DOJ Heightens Focus on Hospital Systems and Market Allocation

On April 14, 2016, the U.S. Department of Justice and two West Virginia hospitals entered into a consent decree requiring the hospitals to cease allocating territories for marketing their healthcare services.  The complaint and consent decree can be viewed here and here.  This consent decree follows a similar consent decree that the DOJ entered into with three Michigan hospitals in June 2015, perhaps signaling the DOJ’s increased focused in policing allegedly anticompetitive agreements among hospitals and medical centers.

The DOJ challenged an alleged agreement between Charleston Area Medical Center (“CAMC”) and St. Mary’s Medical Center (“St. Mary’s”) not to advertise in each other’s geographic territories.  According to the DOJ’s complaint, although executives at both defendants testified that marketing is an important strategy to increase the number of patients and market share, CAMC and St. Mary’s agreed not to place print or billboard advertisements in each other’s respective counties.  The DOJ alleged that the agreement disrupted the competitive process, deprived patients of information they otherwise would have had to make informed healthcare decisions, and denied physicians working for the defendants the opportunity to advertise their services to potential patients.  The DOJ’s complaint asserted a violation of Section 1 of the Sherman Act.

In the consent decree, filed simultaneously with the DOJ’s complaint in the Southern District of West Virginia, CAMC and St. Mary’s agreed to a proposed settlement prohibiting them from agreeing with other healthcare providers to limit marketing or to allocate any service, customer, or geographic market or territory, unless the agreement is reasonably necessary to further a procompetitive purpose concerning the joint provision of medical services.  The defendants also agreed not to communicate with each other about their marketing activities, with limited exceptions, such as communications relating to the joint provision of services, transactions, or potentially false or misleading advertisements.  The hospitals further agreed to implement compliance programs to prevent any future unlawful market allocation activities.

As noted above, the West Virginia consent decree marks the second time in the past year that the DOJ has filed a complaint against hospitals alleging agreements to allocate territories and limit competition.   On June 25, 2015, the DOJ sued four Michigan hospital systems in the Eastern District of Michigan – Hillsdale Community Health Center, Community Health Center of Branch County, ProMedica Health System, and Allegiance Health – alleging that Hillsdale entered into agreements with each of the other defendants not to conduct marketing activities in each other’s respective counties.  The complaint alleged, among other things, that the agreements deprived patients, physicians and employers of information they otherwise would have had when making healthcare decisions.  Hillsdale, Community Health and ProMedica entered into the consent decree which, like the West Virginia consent decree, requires the hospitals to refrain from agreeing with other providers to limit marketing or divide geographic markets or territories, stop communicating with each other about marketing activities (subject to limited exceptions), and to implement compliance programs.  The complaint and consent decree can be viewed here and here.  Allegiance did not enter into the consent decree and is continuing to litigate against the DOJ.

Prior to these two cases, the DOJ had not prosecuted a market allocation case against hospital systems in 10 years – the last one being a February 2006 lawsuit, also against CAMC and another West Virginia hospital, HCA Inc., in which HCA agreed not to develop a cardiac surgery program in a county near CAMC.  The most recent West Virginia consent decree and the Michigan consent decree may signal increased focus at the DOJ in scrutinizing agreements between hospital systems.  In the past, the DOJ has typically focused on more commonly pursued market allocation claims with broader allegations, such as bid-rigging or restrictions on sales themselves.   Hospitals and other healthcare providers should be on the lookout for future activity in this sector.