DOJ Probes Wichita Falls Hospital
Law Feature – November 2011
Tex Med. 2011;107(11):45-48.
By Crystal Conde
Anticompetitive conduct by a hospital system can harm a community by limiting patient choice in health care and driving up costs. That's exactly what the federal government alleges took place in Wichita Falls.
For 18 months, Wichita Falls' largest hospital system's business practices were the target of a U.S. Department of Justice (DOJ) investigation. In February, the department reached a settlement with United Regional Health Care System that prohibits it from entering into contracts that improperly inhibit commercial health insurers from contracting with United Regional's competitors. The department said United Regional unlawfully used the contracts to maintain a monopoly for hospital services, resulting in consumers paying higher prices for health care services.
The DOJ's Antitrust Division and the Office of the Texas Attorney General filed a civil antitrust lawsuit in federal court, along with a proposed settlement that, if approved by the court, would resolve the lawsuit. At press time, the DOJ's proposed settlement was awaiting court approval.
Jerry Myers, MD, a Wichita Falls general surgeon and chief executive officer of physician-owned Kell West Regional Hospital, LLC, says the facility's physician investors became aware of United Regional's restrictive contracting practices with insurers when Kell West opened in 1999. Within three months of the opening, Dr. Myers says United Regional initiated exclusionary contracts with major commercial health insurers that prevented the hospital system's area competitors from participating in the insurers' provider networks.
Kell West is a 41-bed acute care hospital that provides inpatient and outpatient surgical, medical, radiology, pathology, laboratory, pharmacy, and rehabilitative services.
As a result of United Regional's contracting practices, Dr. Myers says, Kell West could not participate in the Unicare, Aetna, HealthSmart, Cigna, and UnitedHealthcare networks, and all insurance companies affiliated with these plans. He says the facility survived for the past 12 years on payments from Medicare, Medicaid, TRICARE, and Blue Cross and Blue Shield of Texas (BCBSTX).
The DOJ complaint in United States and State of Texas v. United Regional Health Care System says BCBSTX is the only major insurer without an exclusionary contract with United Regional. Eight commercial health insurers had signed exclusionary contracts with United Regional as of 2010, according to the complaint.
"United Regional's actions affected not just Kell West but the people of Wichita Falls and Wichita County. Wichita Falls isn't that affluent, so having a county hospital that was more expensive than many of the hospitals in Dallas and Fort Worth created a real problem for area patients," Dr. Myers said.
Allegations of anticompetitive actions by a hospital are nothing new in Texas. In 2009, Texas Attorney General Greg Abbott sent a clear message to Texas hospital systems that attempt to drive physician-owned facilities out of business when he filed an agreed five-year injunction against Houston's Memorial Hermann Healthcare System. (See "Antitrust in Texas.")
While the claims made in the United Regional case in Wichita Falls differ from those in the Memorial Hermann case in Houston, Dallas attorney L. James Berglund, JD, one of the attorneys who represented the physicians in their civil suit against Memorial Hermann, says they both have a common denominator.
"The Texas Attorney General's Office has indicated twice now that it's looking into the commercial insurance contracting practices of Texas' health care providers," he said. "The government examines whether hospitals and other providers of health services are able to balance the evils of anticompetitive harms – an increase in prices and a decrease in quality of care – against the efficiencies that result from the economies of scale."
Contracts Catch DOJ's Attention
In 1997, Wichita General Hospital and Bethania Regional Health Care Center – then the only general acute care hospitals in Wichita Falls – merged to form United Regional Health Care System. According to the complaint, since the merger, United Regional has dominated the sale of inpatient hospital services and outpatient surgical services to commercial health insurers in the area.
"All health insurance companies in the relevant geographic market consider United Regional a 'must-have' hospital for health plans because it is by far the largest hospital in the region and the only local provider of certain essential services," the complaint states.
The complaint maintains that as United Regional's prices for services have increased, it has become "one of the most expensive hospitals in Texas."
