Hospitals, Antitrust, the Department of Justice, and Agreements to Not Compete on Marketing

Hospital Antitrust CasesWhat is great about practicing antitrust law is that you take deep dives into the intricacies of different markets from the shelf space in drug stores for condoms—an actual case from several years ago—to insurance brokerage pricing to processed eggs and everything in between.

There are, however, certain industries that repeat themselves in the antitrust world, which isn’t a surprise because some industries are more susceptible to antitrust issues than others. For example, the airline and pharmaceutical industries consistently face antitrust scrutiny because of the nature of their markets and the regulations surrounding them.

But the industry I’d like to discuss here is the health-care or medical industry, and more specifically, hospitals. I’ve found myself with many antitrust and non-antitrust cases involving health-care of one sort or another over the last couple years, so this area has become an interest of mine.

Lately, I have also spent more time than I will publicly admit consuming materials (mostly books, blogs, and podcasts) on health, nutrition, and fitness, which (combined with my health-care cases) has my family often reminding me that I am not a doctor after some well-meaning but often unwelcome advice.

If you follow antitrust, you will notice that there are a lot of cases about hospitals. Why is that? This might seem surprising at first glance because many hospitals are non-profits or government-owned and you probably don’t picture a hospital in your mind when you think of the term “monopolizing.”

(If you can make it through the explanation below, you can read about a recent Department of Justice antitrust action against some Michigan hospitals that apparently agreed not to compete with each other in particular ways).

First, non-profit status is not a defense to the antitrust laws. Whether you have stockholders or owners that keep residual profits or not, you have to play by the antitrust rules. Non-profit entities (and their officers) still seek power, influence and prestige. And, increasingly, state and local government entities are subject to the antitrust laws. I’ve written a lot about that on The Antitrust Attorney Blog; you can access those articles in the State-Action Immunity category.

In fact, after the Supreme Court’s decision in North Carolina State Board of Dental Examiners v. FTC, it seems like many litigants want to go after state boards of various sorts. Anyway, I’ve received many calls about this and there are a few active cases, including one in Texas that I’ve written about.

Second, the health-care industry encompasses a series of narrow product, service, and geographic markets. That is because, except in limited circumstances, most people don’t travel far for medical care. They want to go somewhere near their work or home. So geographic markets are usually regional to a metro area (with some exceptions).

Within each geographic region, there are usually a limited number of hospitals or other medical facilities for particular specialties. Thus, each geographic market, that is each region, has what may be considered an oligopoly, or a handful of competitors that all know and depend upon each other. Whereas the airline industry is effectively a worldwide oligopoly, the markets for hospitals and other medical facilities are often oligopolies within metro areas. From that perspective, it isn’t a surprise that we see many hospital antitrust cases because there are so many different metro areas with oligopolies.

In addition, within hospitals or other medical facilities, there are many specialties. Because you typically can’t substitute a heart transplant with, for example, allergy treatments, each specialty can become its own service market. And when you combine a narrow geographic market with a narrow specialty, you get a lot of small markets and it doesn’t take much volume to be the market leader. (As an aside, there is something called a cluster market that aggregates what might be called sub-markets, but that is a complexity that is for another time).

Third, hospitals merge a lot and that invites antitrust scrutiny. For example, the famous US Supreme Court case of FTC v. Phoebe Putney Health System, Inc.about state-action immunity under the antitrust laws—originated from a hospital merger involving a local government entity and the FTC’s subsequent challenge. If the Department of Justice or Federal Trade Commission thinks that a hospital or medical facility merger will aggregate market power too much, it will often challenge the merger.

Fourth, I won’t even get into the highly regulated and government-control aspect of the health-care industry that raises entry barriers and distorts markets to such an extent that competition issues are inevitable.

With all of that, it really isn’t that surprising that the hospital and health-care industry finds itself facing antitrust scrutiny so often.

Now let’s talk about a concrete example of hospitals and antitrust.

Department of Justice Antitrust Action Alleges Michigan Hospitals Agreed Not to Compete

The Department of Justice recently publicized its complaint and settlement with three hospitals in Michigan that it accused of market-allocation agreements. A fourth accused hospital has declined to settle and will, at least for now, battle the DOJ Antitrust Division in court.

The targeted hospitals operate within the same region, i.e. same relevant geographic market, in southern Michigan, near the Ohio and Indiana borders. The antitrust complaint alleges that these hospitals directly compete with each other to provide healthcare services in south-central Michigan.

According to the Department of Justice, the Michigan hospitals agreed not to market in each other’s territory (which is a subpart of the larger geographic market in which the four hospitals compete).

So, for example, an agreement between two of the hospitals apparently prohibited them from offering certain free health screenings and physician seminars to residents close to the other hospital. These services are marketing services, though they do provide a benefit to consumers in and of themselves. Other marketing restrictions related to a billboard, newspaper advertising, and media releases, among other items.

Even though the agreements are focused on marketing limitations and not customer limitations, they appears to be—at least based upon the alleged facts—market allocation agreements. This is a straightforward per se antitrust violation.

As I have discussed before, market-allocation agreements are the most dangerous antitrust snafu for someone that is not sufficiently aware of how the antitrust laws work. This is because (1) it is not difficult to find yourself engaging in one without realizing it is an antitrust violation; and (2) it is a per se antitrust violation, which is a label that is reserved for the worst of the worst antitrust violations.

The difficulty for many people is that stealing customers and competing aggressively in the market sometimes seems (or feels) distasteful. When you combine that with the fact that people in the same industry often get to know one another as human beings, you can understand how such an arrangement could be hatched with somewhat innocent initial motives: “Let’s just lay off each other’s customers; it will be easier for everyone that way.” Then you order another drink and talk about your kids.

But an agreement like that can bring the wrath of the Department of Justice, the Federal Trade Commission, the European Commission, countless other national antitrust authorities, or worse yet, a herd of antitrust plaintiffs’ attorneys racing to federal court to file a class action against your company.

So—despite the temptations—it is better to skip the agreement and just keep on battling.

And if you are represent a hospital or some other health-care entity, you should be particularly careful because you likely have a target on your back. When it doubt, seek antitrust counsel.