Wednesday, August 24, 2011

New York City’s Antitrust Challenge to Health Insurance Merger Fails

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

An action brought by the City of New York, seeking to block the merger of health insurance providers, was properly dismissed for failure to define a legally sufficient product market, the U.S. Court of Appeals in New York City has ruled.

Summary judgment in favor of the merging parties—Group Health Incorporated (GHI) and HIP Foundation, Inc. and Health Insurance Plan of Greater New York (HIP) (2010-1 Trade Cases ¶77,053)—was affirmed.

In September 2005, GHI and HIP announced their intent to merge. The U.S. Department of Justice and the New York State Attorney General investigated the antitrust implications of the proposed merger and decided not to challenge it.

In November 2006, the city filed an action under federal and New York State antitrust laws to block the transaction. The city alleged that because plans by GHI and HIP covered a vast majority of city employees, the merger would substantially reduce competition and would result in a monopoly. Moreover, the transaction would allegedly result in an increase in the premiums that the city was required to pay.

Relevant Market

The city’s complaint defined the relevant market as the "low-cost municipal health benefits market." The market included only those insurance plans that were inexpensive and that the city selected for inclusion in its health benefits program.

The city’s proposed market definition was legally insufficient, according to the appellate court, because it was defined by the city’s preferences, not according to the rule of reasonable interchangeability and cross-elasticity of demand.

The city ignored the competition existing among insurance providers for the city’s business, as well as the health insurance market for other large employers in the region. The city did not allege any factor that would prevent insurance companies other than those it selects for the health benefits program from proposing competitive products were the merged firm to raise its premiums to supracompetitive prices.

Despite the city’s argument that the insurance plans it approves constitute a unique market because they reflect its "sound policy choices," it was held that a single purchaser's preferences could not define a market.

Motion to Amend Complaint

The appellate court also ruled that it was not an abuse of discretion for the district court to deny the city’s motion for leave to amend its complaint to add alternative market definitions. The city’s January 2010 motion exhibited undue delay, in the court’s view. Moreover, the proposed amendment would have prejudiced the merging parties by requiring additional discovery on a broader market.

The city sought to add two additional market definitions:

(1) All insurance plans the city selected for inclusion in its health benefits program, not only the inexpensive plans; and

(2) The market for all commercial medical benefits in downstate New York.
The city waited more than three years to seek the amendment and that was only after being confronted with a motion for summary judgment challenging its market definition, the court noted. Although the city’s delay in seeking amendment might not have been evidence of bad faith, it was not an abuse of discretion for the district court to find that the delay, together with the prejudice that would result from the amendment, warranted denial of the city’s motion to amend.

“Upward Pricing Pressure Test”

The appellate court also upheld the lower court’s decision not to permit the city to add the "Upward Pricing Pressure Test." According to the appellate court, “the applicable case law requires plaintiffs asserting a claim under the Sherman Act, the Clayton Act, or the Donnelly Act to allege a market in which the challenged merger will impair competition.”

The city failed to explain how the "Upward Pricing Pressure Test" could substitute for a definition of the relevant market in the pleadings.

The decision is City of New York v. Group Health Incorporated, 2011-2 Trade Cases ¶77,569.

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