Impact of antitrust suit against CHS could ripple nationwide

June 12--The federal antitrust lawsuit filed last week against Carolinas HealthCare System could have sweeping national implications, lowering hospital costs for patients in Charlotte and far beyond, experts said.

In a complaint filed on Thursday, the U.S. Justice Department and the N.C. Attorney General's Office contend that the state's largest hospital system has driven up costs through illegal efforts to prevent competition.

Carolinas HealthCare, which runs 40 hospitals including Carolinas Medical Center, has said that it follows the law and that it is dedicated to making health care more affordable.

In my experience, the justice department doesn't bring action unless they think they have the ability to win.

Fiona Scott Morton, a Yale University economics professor who previously helped enforce antitrust laws as a Deputy Assistant Attorney General for the U.S. Justice Department

Fiona Scott Morton, an economics professor at Yale University's School of Management, said the case could establish an important legal precedent.

If the justice department prevails, she said, hospitals across the country would likely feel compelled to remove contract provisions that tend to reduce competition and increase health care prices.

"It would be good for consumers in the sense of lower prices and more competition," she said.

Steering clear?

At issue are contract restrictions that CHS has negotiated with major health insurance companies.

To make sense of those restrictions, it helps to understand how health insurers often try to give consumers options for lowering their health care expenses.

Insurers often use a technique called "steering," giving consumers a financial incentive to use a lower-cost health care provider. For instance, consumers are often given the option of paying lower premiums or out-of-pocket expenses if they agree to choose from a small network of lower-cost providers.

Barak Richman, a Duke University law professor with expertise in antitrust enforcement, says such contract provisions are the "best hope to have meaningful health care competition."

But according to the federal lawsuit, CHS has tried to reduce competition and protect its revenues by imposing illegal contract restrictions that make it harder for insurers to steer customers to lower-cost hospitals.

CHS' leaders feel steering threatens the system's bottom line, according to the federal complaint. In 2013, the suit says, an internal survey asked a dozen senior leaders to identify the "biggest risks to CHS revenue streams." Nine of the 12 leaders identified steering as one of the biggest risks.

There's no economic smoking gun. There's no single fact that prosecutors can point to and say, 'Aha! Therefore, I win.'

Barak Richman, a Duke University law professor, and an expert in health care competition

With more than $9 billion in annual operating revenue, CHS is by far the largest hospital system in the Charlotte area. That dominance gives the Charlotte-based system considerable power in its negotiations with insurers, experts say.

CHS says the kinds of contract restrictions it negotiates with insurers are common nationally.

But just because those restrictions are common doesn't mean they are legal or good for the public, argues Scott Morton, the Yale professor.

"I mean, speeding is common," said Scott Morton, an expert in competitive strategy. "Does that make it good?"

Exactly how prevalent such contract restrictions are is unclear.

Novant Health, CHS' largest competitor in the Charlotte area, declined to say whether it has similar provisions in its contracts. "Novant Health does not provide comment for stories related to litigation," a spokesperson wrote.

Neither CHS nor Novant would provide the Observer copies of its contracts.

'Very good facts'

Carolinas HealthCare appears to be gearing up for a fight. It has hired Jim Cooney, a prominent Charlotte lawyer, and Boies, Schiller & Flexner, a firm that has fought in many of the nation's highest profile legal battles.

Richman, the Duke professor, said that the U.S. Justice Department and the state Attorney General's office could be in for a difficult contest.

"There's no economic smoking gun," he said. "There's no single fact that prosecutors can point to and say, 'Aha! Therefore, I win.' "

Instead, Richman said, such cases require prosecutors to present a compelling theory and to prove a number of difficult-to-prove facts.

But Scott Morton suspects the Justice Department feels confident about the strength of its case.

"In my experience, the justice department doesn't bring action unless they think they have the ability to win," said Scott Morton, who previously helped enforce antitrust laws as a deputy assistant attorney general for the Justice Department. "I suspect they have very good facts here."

With size comes leverage

Richman said that even if the Justice Department wins its case -- and even if that prompts hospitals nationwide to remove anti-steering provisions -- large systems may find other ways to restrict competition and drive up prices.

The chief problem, he said, is that large hospitals have been allowed to buy up so many competing hospitals and doctor's offices that they've created monopolies.

In a 2012 investigation, The Charlotte Observer and The (Raleigh) News & Observer found that consolidation has given hospitals leverage to demand higher payments from insurance companies.

[READ MORE: The Observer's 2012 investigation into nonprofit hospitals]

In one story, the Observer showed how large nonprofit hospitals in North Carolina were dramatically inflating prices on chemotherapy drugs at a time when they were cornering more of the market on cancer care. Another story showed that North Carolina patients are likely to pay more for routine care if their doctors are employed by a hospital.

And North Carolina isn't unique.

"The cost of health care in the U.S. is extraordinarily high," Richman said. "We're not getting our money's worth."

Ames Alexander: 704-358-5060, @amesalex

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