United States v. Medical Mutual of Ohio; Public Comments and United States' Response to Comments

DEPARTMENT OF JUSTICE

Antitrust Division

[Civil Action No. 1:98 CV 2172]

United States v. Medical Mutual of Ohio; Public Comments and

United States' Response to Comments

Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.

16(b)-(h), the United States publishes below the comment received on

the proposed Final Judgment in United States v. Medical Mutual of Ohio,

Civil Action 1:98 CV 2172, United States District Court for the

Northern District of Ohio, Eastern Division, together with the response

of the United States to the comment.

Copies of the response and the public comment are available on

request for inspection and copying in Room 400 of the U.S. Department

of Justice, Antitrust Division, 325 7th Street, NW., Washington DC

20530, and for inspection at the Office of the Clerk of the United

States District Court for the Northern District of Ohio, Eastern

Division, 201 Superior Ave., Cleveland, Ohio, 44114.

Rebecca P. Dick,

Director of Civil Non-Merger Enforcement, Antitrust Division.

Response of the United States to Public Comments

Pursuant to the requirements of the Antitrust Procedures and

Penalties Act (the ``Tunney Act''), 15 U.S.C. 16(b)-(h), the United

States hereby responds to public comments received regarding the

proposed Final Judgment.

On September 23, 1998, the United States filed a Complaint alleging

that Medical Mutual of Ohio (``Medical Mutual'') unlawfully reduced

hospital discounting and price competition among hospitals in the

Cleveland, Ohio

[[Page 2515]]

area in violation of section 1 of the Sherman Act, 15 U.S.C. 1, by

requiring hospitals wishing to do business with it to agree to a ``Most

Favorable Rates'' (``MFR'') provision. Simultaneously, the United

States filed a proposed Final Judgment, a Stipulation signed by all

parties agreeing to the entry of the proposed Final Judgment, and a

Competitive Impact Statement (``CIS'').

The proposed Final Judgment and CIS were published in the Federal

Register on Thursday, October 1, 1998 at 63 FR 52,764 (1998). A summary

of the terms of the proposed Final Judgment and the CIS and directions

for the submission of written comments were published in the Washington

Post for seven consecutive days from September 27 through October 3,

1998 and in the Cleveland Plain Dealer from September 27 through

October 3, 1998. The 60-day period for public comment expired on

December 1, 1998.

The United States received one comment on the proposed Final

Judgment, from University Hospitals of Cleveland (``UHC''). Although

UHC does not oppose the entry of the proposed Final Judgment, it

requests that the Final Judgment be broadened to address certain of

Medical Mutual's other contracting practices which, UHC believes, are

as pernicious to competition as Medical Mutual's use of MFR provisions.

After careful consideration of UHC's comment, a copy of which is

attached to this Response, the United States has concluded that the

additional relief suggested by UHC is unrelated to the violations

investigated by the Department and alleged in the Complaint. For that

reason, once the comment and the Response have been published in the

Federal Register pursuant to 15 U.S.C. 16(d), the United States will

move the Court to enter the proposed Final Judgment.

I. Background

As explained more fully in the Complaint and CIS, defendant Medical

Mutual is the largest commercial health care insurer in the Cleveland

Region. With more than 730,000 enrollees there, Medical Mutual covers

approximately 36% of the commercially insured population and accounts

for approximately 25 to 30% of commercial payments to local hospitals.

Nearly all of the Cleveland hospitals depend on Medical Mutual for the

largest share of their commercial business.

The Complaint alleges that starting in 1986, Medical Mutual

successfully imposed a MFR provision in all of its contracts with acute

care hospitals in the Cleveland Region. Such provisions, sometimes

referred to as ``Most Favored Nations'' or ``MFN'' provisions,

typically require that a buyer health plan receive a rate at least as

low as the lowest rate the medical provider charges any other plan.

Medical Mutual's MFR provision, however, required hospitals to charge

any smaller commercial health plan rates substantially higher--15 to

30% higher--than it charged Medical Mutual. This buffer gave Medical

Mutual a significant advantage over its rivals in the purchase of

hospital services and insulated Medical Mutual's plans from price

competition.

The Complaint also charges that Medical Mutual's enforcement of its

MFR clause prevented Medical Mutual's competitors from lowering their

hospital costs through more efficient or better management of hospital

services, raised the cost of hospital services and health insurance for

businesses and consumers in the Cleveland area, and suppressed

innovation in the local health insurance industry. The United States

believes that these actions, along with the other conduct alleged in

the Complaint, violated section 1 of the Sherman Act.

