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Marion Healthcare LLC v. Southern Illinois Healthcare

United States District Court, Seventh Circuit

August 26, 2013

MARION HEALTHCARE LLC, Plaintiff,
v.
SOUTHERN ILLINOIS HEALTHCARE, and HEALTH CARE SERVICE CORPORATION, d/b/a BLUECROSS AND BLUESHIELD OF ILLINOIS, Defendants.

MEMORANDUM & ORDER

DAVID R. HERNDON, District Judge.

Before the Court is defendant Health Care Service Corporation, d/b/a BlueCross and BlueShield of Illinois' ("BCBSI") motion to dismiss the first amended complaint (Doc. 22) and memorandum in support (Doc. 23). Also before the Court is defendant Southern Illinois Healthcare's ("SIH") motion to dismiss the first amended complaint (Doc. 25) and memorandum in support (Doc. 25-1). Plaintiff filed a single response in opposition to defendants' motions to dismiss (Doc. 29) and defendant BCBSI filed a reply (Doc. 31).

BACKGROUND

Plaintiff Marion HealthCare, LLC ("MHC"), filed a seventy-two (72) page, eleven (11) count amended complaint against SIH and BCBSI alleging violations of federal and state antitrust law, specifically, Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2), Sections 2 and 3 of the Clayton Act (15 U.S.C. §§ 13, 14), and the Illinois Antitrust Act (740 ILCS 10), and a state law claim of tortious interference with a business expectancy.

In sum, plaintiff alleges that defendants SIH and BCBSI, through exclusionary agreements and other conduct, including exclusive dealing, price discrimination, and monopolization, have substantially suppressed competition for outpatient surgical services in a defined relevant market in Southern Illinois. Plaintiff claims that defendants are foreclosing competition, harming healthcare consumers through higher prices, diminishing the choice of outpatient service providers, reducing innovation, and increasing barriers to entry for competing service providers. Plaintiff seeks damages and for this Court to enjoin defendants from entering into, maintaining, or enforcing contracts that prevent BCBSI from contracting with SIH's competitors, including plaintiff.

Plaintiff raises the following five (5) claims against defendant SIH: (Count I) exclusive dealing with BCBSI in violation of Section 1 of the Sherman Act (15 U.S.C. § 1) and Clayton Act (15 U.S.C. § 14); (Count III) exclusive dealing with BCBSI in violation of the Illinois Antitrust Act; (Count V) tying arrangement with BCBSI in violation of Section 1 of the Sherman Act (15 U.S.C. § 1) and Clayton Act (15 U.S.C. § 14); (Count VI) tying arrangement with BCBSI in violation of the Illinois Antitrust Act (740 ILCS 10/3); (Count IX) monopolization in violation of Section 2 of the Sherman Act (15 U.S.C. § 2).

Plaintiff raises the following six (6) claims against defendant BCBSI: (Count II) exclusive dealing with SIH in violation of Section 1 of the Sherman Act (15 U.S.C. § 1) and Clayton Act (15 U.S.C. § 14); (Count IV) exclusive dealing with SIH in violation of the Illinois Antitrust Act; (Count VII) tying arrangement with SIH in violation of Section 1 of the Sherman Act (15 U.S.C. § 1) and Clayton Act (15 U.S.C. § 14); (Count VIII) tying arrangement with SIH in violation of the Illinois Antitrust Act (740 ILCS 10/3); (Count X) price discrimination against MHC in violation of Section 2 of the Clayton Act (15 U.S.C. § 13); and (Count XI) tortious interference with a business expectancy.

A. The Parties and Other Southern Illinois Healthcare Providers

The Court accepts as true, as it must, for the purpose of considering the motions to dismiss, the following facts alleged in plaintiff's amended complaint. Plaintiff, MHC is a multi-specialty freestanding outpatient surgery center which offers outpatient surgical services. Plaintiff does not offer inpatient services. MHC opened for business in 2004, and is located in the relevant geographic area, defined by plaintiff as Williamson County and Jackson County, Illinois, and the surrounding areas in close proximity to or bordering these two counties.

Defendant SIH is a nonprofit corporation that owns various acute-care hospitals which provide inpatient and outpatient medical services. In addition, SIH owns (wholly or partially) freestanding outpatient surgical service providers. Specifically, Plaintiff claims there are four hospitals within the defined geographic area that provide outpatient surgical services, namely, Heartland Regional Medical Center, owned by Community Health Systems, and the remaining three owned by SIH: Memorial Hospital of Carbondale, Herrin Hospital, and St. Joseph Memorial Hospital. There are also five freestanding providers of outpatient surgical services within the relevant geographic market, including plaintiff, two providers fully or partially owned by SIH which compete with plaintiff, Physicians' Surgery Center, L.L.C. ("PSC"), and Southern Illinois Orthopedic Center, LLC ("SIOC"), and two others, Marion Surgery Center, and Pain Care Surgery Center, which provide a narrow scope of specialized services and do not compete with plaintiff.

