United States District Court, Middle District of Pennsylvania
April 17, 2001
HEALTHAMERICA PENNSYLVANIA, INC., COVENTRY HEALTH AND LIFE INSURANCE COMPANY, AND COVENTRY HEATLHCARE MANAGEMENT CORPORATION, PLAINTIFFS
SUSQUEHANNA HEALTH SYSTEM, THE WILLIAMSPORT HOSPITAL & MEDICAL CENTER, DIVINE PROVIDENCE HOSPITAL, MUNCY VALLEY HOSPITAL, AND SUSQUEHANNA PHYSICIAN SERVICES, DEFENDANTS.
The opinion of the court was delivered by: James M. Munley, U.S. District Judge
Before the court for disposition is the defendants' motion to dismiss
count III of the amended complaint. The plaintiffs are: HealthAmerica
Pennsylvania, Inc., a managed health care plan that offers health
maintenance organization (HMO) product in Northcentral Pennsylvania;
Coventry Health and Life Insurance Company, an insurance company that
offers a point of service product and a preferred provider organization
product in Northcentral Pennsylvania; and Coventry Healthcare Management
Corporation, a third-party administrator that administers self-insured
health insurance products in
Northcentral Pennsylvania. The first named
defendant is Susquehanna Health System, (hereinafter "SHS") a health care
system offering hospital, physician and other health care services in
Northcentral Pennsylvania. Susquehanna Health System includes the
following three hospitals that are also named as defendants: The
Williamsport Hospital and Medical Center; Divine Providence Hospital; and
Muncy Valley Hospital. The final defendant is Susquehanna Physician
Services, (hereinafter "SPS"), the largest physician group in Lycoming
County, Pennsylvania. It employs over 40 percent of the primary care
physicians practicing in that county and is wholly owned and controlled by
SHS. For the reasons that follow the defendants' motion to dismiss will
As alleged in plaintiffs' complaint,*fn1 the facts are as follows: In
1994, the two dominant hospital systems in Northcentral Pennsylvania
region (Providence Health System and North Central Pennsylvania Health
System) merged to create Defendant Susquehanna Health System (hereinafter
"SHS"). The result of the merger was a single entity with overwhelming
market power in the markets for inpatient and outpatient hospital
Prior to the 1994 merger, two health systems were present in the
Lycoming County/Northcentral, Pennsylvania area. They were Providence
Health System, Inc., which included Divine Providence Hospital and Muncy
Valley Hospital, and the North Central Pennsylvania Health System, which
was comprised of only one hospital, the Williamsport Hospital and Medical
Center. All three of these hospitals are located in Lycoming County. Two
of them (Divine Providence Hospital and Williamsport Hospital and Medical
Center) are located in Williamsport, Pennsylvania and the third, Muncy
Valley Hospital, is found approximately fifteen miles away in Muncy,
Pennsylvania. Because of the merger, all of these hospitals are now part
of SHS. The closest hospital that is not part of SHS is at least thirty
miles away, and thus, too far away to be a reasonable alternative to
patients living in the area.
The merger was allowed by the Attorney General of Pennsylvania in
exchange for the merging parties' agreement to enter into a consent
decree. The decree, required, inter alia, that the merged entity achieve
certain savings from increased efficiency and pass those savings on to
consumers in the form of lower prices in each of the five years following
the merger. The five-year period expired in July 1999. Subsequent to
July 1999, SHS has successfully demanded significant price increases from
the plaintiffs for hospital services and indicated that they intend to
extract similar increases from all other payors in the market as their
contracts are negotiated for renewal.
The physician services and hospital services contracts that the
plaintiffs previously had contained different renewal dates. Therefore,
the plaintiffs did not anticipate renegotiating the contracts at the same
time. However, at the time for renewal of the physician services
contract, SHS terminated the contract for hospital services and informed
the plaintiffs that they would be required to renegotiate the physician
and hospital contracts jointly.
