman Act

Recently, Judge Robert T. Conrad, Jr. of the United States District Court for the Western District of North Carolina (Charlotte Division), rejected efforts by The Charlotte- Mecklenberg Hospital Authority, doing business as the Carolinas Health Care System (“CHS”), to dismiss, at the pleadings stage, a complaint filed by the United States’ Antitrust Division of the Department of Justice, and the State of North Carolina, asserting that CHS’s anti-steering provisions in its payer contracts unreasonably restrain trade in violation of section 1 of the Sherman Act. Recognizing the Court’s limited review of preliminary motions, Judge Conrad, in the matter styled as United States of America et al v. The Charlotte-Mecklenberg Hospital Authority d/b/a Carolinas Health Care System, Civil Action No.3:16-cv-00311-RJC-DCK (W.D. N.C., Mar. 30,2017), ultimately concluded that the allegations of the Complaint, taken as true for purposes of ruling on the motion, asserted a claim that was “plausible,” meeting the pleading standards established by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544,570 (2007).

The complaint alleges that CHS is the largest hospital system in the Charlotte, North Carolina area, operating ten acute-care hospitals and garnering a market share of fifty percent (50%). CHS’s next closest competitor is alleged to have only half the number of acute-care hospitals, and less than half of CHS’s annual revenue. The complaint also alleges that “[a]n insurer selling health insurance plans to individuals and employees in the Charlotte area must 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.” Based on these purported facts, the Complaint alleges that CHS maintains “market power” for the sale of acute care hospital services in the Charlotte area.

The complaint goes on to assert that CHS maintains anti-steering provisions in many of its payer contracts including those that collectively insure up to eighty-five percent of the insured residents in the Charlotte area. Furthermore, it is alleged that CHS is able to demand these provisions as a result of its market power.

Finally, the Complaint alleges that these anti-steering provisions impose an unreasonable restraint on competition. Among other things, these provisions have the effect of preventing payers from directing patients to lower cost, higher quality providers, and even prohibit payers from providing its enrollees with information about their health care options. The ultimate effect of these provisions is to allow CHS to maintain its dominant position in the market, and maintain supra competitive prices.

CHS filed an Answer to the Complaint, and a motion on the pleadings which is governed by the same standards as a motion to dismiss filed under Federal Rule of Civil Procedure 12 (b) (6). The essence of CHS’s motion is that the Plaintiff’s allegations were conclusory, and, in particular, the Complaint lacked factual allegations that show “actual competitive harm” resulting from the anti-steering provisions. In addition, CHS argued that: the steering restrictions were beneficial and procompetitive; CHS’s prices were higher due to superior product and consumer loyalty; payers were still able to steer and no payer had ever asked to remove the steering provisions. CHS also relied upon the recently issued Second Circuit decision in United States v. American Express Co., 838 F. 3d 179 (2d. Cir 2016), which ultimately rejected a lower Court’s finding, after a bench trial, that similar steering provisions were unlawful.

Judge Conrad ultimately concluded that while many of the allegations in the Complaint were conclusory, and not factual, the Plaintiff had sufficiently alleged anticompetitive harm. In particular, the Complaint contains plausible allegations that CHS maintains market power, and that as a result of this market power CHS is able to force the anti-steering provisions on payers resulting in CHS’s ability to charge supra-competitive prices. Judge Conrad rejected CHS’s additional factual arguments concluding that these were not appropriate arguments to address on a preliminary motion.

Finally, Judge Conrad rejected the invitation to compare the case before him with that of United States v. American Express. In doing so, Judge Conrad noted: 1) he was not bound by a decision of the Second Circuit; 2) the health care industry is different from the credit card industry; and 3) the case before him was still in the preliminary stages while United States v. American Express was decided after discovery and a full trial on the merits.

©2017 Epstein Becker & Green, P.C. All rights reserved.

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About this Author

John Steren, Epstein Becker Law Firm, Health Care Litigation Attorney
Member

E. John Steren is a Member of the Firm in the Health Care & Life Sciences and Litigation & Business Disputes practices, in the Washington, DC, office of Epstein Becker Green. Mr. Steren devotes a significant portion of his practice to helping health care organizations manage the antitrust risks of joint ventures and other business arrangements. He also focuses his practice on other complex commercial and civil litigation matters.

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