In September 1998, the parties stipulated that the proposed Final

Judgment be entered by this Court to settle this action. The proposed

Final Judgment, if entered, will enjoin and restrain Medical Mutual

from adopting, maintaining, or enforcing in the Cleveland Region a Most

Favorable Rates requirement or any policy, practice, rule, or

contractual provision having the same purpose or effect. In addition,

the proposed Final Judgment will prohibit Medical Mutual from directly

or indirectly requiring hospitals participating in its panels to

disclose the rates such hospitals charge any non-governmental payer

except in extremely limited circumstances.

II. Response to Public Comment

UHC submitted the only comment in response to the proposed Final

Judgment, urging that the proposed Final Judgment be modified to

address other allegedly anticompetitive contracting schemes by Medical

Mutual, not just its use of the MFR provision. Specifically, UHC

alleges that Medical Mutual has entered into a fourteen-year

restrictive agreement with UHC's main competitor in the Cleveland area,

the Cleveland Clinic Foundation (``CCF''), which explicitly provides

that the rates CCF charges Medical Mutual will dramatically increase if

Medical Mutual includes UHC or UHC's affiliate hospital in its

``SuperMed'' managed care panels. UHC believes that this provision

violates the antitrust laws by reducing consumers' choice of health

care providers, stifling competition, and raising UHC's costs of doing

business.

The United States believes that UHC's comment provides no

justification for reconsidering the merits of the proposed Final

Judgment. First, selective or exclusionary contracting is not

necessarily anticompetitive. See Smith v. Northern Michigan Hospitals,

Inc., 703 F.2d 942 (6th Cir. 1983) (``not all exclusive dealing

contracts even by a monopolist are illegal''). Indeed, selective or

exclusive contracting by health plans and providers can in some

circumstances be procompetitive; health plans and providers can use

such provisions to direct patient volume to providers in exchange for

lower prices and/or higher quality services, and any savings can be

passed on to subscribers in the form of lower premiums. See Jefferson

Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 45 (1984); U.S.

Healthcare, Inc. v. Healthsource, Inc. 986 F.2d 589, 594 (1st Cir.

1993); Interface Group v. Massachusetts Port Auth., 816 F.2d 9, 11-12

(1st Cir. 1987).

Second, the agreement between Medical Mutual and CCF that UHC

alleges is anticompetitive is far outside the scope of the Department's

investigation, which was limited to Medical Mutual's use and

enforcement of its MFR provision. The Department did not purport to

investigate--or remedy through the proposed Final Judgment--all

possible anticompetitive conduct by Medical Mutual. Nothing in the

proposed Final Judgment limits the ability of the Department to look

into other anticompetitive conduct by Medical Mutual in the future, or

restricts the right of private parties, including UHC, to pursue the

full range of remedies available under the antitrust laws.

III. The Legal Standard Governing the Court's Public Interest

Determination

Section 2(e) of the Antitrust Procedures and Penalties Act, 15

U.S.C. 16(e), requires that the Court's entry of the proposed Final

Judgment be in the public interest. The Act permits a court to

consider, among other things, the relationship between the remedy

secured and the specific allegations set forth in the government's

complaint, whether the decree is sufficiently clear, whether

enforcement and compliance mechanisms are adequate, and whether the

decree may harm third parties. See United States v. Microsoft Corp., 56

F.3d 1448, 1461-62 (D.C. Cir. 1995). Consistent with Congress' intent

to use consent decrees as an effective tool of antitrust enforcement,

the Court's function is ``not to determine whether the resulting array

of rights and

[[Page 2516]]

liabilities is the one that will best serve society, but only to

confirm that the resulting settlement is within the reaches of the

public interest.'' Id. at 1460 (internal quotations omitted); see also

United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir.), cert.

denied, 454 U.S. 1083 (1981). As a result, a court should withhold

approval of a proposed consent decree ``only if any of the terms appear

ambiguous, if the enforcement mechanism is inadequate, if third parties

will be positively injured, or if the decree otherwise makes `a mockery

of judicial power.' '' Massachusetts School of Law at Andover, Inc. v.

United States, 118 F.3d 776, 783 (D.C. Cir. 1997) (quoting Microsoft,

56 F.3d at 1462). None of these conditions are present here. The

proposed Final Judgment is closely related to the allegations of the

Complaint, the terms are unambiguous, the enforcement mechanism

adequate, and third parties will not be harmed by entry of this

Judgment. The conduct investigated--Medical Mutual's use of a MFR

clause to inhibit competition--is fully remedied in the proposed Final

Judgment. The fact that Medical Mutual may be acting in other ways

detrimental to competition is simply not the issue here, and can be

addressed by means still available to UHC.