SHS was able to renegotiate its most recent contract with plaintiffs
and obtain a 21 percent increase in hospital rates. The
are much higher than the rates paid by the plaintiffs to hospitals in
comparable communities with hospital competition. Further, the current
contract with SPS requires Plaintiff HealthAmerica to pay higher rates
for SPS physicians than it pays for comparable non-SPS physicians in the
Accordingly, plaintiffs have filed a complaint alleging that the
defendants engaged in an illegal hospital merger and a series of illegal
physician practice acquisitions that have reduced competition and
increased the prices that the local community must pay for health care
services. Plaintiffs' complaint is comprised of three counts. The first
count alleges an illegal hospital merger in violation of the Section 7 of
the Clayton Act, 15 U.S.C. § 18, and Section 1 of the Sherman Act,
15 U.S.C. § 1. The second count involves allegations of illegal
physician acquisitions in violation of the same statutory sections.
Illegal restraint of trade in violation of the Section 1 of the Sherman
Act, 15 U.S.C. § 1 is averred in the complaint's third count. Along
with damages, the plaintiffs seek an injunction to force the defendants
to price their services at competitive levels and prohibit them from
tying the sale of hospital services to physician services.
Defendants have filed a motion to dismiss Count III of the plaintiffs'
complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The
motion has been fully briefed and argued, bringing the matter to its
present posture. For the reasons that follow, the motion to dismiss will
Standard of Review
When a 12(b)6 motion is filed, the sufficiency of a complaint's
allegations are tested. The issue is whether the facts alleged in the
complaint, if true, support a claim upon which relief can be granted. In
deciding a 12(b)6 motion, the court must accept as true all factual
allegations in the complaint and give the pleader the benefit of all
reasonable inferences that can fairly be drawn therefrom, and view them
in the light most favorable to the plaintiff. Morse v. Lower Merion
School District, 132 F.3d 902, 906 (3d Cir. 1997).
In the instant case, the defendants claim that Count III of the
plaintiff's complaint fails to state a cause of action upon which relief
can be granted. Defendants present several different arguments to
support their motion. First, they claim that the plaintiffs have not
adequately alleged a "tying arrangement." Second, the defendants contend
that even if a tying arrangement has been pled, relief on Count III is
nonetheless improper because other allegations of the complaint are
inconsistent with a tying scheme. Lastly, the defendants aver that the
complaint fails to allege any damages due to the tying scheme. We shall
address these issues seriatim.
A. Is a tying arrangement alleged?
Defendants' first argument is that plaintiffs have not alleged a proper
tying arrangement. A "tying arrangement" is where a seller agrees to sell
one product (the tying product), but only on the condition that the buyer
also purchase a different (or tied) product. Eastman Kodak Co. v. Image
Technical Services, Inc., 504 U.S. 451, 461 (1992). "[T]he essential
characteristic of an invalid tying arrangement lies in the seller's
exploitation of its control over the tying product to force the buyer
into the purchase of a tied product that the buyer either did not want at
all, or might have preferred to purchase elsewhere on different terms."
Jefferson Parish Hospital District v. Hyde, 466 U.S. 2, 12 (1984). A
arrangement violates section 1 of the Sherman Act where the seller
has "appreciable economic power" in the tying product market and if a
substantial volume of commerce in the tied market is affected by the
arrangement. Eastman Kodak, 504 U.S. at 462.
Count III of the plaintiffs' complaint reads as follows: "Susquehanna
Health System refused to negotiate a hospital contract with the
plaintiffs unless the plaintiffs agreed to renegotiate their contract for
physician services with Susquehanna Physician Services. This conduct
constitutes an illegal tying arrangement or other unreasonable restraint
of trade in violation of Section 1 of the Sherman Act." Compl. ¶¶
Initially, the defendants claim that the plaintiffs merely assert that
in order to negotiate a hospital contract with SHS, the plaintiffs also
had to renegotiate their contract for physician services with SPS at the
same time. Defendants contend that this scenario is not an antitrust
violation but merely a request to conduct joint negotiations.
Plaintiffs do not refute defendants' contention that it is not an
antitrust violation to request or conduct joint negotiations. Rather,
they contend that the defendant's position is irrelevant to the case.
