Tuesday, February 19, 2008

Should Exempt Hospitals Offer Bundled Discounts or Otherwise Engage in Competitive Behavior?

There is a knock-down, drag-out fight going on between two nonprofit hospitals out in Lane County, Oregon that provokes me to ask whether nonprofit hospitals ought to so blithely imitate the cut-throat [read "efficient"] competitive behaviors of their for-profit cousins.  The fight has been ongoing since 2003 when a Lane County jury awarded McKenzie-Willamette Hospital (now known as Cascade Health Solutions) $16 million in damages after finding that another nonprofit hospital, PeaceHealth attempted to monopolize the health care market in Lane County by offering what is known in the antitrust world as "bundled discounts".  For an analysis of the antitrust concerns related to bundled discounts see Thomas A. Lambert, Evaluating Bundled Discounts, 89 Minn. L. Rev. 1688 (2005).  The most ironic thing is that this most competitive, profit-seeking issue is being sorted out in the nonprofit world.  Indeed, the case is being written about (reprint of National Law Journal Article) as though it will eventually settle the murky law of bundled discounts. 

Last year, the 9th Circuit vacated the jury award and then on February 1, 2008, the 9th Circuit certified the antitrust question to the Oregon Supreme Court.  As far as I can tell, nobody has yet raised the question whether legal or illegal (the question awaits the Oregon Supreme Court opinion) bundling by a nonprofit hospital, to the specific detriment of another nonprofit hospital, ought to cause the revocation or at least questioning of the cut-throat competitor's tax exempt status.

I'll give readers a "summary of the case for anti-trust dummies" (like myself).  McKenzie-Willamette, and PeaceHealth are both nonprofit hospitals operating in Lane County.  In fact, no other hospitals serve the area.  PeaceHealth is much larger than McKenzie-Willamette.  Both hospitals offer primary and secondary care but at the time the lawsuit was filed, only PeaceHealth offered "tiertiary care" -- basically more complex surgical procedures.  In an apparent  effort to corner the market, PeaceHealth offered to provide tiertiary care at a discount if the third party payment provider (BlueCross BlueShield) would also agreed to make PeaceHealth its exclusive hospital for primary and secondary care.  In the antitrust world, PeaceHealth offered a "bundled discount"  -- in other words, "buy [exclusively] all my services at a discount or get each of my services at a higher price".  McKenzie-Willamette actually argued that PeaceHealth was demanding that the insurance providers "buy all services from PeaceHealth, or none at all."  Since PeaceHealth was the only nonprofit hospital to offer tiertiary care, it had significant leverage and, theoretically at least, could force insurers into exclusive provider contracts and thereby eliminate alternative providers (somehow the world "competitors" doesn't seem right in the nonprofit world).  Here is an excerpt from the February 1, 2008 opinion better explaining and, in the process, illuminating the problem:

McKenzie asserts that PeaceHealth offered insurers discounts of 35% to 40% on tertiary services if the insurers made PeaceHealth their sole preferred provider for all services--primary, secondary, and tertiary. In 2001, for example, PeaceHealth was the only preferred provider of hospital care under the preferred provider plan ("PPP") of Regence BlueCross BlueShield of Oregon ("Regence"). At that time, Regence was paying PeaceHealth a 76% reimbursement rate for all of PeaceHealth's medical services, including primary, secondary, and tertiary services. Around that time, pursuant to McKenzie's request, Regence considered adding McKenzie to the PPP as a preferred provider of primary and secondary services. When Regence's contract with PeaceHealth came up for its annual renewal, Regence solicited two proposals from PeaceHealth. Under one proposal, PeaceHealth would remain the only preferred provider. Under the other proposal, McKenzie would be added as a preferred provider. PeaceHealth offered an 85% reimbursement rate for all services if it remained Regence's sole preferred provider of primary, secondary, and tertiary services, and a 90% reimbursement rate if McKenzie was added as a preferred provider of primary and secondary services. Regence thereafter declined to include McKenzie as a preferred provider. [emphasis added]

In effect, Peacehealth's pricing practices precluded McKenzie-Willamette from the market, perhaps even reducing the availability of charitable health care in Lane County.  McKenzie-Willamette was already suffering financial losses at the time and eventually merged with Cascade Health Solutions.  Practically speaking, at least, the crushing of another nonprofit hospital through predatory pricing is decidedly non-charitable.  We know, too, that health care, even health care that is not necessarily geared towards those unable to pay, is very nearly "charitable, per se."  See Rev. Rul. 83-157, 1983-2 C.B. 94 (holding that a nonprofit hospital could be tax exempt even though it did not treat indigent patients, so long as there were sufficient alternatives for indigent health care in the relevant community).  It gained that status -- like education and religion -- from the idea that expanding the availability of health care is itself charitable.  Is it appropriate, then, for one tax exempt  hospital to enter into a contract the purpose or effect of which is to cause third party payors to refuse to pay for care provided by another nonprofit hospital and thereby necessarily reduce the amount of available health care in a given community?  I suppose PeaceHealth could argue that consolidation is ultimately good for the market and through some strange twist assures a minimal level of service, but that is a for-profit argument.



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