Publications & Presentations
American Health Lawyers Association
May 4, 2018
Dominant Rhode Island Insurer Will Face Jury Trial for
Blocking Entry of an Innovative Out-of-State Hospital System

Herbert F. Allen and Mitchell D. Raup (Polsinelli PC, Washington, DC)
This Bulletin is brought to you by AHLA's Antitrust Practice Group.*

Dominant health insurers beware: Refusing to negotiate in good faith with an innovative health care provider in an attempt to block its entry could violate Section 2 of the Sherman Act.
Last week, a federal court in Rhode Island denied Blue Cross & Blue Shield of Rhode Island’s motion for summary judgment on claims that it stymied the acquisition of a financially troubled Rhode Island hospital, Landmark Medical Center, by a Massachusetts hospital system, Steward Health, which sought to bring its innovative risk-based business model to Rhode Island. According to the court, a reasonable jury could conclude that Blue Cross’s aggressive negotiating approach with Landmark was “not a legitimate business decision” but instead was “designed to kill” Steward’s acquisition of Landmark and, with it, the entry of a disruptive hospital system.

In 2008, Landmark’s financial troubles forced it into receivership. A court appointed a special master to solicit bids from prospective buyers, including one from Steward, which operated a network of for-profit hospitals in Massachusetts.

Steward’s business model focused on entering into risk-based contracts with payers, meaning that Steward received capitated payment on a per-member-per-month basis, rather than billing on a fee-for-service basis. Steward sought to bring this innovative and disruptive model to Rhode Island by acquiring a number of hospitals in the state, beginning with Landmark. 

Blue Cross documents showed that Blue Cross viewed Steward’s business model-and the increasing prevalence of “providers becoming payers”-as “existential threats.” One Blue Cross document expressed concern that the appearance of providers willing to take on risk, including Accountable Care Organizations, could “result in significant enrollment losses and could negatively affect our long term viability as a health plan.”

In 2010 and 2011, Steward submitted bids to acquire Landmark. A key prerequisite to any deal was an acceptable contract with Blue Cross. With more than 70% market share in Rhode Island, Blue Cross was the primary source of income for services rendered at Landmark, as well as all other hospitals in the state. As the court noted, Steward’s proposed business model in Rhode Island required a “non-hostile relationship” with Blue Cross.

Negotiations between Blue Cross and Steward stalled. Blue Cross insisted that Steward commit to meet quality metrics that Steward believed were “unattainable” for Landmark. Then, in May 2012, with negotiations faltering, Blue Cross filed an application for a material network modification with the Rhode Island Department of Health, and then sent notice letters informing Blue Cross’s subscribers and providers that Landmark might go “out of network.”

Frustrated at what it viewed as bad-faith negotiating tactics by Blue Cross, Steward withdrew from the bidding process. In September 2012, another large hospital system, Prime, agreed to acquire Landmark. Finally, in June 2013, Steward filed its first antitrust complaint, alleging that Blue Cross’s unilateral conduct violated Section 2 of the Sherman Act. Steward later added a conspiracy claim under Section 1, alleging that BCBS’s efforts to prevent Steward’s entry were coordinated with another potential buyer.

The Court’s Analysis
The court’s opinion emphasized that this was a “close case-one that highlights the difficulty of applying less-than-clear antitrust doctrines and precedents to one of the most complicated and volatile sectors of the national economy.” Indeed, the governing antitrust law was, according to the court, “confused and opaque.”

No Interruption of a Prior Course of Dealing Required for Section 2 Liability-In assessing the Supreme Court’s refusal-to-deal case law, including Aspen Skiing and Trinko, the court observed that there is no formulaic “paint-by-the-numbers kit” for what a Section 2 claim “must look like.” That is because “[p]otentially anticompetitive behavior by market participants is bound to manifest itself differently in different markets.” In the context of a refusal-to-deal case, the court emphasized that there need not be an interruption of a prior course of dealing, and appellate decisions that require such a course of dealing either misread Aspen Skiing and Trinko or deliberately extend their holdings. Instead, Section 2 liability should hinge on whether there is “harm to competition without a valid business justification, which can manifest itself in myriad ways.” The court held that, in this case, “[i]t is of no consequence that Blue Cross did not have or terminate a prior course of dealing directly with Steward and Landmark . . . the critical question is how Blue Cross dealt with Landmark in the context of the effort by Steward to purchase it.”

Blue Cross’s Refusal to Deal Made No Economic Sense-As evidence that Blue Cross “sacrificed short-term profits for the longer-term benefit of eradicating potential competition from Steward,” the court pointed to an internal Blue Cross analysis showing that the cost of pushing Landmark out of network would be $9.8 million-$4 million more than the cost of accepting rate increases proposed by Steward for Landmark.
Blue Cross’s Bad Faith Negotiation Amounted to a Refusal to Deal-Even though it was Steward that ultimately withdrew from the negotiation, the court found that Steward had presented facts sufficient for a jury to conclude that Blue Cross’s rejections of Steward’s proposals amounted to a refusal to deal. The court specifically pointed to the fact that Blue Cross rejected proposed rates for Landmark that were 5% less than the average rates Blue Cross paid to all hospitals in Rhode Island. And, referencing the “unattainable” quality metrics, the court added that “it does not matter that Steward ‘walked away’ from the negotiating table, if Blue Cross made an offer that it knew could not be accepted.”

Blue Cross Took Unprecedented Steps in Its Dealings with Landmark-Finally, the court emphasized that Blue Cross did things it had never done before in its negotiations with Landmark, including allowing Landmark to go “nonparticipating” and sending its members a letter on the subject. These actions, according to the court, “strayed far from [Blue Cross’s] ordinary course of dealing with Landmark, or any other hospital.”

The court’s decision should send a message to dominant insurers that efforts to exclude providers from their markets-especially those that threaten to compete against insurers by using a disruptive risk-sharing business model-can expose them to real antitrust risk. These exclusionary efforts need not rise to the level of a clear-cut refusal to deal. Making offers to deal on unusual terms that simply cannot be accepted can be enough.

The court’s decision also reveals the importance of ordinary-course business documents in antitrust litigation. Blue Cross’s own internal documents revealed the degree to which its negotiating tactics were out-of-the-ordinary and motivated by a desire to exclude a provider it viewed as a competitive threat.

The case is Steward Health Care Sys. LLC v. Blue Cross & Blue Shield of R.I., No. 13-405 WES (D.R.I. Apr. 23, 2018).

*AHLA thanks the Antitrust Practice Group for sharing this Bulletin with the Academic Medical Centers and Teaching Hospitals; Business Law and Governance; Health Care Liability and Litigation; Hospitals and Health Systems; Physician Organizations; and Regulation, Accreditation, and Payment Practice Groups.