United Regional's share of general acute care inpatient hospital services is about 90 percent, and its share of outpatient surgical services is more than 65 percent, according to the government.
The DOJ reports United Regional had net patient revenues of approximately $265 million for 2009.
In fact, the complaint says commercial health insurers' payments for inpatient hospital services at United Regional are at least 50 percent higher than average prices paid in seven other comparable Texas cities. When comparing United Regional's average per-day rate for inpatient services sold to commercial health insurers to that of Kell West, the complaint says United Regional's rate is about 70 percent higher.
Dr. Myers is pleased with the DOJ's settlement with United Regional. He says since the settlement announcement, Kell West was to contract with HealthSmart and CIGNA. At press time, he was talking to UnitedHealthcare and Aetna about contracting with them.
Assistant Attorney General Christine Varney, who's in charge of the DOJ's Antitrust Division said in a press release, "Unfettered competition among hospitals is vital to ensuring that patients receive high-quality, low-cost health care." She added the proposed settlement "prevents a dominant hospital from using its market power to harm consumers by undermining its competitors' ability to compete in the marketplace."
The proposed settlement, which would be in effect for seven years, restores lost competition by prohibiting United Regional from:
- Using agreements with commercial health insurers that improperly inhibit insurers from contracting with United Regional's competitors,
- Conditioning the prices or discounts it offers to commercial health insurers based on whether those insurers contract with other health care providers,
- Inhibiting insurers from entering into agreements with United Regional's rivals, and
- Taking any retaliatory actions against an insurer that signs an agreement with a rival facility.
United Regional's exclusionary contracts were "in direct response to the competitive threat presented by Kell West, the North Texas Surgi-Center, and other local outpatient surgical facilities to United Regional's monopoly position in the Wichita Falls MSA," the complaint alleges.
The North Texas Surgi-Center was open from 1985 to 2008. The complaint says United Regional's exclusionary contracts prevented the facility from participating in some commercial health insurers' networks.
To read the DOJ complaint, competitive impact statement, and proposed final judgment in the Federal Register, visit http://federalregister.gov/a/2011-5529.
Texas Medicine attempted to reach a number of Wichita Falls physicians at health care facilities that compete with United Regional, but they declined to be interviewed.
Settlement Would Restore Patient Choice
According to the government, United Regional's exclusionary contracts increased prices and reduced quality competition in three ways:
- The exclusionary contracts likely delayed and prevented expansion and entry of competitors.
- The exclusionary contracts likely have limited price competition for patients who select a hospital based on price and out-of-pocket expenses.
- The exclusionary contracts likely have reduced quality competition between United Regional and its competitors.
In appraising the potential for expansion by competitors, the DOJ found Kell West could more than double the number of patients it serves without any physical expansion, and Maplewood Ambulatory Surgery Center, which operates only three days per week, could easily add at least one more day per week to its schedule to serve more patients. Maplewood focuses on providing outpatient surgical procedures for pain remediation in Wichita Falls.
The complaint says Kell West was likely unable to expand into obstetrics, pediatrics, oncology, industrial medicine, and neurology due to United Regional's exclusionary contracts.
"Doctors in the Wichita Falls community have expressed interest in treating additional patients at Kell West if it could expand into new services," the complaint reads.
In examining United Regional's monopoly power, the DOJ estimates that allowing Kell West and other health care facilities to participate in commercial health insurers' networks that have exclusionary contracts with United Regional would result in substantially higher profits for the facilities.
"For example, if only 10 percent of these insurers' patients switched from United Regional to Kell West, and these insurers paid Kell West 30 percent less than they currently pay United Regional, Kell West's profits would still likely increase by more than 40 percent," according to the complaint.
While Dr. Myers welcomes the prospect of improving Kell West's financial health through new contracts with insurers, he's most grateful patient choice will be restored in Wichita Falls.
