West Penn Allegheny Health System, Inc. v. UPMC; Highmark, Inc.

Brief Fact Summary.

West Penn Allegheny Health System, Inc. (Plaintiff) alleged conspiracy to engage in antitrust violations and brought suit against the dominant hospital system, University of Pittsburgh Medical Center (Defendant) and the largest local insurer, Highmark, Inc. (Defendant).

Synopsis of Rule of Law.

A plaintiff can prove an antitrust conspiracy if it shows that a party used its dominant power in the provider market to insulate a health insurer from competition.

Facts.

West Penn Allegheny Health System, Inc. (West Penn) (Plaintiff) is Pittsburgh’s second-largest hospital system and has a share of less than 23 percent of the market for hospital services in Allegheny County, which includes the City of Pittsburgh.  University of Pittsburgh Medical Center (UPMC) (Defendant) is Pittsburgh’s leading hospital system, with a 55 percent share of the Allegheny County market for hospital services, and its share of the market for tertiary and quaternary care services is more than 50 percent.  Plaintiff and UPMC (Defendant) are the two major competitors in the Allegheny County market for hospital services, and are the only competitors in the market for tertiary and quaternary care services.  Highmark (Defendant) is the largest insurer in the Allegheny County market for health insurance, with a market share between 60 and 80 percent since 2000.
  In 2000, several financially distressed medical providers merged with others to form West Penn (Plaintiff).  Highmark (Defendant) funded the merger with a $125 million loan and the intention to preserve competition in the market for hospital services.  After the merger, Highmark (Defendant) and West Penn (Plaintiff) had a good relationship.  Highmark (Defendant) encouraged investors to purchase bonds from West Penn (Plaintiff), touting West Penn’s financial outlook and the quality of medical services provided.  In early 2002, Highmark (Defendant) gave West Penn (Plaintiff) a grant of $42 million to invest in its facilities.
  In contrast, UPMC (Defendant) has been hostile to West Penn (Plaintiff) since it began.  UPMC (Defendant) opposed the merger creating West Penn (Plaintiff): it intervened in the merger proceedings, filed an unsuccessful lawsuit to prevent Highmark (Defendant) from funding the merger, and tried to advise investors against purchasing bonds from West Penn (Plaintiff).  UPMC’s (Defendant) hostility toward West Penn (Plaintiff) continued after the merger and their executives have stated repeatedly that they want to destroy West Penn (Plaintiff).
  Historically, UPMC (Defendant) has also had a bitter relationship with Highmark (Defendant).  For example, when UPMC (Defendant) demanded allegedly excessive reimbursement rates from Highmark (Defendant), Highmark (Defendant) formed Community Blue, a low-cost insurance plan, in response.  To participate in Community Blue, a hospital was required to agree to accept reduced reimbursements but would receive a greater number of patients.  West Penn (Plaintiff) participated in Community Blue, but UPMC (Defendant) did not, claiming that its reimbursement rates were too low.  UPMC (Defendant) responded to Community Blue by forming its own health insurer, UPMC Health Plan.
  In 1998, UPMC (Defendant) offered a “truce” to Highmark (Defendant) in that each entity would use its market power to protect the other from competition.  Initially Highmark (Defendant) rejected UPMC’s (Defendant) offer, calling it an illegal attempt to form a super monopoly for the provision of health care, but then ultimately did accept the offer.  West Penn (Plaintiff) claimed that UPMC (Defendant) engaged in conduct that effectively insulated Highmark (Defendant) from competition.
  To support Highmark (Defendant), UPMC (Defendant) would not enter into competitive provider agreements with rivals of Highmark (Defendant).  UPMC (Defendant) also shrank UPMC Health Plan (Highmark’s (Defendant) main competitor in the insurance market).  In return, Highmark (Defendant) agreed to take Community Blue off the market and pay UPMC (Defendant) supra-competitive reimbursement, which caused Highmark (Defendant) to increase its insurance premiums.  It also claimed that UPMC (Defendant) systematically “raided” key physicians from West Penn (Plaintiff) by paying them salaries that were well above market rates to hurt other hospitals.  UPMC (Defendant) reportedly approached community hospitals in an effort to support referrals only to UPMC (Defendant), while making false statements about the financial health of West Penn (Plaintiff).
  To support UPMC (Defendant), Highmark (Defendant) provided the financial support to build a new facility for its children’s hospital, eliminated its Community Blue low-cost insurance plan, and cut all funding to West Penn (Plaintiff).  Highmark (Defendant) rejected the requests of West Penn (Plaintiff) to refinance the loan that was used to fund its 2000 merger.  While Highmark (Defendant) believed that refinancing the loan made business sense, it declined to do so out of fear that UPMC (Defendant) would retaliate against it for violating their agreement, which Highmark (Defendant) openly admitted was “probably illegal.”  Highmark (Defendant) also acknowledged that its reimbursement rates to West Penn (Plaintiff) were low, but were reluctant to raise them because if it did, UPMC (Defendant) would retaliate.
  During all of the years of this “conspiracy,” both UPMC (Defendant) and Highmark (Defendant) recorded record profits while West Penn (Plaintiff) struggled.  West Penn (Plaintiff) sued UPMC (Defendant) and Highmark (Defendant) alleging antitrust violations.  The trial court granted the defendant’s motion to dismiss certain counts.  West Penn (Plaintiff) then appealed.

Issue.

Can a plaintiff prove an antitrust conspiracy if it shows that a party used its dominant power in the provider market to insulate a health insurer from competition?

Held.

(Smith, J.)  Yes.  A plaintiff can prove an antitrust conspiracy if it shows that a party used its dominant power in the provider market to insulate a health insurer from competition.  This court concludes that the complaint contains non-conclusory allegations of direct evidence of such an agreement.  The defendants make a half-hearted argument that even if the complaint alleges that they formed a conspiracy to shield one another from competition, the Sherman Act § 1 claim is still deficient because the complaint does not allege that the conspiracy unreasonably restrained trade.  The court disagrees.  At the pleading stage, a plaintiff may satisfy the unreasonable-restraint element by claiming that the conspiracy produced anticompetitive effects in the relevant markets.  The Supreme Court held that an antitrust plaintiff must do more than show that it would have been better off without the violation; the plaintiff must establish that it suffered an antitrust injury.  An antitrust injury is the type of injury the antitrust laws were intended to prevent and the injury flows from that which makes the defendants’ acts unlawful.
  West Penn (Plaintiff) argues that it sustained an antitrust injury in the form of artificially depressed reimbursement rates.  The complaint alleges that during the conspiracy, West Penn (Plaintiff) asked Highmark (Defendant) to renegotiate and raise its rates.  The complaint suggests that Highmark (Defendant) admitted that the rates were too low and initially agreed to raise them, but that Highmark (Defendant) refused to follow through, citing its agreement with UPMC (Defendant), under which it was barred from doing anything to benefit West Penn (Plaintiff) financially.  West Penn (Plaintiff) states that the amount of the underpayments constitutes an antitrust injury because of the difference between the reimbursements it would have received in a competitive market and those it actually received.  The Defendants themselves do not take issue with West Penn’s (Plaintiff) suggestion that its reimbursement rates would have been greater without the conspiracy.  Instead, they argue that paying West Penn (Plaintiff) depressed reimbursement rates was not an element of the conspiracy that posed antitrust problems.  Their reasoning is that low reimbursement rates mean low premiums for subscribers, and that it would therefore be contrary to a key purpose of the antitrust laws—promoting consumer welfare—to allow West Penn (Plaintiff) to recover the amount of the underpayments.  West Penn (Plaintiff) has it right.
  If Highmark (Defendant) had been acting alone, admittedly, West Penn (Plaintiff) would have little basis for challenging the reimbursement rates.  A firm that has substantial power on the buy side of the market (i.e., monopsony power) is generally free to bargain aggressively when negotiating the prices it will pay for goods and services.  However, a firm’s conduct is subject to more rigorous scrutiny when it exercises monopsony power pursuant to a conspiracy, and will be condemned if it imposes an unreasonable restraint of trade.  West Penn (Plaintiff) claims that Highmark (Defendant) paid it depressed reimbursement rates, not as a result of independent decision-making, but pursuant to a conspiracy with UIPMC (Defendant).  It is certainly plausible in these circumstances that paying West Penn (Plaintiff) depressed reimbursement rates unreasonably restrained trade.  Shortchanging such as this poses competitive threats similar to those posed by conspiracies among buyers to fix prices.
  The defendants argue, though, that Highmark’s (Defendant) paying West Penn (Plaintiff) low reimbursements did not pose antitrust problems because it enabled Highmark (Defendant) to set low insurance premiums which benefitted consumers.  The court disagrees.  First, even it were true that paying West Penn (Plaintiff) low rates enabled Highmark (Defendant) to offer lower premiums, it is very unclear that this would have benefitted consumers, because the reductions in premium would have been achieved only by taking action that tends to diminish the quality and availability of hospital services.  Second, Highmark (Defendant) did not pass the savings on to consumers.  Instead, it alleges that Highmark (Defendant) pocketed the savings, while repeatedly raising insurance premiums. But most important, the defendants’ argument reflects a basic misunderstanding of the antitrust laws.
