Hospital Economic Credentialing Battles Continue

12 February 2010 Publication
Authors: H. Holden Brooks James T. McKeown Michael A. Naranjo David W. Simon

Legal News Alert: Antitrust

Two recent cases involving antitrust challenges to large hospital systems brought by physician-owned hospitals (POH) may be of interest to those following the fate of such cases. In one, the POH plaintiffs failed to surmount the same hurdle that has long foiled plaintiffs bringing antitrust claims against hospitals — the definition of the relevant markets. In the second, a POH, allegedly driven out of business by a hospital’s practices, settled on the eve of a high-profile trial.

On December 29, 2009, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal of antitrust claims in Little Rock Cardiology Clinic PA v. Baptist Health, App. Nos. 08-3158/09-1786. The case was brought by Little Rock Cardiology Clinic (LRCC), a professional association of cardiologists, and its individual members, against the largest hospital system in Arkansas and Blue Cross & Blue Shield of Arkansas (ABCBS). Plaintiffs alleged that in response to LRCC opening a competing POH specializing in cardiology in Little Rock, Baptist Health took actions that violated Sections 1 and 2 of the Sherman Act. 15 U.S.C. §§ 1, 2. Specifically, plaintiffs alleged that Baptist Health conspired with ABCBS to restrain trade in, monopolize, and attempt to monopolize the market for cardiology hospital services for privately insured patients in Little Rock by excluding plaintiffs from the ABCBS preferred provider network. Plaintiffs also alleged that Baptist Health unlawfully excluded them from the same market by implementing an “economic credentialing” policy that prohibited any physician from maintaining staff privileges at any Baptist Health facility if the physician also directly or indirectly held an interest in a competing hospital. Although a state court permanently enjoined Baptist Health from enforcing the policy, the plaintiffs sought damages for the period of time during which the policy was enforced.

The district court dismissed plaintiffs’ antitrust claims, finding that they did not define plausible product and geographic markets as required to state a claim under the Sherman Act. In affirming the dismissal, the Eighth Circuit concluded that the product market could not be limited to patients using private insurance as method of payment because there were other methods of payment, including, for example, government insurance programs, that were acceptable to the clinic and physicians. According to the court, although private insurance and government insurance may not be interchangeable from the patient’s perspective, either method of reimbursement was acceptable to the clinic and physicians. The court found that patients who used any of these methods of payment were “reasonably interchangeable” and, under prevailing antitrust precedent, therefore within the same product market. Although, according to the court, “the general issue when determining the relevant product market concerns the choices available to consumers, … [i]n this case—an exclusive-dealing case involving shut-out cardiologists—the relevant inquiry is whether there are alternative patients available to the cardiologists.”

Ultimately, the court held that defining a relevant product market by how patients paid for services “lacks support in both logic and law” because it “focuses on the wrong side of the transaction.” Because, “as a matter of law, in an antitrust claim brought by a seller, a product market cannot be limited to a single method of payment when there are other methods of payment that are acceptable to the seller,” the court found that plaintiffs failed to allege a plausible product market.

Second, the Eighth Circuit rejected plaintiffs’ attempt to limit the geographic market to a single city, Little Rock (where cardiology services were provided), as opposed to the larger area from which patients traveled to receive those services. The court noted that in the health care context, the appropriate inquiry for determining a relevant geographic market is whether the area is one into which few patients travel for care, and out of which few patients travel for care. Because plaintiffs had only argued that few patients traveled out of Little Rock for cardiology services, and did not show that few patients traveled into the city, the court found the geographic market improperly defined. “By limiting the geographic market [to the place where the services are delivered], LRCC is able to gerrymander the relevant market to an artificially narrow location, the location where cardiology procedures take place.”

The court further concluded that because plaintiffs expressly alleged that Baptist Health competed in and drew customers from multiple cities throughout Arkansas, they could not limit the geographic market to Little Rock. “We hold only that where, as here, an antitrust plaintiff alleges that a firm competes in and draws its customers from a specified geographic area, it cannot then limit the relevant geographic market to a location smaller than that area based solely on the fact that consumers must travel to that smaller area to obtain the relevant service or product.”

The second case, Franco v. Memorial Hermann Healthcare System, Tex. Dist. Ct., Civ. No. 2006-79945, was settled on January 10, 2010, on the eve of trial. The antitrust claims in that case are strikingly similar to those in the Baptist Health matter, but were brought under the Texas Free Enterprise and Antitrust Act as opposed to federal antitrust laws. (In 2007, parties stipulated to the dismissal of a federal action in the Eastern District of Texas.) The plaintiffs in Franco, a POH called Houston Town and Country Hospital and its individual members, alleged that Memorial Hermann and its top executives engaged in a “massive and concerted scheme” to put Town and Country out of business. Specifically, plaintiffs allege that Memorial Hermann used its power in the market to dissuade health insurers from entering into contracts with Houston Town and Country; forced patients out of Memorial Hermann unless they gave up their POH-affiliated doctor; and ultimately bought the brick-and-mortar facilities of Town and Country for no other reason than to eliminate competition from the fledgling POH. In addition, as in the Baptist Health case, Memorial Hermann also implemented an “economic credentialing” policy whereby any doctor with an ownership interest in another hospital would be denied privileges at Memorial Hermann.

The settlement, the terms of which may soon become public, comes nearly a year after the Attorney General of Texas settled its similar claims against Memorial Hermann, brought in a separate lawsuit. In connection with that settlement, Memorial Hermann paid the state $700,000 to compensate it for the cost of the antitrust investigation and agreed to refrain from certain practices for five years.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:


David W. Simon
Milwaukee, Wisconsin

James T. McKeown
Milwaukee, Wisconsin

Holden Brooks
Milwaukee, Wisconsin

Michael A. Naranjo
San Francisco, California

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