Plaintiffs aver that the tying arrangement alleged in their complaint
does not deal merely with negotiation of contracts but that the
defendants refused to sign a contract to sell hospital services unless
the plaintiffs agreed to sign a contract to purchase physician services
from the defendants at the supra-competitive prices that the defendants
demanded. Accordingly, in order to buy the "tying product" of hospital
services, plaintiffs were forced to buy the "tied product" of physician
services at a supra-competitive price. A review of the complaint reveals
that plaintiffs have in fact alleged such a tying arrangement, although
it could have been written more clearly.
According to the plaintiffs' complaint: "[T]he defendants' refusal to
contract for hospital services unless the plaintiffs renegotiated their
contract for physician services constitutes an illegal tying arrangement
. . . in violation of Section 1 of the Sherman Act. . . . [this violation
has] resulted in higher prices for hospital and physician services. These
higher prices have harmed the plaintiffs and, if not stopped, will
continue to harm the plaintiffs and will also harm employers, which pay a
substantial amount of the cost of health care benefits for their
employees." Compl. ¶¶ 28 and 30. We find that it can be inferred
from this section of the complaint that the plaintiffs are alleging that
in order to buy the "tying product" of hospital services, plaintiffs were
forced to buy the "tied product" of physician services at a
supra-competitive price.*fn2 Accordingly, we find that these allegations
along with the allegations regarding SHS's power in the hospital services
market (See Compl. ¶¶ 31-36) are sufficient to overcome the
defendants' first argument.
B. Are the plaintiffs' allegations of a tying arrangement invalid because
the complaint alleges that it is SPS's market power that forces
plaintiffs to purchase physician services from SPS?
Additionally, the defendants claim that the A mended Complaint actually
alleges that it is the "illegal physician acquisitions" and SPS's
resultant market power, not a tying arrangement, that forces Plaintiff
HealthAmerica to purchase physician services from SPS. Thus, defendants
read the complaint as alleging that Plaintiff HealthAmerica would have
purchased physician services from SPS regardless of its purchase of
hospital services from SHS. Plaintiff HealthAmerica was forced to deal
with SPS because of the number of SPS physicians in the alleged relevant
market, not because of any tying arrangement. Accordingly, plaintiffs
argue that the complaint contains two inconsistent causes of action.
Count II of the complaint asserts that the plaintiffs have to deal with
SPS and pay higher prices due to SPS's market power, and Count III
contends that this result is due to the tying arrangement. Defendants
find these two theories of recovery to be inconsistent with each other
and assert that plaintiffs have pled themselves out of court on the tying
arrangement claim by asserting the market power claim.
We find the defendants' argument to be wholly without merit. Even if
we were to accept their argument that the complaint contains two
inconsistent causes of action, such a situation is allowed under Rule 8
of the Federal Rules of Civil Procedure. Rule 8 allows for the pleading
of alternative or inconsistent causes of action. See Fed.R.Civ.P.
8(e)(2). The Third Circuit Court of Appeals has acknowledged that this
rule allows inconsistency in both legal and factual allegations.
Independent Enterprises Inc. v. Pittsburgh Water and Sewer Authority,
103 F.3d 1165, 1175 (3d Cir. 1997). Moreover, because of the rule, a
court may not construe one of plaintiff's claims as an admission against
another alternative or inconsistent claim. Id. Accordingly, the
allegation that Counts II and III of the plaintiffs' complaint are
inconsistent is not cause for dismissal of either count.
Moreover, the two causes of action are not necessarily in conflict with
each other. If a seller engaged in a tying arrangement has a monopoly
over the tied product, it merely enhances its ability to maximize its
profits regarding the tying arrangement. Therefore, prices can
potentially be higher. Ergo, the two theories of tying arrangement and
market control are not necessarily mutually exclusive.
