June 26, 2017

Seventh Circuit Rejects Challenge to Hospital’s Exclusive Contracts with Insurers

Holland & Knight Healthcare Blog
David C. Kully
The news is not all bad for large hospitals in Illinois facing antitrust challenges. Holland & Knight reported previously on unsuccessful efforts by Advocate Health Care Network and NorthShore University HealthSystem to overcome an FTC challenge to their merger. Saint Francis Medical Center, the largest hospital in Peoria, Ill., recently had better success when Judge Richard Posner of the Court of Appeals for the Seventh Circuit affirmed summary dismissal of antitrust claims brought against it.

Saint Francis’ case concerned the permissibility of exclusive contracts it entered into with insurers. These contracts made Saint Francis the only in-network hospital for certain large plans covering patients in Peoria. The case was brought by Saint Francis’ largest hospital competitor in Peoria, Methodist Health Care Services Corp., which complained that the exclusive contracts prevented it from obtaining a sufficiently high volume of patients to allow it to make the investments it needs to improve its facilities.

Judge Posner quickly disposed of Methodist’s complaints. He observed that exclusive contracts are “common” and likely would violate the antitrust laws only if Saint Francis locked up so many insurers to long-term exclusive contracts that other hospitals, deprived of patients, were driven into bankruptcy.

This did not describe the competitive environment in Peoria. Saint Francis entered exclusive contracts with insurers covering half of commercially insured patients in Peoria, and its contract were relatively short in duration. It did not coerce insurers to enter exclusive contracts. Saint Francis provided certain services that other Peoria-area hospitals do not provide (and is thus regarded by insurers to be a “must-have” hospital) and likely offered lower rates to insurers willing to commit exclusively – because Saint Francis could expect a higher volume of patients from those insurers than if they remained nonexclusive.

Judge Posner also observed that Methodist itself has entered exclusive contracts with some insurers and can compete for more insurers as Saint Francis’ contracts expire, describing this dynamic as “competition-for-the-contract,” a form of competition that Judge Posner stated the “antitrust laws protect rather than proscribe.”

Finally, Judge Posner noted that Methodist was not joined in the case by other hospitals in Peoria, from which he concluded that Saint Francis’ exclusives might have presented problems for Methodist alone, and not for hospital competition generally.

Hospitals (as well as other companies) can take from Judge Posner’s opinion that exclusive contracts, in many instances, are “common . . . and legal” and can benefit both parties to the contract. But there are limits, and Holland & Knight’s Healthcare & Life Sciences Team and Antitrust, Trade Regulation, and Competition Team are available to work with you to address needs or concerns relating to these issues.

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