Eleventh Circuit Finds No Antitrust Violation in
"Preferred Provider" Arrangement by Hospitals

By Seth J. Chandler

In a case with implications for other antitrust attacks on efforts by managed care organizations and health purchasing cooperatives to reduce the price of medical care, the Eleventh Circuit has ruled in All Care Nursing Service, Inc. v. High Tech Staffing, Services, 135 F.3d 740 (1998), that federal antitrust laws are not violated "per se" by various hospitalís formation of a "preferred provider program" that constrained the terms under which they would purchase nursing services. The court further held that the failure of the plaintiffs to establish a relevant market in which the defendants held market power was fatal to any antitrust claim under "rule of reason" analysis.

The scope of the Eleventh Circuit ruling depends, as in most antitrust cases, on the particulars and characterization of the arrangement under challenge. Here, twelve Palm Beach County hospitals agreed amongst themselves to purchase nursing services only from nursing agencies that the twelve had jointly designated as "preferred providers." The status of a nursing agency as a preferred provider was based on: (a) a joint determination by the twelve of the quality of an agency, including factors such as competence, services provided, quality and price, and (b) willingness of an agency that emerged highly rated by this process to enter into contracts with each of the twelve hospitals that fixed price and other terms of the purchase for one year. Agencies had the option, however, to terminate a contract with a hospital or hospitals on 30 daysí notice. In addition, under certain circumstances not made clear by the opinion, the twelve hospitals could occasionally purchase nursing services from non-preferred providers.

The Eleventh Circuit declined to characterize the arrangement either as price fixing or a group boycott, either of which would have rendered the arrangement subject to per se treatment under the antitrust laws. The joint selection of preferred providers based in part on price did not amount to price fixing Ėthough it did "stabilize" prices -- but was rather the outcome of an auction. According to the court, the ability of the agencies to terminate the resulting contracts on 30 daysí notice meant that the market rather than the twelve hospitals was the ultimate decision maker on the terms of trade.

With respect to the group boycott claim, the Eleventh Circuit found the Supreme Courtís decision in Northwest Wholesale Stationers, Inc. v. Pacific Stationary and Printing Co., 472 U.S. 284 (1985), to be highly influential. In Northwest, the Supreme Court held the expulsion of a stationer from a purchasing cooperative, though arguably a "group boycott," was subject to rule of reason analysis and not per se treatment, and that, absent a showing of market power by the cooperative, expulsion was unlikely to have anticompetitive effects. Drawing on this analysis, the Eleventh Circuit noted that competition for nursing services was unlikely to have been injured here because non-preferred providers were still able to conduct significant business in the region. Moreover, the sort of history required for per se treatment did not exist with respect to the particular arrangement under scrutiny here.

Courts are unlikely to follow the Eleventh Circuitís ruling without considerable reflection when confronted with other efforts of entities subject to characterization as colluding entities to curb the price of trade in medical services. First, the Eleventh Circuitís refusal to see the arrangement as price fixing rests on a peculiar conflation of contracts that result from a conventional auction and ones that result from an auction in which the various bidders collude. Second, the courtís understanding that the preferred providerís ability to escape the jointly determined contracts exempts the arrangement from characterization as price fixing rests in tension with much antitrust jurisprudence. Generally, it is no defense to antitrust charges that the plaintiff was not compelled to trade with those attempting to collude. The collusion itself violates the antitrust laws because it potentially pushes prices away from the efficient level. The fact that in a particular case it may not do so because the colluding parties lack market power is usually thought significantly unlikely to warrant departure from per se treatment. Third, the failure to establish a relevant market from which rule of reason analysis might have proceeded appears to have been a peculiar lawyering unlikely to repeat itself frequently. Nonetheless, the refusal of the federal appellate court to see an antitrust violation on these facts and the expansive reading of the Supreme Courtís opinion in Northwest should encourage managed care organizations and others seeking to restrain the price of medical services.