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WEST PENN ALLEGHENY HEALTH SYSTEM v. UPMC; HIGHMARK

November 29, 2010

WEST PENN ALLEGHENY HEALTH SYSTEM, INC., APPELLANT
v.
UPMC; HIGHMARK, INC.



On Appeal from the United States District Court for the Western District of Pennsylvania District Court No. 2-09-cv-00480 District Judge: The Honorable Arthur J. Schwab

The opinion of the court was delivered by: Smith, Circuit Judge.

PRECEDENTIAL

Argued September 15, 2010

Before: SLOVITER, BARRY, and SMITH, Circuit Judges

OPINION

The plaintiff in this antitrust case is Pittsburgh's second-largest hospital system. It sued Pittsburgh's dominant hospital system and health insurer under the Sherman Act and state law. The plaintiff asserts that the defendants violated sections 1 and 2 of the Sherman Act by forming a conspiracy to protect one another from competition. The plaintiff says that pursuant to the conspiracy, the dominant hospital system used its power in the provider market to insulate the health insurer from competition, and in exchange the insurer used its power in the insurance market to strengthen the hospital system and to weaken the plaintiff. The plaintiff also asserts that the dominant hospital system violated section 2 of the Sherman Act by attempting to monopolize the Pittsburgh-area market for specialized hospital services. Finally, the plaintiff asserts state-law claims for unfair competition and tortious interference against the dominant hospital system. The District Court dismissed the Sherman Act claims and, having done so, declined to exercise supplemental jurisdiction over the state-law claims. Because we conclude that the District Court erred in dismissing the Sherman Act claims, we will reverse in part, vacate in part, and remand for further proceedings.

I. Facts

The following facts are alleged in the plaintiff's complaint. The District Court decided this case on a motion to dismiss. We accept as true the factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor. Revell v. Port Auth., 598 F.3d 128, 134 (3d Cir. 2010).

A. Cast of Characters

This lawsuit involves three parties. The plaintiff West Penn Allegheny Health System, Inc. ("West Penn") is Pittsburgh's second-largest hospital system; it has a share of less than 23% of the market for hospital services in Allegheny County, which includes the City of Pittsburgh. The defendant University of Pittsburgh Medical Center ("UPMC") is Pittsburgh's dominant hospital system. It enjoys a 55% share of the Allegheny County market for hospital services, and its share of the market for tertiary and quaternary care services exceeds 50%.*fn1 West Penn and UPMC are the two major competitors in the Allegheny County market for hospital services, and are the only competitors in the market for tertiary and quaternary care services. The defendant Highmark, Inc. is the dominant insurer in the Allegheny County market for health insurance.*fn2 Highmark's market share has remained between 60% and 80% since 2000.

B. Pre-Conspiracy Conduct

In 2000, The Western Pennsylvania Healthcare System merged with several financially distressed medical providers, including Allegheny General Hospital, to form West Penn. Highmark funded the merger with a $125 million loan. Highmark's largesse did not spring from a sense of altruism but was intended to preserve competition in the market for hospital services. Had the financially distressed providers comprising West Penn failed, UPMC would have attained nearly unchecked dominance in the market. This would not have been good for Highmark: the more dominant UPMC becomes, the more leverage it gains to demand greater reimbursements from Highmark. (Reimbursements are the payments insurers give to providers to cover services rendered to the insurers' subscribers.)

After the merger, Highmark and West Penn continued to enjoy a good relationship, as Highmark recognized that preserving West Penn was in its interests. Thus, Highmark encouraged investors to purchase bonds from West Penn, touting its financial outlook and the quality of its medical services. And in early 2002, Highmark gave West Penn a $42 million grant to invest in its facilities.

In contrast to Highmark, UPMC has been hostile to West Penn since its inception. UPMC opposed the merger creating West Penn: it intervened in the merger proceedings, filed an unsuccessful lawsuit to prevent Highmark from funding the merger, and attempted (with some success) to dissuade investors from purchasing West Penn bonds. UPMC's hostility towards West Penn continued after the merger. Since West Penn's formation, UPMC executives have repeatedly said that they want to destroy West Penn, and they have taken action to further that goal on more than a few occasions. But more on that later. See Section I.E, infra.

Historically, UPMC has also had a bitter relationship with Highmark. For example, when UPMC demanded purportedly excessive reimbursement rates from Highmark, Highmark responded by forming Community Blue, a low-cost insurance plan. To participate in Community Blue, a hospital had to agree to accept reduced reimbursements, but would receive a higher volume of patients. West Penn participated in Community Blue, but UPMC did not, claiming that its reimbursement rates were too low. UPMC responded to Community Blue by forming its own health insurer, UPMC Health Plan. UPMC Health Plan has been Highmark's main competitor in the Allegheny County market for health insurance since its formation.

Moreover, Highmark and UPMC have faced off in litigation in the past. In a 2001 federal lawsuit, Highmark sued UPMC under the Lanham Act, asserting that UPMC had made false statements about Community Blue in an advertisement. The District Court agreed with Highmark and preliminarily enjoined dissemination of the advertisement; we affirmed on appeal. Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160, 171--73 (3d Cir. 2001). In another 2001 lawsuit, Highmark sought to enjoin UPMC's proposed acquisition of a children's hospital; Highmark claimed that the acquisition would violate the antitrust laws. The case ultimately settled, however, and UPMC acquired the hospital.

C. The Conspiracy Begins; the Dynamics Change

In 1998, UPMC offered a "truce" to Highmark. Under the terms of the truce, each entity would use its market power to protect the other from competition. Highmark initially rejected UPMC's offer, criticizing it as an illegal "attempt to form a 'super' monopoly for the provision of health care in Western Pennsylvania in which [UPMC], the leading provider of hospital services, and Highmark, the leading health insurer, would combine forces." JA 95.

