In its continuing fight against rising healthcare costs, the Justice Department (DOJ) has sued Charlotte, North Carolina’s largest healthcare system for using a common healthcare contracting tool, the anti-steering clause. U.S. and the State of North Carolina v. The Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Healthcare System (CHS), Case No. 3:16-cv-00311, filed on June 9, 2016.

A few years ago, the DOJ attacked another healthcare contracting tool, the most-favored-nation clause, which insurers employed to guarantee they would receive the lowest rates on any given service. According to the DOJ, those clauses, when utilized by dominant healthcare systems, stifle competition and contribute to rising healthcare costs because providers cannot offer lower rates to other insurers without violating the most-favored-nation clause. The DOJ’s work had an effect too, as legislation banning the clauses has passed in a number of states. Now, the DOJ and the state of North Carolina have placed anti-steering clauses in their crosshairs.

To set the background, insurers employ two types of steering strategies, each of which is designed to incentivize consumers (patients) to use lower-cost providers or provider networks in order to reduce some of their healthcare expenses. Insurers use “tiered networks,” which place healthcare providers that “offer better value healthcare services in top tiers.” Consumers who use top tier providers pay less for those services than they do if they visit lower tier providers. Insurers also use “narrow-network” insurance plans, which consist only of a subset of healthcare providers from the broader network—those that presumably offer the “best value,” i.e., lowest price at highest quality. Consumers that use “narrow-network” plans pay lower premiums and lower out-of-pocket expenses than the conventional network plans. Healthcare systems, such as CHS, employ anti-steering clauses in their contracts with insurers to prevent insurers from steering patients to their competitors’ systems.

The DOJ alleges in the complaint that, because of CHS’s market dominance, these clauses reduce competition in the greater Charlotte, NC region. Specifically, the complaint alleges that CHS has gained patient volume from insurers that steer patients towards CHS by offering “modest concessions on its market-power driven, premium prices.” Yet, according the DOJ, “CHS forbids insurers from allowing CHS’s competitors to do the same.” CHS allegedly insists on anti-steering clauses that forbid the insurer from including competitors in the top tiers or from creating narrow networks that include only CHS’s competitors. The DOJ also complains that CHS includes clauses that restrict insurers ability to provide important information to their consumers. According to the Complaint, “CHS’s restrictions on insurer’s price and quality transparency are an indirect restriction on steering, because they prevent patients from accessing information that would allow them to make healthcare choices based on available price and quality information.” The Complaint seeks to enjoin these alleged Sherman Act violations.

The crux of the matter, according to the Complaint, is that CHS is able to negotiate for anti-steering clauses because of its market power in the Charlotte region. The DOJ claims that CHS holds a fifty-percent share of the relevant market, and its closest competitor is less than half its size. Because of its size, and breadth of locations and services, it is alleged that patients must have access to CHS’s system. Accordingly, insurers must accede to CHS’s demands for these anti-steering clauses. The Complaint alleges these anti-steering clauses have increased healthcare costs in the Charlotte region because the clauses immunize CHS from having to compete on price, and its competitors cannot gain an advantage by competing on price.

The Complaint includes several noteworthy allegations, including:

  • CHS’s alleged reputation for being high-priced
  • CHS’s market share dwarfs the market share of its nearest competitor
  • Because of CHS’s market share and its comprehensive offering of services, insurers are compelled to include CHS in their networks or risk being non-competitive
  • Insurers have tried, but failed, to eliminate these clauses from their contracts with CHS
  • CHS’s information restrictions keep consumers from comparison shopping
  • CHS takes advantage of steering practices while restricting its competitors’ ability to do the same
  • A key CHS executive apparently admitted that these clauses were not necessary

Healthcare systems that fit that profile should take notice, and analyze how they employ anti-steering clauses in their contracts.

Stayed tuned as we follow developments in this case.