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THE LATEST: DOJ Announces Settlement with Carolinas Health System (Atrium Health) After Two Years of Litigation

The Department of Justice (DOJ) announced last week that it and the State of North Carolina have reached a settlement with Carolinas Healthcare System / Atrium Health relating to provisions in contracts between the health system and commercial insurers that allegedly restrict payors from “steering” their enrollees to lower-cost hospitals. The settlement comes after two years of civil litigation, and serves as an important reminder to hospital systems and health insurers of DOJ’s continued interest in and enforcement against anti-steering practices.

WHAT HAPPENED:

  • On June 9, 2016, the DOJ and the State of North Carolina filed a complaint in the Western District of North Carolina against the Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Healthcare System, now Atrium Health (Atrium).

  • In its complaint, DOJ accused Atrium of “using unlawful contract restrictions that prohibit commercial health insurers in the Charlotte area from offering patients financial benefits to use less-expensive health care services offered by [Atrium’s] competitors.”

  • DOJ alleged that Atrium held approximately a 50 percent share of the relevant market and was the dominant hospital system in the Charlotte area. DOJ defined the relevant product market as the sale of general acute care inpatient hospital services to insurers in the Charlotte area.

  • DOJ alleged that Atrium used market power to negotiate high rates and impose steering restrictions in contracts with insurers that restrict insurers from providing financial incentives to encourage patients to use comparable lower-cost or higher-quality providers. Such financial incentives include health plan designs that charge consumers lower out-of-pocket costs (such as copays and premiums) for using top-tier providers that offer better value, or for subscribing to a narrow network of providers.

  • Atrium also allegedly prevented insurers from offering tiered networks with hospitals that competed with Atrium in the top tiers, and imposed restrictions on insurers’ sharing of value information with consumers about the cost and quality of Atrium’s health care services compared to its competitors. These “steering restrictions” allegedly reduced competition and resulted in harm to consumers, employers, and insurers in the Charlotte area.

  • Atrium allegedly included these steering restrictions in its contracts with the four largest insurers who in turn provide coverage to more than 85 percent of commercially insured residents in the Charlotte area.

  • On March 30, 2017, the court denied Atrium’s motion for judgment on the pleadings, finding that the government met its initial pleading burden. Atrium had argued that the complaint failed to properly allege that the contract provisions actually lessened competition or lacked procompetitive effects.

  • More than a year later, on November 15, 2018, DOJ announced that the State of North Carolina and DOJ had reached a settlement with Atrium, which prohibits Atrium from continuing its practices of using alleged steering restrictions in contracts with commercial health insurers. The proposed settlement also prevents Atrium from “taking actions that would prohibit, prevent, or penalize steering by insurers in the future.” The agreement lists certain prohibitions and permissions for Atrium; for example, that Atrium may not enforce existing alleged anti-steering provisions, and must allow payors to be transparent with consumers about price, cost and quality information. However, Atrium is permitted to enforce other contract provisions that protect against carve outs (where an insurer unilaterally removes a health care service from coverage in a health plan), and may restrict payor steering for any co-branded plan or narrow network in which Atrium is the most prominently-featured provider.

WHAT THIS MEANS:

  • Going forward, both DOJ and the Federal Trade Commission (FTC) are likely to investigate similar contract provisions by health systems susceptible to allegations of market power. The resolution of the Atrium matter comes just one month after Senator Chuck Grassley sent a letter to FTC Chairman Joseph Simons, asking FTC to investigate certain allegedly anticompetitive hospital system managed care contracting practices and to assess how prevalent they are in the marketplace. Senator Grassley’s October 10 letter cited to a recent Wall Street Journal article detailing various provisions said to increase health care costs and restrict patient choice, including anti-steering provisions. The letter cited to the then-pending Atrium case specifically. In the wake of the Grassley letter and the Atrium settlement, hospital systems that have entered into alleged anti-steering provisions with payors may need to expect inquiry from the FTC or DOJ.

  • The Atrium settlement follows the resolution of another DOJ challenge to anti-steering provisions. Earlier this year, in American Express, the Supreme Court rejected DOJ’s challenge to the anti-steering rules that the credit card company imposed on merchants. The cases are distinguishable in part due to the difference in market share of defendants. American Express held 26.4 percent of the credit card market, whereas Atrium allegedly holds 50 percent of the relevant market asserted by DOJ.

  • Many watched the Atrium case as an opportunity for further guidance from the courts on the competitive implications of anti-steering practices, but the settlement means practitioners and industry members must continue to wait for judicial consideration of these types of provisions in the health care industry.

  • The Atrium matter serves as a reminder of the agencies’ interest in alleged anti-steering and other restrictive contracting practices. Now is an opportune time for hospital systems to review their managed care contracting practices for potential antitrust risk under the rule of reason, particularly hospital systems with relatively high shares within concentrated service areas or that have contracting provisions with payors representing a majority of the local patient population that could be characterized as allegedly restrictive.

© 2019 McDermott Will & Emery

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About this Author

Jeffrey W. Brennan, McDermott Will Emery Law Firm, Antitrust Attorney
Partner

Jeffrey W. Brennan is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He focuses his practice on mergers, litigation, government investigations and counseling, with extensive experience across a broad range of industries, including the health care sector. 

202-756-8127
Ashley Fischer, Partner, Health Industry, Attorney, McDermott Will Law firm
Partner

Ashley Fischer is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  She is Partner-in-Charge of the Health Industry Advisory Practice Group in Chicago.  She also co-chairs the Health Antitrust Affinity Group.

Ashley represents healthcare providers on a wide range of corporate and regulatory matters, focusing on affiliations, collaborations, joint ventures, managed care contracting networks such as clinically-integrated networks (CINs) and accountable care organizations (ACOs), and other health reform initiatives and alignment strategies. Ashley provides corporate transactional and antitrust counseling for these projects. Her antitrust counseling practice includes assessment of the implications of the formation and operation of these collaborations, such as analyses of competitive effects, sufficiency of integration, ancillary restraints, restrictive covenants, and ongoing conduct.

312-984-7766
Partner

Stephen Wu is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Chicago office. He focuses his practice on complex litigation, mergers and acquisitions, and counseling clients on pricing and distribution issues. Stephen has represented clients in a wide variety of industries including: aerospace, biotechnology, consumer products, energy, food, and health care.

Stephen has defended clients in private litigation against federal and state antitrust and unfair competition claims, and represented...

312-984-2180
Michelle S. Lowery, antitrust attorney with McDermott Will law firm
Partner

Michelle S. Lowery is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  She focuses her practice on antitrust and competition.

Michelle has experience in antitrust counseling and litigation, mergers, criminal antitrust, internal investigations and white collar defense.  She has represented clients in a broad range of matters, including litigating Sherman Act, RICO, Lanham Act, FTC Act, breach of contract, business torts, unfair competition, false advertising, trademark and patent...

312-984-2139
Ashley McMahon, Mc Dermott Law Firm, Antitrust and Regulatory Attorney
Associate

Ashley (Lee) McMahon focuses her practice on regulatory and antitrust matters.

Lee also maintains an active pro bono practice and assisted in winning political asylum for a client. As a law clerk for the Parole Division of the DC Public Defender Service, she represented clients before the US Parole Commission at probable cause, short-term intervention for success (SIS) and final revocation hearings, and won release for clients.

Lee spent nearly four years as a paralegal before law school, where she provided assistance...

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