IV. Conclusion

The United States has concluded that the proposed Final Judgment

reasonably, adequately, and appropriately addresses the harm alleged in

the Complaint. As required by the Tunney Act, the United States will

publish the public comment and this response in the Federal Register.

After such publication, the United States will move this Court for

entry of the proposed Final Judgment based on this Court's

determination that the Decree is in the public interest.

Respectfully submitted,

Paul J. O'Donnell,

Jean Lin,

Frederick S. Young,

Attorneys, Antitrust Division, Health Care Task Force, U.S. Dept. of

Justice, 325 7th Street, NW., Suite 400, Washington, DC 20530, (202)

616-5933.

Emily M. Sweeney,

United States Attorney, Northern District of Ohio, 1800 Bank One

Center, 600 Superior Ave., E., Cleveland, Ohio 44114-2600, (216) 622-

3600.

Federal Express

December 7, 1998.

Re: United States v. Medical Mutual of Ohio

The Hon. Gail Kursh,

Chief, Healthcare Task Force, 325 Seventh Street, NW, Room 404,

Antitrust Division, Department of Justice, Washington, DC 20530.

Dear Ms. Kursh: We represent University Hospitals of Cleveland

(``UHC'') and hereby submit these comments regarding the proposed

consent decree (the ``Consent Decree'') entered into by the United

States of America and Medical Mutual of Ohio (``Medical Mutual'') on

September 23, 1998. The Consent Decree abrogates Medical Mutual's

requirement that any hospital in the Cleveland area wishing to do

business with it agree to a ``Most Favorable Rates'' (``MFR'')

provision. In announcing the Consent Decree, the Justice Department

stated that: ``[a]s a result of the Department of Justice's

settlement of this suit, competition in the health insurance and

hospital services market will be restored in the Cleveland area for

the benefit of businesses and consumers.'' UHC submits these

comments because UHC believes that the Consent Decree should be

broadened to address Medical Mutual's other equally egregious

contracting practices that directly impact and lessen competition in

the Cleveland area market place.\1\ The MFR provision is but one

means used to suppress competition. We urge, based on considerations

of justice, fairness and expediency, that the Consent Decree be

modified to deal specifically with Medical Mutual's other

anticompetitive contracting schemes, not just its use of the MFR

provision.

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\1\ For purposes of these comments, UHC adopts the definition of

``Cleveland area'' set forth in the Consent Decree, which refers to

Ashtabula, Cuyahoga, Geauga, Lake, Lorain, Medina, and Wayne

Counties in Ohio.

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While the Consent Decree purports to rectify Medical Mutual's

anticompetitive conduct, it focuses almost exclusively on Medical

Mutual's use of the MFR provision, which requires Cleveland area

hospitals to charge any non-governmental health plan with a total

dollar volume of services lower than that of Medical Mutual, rates

equal to or higher than the rates such hospitals charge Medical

Mutual for services to its traditional indemnity subscribers. To

avoid significant penalties for violating the MFR provision,

Cleveland area hospitals charged Medical Mutual's competitors

significantly more, often 15%-30% more, than they have charged

Medical Mutual for identical services.

The Competitive Impact Statement in this case found that the MFR

provision directly increased the costs of hospital services for

other plans, businesses, and consumers and discouraged innovation in

the design of health insurance plans and in the delivery of hospital

services. The Consent Decree prohibits Medical Mutual from

``adopting, maintaining, or enforcing in the Cleveland Region a Most

Favorable Rates Requirement or any policy, practice, rule or

contractual provision having the same purpose or effect.'' However,

the Consent Decree fails to address another equally anticompetitive

provision found in Medical Mutual's contracts for its SuperMed

products.

Medical Mutual's SuperMed products refer to a group of health

insurance programs, including SuperMed Classic, a preferred provider

organization; SuperMed Plus, a hospital and physician preferred

provider organization; SuperMed Select, a hospital and physician

point-of-service plan; and SuperMed HMO, a health maintenance

organization. Under SuperMed, insureds are permitted to receive

their care from a closed panel of physicians and hospitals offered

by SuperMed.

Since their creation in 1991, Medical Mutual SuperMed products

have never been included in a Medical Mutual contract with UHC.

