On March 30, 2017, the U.S. District Court for the Western District of North Carolina rejected a motion for judgment on the pleadings (akin to a motion to dismiss) by Carolinas HealthCare System (CHS) in a novel health care antitrust suit brought by the Department of Justice (DOJ) and State of North Carolina (collectively, the Government).

The Government filed suit against CHS, a health system consisting of 10 hospitals in and around Charlotte, North Carolina, in June 2016, alleging that contractual provisions mandated by CHS in its contracts with health insurers that sought to prevent insurers from establishing narrow networks or otherwise incentivizing insureds to see lower cost providers than CHS violated federal antitrust law. Specifically, the Government alleges that CHS’s contractual restrictions on “steering” by insurers—that is, not contractual provisions requiring that insureds be steered to CHS but rather contractual provisions that prevented insurers from steering insureds away from CHS—constitute unreasonable restraints on trade in violation of the Sherman Act. In its complaint, the Government describes “steering” as a competitive behavior that may refer to the insurer practice of offering tiered provider networks (with copayments varying by provider tier) as well as narrow-network plans (offering lower prices to insureds in exchange for a more limited provider panel).

The Government argues that steering insureds can be procompetitive in the context of health insurance markets because it enables insurers to enroll insureds at lower price points in narrower networks that exclude higher-cost providers. Under this theory, CHS’s contractual restrictions on insurer steering thus constitute anticompetitive restraints on the insurers’ activities. Additionally, because CHS has significant market power in its geographic area (50 percent of the relevant market for inpatient hospital services), the Government explained that insurers are obligated by market forces to agree to CHS’s contractual demands.

In its order denying CHS’s efforts to dismiss the case, the Court emphasized that the bar for survival at this stage “is not a high one and it also is not meaningless one.” The Court applied a rule of reason analysis, under which a restraint on trade is unreasonable where its anticompetitive effects outweigh its procompetitive effects. In pertinent part, the Court determined that the Government had sufficiently alleged facts showing that CHS’s conduct had direct competitive harm, including that individuals in CHS’s geographic area pay higher prices for health insurance (and have higher out-of-pocket costs), have fewer health insurance options, and are denied access to cost-saving innovations such as comparison shopping as well as “more efficient health plans that would be possible if insurers could steer freely.” The Court also found a sufficient basis for allegations of indirect competitive harm by CHS’s steering restrictions, noting that CHS has a reputation as an expensive provider, that insurers would prefer not to be subject to anti-steering restrictions, and that “absent these steering restrictions” insurer’s costs would be reduced by being able to steer patients to lower-cost providers.

In its defense, CHS argued that the anti-steering provisions have procompetitive effects and sought to undermine the Government’s anti-steering theory by likening it to the anti-steering position taken by the DOJ in an antitrust suit against credit card companies recently rejected by the U.S. Court of Appeals for the Second Circuit. The Court declined to accede to CHS’s position, noting that the Second Circuit opinion “involved a different product and a different market” and considered the DOJ’s burden of proof to establish liability at the trial stage, not at the preliminary pleadings stage of this case. The Court further observed that the Second Circuit decision was narrowly decided within the context of the credit card industry and relied on the record from a seven-week bench trial (that case survived the summary judgment phase).

The Court ultimately denied CHS’s motion but cautioned that it had “not been presented with facts yet enabling it to conclude whether CHS’s steering restrictions have procompetitive or anticompetitive effects” and that factual discovery will be necessary to make that conclusion. The validity of the DOJ’s anti-steering theory of antitrust liability thus remains to be determined within the context of the health care market, and this case will continue to be closely monitored throughout the industry.