In Eastman Kodak, supra, the Supreme Court discussed a tying
arrangement where it was alleged that Kodak tied the sale of service for
its machines to sale of parts. It was also claimed that Kodak's control
over the parts market "excluded service competition, boosted service
prices, and forced unwilling consumption of Kodak service." Eastman
Kodak, 504 U.S. at 465. The Court allowed both the claim of a tying
arrangement and the claim that Kodak exercised excessive amount of market
power to proceed.
Likewise, in the instant case, it is alleged first that the SHS has
tied the use of its hospital services to purchasing physician services.
The plaintiffs further claim that SPS, (a wholly owned subsidiary of SHS)
has a great amount of market power which forces higher prices. As
opposed to being two separate and distinct theories, it can be argued that
the tying arrangement has augmented the defendants' market power.
Hence, they can require plaintiffs and others to buy physician services
at prices that are higher then they would be in the absence of the tying
arrangement. This situation is similar to the Eastman Kodak case and we
find no inconsistency and no reason to dismiss either count.
Defendants cite several cases in support of their position, but we find
them to be distinguishable. First, Queen City Pizza, Inc. v. Domino's
Pizza, Inc., 124 F.3d 430 (3d Cir. 1997) is cited. In this case, the
plaintiffs alleged that Domino's Pizza had
used its power in the purported
market for Domino's — approved dough to force the plaintiffs to buy
unwanted ingredients and supplies from them. Id. at 443. However, the
court concluded that Domino's was not forcing the plaintiffs to purchase
the alleged tying product out of market control, but out of a contractual
agreement they had made with the plaintiffs. Accordingly, no tying
arrangement was found. Id. In the instant case, the plaintiffs do not
have a contractual obligation with SHS to purchase physician services. It
is alleged that they must purchase the physician services because of the
market power the defendants possess. This element was lacking in Queen
City Pizza, supra. Accordingly, that case is distinguishable and not
controlling in the instant case.
Defendants also cite Allen-Myland, Inc. v. International Business
Machines Corp., 33 F.3d 194 (3d Cir. 1994) in support of its claim. This
case is inapplicable to the instant case. In Allen-Myland, the court
first examined the facts to determine what the two relevant markets
were, the tying product market and the tied product market. Id. at 200.
In that case, the tying product market was large-scale main frame
computers, and the court found that leasing of such computers and used
parts upgrades were not part of this tying product market. Id. at 203-04.
The Allen-Myland opinion, therefore, merely made a fact specific
definition of the relevant market in a tying scheme. The opinion is
little help to our decision in this instant case as the relevant markets
are rather clearly defined as the hospital services market and the
physician services market. Accordingly, nothing in Allen-Myland causes us
to find for the defendants, and pursuant to Rule 8 and Eastman Kodak, the
defendants' motion to dismiss on this ground will be denied.
C. Did the plaintiffs allege antitrust damages?
Lastly, the defendants claim that the plaintiffs did not allege any
injury caused by the tying arrangement and only seek damages based upon
the higher prices that SHS/SPS were able to demand because of the market
power created by the allegedly illegal mergers. We do not find the
defendants' argument to be cogent. In order to bring a private antitrust
action, a plaintiff must demonstrate "fact of damage," which is defined
as some harm flowing from the antitrust violation. Allen-Myland, 33 F.3d
at 201. As we have set forth above, the plaintiffs have sufficiently
pled both a tying arrangement and claims of illegal mergers. The
plaintiffs contend that both the tying arrangement and the illegal mergers
caused damages. See Compl. ¶ 30. Accordingly, we cannot grant the
defendants' motion to dismiss based on a failure to allege damages.
In conclusion, we find that the plaintiffs have sufficiently pled a
tying arrangement where in order to buy the "tying product" of hospital
services, plaintiffs were forced to buy the "tied product" of physician
services at a supra-competitive price. In addition, the tying claim is
not inconsistent with and not precluded by the claims regarding the
defendants' market power in the physician services market. Lastly, the
plaintiffs have properly alleged damages with regard to the tying
arrangement and the illegal merger claims. Accordingly, the defendants'
motion to dismiss Count III of the plaintiffs' amended complaint will be
denied. An appropriate order follows.