Third Circuit “Precedential” Decision Keeps West Penn Antitrust Suit Against UPMC and Highmark Alive

On November 29, 2010, the 3rd Circuit Court of Appeals ruled that the U.S. District Court for the Western District of Pennsylvania erred in dismissing West Penn Allegheny Health System Inc.’s complaint against University of Pittsburgh Medical Center (UPMC) and health insurer Highmark, Inc. alleging an anticompetitive conspiracy, attempted monopolization and state law claims.  The court stamped the decision “precedential,” signaling that the ruling contains important antitrust principles to be followed in future cases. 

The decision provides important guidance for health care firms on the antitrust issues that can arise from (a) relationships between health plans and hospitals and (b) strategic competition between hospitals.  It illustrates the concerns that might motivate an antitrust challenge based on relationships between health plans and hospitals and on the antitrust risks that hospitals and plans run, particularly where, as alleged in this suit, the hospital or health plans hold significant market share.  It is noteworthy that not only has West Penn (a competing hospital) brought antitrust claims, but a purported class action was also filed in the wake of the 3rd Circuit decision by plaintiffs seeking to represent purchasers of health insurance from Highmark allegedly harmed by Highmark’s and UPMC’s conduct.  Finally, the West Penn complaint recites that the U.S. Department of Justice had opened an investigation into the conduct challenged in the lawsuit, thus identifying another source of antitrust risk. 

Turning to West Penn’s complaint in more detail, it alleges that UPMC, which holds a 55 percent share of the Allegheny County market for hospital services, and Highmark, which has held between a 60 percent to 80 percent share of the Allegheny County health insurance market since 2000, formed a conspiracy to protect one another from competition in violation of Sections 1 and 2 of the Sherman Antitrust Act.  West Penn further alleges that UPMC attempted to monopolize the Pittsburgh-area market for specialized hospital services in violation of Section 2 of the Sherman Act and asserts state law claims against UPMC for unfair competition and tortious interference with business relations.  The U.S. District Court for the Western District of Pennsylvania dismissed the Sherman Act claims and declined to exercise supplemental jurisdiction over the state law claims. 

The 3rd Circuit reversed the district court’s dismissal of West Penn’s Sherman Act claims, vacated the district court’s dismissal of West Penn’s state law claims and remanded the case for further proceedings.  In doing so, the 3rd Circuit provides details on the allegations of specific conduct that were sufficient to state a claim.  Discussion in this alert is based on the complaint’s allegations, which were not tested during the court proceedings to date.  And it bears observing that, despite significant arguments that UPMC and Highmark advanced in attempting to defeat this suit and that they can argue as the case proceeds, they still face discovery, multiple cases and a potential antitrust trial on West Penn’s claims.  In short, the 3rd Circuit’s decision illustrates that even plans and hospitals with a firm belief in the merits of their defenses should recognize the risks attendant on engaging in similar conduct to that alleged by West Penn.

West Penn’s Allegations

UPMC allegedly offered Highmark a “truce” in 1998 to protect one another from competition, an offer that Highmark initially rejected as an illegal “attempt to form a ‘super’ monopoly.”  After several meetings in 2002, however, Highmark allegedly agreed to the “truce” with UPMC, under which UPMC agreed to use its power in the health care provider market to “prevent Highmark competitors from gaining a foothold in the Allegheny County market for health insurance” in exchange for Highmark’s promise to “take steps to strengthen UPMC and weaken West Penn.”

Pursuant to the agreement, UPMC allegedly refused to enter competitive provider agreements with Highmark’s rivals, a move which, due to UPMC’s dominance, prevented Highmark’s rivals from entering the Allegheny County health insurance market.  UPMC also shrank its own UPMC Health Plan that competed with Highmark and refused to sell the plan to other insurers.  In return, Highmark paid UPMC supracompetitive reimbursement rates (which it accomplished by increasing its insurance premiums) and funded a new UPMC children’s facility.  Highmark eliminated its low-cost Community Blue insurance plan as part of a promise not to offer any health plan that did not include UPMC as an in-network provider, causing an increase in Allegheny County insurance premiums.  Highmark also rejected West Penn’s requests to refinance a loan it had given West Penn even though it “made business sense” and maintained West Penn’s reimbursement rates at artificially depressed levels, explaining that it feared retaliation by UPMC for violating their agreement, which Highmark admitted was “probably illegal.” 

UPMC also allegedly took steps unilaterally “to weaken West Penn.”  UPMC allegedly “systematically” raided key physicians from West Penn, luring them with bloated salaries.  For example, in 2002, UPMC attempted to poach the entire anesthesiology staff from a West Penn hospital, even though an internal analysis found the move would be unprofitable.  In 2003, UPMC hired two primary care physicians from a West Penn hospital “in order to injure the hospital.”  UPMC also allegedly pressured community hospitals to enter into joint ventures with UPMC for oncology services by threatening to build UPMC satellite facilities nearby; with the exception of the West Penn facilities, almost all of them entered joint ventures with UPMC.  Further, the oncology joint ventures function as exclusive-dealing arrangements, as the community hospitals refer all of their oncology patients to UPMC facilities.  Finally, UPMC allegedly made false statements about West Penn’s financial health to discourage investors from purchasing West Penn bonds.

UPMC’s Side of the Story

In its brief to the 3rd Circuit, UPMC argued that, while there was an agreement between UPMC and Highmark—a matter of necessity for a hospital system doing business with an insurer—the activities West Penn alleged UPMC and Highmark engaged in under the agreement failed to give rise to an antitrust violation.