B. Allegations Regarding Relevant Market

Plaintiff defines two relevant markets: (1) "the sale of general acute-care inpatient hospital services, including pediatric services and neonatal care services to commercial health insurers, " and (2) "the sale of outpatient surgical services to commercial health insurers." (Doc. 13 at 2). Commercial health insurers include managed-care organizations, rental networks, and self-funded plans. Plaintiff excludes government payers, such as Medicare, Medicaid, and TRICARE from the relevant markets.

In the relevant geographic market, SIH has approximately a 77% share of the market for inpatient hospital services sold to commercial insurers, and a more than an 85.3% share of the market for outpatient services sold to commercial insurers. Accordingly, plaintiff asserts, most health insurance companies in the relevant geographic market consider SIH a "must-have" hospital system for health plans because it is the largest hospital system in the region and the only local provider of certain essential services.

Plaintiff alleges that hospitals or other facilities outside of the relevant geographic area do not compete with those within the area for the sale of the relevant products in a manner that would create a competitive market or otherwise constrain the pricing or other behavior of the providers within the geographic area. Further, competition for the sale of inpatient and outpatient services to commercial health insurers from outside the geographic area would not be sufficient to prevent a hypothetical monopolist provider of either of these services within the geographic area from profitably maintaining supracompetitive prices for those services over a sustained period of time.

Defendant BCBSI allegedly is the largest health insurance company in Illinois, and the dominant health insurer in Williamson and Jackson Counties, Illinois, and the surrounding area. Accordingly, BCBSI is the dominant provider of health insurance covering inpatient and outpatient services, and has market power for health insurance coverage in the defined geographic market. Plaintiff claims that on at least three (3) occasions, it submitted an application to BCBSI for acceptance as a network provider with BCBSI, but was denied each time. Plaintiff believes that SIH, by virtue of its contracts with BCBSI, prohibits BCBSI from contracting with plaintiff and other competitors for health-care services as an "in-network" provider, which could thereby make plaintiff competitive within the relevant area. In 2011, a BCBSI representative informed plaintiff that BCBSI had an exclusive contract with SIH which precluded or prohibited BCBSI from contracting with plaintiff. It is this exclusive agreement between SIH and BCBSI that forms the crux of plaintiff's claims.

C. Basis of Plaintiff's Claims

Plaintiff alleges that SIH has monopoly power in the two relevant markets in the defined geographical area, and that its prices have climbed. Further, plaintiff alleges that SIH is attempting to increase its control over the referral of patients in the market by acquiring or otherwise controlling independent providers in the area, in an attempt to further establish its monopoly power. Plaintiff alleges that SIH is the largest provider of inpatient and outpatient services in Williamson and Jackson Counties and the surrounding areas.

Plaintiff claims that SIH willfully maintained and extended its monopoly power through the use of anticompetitive exclusionary contracts. Specifically, plaintiff alleges that BCBSI had a compelling business need to include SIH in its network of inpatient service providers. Further, in consideration of discounts sought by BCBSI on inpatient services, SIH demanded exclusionary language in its contracts with commercial insurance companies, including BCBSI, prohibiting BCBSI from contracting with competing providers, including plaintiff, MHC. Plaintiff alleges that SIH improperly and illegally coerced BCBSI into entering into an agreement that tied discounts for coverage of SIH's inpatient hospital services with exclusive contracting for in-network coverage of SIH's outpatient surgical services, prohibiting BCBSI from contracting for in-network coverage with competing freestanding outpatient surgery centers in the region. Plaintiff alleges that this arrangement constitutes exclusive dealing and tying.

Plaintiff further alleges that inclusion in health insurance networks is critical as patients generally seek services from "in-network" providers because, typically, an insurer charges a member substantially lower co-payments or other charges when the member uses an in-network provider. In this manner, the patient's out of pocket costs are generally lower if they use an in-network provider. Plaintiff alleges that because of SIH's monopoly power and BCBSI's market power, the exclusionary agreements between these parties have substantially foreclosed plaintiff and other competitors from commercial health-insurance contracts for outpatient services in the relevant geographic area. Without these contracts, plaintiff alleges, SIH's competitors cannot effectively compete. Additionally, by refusing to grant competitors in-network status, SIH and BCBSI have substantially reduced the number of patients who would otherwise use plaintiff or other competitors for outpatient services, and effectively denied access to non-SIH providers to a substantial percentage of patients who hold BCBSI insurance coverage.

