Monday, September 10, 2007

$16 Million Antitrust Award in Favor of Oregon Hospital Vacated

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

A jury's verdict and $16.2 million award in favor of the operator of a 114-bed hospital in Springfield, Oregon, in an antitrust action against a larger competitor, has been vacated by the U.S. Court of Appeals in San Francisco. The appellate court reversed findings that the competitor, PeaceHealth, engaged in attempted monopolization and price discrimination.

PeaceHealth operated three facilities in the area, including a 432-bed operation that offered primary, secondary, and tertiary care in Eugene, Oregon. The complaining firm operated McKenzie-Willamette Hospital, which provided only more standard, primary and secondary acute care. The lower court's grant of summary judgment in favor of PeaceHealth on McKenzie's tying claims prior to trial was also reversed. The case was remanded for further proceedings.

Attempted Monopolization

In its attempted monopolization claim, McKenzie alleged that PeaceHealth offered insurers discounts of 35 to 40 percent on tertiary services if the insurers made PeaceHealth their sole preferred providers for all services—primary, secondary, and tertiary. McKenzie argued that, although it could provide primary and secondary services at a lower cost than PeaceHealth, it was frozen out of the market because it did not provide tertiary services. Thus, it could not match the discount that PeaceHealth offered insurers.

A multi-product bundled discount would be anticompetitive if the discount excluded a rival who was equally efficient at producing the competitive product simply because the rival did not sell as many products as the bundled discounter, the appellate court explained. However, McKenzie could not base its attempted monopolization claim on the fact that PeaceHealth offered a discount that it could not match, according to the appellate court.

PeaceHealth convinced the appellate court to reverse the attempted monopolization claim on the ground that the district court incorrectly instructed the jury about when bundled discounting can amount to anticompetitive conduct for purposes of a Sherman Act, Sec. 2 claim.

In order to prove that PeaceHealth's bundled or package discounts to insurers constituted exclusionary conduct, McKenzie had to establish that, after allocating the discount given by the defending hospital operator on the entire bundle of products to the competitive product or products, PeaceHealth sold the competitive product or products below its average variable cost of producing them. The exclusionary conduct element of a claim arising under Sec. 2 of the Sherman Act could not be satisfied by reference to bundled discounts, unless the discounts resulted in prices that were below an appropriate measure of the defending firm's costs—average variable cost.

Primary-Line Price Discrimination

The appellate court also reversed the jury's finding of primary-line price discrimination in violation of the Oregon price discrimination statute.

McKenzie argued that PeaceHealth violated the state law by charging a higher reimbursement rate to an insurer with whom it had an exclusive arrangement than it charged an insurer with whom it did not have an exclusive arrangement.

In order to state a primary-line price discrimination claim, McKenzie had to prove that PeaceHealth priced below cost. Because the jury instructions did not require the jury to find that PeaceHealth priced below cost, the jury's verdict in favor McKenzie had to be vacated.

Tying Arrangements

Before trial, the district court granted PeaceHealth summary judgment on McKenzie's claim that PeaceHealth illegally tied primary and secondary services to its provision of tertiary services in violation of Sec. 1 of the Sherman Act.

The lower court incorrectly concluded that McKenzie had not presented any evidence that PeaceHealth coerced insurers into purchasing primary and secondary services from it in order for the insurers to obtain tertiary services, the appellate court held. PeaceHealth's practice of giving a larger discount to insurers who dealt with it as an exclusive preferred provider might have coerced some insurers to purchase primary and secondary services from it rather than from McKenzie.

There were genuine factual disputes about whether PeaceHealth forced insurers either as an implied condition of dealing or as a matter of economic imperative through its bundled discounting, to take its primary and secondary services if the insurers wanted tertiary services.

Moreover, PeaceHealth's substantial market power, as a result of being the exclusive provider of tertiary services in the market, created a possibility that it was able to force unwanted purchases of primary and secondary services. Thus, summary judgment on McKenzie's tying claim was inappropriate.

The September 4, 2007, opinion in Cascade Health Solutions v. PeaceHealth, will appear at 2007-2 Trade Cases ¶75,846.

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