I Say Single Entity, You Say Antitrust Violation: Sixth Circuit Finds JOA Fails Antitrust Test

In a troubling split decision issued on March 22, 2016, a three-judge panel of the Sixth Circuit reversed the ruling by the district court for the Southern District of Ohio at Dayton in The Medical Center at Elizabeth Place, LLC v. Atrium Health System, et al. and remanded the case back to the district court for further proceedings. At issue was whether Premier Health Partners (“Premier”), a joint venture formed through a joint operating agreement (“JOA”) in 1995 between four hospitals, should be considered a “combination” subject to liability under §1 of the Sherman Act or whether it should be considered a single entity in line with the Supreme Court’s decision in Copperweld Corp. v. Independence Tube, Corp. (which would render the JOA incapable of conspiring in violation of the antitrust laws). The district court held thatPremier was a single entity and dismissed the case on summary judgment without adjudicating the question of whether Premier’s actions constituted impermissible anticompetitive conduct. In reversing this decision, the Sixth Circuit determined that the defendant hospitals were, in fact, competitors attempting to eliminate another competitor through concerted action. On May 5, 2016, the Sixth Circuit declined to rehear the decision of the three-judge panel en banc.

This decision is troubling for providers because it creates uncertainty regarding how JOAs will be analyzed under the antitrust laws. Unfortunately, the majority’s opinion appears to incorrectly focus on whether the JOA’s overall conduct is anticompetitive as opposed to the correct legal issue, which is whether or not the JOA is considered a single entity capable of conspiring for antitrust purposes. While the dissent appears to apply the antitrust analysis correctly, the majority decision is the only court of appeals authority on this issue, so now providers must be mindful of this decision in structuring future JOAs.

Background

The private plaintiff, The Medical Center at Elizabeth Place (“Elizabeth Place”), operates a 26-bed, physician-owned hospital in Dayton, Ohio specializing in acute-care surgical services. Elizabeth Place competes against the defendant hospitals for surgical patients.

The defendant, Premier, through the JOA is composed of four hospitals: Good Samaritan Hospital; Miami Valley Hospital; Atrium Medical Center; and Upper Valley Medical Center. Premier has no assets and provides no health care services, instead providing administrative and financial services to the defendant hospitals including negotiating managed care contracts with commercial payors. The defendant hospitals share revenues and losses pursuant to an agreed upon formula but maintain separate ownership of assets and file separate tax returns and other corporate forms and documents with the government.

Elizabeth Place claims that the defendant hospitals engaged in concerted action to keep Elizabeth Place from competing in the market by:

Coercing commercial health insurers, collectively representing approximately 70 percent of insured consumers in the relevant geographic market, to refuse to negotiate managed care contracts and to deny Elizabeth Place access to their networks;
Threatening punitive financial consequences to physicians who affiliated with Elizabeth Place, including terminating leases for office space and threatening to withhold referrals; and
Compelling physicians through punitive measures and financial incentives to refuse to admit patients to Elizabeth Place.

Analysis

In reversing the ruling of the district court, the majority opinion stated that the defendant hospitals maintained separate identities and acted more like competitors than one unit, citing letters, emails and statements elicited from a consultant and the fact that the defendant hospitals maintained separate assets. Judge Merritt asserted that each hospital holding its own assets prevented the hospitals from completely uniting their economic interests and resulted in “distinct, potentially competing interests” among the hospitals and that each hospital “is a substantial, independently owned” business “guided by a separate corporate consciousness.” This is troubling because based on the limited legal precedent surrounding JOAs, many practitioners advise that financial integration through sharing revenues and losses is usually sufficient to establish single-entity status even though the hospitals’ assets remain separate. The majority’s opinion appears to assert that this type of profit sharing is not enough, but rather there must be some type of asset integration.

The majority also appears to have conflated the single entity analysis with the “conspiracy in fact” analysis by focusing on certain conduct of the defendant hospitals, including the defendant hospitals’ stated intent to engage in coercive behavior and the defendant hospitals’ alleged request to health insurance companies that those companies boycott Elizabeth Place. The correct legal issue at hand was not whether Premier’s conduct was actually anticompetitive, but rather whether Premier was a single entity able to conspire in the first place.

In finding that the defendant hospitals were distinct entities capable of conspiring to inhibit competition, the court relied on a strategic plan prepared by a consulting company that reached the following conclusions based on interviews with Premier executives and key stakeholders:

“Premier partners do not collaborate or act as a system today, more often Premier partners find themselves competing with each other.”
“Premier does not have an identity as a collaborative group, rather act as a confederacy that collaborates in a few areas (i.e., supplies, financing/access to capital, electronic medical records).”
“Premier does not think of itself as an integrated organization.”
“Premier Partners compete with each other for market share.”

In the dissent, Judge Griffin’s antitrust analysis is consistent with prior precedent, stating that the majority misapplied the single-entity test developed in American Needle, Inc. v. National Football League and Copperweld, namely that Premier possessed a “complete unity of interest” and single center of decision-making. Citing the JOA between Premier and the defendant hospitals, Judge Griffin highlighted that while the defendant hospitals may maintain separate assets, they do so in name only and derive no individual benefit from those assets. Instead, Premier had significant operational, managerial and strategic control of the defendant hospitals.

Practical Takeaways

While generally troubling for providers, the Sixth Circuit ruling offers a number of practical takeaways to keep in mind if you are contemplating a JOA.

Providers cannot assume that all JOAs will confer single-entity status; instead, when structuring a JOA, it is important to work with antitrust counsel to consider the single-entity analysis. The fact that substance over form governs the antitrust analysis introduces a great deal of subjectivity into the single entity determination.
Generally, the greater the level of financial, clinical and administrative integration, and the more control given to the JOA entity, the more likely a court is to find that the JOA is a single entity incapable of conspiring in violation of the antitrust laws.
Profit sharing via an agreed upon formula may not be considered sufficient financial integration to satisfy the single-entity analysis, even with significant centralized administrative control; rather, some courts may require asset integration to be considered a single entity.
Ordinary course documents detailing any type of anticompetitive intent to conspire or exclude competitors are likely to prove problematic even to JOAs, although technically not properly considered as a part of the single entity analysis.

If you have any questions or would like additional information about this topic, please contact one of the following members of Hall Render’s Antitrust Practice Group: