• Exclusive Contracts Between Hospitals and Health Insurance Plans
  • March 26, 2004 | Authors: John E. Linville; Martin J. Thompson; Eliot G. Disner
  • Law Firms: Manatt, Phelps & Phillips, LLP - New York Office; Manatt, Phelps & Phillips, LLP - Costa Mesa Office; Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • What happens when the two major hospitals in a local market do not merge, but sign exclusive contracts with major health insurers there? Two recent developments illustrate the risks involved when such exclusive contracts significantly affect competition.

    In October 2003 a federal court awarded a $16.2 million antitrust verdict to McKenzie-Willamette Hospital in Eugene, Oregon, a hospital found to have been victimized by such an exclusive arrangement. Sacred Heart Hospital, also in Eugene, had the area's only cardiovascular surgery and neonatal services. Sacred Heart used its market position in those services to extract an essentially exclusive contract with Regency Blue Cross that provided health insurance to one-third of the residents in the county where Eugene is located. Although the contract was not strictly exclusive, Sacred Heart charged more for neonatal and cardiac services in plans that permitted patients to use McKenzie-Willamette. The jury found this to be an illegal attempt to monopolize and awarded damages of $5.4 million, which were trebled by the court to a $16.2 million verdict.

    A similar claim was recently rejected in another private antitrust case, this time in Tennessee. Western Tennessee Healthcare, Inc. was alleged to have 80% of the hospital services market in western Tennessee and 99% of the managed care business. It signed allegedly exclusive contracts with local Blue Cross plans. Those contracts were alleged to have frozen one competitor, Regional Hospital, out of the market. Regional sued, with amicus support from the Tennessee Attorney General. In a February 27, 2004 opinion, the court dismissed the claim on the basis that the defendants enjoyed "state action" immunity by virtue of being a hospital operated by a hospital district created by state legislation. "State action" defenses are rarely available to purely private hospitals and often not available even to public hospitals unless the anticompetitive conduct is authorized by a state program.

    The immunity aspect of this case limits its precedential value, but it serves as a further reminder of frequent sensitivities to exclusionary managed care activities.