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Giving the green light to an antitrust suit brought by a group of insurers against a pair of rural hospitals that merged, a federal judge in Pennsylvania ruled that the insurers have a valid claim of an illegal “tying arrangement” where they say they are forced to pay supra-competitive prices for physician services in order to buy hospital services. In his 13-page opinion in HealthAmerica Pennsylvania Inc. v. Susquehanna Health System, U.S. District Judge James M. Munley of the Middle District of Pennsylvania refused to dismiss claims under the Sherman Act that allege an illegal restraint of trade. According to the suit, in 1994, the two dominant hospital systems in north-central Pennsylvania — Provident Health System and North Central Pennsylvania Health System — merged to form Susquehanna Health System. The result of the merger, the suit says, was a single entity with overwhelming market power in the Lycoming County area in both the in-patient and outpatient markets. SHS had almost no competition because the merger gave it both of the hospitals in Williamsport and a third in the town of Muncy, 15 miles away, while the nearest hospital that is not part of SHS is 30 miles away. At the time of the merger, the Pennsylvania Attorney General allowed it only after SHS agreed to enter into a five-year consent decree that required SHS to achieve savings from increased efficiency and to pass those savings on to consumers in the form of lower prices. But the consent decree expired in July 1999, the suit says, and SHS has since then demanded significant price increases. The three plaintiffs in the suit — an HMO, a fee-for-service insurer and a third-party administrator — claim that when it came time to renew their contract with SHS for physician services, SHS also terminated their contracts for hospital services and insisted that the two contracts be renegotiated jointly. When the contract negotiations were done, the suit says, SHS had obtained a 21 percent increase in hospital rates. The insurers say the rates are much higher than they pay to hospitals in comparable communities whose hospitals are in competition. In the suit, the insurers brought three claims. First, they alleged that the merger was illegal and violated both the Clayton Act and the Sherman Act. The second count alleged illegal physician acquisitions, also in violation of both the Clayton and Sherman acts. The third count alleged an illegal restraint of trade as the result of a “tying arrangement” in violation of the Sherman Act. SHS’s lawyers moved to dismiss only the third count, arguing that the insurers failed to allege a true tying arrangement and also failed to allege damages that resulted from the tying scheme. In the suit, the tying claim focuses on SHS’s insistence on joint negotiations for the contracts for physician and hospital services. SHS argued that such a scenario is not an antitrust violation, but merely a request to conduct joint negotiations. The insurers’ lawyers begged to disagree, saying their claim was more than that since they also allege that SHS refused to sign a contract for hospital services unless the insurers agreed to sign a contract for physician services at supra-competitive prices. As a result, the insurers say, they were forced to buy the “tied product” of physician services in order to buy the “tying product” of hospital services. Judge Munley agreed, finding that the claim alleged a true tying arrangement since the insurers say they were forced to pay supra-competitive prices for the tied product. SHS also argued that the claim of a tying arrangement was flawed since the insurers’ real claim is that SHS’s market power and its illegal physician acquisitions are the reasons for the insurers paying supra-competitive prices for physician services. SHS argued that the two claims are inconsistent and that the insurers cannot have it both ways — arguing in one count that the higher price is a result of market power, while in the next count arguing that they resulted from the tying arrangement. But Munley found there was nothing wrong with inconsistency in a lawsuit. Under Rule 8 of the Federal Rules of Civil Procedure, the judge said, a plaintiff is allowed to plead “alternative or inconsistent” causes of action. As the 3rd U.S. Circuit Court of Appeals has interpreted that rule, Munley said, a court “may not construe one of plaintiff’s claims as an admission against another alternative or inconsistent claim.” Munley also found that the two claims are “not necessarily” in conflict with each other. “If a seller engaged in a tying arrangement has a monopoly over the tied product, it merely enhances its ability to maximize its profits regarding the tying arrangement,” Munley wrote. “Ergo, the two theories of tying arrangement and market control are not necessarily mutually exclusive.”

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