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Venice Hospital decision vacated.

The United States Court of Appeals for the Eleventh Circuit recently ordered an en banc rehearing of its widely reported hospital downstream diversification antitrust case.(1) The so-called Venice Hospital case had found antitrust liability in the operation of a durable medical equipment (DME) joint venture between a hospital and a DME vendor. The Eleventh Circuit, however, has vacated its prior decision and, pending its en banc opinion, reinstated the district court's decision that the defendants did not violate antitrust law.

Many observers are hopeful that the rehearing that has been ordered by the Eleventh District Court in the Venice Hospital case will clear up a number of issues, including the viability of the monopoly leveraging cause of action and the requirement of consumer injury. Moreover, a recent decision by the U.S. Supreme Court could affect the court's method of calculating monopoly power in the acute care market.

The plaintiff in the case, Key Enterprises of Delaware, supplied DME in the Venice, Florida, area. The defendants, Sammett Corporation and Venice Hospital, jointly owned the third defendant, Medicare Patient Aid Centers (MPAC), also a DME supplier.

Prior to the creation of MPAC, home health nurses generally assisted their patients in the selection of DME. If a patient did not express a DME vendor preference, the patient's nurse would select the vendor on the basis of the patient's needs and the nurse's experience with DME vendors. Upon the creation of the joint venture, Venice Hospital instituted a policy to encourage home health nurses to select MPAC as the DME supplier for discharged Venice Hospital patients. The hospital hired a former Sammett DME salesman and sales supervisor to be the patient equipment coordinator in its discharge planning department. The hospital honored requests by patients or their health care providers for DME providers other than MPAC but, in the absence of a request, referred all DME business to MPAC.

At trial in the U.S. District Court, the plaintiff alleged that the defendants violated Sections 1 and 2 of the Sherman Act by coercing home health agencies to select MPAC and by unreasonably restricting and excluding competition. The jury awarded treble damages of almost $2.3 million. The trial judge, however, granted the defendants' motion for a judgment notwithstanding the verdict, which overturned the jury's decision on the grounds that the evidence did not support the finding that the "defendants [sic] behavior was coercive or unreasonably exclusionary, or, in other words, that competition was injured."

In support of its ruling for the defendants, the district court had noted that the defendants' actions were economically rational; that patients, home health nurses, and doctors were free to select the DME vendor of their choosing; and that other DME suppliers were not unreasonably excluded from competing in the market. The district court also found that consumers had not complained about the arrangement, that prices had dropped, and that market concentration had been diminished.

In reversing the district court in the now vacated decision, three Eleventh Circuit judges noted, contrary to the stipulation of the parties, that the freedom of patients to select a vendor "may be illusory" because of patients' lack of knowledge and susceptibility to recommendations. Furthermore, the now vacated circuit court opinion held that the defendants channeled patient choice by limiting patients' exposure to competing DME dealers.

The circuit court opinion described two policy changes that allowed the hospital to limit patient exposure to competing DME dealers. First, the hospital prohibited home health nurses (at least initially) from discussing DME choices with their patients. Second, the hospital permitted only a representative of MPAC to solicit business within the hospital, thereby prohibiting patient access to all other DME vendors. The panel also concluded that "channeling of patient choice is sufficient to show injury to consumers" and that injury to competition could be proven even if injury to the consumer was "practically nonexistent." Moreover, the opinion concluded that the evidence as a whole reasonably supported the inference that home health nurses treated MPAC preferentially because of possible threats to job security and in response to hospital solicitations.

The now vacated circuit court decision was also notable for its view that the hospital had engaged so-called "monopoly leveraging," an independent violation of Section 1. "Monopoly leveraging" is the use of power in one market to gain a competitive advantage in another, by other than competitive means. While the decision noted that there were "plausible business reasons" for the hospital to enter the DME market, it found that the hospital had intentionally abused its monopoly power in the acute care services market to exclude competitors in the DME market.

The recently ordered en banc review presents the opportunity for a reheating by all of the judges presiding in the circuit of a number of significant antitrust issues relevant to hospital downstream joint ventures. These issues include the viability of the monopoly leveraging theory, the necessity of consumer injury for competitive injury to exist, and the method of determining monopoly power in the acute care market.

Two federal circuits have recently declined to recognize the monopoly leveraging theory as a cause of action. In Alaska Airlines, Inc. v. United Airlines, Inc. a case involving alleged attempts by United Airlines and American Airlines to use their monopoly power in computer reservation systems to gain unfair competitive advantages in the air travel market, the court ruled that monopoly leveraging was a permissible mechanism for a monopoly to employ to benefit from its position.(2) Likewise, in Fineman v. Armstrong World Industries, Inc., a case involving a floor tile manufacturer's alleged use of its market power to gain a competitive advantage in the video marketing market, the court ruled that the monopoly leveraging cause of action requires at least proof of attempted monopolization in the second market.(3) Both decisions recognized that the leveraging of one's monopoly into a different market is not a violation under Section 2 unless there is a dangerous probability that the monopolist will monopolize the second market.

A second issue before the court is the necessity of demonstrable consumer injury in an antitrust action. The panel's finding that "[i]njury to competition may be shown even though injury to the consumer is practically nonexistent" arguably conflicts with both general antitrust principles and with the recent conclusion of the Fourth Circuit, in a similar DME case, that economic effects engendered by alleged exclusionary conduct are relevant to a court's inquiry and that a plaintiff must show a business loss.(4)

A third issue that the en banc court could address is the means of determining monopoly power in the acute care market. Under traditional antitrust analysis, the market power of a hospital's DME company is determined by comparing its share of the DME market with the total DME market. However, a recent U.S. Supreme court case suggests that a product market analysis may be as narrow as a single product after market for purposes of the Sherman Act.(5) However, it is doubtful that a single hospital's DME referrals would be a "market." Moreover, the facts in the Kodak case may be distinguishable from those in Venice Hospital and other downstream diversification cases. Hospital DME patients are arguably not distinct from other DME patients and therefore do not have the same market impact as the services and manufactured parts in the Eastman Kodak case. The reheating of Venice Hospital by the Eleventh Circuit should clarify the law governing downstream diversification. In the meantime, hospital administrators considering a downstream diversification project need to evaluate the position of the courts in their jurisdictions on such projects, to include the issues outlines above.

References

1. Key Enterprises of Delaware, Inc. v. Venice Hospital, 703 F. Supp. 1513 (M.D. Fla. 1989), rec'd, 919 F.2d 1550 (11th Cir. 1990), vacated and reh'g granted, No. 89-3086, 1992 WL 352484 (11th Cir. Nov. 10, 1992).

2. 948 F.2d 536 (9th Cir. 1991), cert. denied, 112 S. Ct. 1603 (1992).

3. 1992 WL 309215 (3rd Cir. Oct. 28, 1992).

4. Advanced Health-Care Services, Inc. v. Radford Community Hospital., 910 F.2d 139, 149 (4th Cir. 1990).
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Author:Gradle, Brian D.
Publication:Physician Executive
Date:Mar 1, 1993
Words:1354
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