Is There a Legal Duty to Deal with Competitors? Sixth Circuit Antitrust Opinion Examines ProMedica’s Termination of Rival Hospital from Insurance Network
American Health Law Association
The Sixth Circuit’s recent decision in St. Luke’s Hospital et al. v. ProMedica Health System, Inc.[1] addresses whether and when a unilateral refusal to deal can result in competitive injury within the meaning of the federal antitrust laws. The appeal centered on the significance of a “Change in Control” provision in a provider contract between St. Luke’s and ProMedica’s affiliated health plan, Paramount. Under that provision, Paramount could terminate St. Luke’s as an in-network provider if it were acquired by a third party. Paramount exercised that provision, and ProMedica terminated additional clinical agreements with St. Luke’s when it merged with a larger system. St. Luke’s responded by filing an antitrust suit, and moved for a preliminary injunction to stay such terminations during the pendency of the lawsuit.
Some context is appropriate here. In 2010, ProMedica, the largest health system in the Toledo, Ohio metropolitan area, acquired St. Luke’s, a standalone community hospital in the area. St. Luke’s had pursued an affiliation with a larger system because it viewed its financial viability as not sustainable. The Federal Trade Commission thereafter filed suit challenging the transaction as anticompetitive in violation of the Clayton Act. Both the district court and the Sixth Circuit concurred in that assessment, and ProMedica was ordered to divest St. Luke’s assets.[2]
In the wake of the divestiture, St. Luke’s again found itself in a precarious financial position. St. Luke’s executed two provider contracts with Paramount, which allowed for termination of St. Luke’s as an in-network provider in the event of a change in control. It also continued to maintain other clinical and commercial agreements with ProMedica. In October 2020, St. Luke’s merged with McLaren Health, a large Michigan-based system that is roughly comparable to ProMedica in size and scope. As part of the deal, McLaren agreed to invest $100 million in St. Luke’s as well as upgrade its cancer program to provide a competitive alternative to ProMedica. Paramount thereupon terminated St. Luke’s in-network status, and ProMedica terminated other clinical and commercial agreements with St. Luke’s. ProMedica also directed its employed surgeons to practice at its own facilities rather than at St. Luke’s. In the ensuing lawsuit, St. Luke’s alleged that ProMedica’s and Paramount’s conduct was anticompetitive in purpose and effect in violation of Sections 1[3] and 2[4] of the Sherman Act.
The district court concluded that there was “little doubt” that ProMedica’s conduct was “exclusionary” in an antitrust sense.[5] In the court’s view, such conduct had the “potential” for anticompetitive effects, and may have already resulted in “actual detrimental effects.”[6] The court observed St. Luke’s had been a “low cost, high quality” alternative to ProMedica for many services, and expressed concern that St. Luke’s market share would erode as a result of ProMedica’s actions. Finding the facts “strikingly similar” to those of Aspen Skiing v. Aspen Highlands Skiing[7] – the Supreme Court decision affirming a plaintiff’s victory in a refusal-to-deal case – the court granted St. Luke’s motion for a preliminary injunction.
On appeal, however, the Sixth Circuit vacated the injunction. At the outset, the appellate court noted that unilateral refusals to deal with a competitor rarely trigger antitrust liability. To prevail, St. Luke’s would “face a steep and obstacle-laden climb.”[8] The court explained that a refusal to deal may be monopolistic under Section 2 of the Sherman Act only if it is “irrational but for its anticompetitive effect.”[9] Here, both ProMedica and St. Luke’s foresaw the possibility that the latter would merge with another health system, and agreed to the “change in control” provision with that eventuality in mind. ProMedica thus had a “valid business reason” for terminating its commercial and clinical relationships with St. Luke’s when it merged with another regional health system. Furthermore, it was clear that ProMedica’s conduct was economically rational; that is, ProMedica did not incur short-term losses as might be necessary to foreclose competition. Quite the contrary, ProMedica’s shifting surgeries from St. Luke’s to its own facilities proved to be profitable. Under such circumstances, the Sixth Circuit declined to require ProMedica to continue to deal with a competitor. To hold otherwise, the court observed, would tax the limits of its expertise in fashioning appropriate relief.
There are multiple lessons to draw from the Sixth Circuit’s ProMedica decision. First, contractual relationships and course of dealings serve as highly probative evidence of whether a particular business strategy is rational for purposes of Section 2 analysis. Here the court examined, among other things, the 2016 divestiture agreement that contained the “Change in Control” provision permitting ProMedica to “immediately terminate” its contract in the event St. Luke’s were acquired. It found that this bilaterally-negotiated provision was compelling evidence that, while the series of arrangements between the parties made economic sense as of the time of agreement, a subsequent change in St. Luke’s ownership could undermine the benefit of the bargain from ProMedica’s standpoint. McLaren’s $100 million capital commitment, along with the new competing services it could introduce in the area, rendered St. Luke’s a wholly different type of competitor from the one that initially contracted with ProMedica. ProMedica contemplated the need for a potential exit strategy at the time of contract formation and thus, the court concluded, it was not irrational to exercise it once such circumstances materialized. This underscores the importance of documenting, as clearly and comprehensively as possible, the contractual conditions on which one party may unilaterally refuse to deal with another.
