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Seventh Circuit Finds Exclusive Dealing in Hospital-Payer Case Pro Competitive

“But what is more common than exclusive dealing?”  Affirming summary judgment for defendant Saint Francis Medical Center, the Seventh Circuit recently held that the hospital’s contracts with health care insurers—though admittedly exclusive—did not harm competition.  In fact, such contracts were likely the product of a competitive market in which Saint Francis was simply the best competitor.

In Methodist Health Services v. OSF Healthcare System, Methodist Health Services alleged that Saint Francis entered into exclusive contracts with health care insurers, preventing those insurers from contracting with Methodist to treat its insureds.  Methodist argued that, because insurers view Saint Francis as a “must have hospital,” it has “substantial market power” in the Tri-County Area around Peoria, Illinois.  Moreover, Saint Francis’s exclusive contracts with insurers were either long-term or effectively long-term, as they were continuously amended every couple years and therefore blocked Methodist and other competitors from gaining access to many insured patients  The result was that the market was not “fluid and competitive,” and insurers could not “cho[o]se between hospitals freely.”

Judge Posner, writing for the panel, did not refute Saint Francis’s elevated status in the market.  Instead, he emphasized that Saint Francis is a “must have” hospital for good reason: it offers “more extensive services” and accommodates almost twice as many patients as Methodist. Consequently, the court suggested, health insurers contract with Saint Francis because it is a better hospital than others in the region.  What Methodist characterizes as anticompetitive conduct may in fact constitute “competition for the contract,” which Seventh Circuit has recognized “is a form of competition that antitrust laws protect rather than proscribe.”

Ignoring Methodist’s expert analysis, the court analogized these exclusive contracts to requirements contracts—“which are common, and legal.”  While the opinion acknowledges that “some exclusive-dealing arrangements run afoul of the Sherman Act,” Saint Francis’s arrangements did not for a number of reasons.  For example, the court noted the absence of evidence that Saint Francis’s contracts were leading to “sky-high prices” for health services, or other “dire consequences” such as the bankruptcy of other regional hospitals.  Furthermore, nothing in the exclusive contracts prevented Methodist from becoming a more successful competitor—by, for example, “duplicat[ing] the special services, such as Level 1 trauma care, that makes Saint Francis so special.”  The court also did not accept Methodist’s argument that the agreements were long-term, pointing out that most of the contracts at issue expire every couple of years.  The court hinted that this analysis might be different in the context of truly long-term exclusive contracts, where competing hospitals would be deprived of “a shot at obtaining the next contract by outbidding Saint Francis.”  Where, as here, contracts expire relatively often, competitors like Methodist are free to step in when an agreement expires to offer the insurer a better deal.

Judge Posner also highlighted as a “curious feature of the case” the fact that Methodist identified health care insurers allegedly injured by Saint Francis’s exclusive dealing, but none of them joined in the suit.  The court similarly noted that Methodist did not sue on behalf of any other hospitals in the region which also compete against Saint Francis.  Moreover, Methodist had sent a copy of its complaint to the Department of Justice, which declined to initiate a separate action.  Drawing the inference that “Methodist may be the only victim,” the court indicated that this may be a case in which there has been  harm to a competitor, but no harm to competition—a harm which the Sherman Act does not protect.

Casting Methodist as “an unsuccessful competitor,” the court underscored its reluctance to accept exclusivity as a harbinger of anticompetition.  When services are not equal among competitors, contracting opportunities are likely to be unequal as well.