"You have to understand; we started this hospital [Kell West] to try to prevent United Regional's monopoly and to give patients another choice. Because of the exclusionary contracts, Wichita Falls' public school teachers couldn't come to Kell West because they're insured by Aetna. People don't like not having a choice, and now, thanks to the DOJ settlement, they'll have more options for care," he said.
Dr. Myers says that at this point he and the 73 other physician-owners of Kell West aren't planning to file a lawsuit against United Regional for its contracting practices.
"Right now we're happy we're able to give all insurance companies a chance to contract with Kell West," Dr. Myers said.
United Regional Responds
In a press release, United Regional said it is pleased the lawsuit has been resolved.
"While we disagree with the department's interpretation of the facts and would have welcomed the opportunity to address this matter in a court of law, we believe it is in the best interest of United Regional and our patients to instead move forward with our total attention and resources focused on our passion of providing excellence in health care for the communities we serve," the press release says.
United Regional added that, "There appears to be little, if any, correlation between the involved contracts and United Regional's growth of the last few years. Instead, evidence shows that our progress is the result of many strategic and operational factors."
In a letter, United Regional President and Chief Executive Officer Phyllis Cowling wrote that contractual provisions allowed each plan to elect one of two options:
- Designate United Regional as its local in-network hospital and receive deeper discounts on United Regional services, or
- Provide an unlimited range of local hospital providers and receive more shallow discounts on United Regional services.
"In other words, the contracts provided for discounts corresponding to a plan's expected volume commitments and at the election of the plan," Ms. Cowling wrote.
She added that since United Regional can "provide significant services not available elsewhere in our local area, and because the majority of residents of the Wichita Falls area obtain their hospital care from United Regional, the Department determined that the 'either/or' provision outlined above must be eliminated from these contracts, and we agreed to do so. Thus, we will be taking appropriate steps to ensure fulfillment of our obligations in resolution of this matter."
Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by email.
Antitrust in Texas
Texas Attorney General Greg Abbott filed an agreed five-year injunction against Houston's Memorial Hermann Healthcare System in 2009. The order bars Memorial Hermann from certain contracting practices and orders it to pay $700,000 in partial reimbursement to the attorney general's office for its two-year investigation.
Among its lengthy terms, the injunction bans Memorial Hermann from signing any agreement with a health care payment plan that results in a boycott of competing hospitals. The hospital system also can't require or request that health plans supply information on the rates they pay competing hospitals.
Additionally, last year Memorial Hermann settled a lawsuit for an undisclosed amount with Stealth, a group of physicians in a limited partnership that owned and operated Houston Town & Country Hospital. In the case, the physician partners alleged Memorial Hermann violated antitrust laws and employed certain business practices to dissuade insurance companies from doing business with the physician-owned hospital.
Following the attorney general's injunction, the operator of a competing hospital and a group of physician investors sued Memorial Hermann, alleging the hospital system's anticompetitive behavior pressured insurance companies to avoid contracting with Houston Town & Country, a 99-bed physician-owned hospital that closed in 2007 after failing to secure contracts with more than one major health care payment plan.
Memorial Hermann settled the lawsuit with the operator of Houston Town & Country before the trial. Last year, a Harris County jury rejected physicians' allegations that Memorial Hermann violated antitrust laws, causing the physician-owned competing hospital to fail. At the conclusion of the eight-week trial, the jury found the evidence was insufficient to determine whether insurance companies engaged in a conspiracy to discourage insurers from contracting with Town & Country.
L. James Berglund, JD, one of the attorneys who represented the physicians in their civil suit against Memorial Hermann, says to win the case, the plaintiffs had to prove Memorial Hermann facilitated a conspiracy between at least two insurance companies to deny contracts to Houston Town & Country. Mr. Berglund says his clients decided not to appeal the jury's decision. A second lawsuit, however, brought by the operator of the hospital against the insurance companies, is ongoing.
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