Further, plaintiff claims that most patients must pay SIH substantially more for its outpatient surgical services, as compared to having the procedure performed in a non-SIH owned or partially owned facility. Therefore, plaintiff alleges, SIH's contracts prevent members of the public from accessing competing full service outpatient surgical services in a cost-efficient manner.

Plaintiff alleges that patients covered by government plans like Medicare or Medicaid are not adequate substitutes for commercially insured patients, because government plans pay providers significantly less than commercial health insurers. Through its exclusionary contracts with BCBSI, SIH retains substantial profits that would otherwise be available to plaintiff. Plaintiff asserts that this additional earned profit, if available to plaintiff, would provide the basis for increased competition, increased services, greater innovation and greater choices for patients.

Additionally, plaintiff alleges that SIH's exclusionary contracts violate antitrust laws, have reduced competition, and caused substantial anticompetitive effects, such as: delaying and preventing the expansion and entry of SIH's competitors, likely leading to higher healthcare costs and higher insurance premiums; limited price competition for price-sensitive patients, likely leading to higher healthcare costs for those patients; reduced quality competition between SIH and its competitors; reduced the likelihood that patients will be treated at MHC; and reduced the healthcare options for patients in need of outpatient surgery, all without a valid business justification.

D. Motions to Dismiss

Both defendants have filed motions to dismiss. BCBSI asserts that (1) plaintiff's claims under § 3 of the Clayton Act, namely Counts II (Exclusive Dealing), VII (Tying), and X (Price Discrimination), should be dismissed because sections 2 and 3 of the Clayton Act apply to goods, not services; (2) plaintiff's claims under Count II (Exclusive Dealing) should also be dismissed because (a) the "market" identified by plaintiff is deficient as a matter of law, and (b) plaintiff cannot adequately plead substantial foreclosure; (3) plaintiff's Count VII claims under the Sherman Act should also be dismissed because plaintiff has not and cannot allege that BCBSI has market power in the tying product (inpatient hospital services) or the tied product (outpatient surgical services); (4) plaintiff's state law antitrust claims, Counts IV and VIII, should be dismissed on the same bases as their federal counterparts; and (5) plaintiff's tortious interference claim, Count XI, should be dismissed because the physicians and patients at issue were alleged to be under contract with BCBSI, and BCBSI cannot interfere with its own relationships as a matter of law, or, alternatively, Count XI should be dismissed for lack of independent jurisdiction, should the Court determine that there are no viable federal claims. BCBSI seeks dismissal of all claims against it, with prejudice.

SIH, in its motion to dismiss, asserts that: (1) plaintiff fails to allege facts supporting the proposition that SIH coerced BCBSI to contract with SIH for outpatient surgery services as a condition of a contract for inpatient hospital services, which is required to state a claim for unlawful tying under Section 1 of the Sherman Act and the Illinois Antitrust Act (Counts V, VI); (2) plaintiff fails to allege that the exclusive contract foreclosed plaintiff from the alleged market for the sale of outpatient surgery services to commercial insurers as it must to state a claim for exclusive dealing under Section 1 of the Sherman Act and the Illinois Antitrust Act (Counts I, III); (3) plaintiff fails to allege that SIH acquired or maintained its allegedly dominant position in the alleged relevant markets through anticompetitive conduct, which is necessary to state a claim for monopolization under Section 2 of the Sherman Act (Count IX); plaintiff's exclusive dealing and tying claims under Section 3 of the Clayton Act must be dismissed with prejudice because Section 3 of the Clayton Act only applies to goods and commodities, and not to services, which are at issue in this case (Counts I, III, V, and VI).

LEGAL STANDARD

A motion pursuant to Fed.R.Civ.P. 12(b)(6) allows for dismissal for "failure to state a claim upon which relief can be granted." To state a claim, a pleading need only contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Furthermore, the Court must review a complaint in the light most favorable to the plaintiff, accept as true all well-pleaded facts alleged, and draw all possible inferences in the plaintiff's favor. Tamayo v. Blagojevich , 526 F.3d 1074, 1081 (7th Cir. 2008). Detailed factual allegations are not required, but the pleading must contain "sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570 (2007)). A plaintiff "can plead himself out of court by pleading facts that show that he ...


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