Their absence from Medical Mutual's contracts with UHC is explained

by an anticompetitive, exclusionary provision found in Medical

Mutual's SuperMed contract with the Cleveland Clinic Foundation

(``CCF''), UHC's primary competitor in the Cleveland region. UHC has

been advised that the Medical Mutual/CCF SuperMed contract (the

``Contract'') provides that the rates that CCF charges Medical

Mutual will dramatically increase if Medical Mutual contracts for

SuperMed insurance with UHC or UHC's affiliated hospital, University

Hospitals Health System Bedford Medical Center (``Bedford''). \2\

UHC and Bedford are the only hospitals identified in the Contract as

triggering this substantial monetary penalty.\3\ Medical Mutual has

indicated to UHC that the extent of this rate increase would be so

draconian that Medical Mutual will not consider contracting with UHC

for SuperMed insurance until the Contract expires. The Contract has

a fourteen-year term and was entered into only two or three years

ago.

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\2\ Review of the Contract is necessary for the Department of

Justice to investigate Medical Mutual's anticompetitive contracting

practices. Accordingly, the Contract should be reviewed by the

Department of Justice and lodged in the public record to facilitate

public comment.

\3\ Bedford is located in Cuyahoga County and its primary

competitor is Marymount Hospital, which is affiliated with CCF.

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The Contract's provision targeting UHC (the ``Target

provision'') has had the same effect as Medical Mutual's MFR

provision. Both stymie competition in the Cleveland area, raise

prices for competitors, businesses and consumers, and discourage

product and pricing innovation in the delivery of hospital services.

This provision automatically bars UHC's access to patients while

inhibiting consumer choice. Patients enrolled in the SuperMed

products cannot realistically make provider choices based on cost

and quality of service because of the exorbitant financial penalties

associated with using out-of-network services.

As the Complaint in this action indicates, Medical Mutual is the

largest commercial health insurer in the Cleveland area. It has over

730,000 enrollees in the Cleveland area, constituting 36% of the

commercially insured population, and is approximately twice the size

of its closest competitor. As the Complaint also alleges, Medical

Mutual accounts for approximately 25%-30% of commercial payments to

Cleveland area hospitals, and nearly all of these hospitals depend

on Medical Mutual for the largest share of their commercial

business. Within the Medical Mutual lines of insurance, the

[[Page 2517]]

SuperMed products comprise the substantial majority of its health

insurance business. Moreover, Medical Mutual's enrollment has been

steadily increasing in market share among commercial insurers for

the last five years. Medical Mutual's increasing domination of the

commercial insurance market makes its refusal to deal with UHC for

SuperMed products a growing concern for Cleveland area patients and

businesses and for competition as a whole.

The Target provision will have significantly negative financial

effects in the Cleveland area marketplace. The two biggest, most

diversified hospitals in the Cleveland area are UHC and CCF. Both

hospitals offer a wide range of primary through tertiary inpatient

and ambulatory services; both hospitals have over 1,000 beds and

hundreds of physicians on staff; and both hospitals discharged

approximately 40,000 patients last year. Meanwhile, the other

secondary hospitals in the Cleveland area are not thriving or have

become part of the CCF system. Mount Sinai Medical Center's

financial problems have been reported in the press. Meridia

Hillcrest Hospital, Fairview General Hospital and Metrohealth

medical Center have all either merged with or become affiliated with

CCF. It is not unrealistic to project that through acquisitions or

attrition, the future of the Cleveland area market will devolve to

the two largest competitors, UHC and CCF. Because of these economic

realities, Cleveland area residents and businesses have a

substantial interest in free and unfettered competition in order to

ensure the long-term health of all competitors.

In the years that the Contract has been in place, UHC has

aggressively worked to counteract the effects of the Target

provision by actively marketing its services, reconfiguring its

finances, and focusing on other sectors of the population. However,

these measures cannot sustain UHC in the long term. UHC increasingly

has been meeting its operating expenses by relying on its endowment

as opposed to its operating revenues.

The purpose and effect of the Target provision is to alter UHC's

patient mix in a way which seriously reduces UHC's operating

revenue. Equally important, patient choice is being undermined by

the anticompetitive agreement between Medical Mutual, the area's

most prolific private health insurer, and CCF.

Conclusion

The proposed Consent Decree purports to restore competition in

the health insurance and hospital services markets in the Cleveland

area. Although it takes a much needed and significant step in that

direction, its failure to address the Target provision in the

Medical Mutual/CCF SuperMed contract substantially undercuts the

effectiveness of the Consent Decree in achieving its stated purpose.

UHC urges the Department of Justice to expand the inquiry into

Medical Mutual's anticompetitive practices and to rectify Medical

Mutual's blatantly restrictive and unlawful agreement with CCF.

Failure to do so will deprive consumers of choice of their health

care providers, reduce competition in the Cleveland area and drive

up UHC's costs of doing business.

Very truly yours,

Charles E. Koob.

[FR Doc. 99-825 Filed 1-13-99; 8:45 am]

BILLING CODE 4410-11-M