Jury may set course for region's health care.

Byline: TIM CHRISTIE The Register-Guard

If and when McKenzie-Willamette Hospital's antitrust lawsuit against PeaceHealth goes to trial, a jury will be asked to decide two key legal questions:

Does PeaceHealth have a monopoly, or dominant market power, in the Lane County hospital market?

If so, did PeaceHealth compete fairly, or did it use its market power to engage in "predatory" tactics intended to drive its weaker competitor out of business?

How a jury answers those questions could determine how health care is delivered in the southern Willamette Valley for decades.

The suit, filed Monday in U.S. District Court in Eugene, holds huge stakes both for McKenzie-Willamette, an independent, 114-bed community hospital in Springfield, and PeaceHealth, a regional Catholic health care group that owns six hospitals in the Northwest, including its flagship, the 432-bed Sacred Heart Medical Center in Eugene.

If McKenzie-Willamette loses the case, its executives said PeaceHealth's business tactics will drive the smaller hospital out of business - or into the arms of another big hospital group. If PeaceHealth loses, it could be ordered to pay damages in the tens of millions of dollars. McKenzie-Willamette is seeking $15 million in economic damages and $20 million in punitive damages; under federal antitrust law those sums would be tripled if McKenzie-Willamette prevails.

The case is the most recent in a spate of antitrust lawsuits between health care organizations in the past few years, legal experts said. It goes to the heart of how a free-market economy is supposed to work.

Squashing competitors

Our capitalist system is based on the premise that competition is good. It's good for competitors, because it makes them operate more efficiently. It's good for consumers, because it provides choice and keeps prices down.

But when one competitor dominates a market, federal antitrust law recognizes that unfettered competition is not necessarily a good thing. It's not fair, for instance, for a dominant competitor to lower its prices just long enough to quash its weaker rival, then jack up prices when the competition is gone.

That, in essence, is what McKenzie-Willamette is alleging in its lawsuit.

The suit accuses PeaceHealth of negotiating contracts with Regence BlueCross BlueShield of Oregon that effectively excluded customers from seeking care at McKenzie-Willamette. Such preferred-provider agreements are common in the health insurance industry, but the suit alleges PeaceHealth used its dominant market power to keep McKenzie-Willamette from fairly competing for those contracts.

Specifically, PeaceHealth offered Regence deep discounts for two services where it has no competition, cardiovascular and neonatal intensive care, the suit charges. In return, PeaceHealth demanded that customers in the Regence plan go to Sacred Heart for all other care.

Whether that conduct is legal depends on several factors a jury will be asked to sort out, said Jeff Miles, a Washington, D.C., attorney who specializes in health care antitrust law.

"It depends on the size of the market involved, and it depends on the market power of the different players and it depends on whether the conduct is likely to drive the smaller competitor out of business," he said.

Bill Kopit, another Washington lawyer specializing in health care competition issues, said the allegation in the suit "is perfectly plausible."

"Conduct that can't net you any money, like giving away services at a lesser price, where you have no competition, can only be done for one purpose: to get the exclusive contract to hurt the smaller competitor," he said.

PeaceHealth have monopoly?

In antitrust cases, the size of the market is a critical issue. In other words, "Over what area do these hospitals compete, and who else competes?" said Richard Feinstein, a Washington, D.C., lawyer who previously headed up the Federal Trade Commission's health care section.

Market size is important because it determines whether consumers would still have choice if a dominant competitor drives a weaker rival out of business.

McKenzie-Willamette argues in its suit, for instance, that the local hospital market is confined to Lane County and includes only PeaceHealth and itself. PeaceHealth may counter that the market includes more than just the two hospitals in question, so consumers would still have choice if McKenzie-Willamette folds.

As important as the arcane economics of defining a market, said Thomas Greaney, who directs the Center for Health Law Studies at St. Louis University, is what the consumers of health care have to say about it.

`If the buyers, employers and middlemen who purchase health care line up to say, `This is a local market,' and yes, they would prefer some choice, that's going to go a long way' toward defining the market size, said Greaney, a former assistant chief of the antitrust division at the U.S. Department of Justice.

If McKenzie-Willamette establishes that PeaceHealth has dominant market power, it then must prove that PeaceHealth competed unfairly: Was it offering discounted prices to Regence as a legitimate competitive tactic, or was it engaging in predatory conduct? If the low price is intended to drive the competitor out of business so that it could then jack up prices, that's predatory, anti trust lawyers say.

It can be difficult to prove conduct was motivated by anti-competitive intent, Kopit said. But a legitimate business purpose has to be rational, he said.

"I do believe that giving away services where you have no competition is unlikely to be a legitimate business purpose because there's no other reason for doing it except to exclude your competitor from the market," he said.

Feinstein noted, however, that courts typically have "a lot of tolerance" for business conduct that reduces prices for consumers.

"If the folks signing contracts with (PeaceHealth) are not being coerced, and are choosing the hospital because its service is good and prices are competitive, then it's hard to show in the short run that consumers are worse off," he said.

David vs. Goliath

Such cases have grown more common in recent years, antitrust lawyers said.

Mergers have consolidated a number of markets in recent years, giving hospitals market power and more leverage, Feinstein said.

"Sometimes that gets challenged by the payers, or insurers. Other times it gets challenged by competitors," he said.

One recent case with facts similar to the local dispute involved a surgical center and a hospital in Hammond, La., about 55 miles north of New Orleans.

St. Luke's SurgiCenter sued North Oaks Medical Center, arguing, among other things, that North Oaks offered insurers deeper discounts for contracts that excluded St. Luke's, and lesser discounts for nonexclusive discounts.

In January 2001, a federal district court judge ruled against St. Luke's. The judge said North Oaks did not have a monopoly in the market and that its contracts with insurers were "reasonable and pro-competitive." The case is now on appeal.

McKenzie-Willamette leaders said they expect their case to go to trial within a year. PeaceHealth officials said the case could drag out two or three years. It's also possible that the hospitals could settle their differences rather than risk having a jury decide.

Miles said a case such as this forces jurors to wrestle with complex economic concepts.

"The unfortunate thing is, the whole thing will be thrown in front of a lay jury who, when all the smoke clears, won't have any idea what is going on because they don't understand microeconomic principles," he said.

"They make the case based on who they think the good guy is and who they think the bad guy is. Usually the bad guy is Goliath."