  In Knevelbaard Dairies v. Kraft Foods, Inc., 232 F.3d 979 (2000), the Ninth Circuit stated: “The fallacy of the defendants’ argument becomes clear when we recall that the central purpose of the antitrust laws . . . is to preserve competition.  It is competition—not the collusive fixing of prices at levels either low or high—that these statutes recognize as vital to the public interest.  The Supreme Court’s references to the goals of achieving the lowest prices, the highest quality and the greatest material progress, and of assuring customers the benefits of price competition, do not mean that conspiracies among buyers to depress acquisition prices are tolerated.  Every precedent in the field makes clear that the interaction of competitive forces, not price-rigging, is what will benefit consumers.”
  Highmark’s (Defendant) improperly motivated exercise of monopsony power was anticompetitive and cannot be defended on the only ground that it enabled Highmark (Defendant) to set lower premiums on its insurance plans.  Having concluded that paying West Penn (Plaintiff) artificially depressed reimbursement rages was an anticompetitive aspect of the alleged conspiracy, it follows that the underpayments constitute an antitrust injury.
  In addition to the conspiracy claims, West Penn (Plaintiff) alleges that UPMC (Defendant) violated § 2 of the Sherman Act by attempting to monopolize the Allegheny County market for specialized hospital services.  The elements of attempted monopolization are (1) that the defendant has a specific intent to monopolize, and (2) that the defendant has engaged in anticompetitive conduct that, taken as a whole, creates (3) a dangerous probability of achieving monopoly power.
  The district court dismissed the attempted monopolization claim on the ground that the complaint fails to allege anticompetitive conduct, and that is the only issue the parties have addressed here.  Broadly speaking, a firm engages in anticompetitive conduct when it attempts to exclude rivals on a basis other than efficiency.  It is sufficient for present purposes to note that anticompetitive conduct can include a conspiracy to exclude a rival.
  West Penn (Plaintiff) alleged the following anticompetitive conduct.  First, the defendants engaged in a conspiracy with a purpose to drive West Penn (Plaintiff) out of business.  Second, UPMC (Defendant) hired employees away from West Penn (Plaintiff) by paying them inflated salaries.  UPMC (Defendant) could not absorb some of the employees and had to let them go; and UPMC (Defendant) suffered financial losses as a result of the hiring.  These charges are enough to suggest that at least some of the hirings were anticompetitive.  Third, UPMC (Defendant) approached community hospitals and threatened to build UPMC (Defendant) satellite facilities next to them unless they stopped referring oncology patients to West Penn (Plaintiff) and began referring these same patients to UPMC (Defendant).  Almost all of the community hospitals caved in, which deprived West Penn (Plaintiff) of a key source of patients.  In addition, under pressure from UPMC (Defendant), several of the community hospitals stopped sending referrals to West Penn and began sending them all to UPMC (Defendant).  Finally, on several occasions, UPMC (Defendant) made false statements about West Penn’s (Plaintiff) financial health to potential investors, which caused West Penn (Plaintiff) to pay artificially inflated financing costs on its debt.
  Viewed as a whole, these allegations plausibly suggest that UPMC has engaged in anticompetitive conduct, i.e., that UPMC (Defendant) has competed with West Penn (Plaintiff) on some other basis than the merits.  Reversed in part, vacated in part, and remanded for further proceedings.

Discussion.

The court took a skeptical view of the relationship between the dominant medical system and the largest health insurer in this case.  Taken individually, one defendant’s actions may not have constituted anticompetitive behavior.  However, a holistic view of the facts permitted the court to rule that West Penn (Plaintiff) presented sufficient evidence to overcome a motion to dismiss.  The court found a series of anticompetitive behaviors based in a conspiracy to preserve defendants’ market share and highlighted how each defendant benefitted from the actions to hurt West Penn (Plaintiff).