The complaint alleges, however, that in the summer of 2002, over the course of several meetings, Highmark reconsidered and decided to accept UPMC's offer of a truce. The complaint alleges that UPMC agreed to use its power in the provider market to prevent Highmark competitors from gaining a foothold in the Allegheny County market for health insurance, and in exchange Highmark agreed to take steps to strengthen UPMC and to weaken West Penn. The complaint offers the following factual allegations in support of the conspiracy claim.

UPMC engaged in conduct that effectively insulated Highmark from competition. First, it refused to enter into competitive provider agreements with Highmark's rivals. This prevented the rivals from entering the Allegheny County health insurance market because, given UPMC's dominance, an insurer cannot succeed in the market without being able to offer a competitively-priced plan that includes UPMC as an in-network provider.*fn3

Second, UPMC shrunk UPMC Health Plan (Highmark's main competitor in the insurance market). It cut the Health Plan's advertising budget and increased its premiums, which led to a sharp drop in enrollment. It also refused to sell the Health Plan to insurers interested in buying it, which might have revived it as a Highmark competitor. UPMC acknowledged that it decided to shrink the Health Plan as a result of negotiations with Highmark, in which Highmark had agreed to take Community Blue off the market.

Meanwhile, Highmark took action that enhanced UPMC's dominance. Most significantly, it paid UPMC supracompetitive reimbursement rates. To afford UPMC's reimbursements, Highmark had to increase its insurance premiums (which, according to West Penn, it was able to do without losing business because UPMC had insulated it from competition). Highmark, moreover, provided UPMC with $230 million to build a new facility for its children's hospital, $70 million of which was a grant and the remainder of which was a low-interest loan. In addition, Highmark vowed not to offer a health plan that did not include UPMC as an in-network provider. Thus, in 2004, Highmark eliminated its low-cost insurance plan, Community Blue, in which UPMC had declined to participate. With the elimination of a leading low-cost insurance plan, health insurance premiums in Allegheny County rose. Furthermore, in 2006, Highmark publicly supported UPMC's acquisition of Mercy Hospital, which, other than West Penn, was UPMC's only other competitor in the market for tertiary and quaternary care services. Finally, in 2006, Highmark leaked confidential financial information regarding West Penn to UPMC, "which in turn leaked a distorted version of the information to credit-rating agencies and to the business media in an attempt to destroy investor confidence in West Penn." JA 113.

In addition, Highmark essentially cut West Penn off from its financial support, thus hampering its ability to compete with UPMC. Highmark, for instance, repeatedly rejected West Penn's requests to refinance the $125 million loan that was used to fund the 2000 merger.*fn4 Although Highmark believed refinancing the loan made business sense, it declined to do so out of fear that UPMC would retaliate against it for violating their agreement-an agreement that Highmark candidly admitted was "probably illegal." Highmark said that it was under a "constant barrage" from UPMC and that UPMC was "obsessed" with driving West Penn out of business. Highmark explained that if it helped West Penn financially, UPMC would allow one of Highmark's competitors to enter the Allegheny County insurance market or would sell UPMC Health Plan to a Highmark competitor. Indeed, UPMC had sent Highmark a letter containing such a warning. JA 107--09.

Finally, Highmark "discriminated against West Penn [] in the award of grants to improve the quality of medical care in" Allegheny County. In November 2005, for example, Highmark launched a program to provide grant dollars to improve the implementation of information technology in health care. The program provided for grants of $7,000 per physician, with an aggregate limit of $500,000 per health system. Only two health systems in Western Pennsylvania employed enough physicians to be limited by the $500,000 cap: UPMC and West Penn []. Highmark waived the cap in UPMC's case, awarding a grant of $8 million. [But] Highmark consistently refused to raise the cap for West Penn. . . .

Moreover, Highmark maintained West Penn's reimbursement rates at artificially depressed levels and repeatedly refused to increase them. In 2005 and 2006, for example, West Penn asked Highmark for a general increase in its rates, which were originally set in 2002. Highmark initially acknowledged that West Penn's rates were too low and suggested that it would raise them, but it ultimately refused to follow through, explaining that it could not help West Penn because, if it did, UPMC would retaliate.

JA 113.

D. The Effects of the Conspiracy

The conspiracy ended in 2007, when the Antitrust Division of the Department of Justice began investigating Highmark's and UPMC's relationship. During the years covered by the conspiracy, UPMC and Highmark reaped record profits. UPMC's net income rose from $23 million in 2002 to over $618 million in 2007, and Highmark's net income rose from $50 million in 2001 to $398 million in 2006. UPMC's increased revenue came largely from the "sweetheart" reimbursements it received from Highmark, and Highmark increased its earnings by raising premiums.*fn5 On the other hand, West Penn struggled during the years covered by the conspiracy. It was forced to scale back its services, and to abandon projects to expand and improve its services and facilities. In essence, West Penn was unable to compete with UPMC as vigorously as it otherwise would have.

E. UPMC's Unilateral Conduct

Besides the conspiracy with Highmark, UPMC has taken a number of actions on its own to weaken West Penn. Most significantly, UPMC has systematically "raided" key physicians from West Penn. Even before West Penn's formation, UPMC hired physicians, including neurosurgeons, oncologists, hand surgeons, cardiologists, gastroenterologists, pulmonologists, and primary care physicians from two of West Penn's predecessor hospitals, including Allegheny General. UPMC lured these physicians away by paying them salaries that were well above market rates. Although UPMC incurred financial losses because of ...


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