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Hospitals And Insurers Face Growing Antitrust Scrutiny

Apr 05, 2011

This story was produced in collaboration with wapo

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

Department officials aren’t 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 it also became 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 attorney Matthew Cantor of the New York law firm Constantine Cannon, who was not connected with the case, says the court challenge shows the DOJ 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 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 last week that the department has expanded its investigation of such contracts to other insurers, including CareFirst Blue Cross Blue Shield, which does business in Northern Virginia, Maryland and the District of Columbia, and Wellpoint, which offers Blues plans in Ohio and Missouri.

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 comprise 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 currently specializes in antitrust law at the Washington firm Hogan Lovells.

Rising Health Costs Invite Closer Scrutiny

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 Federal Trade Commission has found in a number of studies, although not all do.

Justice officials would not comment on the Texas case or others it is working on.

At a conference last May in Arlington, Va., DOJ 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 anticompetitive behavior."

Pricing Practices Focus Of Texas Case

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 Feb. 25 by the DOJ and Texas attorney general’s office after an 18-month investigation. The contracts offered insurers steep price discounts, but only if they agreed not to contract with any other hospital or outpatient facility in the area.

At the time, 369-bed United Regional was the only hospital in Wichita Falls, population 100,000, having merged with another hospital. But a group of doctors was actively working to build a far smaller rival facility, says surgeon Jerry Myers, who led the effort and is now CEO of the 41-bed Kell West hospital.

If insurers did sign 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," says Tim L. Greaney, an antitrust expert and director of the Center for Health Law Studies at St. Louis University.

Within three months of Kell opening, United Regional had signed the now-disputed contracts with five health insurers and by 2010 had eight insurers, according to the DOJ lawsuit.  The only insurer that didn't sign was the largest in the region, 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 the 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,  says United Regional CEO Phyllis Cowling: "We believe then and now that these contracts were appropriate and legal."

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," says Cowling. "It's probably some 10 percent or 15 percent more, based on our numbers."

Going forward, the hospital is under orders to remove the exclusionary contract provisions. It will continue to honor the deeper discounts to charges already offered to its insurers – even if they now sign deals with Kell, she says.

Patients "choose United Regional because of quality, service and safety," says Cowling. "The absence of these contracts really won't matter."

Myers says he is pleased with the settlement.

"What they did here was not simply find a problem for Kell West, but for the community," Myers says of investigation by federal regulators, which he had repeatedly requested for years. "People have paid 70 percent more than they should have."

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