Second, ProMedica reinforces that Aspen Skiing indeed remains “at or near the outer boundary of § 2 liability.”[10] Aspen Skiing centered on a longstanding commercial arrangement whereby two owners of downhill skiing facilities in Aspen, Colorado collaborated to offer an interchangeable six-day “all-Aspen” lift ticket. Eventually, the dominant operator (“Ski Co.”) withdrew from the arrangement, resulting in the smaller company (“Highlands”) facing significant economic harm. In an effort to avoid financial calamity, Highlands attempted various ways to replicate the all-Aspen lift ticket, including directly purchasing at full retail price lift tickets from Ski Co. that could be coupled with Highlands’ own lift tickets. Ski Co., however, eschewed the profits associated with selling daily passes to Highlands and refused all other offers to collaborate. The Sixth Circuit in ProMedica disagreed with the District Court’s reliance on Aspen Skiing, finding the fact patterns distinguishable. That is, Ski Co. acted against its own economic self-interest in refusing to deal with Highlands – arguably, an irrational short-run business strategy aimed at further marginalizing a weakened competitor. By contrast, it was not irrational for ProMedica to exercise a bargained-for termination right in the face of a smaller competitor becoming greatly strengthened through acquisition and investment. As the Sixth Circuit aptly noted, “[l]ast, but hardly least, Aspen Skiing did not involve a preexisting agreement that permitted the resort to end its ongoing contracts.”[11] In short, Aspen Skiing dealt with a dominant competitor’s economically unjustifiable conduct aimed at crushing its rival. Without that key ingredient, it is difficult to extend Aspen Skiing to a generalized proposition that one competitor has a duty to deal with another – indeed most courts have not.
Third, ProMedica suggests that health systems that assume the financial and business risk associated with vertical integration should not be forced to strengthen those competitors that have not. The court noted that Paramount has a 17% share of the relevant medical insurance market and “competes alongside national insurers like Aetna and Anthem and regional insurers like Buckeye Insurance Group and Medical Mutual of Ohio.”[12] According to the court, no market forces are prohibiting further competition in this space: “McLaren can enter the healthcare market and offer its own insurance plan to compete alongside Paramount's narrow network. Unlike industries requiring extensive infrastructure, new firms can easily enter the ‘market for medical insurance.’”[13] To impose on ProMedica a duty to deal with St. Luke’s under radically different competitive conditions would arguably disincentivize innovation and investment, and this would subvert rather than promote competition.
Finally, ProMedica reinforces the fundamental concept that the antitrust laws concern “the protection of competition, not competitors.”[14] The Sixth Circuit recognized that Paramount’s contract termination may result in St. Luke’s seeing fewer patients in the near term, yet observed that the “antitrust laws are not balm for rivals’ wounds.”[15] In the court’s view, St. Luke’s was unable to establish a compelling case as to how health care consumers would be harmed by Paramount’s termination of its contract with St. Luke’s. Implicit in the court’s reasoning is that Paramount’s members have sufficient access to health care services from providers other than St. Luke’s. In the absence of competitive harm, the court concluded that St. Luke’s claims were unsustainable.
Republished with permission. This article, "Is There a Legal Duty to Deal with Competitors? Sixth Circuit Antitrust Opinion Examines ProMedica’s Termination of Rival Hospital from Insurance Network," was published by AHLA on February 25, 2022.
Copyright 2022, American Health Law Association, Washington, DC. Reprint permission granted.
[1] 8 F.4th 479 (6th Cir. 2021).
[2] See generally, Federal Trade Commission v. ProMedica Health System, Inc., 2011-1 Trade Cases ¶ 77,395 (N.D. Ohio 2011), aff’d, 749 F.3d 559 (6th Cir. 2014).
[3] 15 U.S.C. § 1.
[4] 15 U.S.C. § 2.
[5] 510 F. Supp. 3d 529, 535 (N.D. Ohio 2020).
[6] Id.
[7] 472 U.S. 585 (1985).
[8] 8 F.4th at 486.
[9] Id. quoting Novell, Inc. v. Microsoft Corp., 731 F.3d 1064, 1075 (10th Cir. 2013).
[10] Verizon Comms. Inc. v. Law Offs. of Curtis Trinko, 540 U.S. 398, 409 (2004).
[11] 8 F.4th at 490.
[12] 8 F.4th at 484, 489.
[13] 8 F.4th at 491, citing Ball Mem'l Hosp., Inc. v. Mut. Hosp. Ins. Inc., 784 F.2d 1325, 1335 (7th Cir. 1986).
[14] Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962).
[15] 8 F.4th at 491, citing Ball Mem’l, 784 F2d. at 1338.