Regarding West Penn’s conspiracy claims, UPMC argued that there was no agreement between UPMC and Highmark to discontinue Highmark’s low-cost Community Blue insurance plan.  In fact, the 2002 UPMC/Highmark agreement “provided for the continuation of Community Blue.”  There was also, according to UPMC, no agreement between UPMC and Highmark on the rates Highmark would pay West Penn.  In 2002, West Penn and Highmark reached an agreement on rates before Highmark and UPMC contracted; West Penn was also “granted reimbursement increases from Highmark” starting in June 2002.  Regarding Highmark’s failure to refinance West Penn’s debt, UPMC stated that it did not foreclose West Penn from seeking refinancing, as it successfully refinanced through other sources.  Finally, UPMC argued that even if it had agreed with Highmark on Community Blue, West Penn rates or debt refinance, none of those agreements would have constituted an unreasonable restraint of trade.

In response to West Penn’s allegations that UPMC agreed that its health plan would compete less aggressively against Highmark and that UPMC declined to sell its health plan to Highmark’s rivals, UPMC argued that, because West Penn was not a competitor or a consumer of health insurance, West Penn lacked standing and could not have suffered antitrust injury as a result of the alleged conduct in the insurance market.

With respect to West Penn’s attempted monopolization claims, UPMC argued that, although West Penn alleged that UPMC’s joint ventures with community hospitals cut West Penn off from oncology referrals, West Penn failed to allege that such activity resulted in substantial foreclosure, or any foreclosure at all, in the relevant “Allegheny County market for acute inpatient hospital services and/or for tertiary and quaternary care services.”  UPMC further argued that West Penn’s predatory hiring allegations were insufficient to support a Section 2 claim because West Penn failed to allege 1) that the only reason UPMC hired West Penn’s employees was to deny West Penn the ability to compete, 2) that UPMC actually lost money and 3) that the predation scheme had long-term effects in the relevant market by allowing UPMC to raise prices to recoup losses incurred from the hirings.

The 3rd Circuit Ruling

In its ruling, the 3rd Circuit opined on the sufficiency of West Penn’s pleadings and held that West Penn had adequately pled 1) a conspiracy in violation of Sections 1 and 2 of the Sherman Act by alleging sufficient evidence of an agreement between UPMC and Highmark that produced anticompetitive effects in the relevant markets and caused antitrust injury to West Penn and 2) an attempt to monopolize in violation of Section 2 by alleging UPMC’s predatory acts against West Penn.

First, as to the conspiracy, the court found West Penn’s allegations of direct evidence of UPMC and Highmark’s agreement to protect one another from competition sufficient to survive a motion to dismiss.  In support of its finding, the court cited, among other things, Highmark’s refusal to refinance a loan to West Penn based on Highmark’s expressly stated fear that, if Highmark assisted West Penn financially, UPMC “would retaliate against [Highmark] for violating their agreement – an agreement that Highmark admitted was ‘probably illegal.’”  The court also cited UPMC CEO’s admission that “he decided to shrink UPMC Health Plan as a result of ‘negotiations’ with Highmark.”

The court further found that the complaint alleged the requisite anticompetitive effect from the agreement, based on West Penn’s allegations that, “by denying West Penn capital, the conspiracy caused West Penn to cut back on its services . . . and to abandon projects to expand and improve its services and facilities,” and “by shielding Highmark from competition, the conspiracy resulted in increased premiums and reduced output in the market for health insurance.”  These anticompetitive effects were alleged to have occurred in the relevant Allegheny County market for specialized hospital services and the relevant Allegheny County market for health insurance.

The court also found that West Penn had alleged antitrust injury.  The court found West Penn had successfully pled antitrust injury based on its receipt of depressed reimbursement rates from Highmark pursuant to Highmark’s agreement with UPMC not to benefit West Penn financially.  Admitting that “had Highmark been acting alone, West Penn would have little basis for challenging the reimbursement rates,” the court concluded that because “paying West Penn artificially depressed reimbursement rates was an anticompetitive aspect of the alleged conspiracy, it follows that the underpayments constitute an antitrust injury.”  The court, however, held that West Penn could not claim antitrust injury from Highmark’s decision to discontinue Community Blue and Highmark’s refusals to refinance West Penn’s loan.

Second, the 3rd Circuit reversed the district court’s dismissal of West Penn’s attempted monopolization claim.  The 3rd Circuit found West Penn’s allegations that “the defendants engaged in a conspiracy . . . to drive West Penn out of business,” “UPMC hired employees away from West Penn by paying them bloated salaries,” UPMC threatened to build UPMC satellites next to community hospitals unless they stopped referring oncology patients to West Penn and began referring all such patients to UPMC” and “UPMC made false statements about West Penn’s financial health to potential investors” were sufficient to suggest that UPMC engaged in anticompetitive conduct.

After determining that the district court erred in dismissing the Sherman Act claims, the 3rd Circuit vacated the district court’s dismissal of the state law claims.  As the 3rd Circuit did not rule on the merits, West Penn will still have to prove its case against UPMC and Highmark in court.

Implications and Guidance

The West Penn case cautions health insurers and providers regarding communications that might be interpreted as giving rise to an agreement to shield one another from competition.  It also cautions them regarding communications that might be interpreted as encouraging one party to act anticompetitively out of fear of retaliation by the other party.  In West Penn, the 3rd Circuit highlighted the fact that Highmark made numerous decisions, such as declining to refinance West Penn’s loan and refusing to increase West Penn’s reimbursement rates, allegedly out of fear of retaliation by UPMC and even stated that its agreement with UPMC was “probably illegal.” 

The 3rd Circuit’s opinion should be particularly relevant to health plans and hospitals systems with substantial market share because the theories and analysis are based on the proposition that Highmark and UPMC acted to preserve their market position and thwart challenges to it.  Moreover, the court’s analysis highlights that conduct and communications among healthcare market participants that appear to focus on harming rivals’ ability to compete can create significant antitrust risk.

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