Methodist Health Services Corp v. OSF Healthcare System

Filing

Filed opinion of the court by Judge Posner. AFFIRMED. Richard A. Posner, Circuit Judge; Daniel A. Manion, Circuit Judge and Michael S. Kanne, Circuit Judge. [6846754-1] [6846754] [16-3791]

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In the

United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-3791
METHODIST HEALTH SERVICES CORP.,
Plaintiff-Appellant,
v.
OSF HEALTHCARE SYSTEM d/b/a SAINT FRANCIS MEDICAL
CENTER,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Central District of Illinois.
No. 1:13-cv-01054-SLD-JEH — Sara L. Darrow, Judge.

____________________
ARGUED APRIL 13, 2017 — DECIDED JUNE 9, 2017
____________________
Before POSNER, MANION, and KANNE, Circuit Judges.
POSNER, Circuit Judge. Methodist and Saint Francis are the
two largest hospitals in Peoria, Illinois; Saint Francis is considerably larger and more profitable than Methodist. On
February 5, 2013, Methodist filed suit against Saint Francis in
the federal district court in central Illinois, charging Saint
Francis with violating the Sherman Act to the detriment of
Methodist, a competitor. The district judge granted sum-

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mary judgment in favor of Saint Francis. Methodist had
pleaded state-law claims as well, which the district judge also rejected; we have nothing to add to the judge’s discussion
of those claims, beyond noting that they largely duplicated
the Sherman Act claims.
Methodist’s antitrust case is quite simple. Its essence is
that because Saint Francis is the dominant hospital in the
markets served by both hospitals (the markets consisting of
acute-care inpatient services and outpatient surgical services
sold to commercial health insurers in an area in central Illinois comprising Peoria, Tazewell, and Woodford Counties,
known as the “tri-county area”), it was able to persuade insurance companies to enter into exclusive contracts with it;
and being exclusive, those contracts prevented the companies from contracting with Methodist, to the latter’s detriment. The contracts involve health insurance plans that use
restricted-provider networks, meaning that each plan has a
network of hospitals and other health-care providers that
have agreed to charge the plan’s members specified rates.
Each plan encourages its members to use its in-network
hospitals, with “encouragement” taking the form either of
charging the members higher prices for treatment at out-ofnetwork hospitals or by not covering treatment at such hospitals at all.
The exclusive contracts between Saint Francis and the
insurance companies required that for specified health insurance plans Saint Francis would be an in-network hospital
and Methodist an out-of-network one. The major plan was
the Blue Cross Blue Shield PPO (“PPO” stands for Preferred
Provider Organization), whose members constituted a third
of all the commercially-insured patients in the area. Saint

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Francis’s exclusive contracts covered more than half of all
commercially-insured patients in the area, and Methodist
contends that as a result it couldn’t obtain a sufficiently high
volume of patients to enable it to invest in quality-improving
projects it otherwise would have undertaken.
One reason for this disparity is that health insurers regard Saint Francis as a “must have” hospital, that is, a hospital with which the insurer must have a contract to provide
hospital services, because it provides certain inpatient services that the other hospitals in the tri-county area do not
provide, such as solid-organ transplants, neonatal intensive
care and other sophisticated pediatric care, and, probably
most important, a Level 1 trauma center, certified by the
state to “provide optimal care to trauma patients, [including]
all essential services in-house, 24 hours per day.” Illinois
Department of Public Health, “Trauma Program,”
www.dph.illinois.gov/topics-services/emergency-prepared
ness-response/ems/trauma-program (visited June 8, 2017).
Given the more extensive services offered by Saint Francis (further illustrated by its large number of beds—616 to
Methodist’s 330), it’s no surprise that it attracts more commercial health insurance companies than Methodist does—
and patients covered by commercial insurance are more
profitable for hospitals than patients covered by government
insurance. It’s also no surprise that Saint Francis should not
want to share the health-care insurers that have contracted
to use its services thereby making Saint Francis part of their
hospital network.
But what is more common than exclusive dealing? It is illustrated by requirements contracts, which are common, and
legal, and obligate a buyer to purchase all, or a substantial

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portion of, its requirements of specific goods or services
from one supplier. Saint Francis’s deals with the health insurance companies are a form of requirements contract, for
the deals require the companies to limit the network of providers from which they obtain the health care that their insurance contracts obligate them to obtain for their insureds.
And an insurance company may get better rates from a hospital in exchange for agreeing to an exclusive contract, as exclusivity will drive a higher volume of business to the hospital. The contracts made by Saint Francis are of fixed rather
than indefinite, let alone perpetual, duration; and when they
terminate, the insurance companies are free to strike deals
with other hospitals—with Methodist, for example.
It’s true that some exclusive-dealing arrangements run
afoul of the Sherman Act, see Roland Machinery Co. v. Dresser
Industries, Inc., 749 F.2d 380, 394 (7th Cir. 1984); if Saint Francis had signed long-term exclusive contracts with all the
health insurance companies serving the tri-county market,
the destruction of competition in health services might result
in sky-high prices for such services and the bankruptcy of
the other hospitals in the market, such as Methodist. But
there is no evidence of such dire consequences of Saint Francis’s exclusive contracts with insurance companies—no evidence for example that Methodist could not duplicate the
special services, such as Level 1 trauma care, that makes
Saint Francis so special; apparently it has been able to raise
hundreds of millions of dollars for new investments. Also no
evidence that Saint Francis’s exclusive contracts have a significant exclusionary effect, since most of the contracts expire every year or two, giving other hospitals, such as Methodist, a shot at obtaining the next contract by outbidding
Saint Francis. The Blue Cross Blue Shield PPO contract alone

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accounts for more than half of all patients covered by a Saint
Francis exclusive contract—and it has expired every two or
three years during the period that Methodist alleges it was
excluded from the market. If Methodist can’t outbid Saint
Francis—if a health insurance company prefers to contract
with Saint Francis, the logical inference is that Saint Francis
offered the health insurer a better deal, doubtless based on
its offering a broader and deeper range of services than
Methodist does. Methodist has made its own exclusive contracts with insurance companies, although they cover fewer
patients than Saint Francis’s exclusive contracts do. As we’ve
said before, “competition-for-the-contract is a form of competition that antitrust laws protect rather than proscribe, and
it is common.” Paddock Publications, Inc. v. Chicago Tribune
Co., 103 F.3d 42, 45 (7th Cir. 1996).
A curious feature of the case is Methodist’s isolation.
Methodist devotes much of its brief to listing the commercial
insurers that have allegedly been hurt by Saint Francis’s exclusive dealing, but none of those companies is a plaintiff; it
doesn’t discuss any other hospitals, other than mentioning
that there are four other (smaller) hospitals in the tri-county
area. So far as appears, the overall effect of Saint Francis’s
exclusive contracts in the tri-county area may be slight; indeed Methodist may be the only victim. Methodist had sent
a copy of its complaint to the Department of Justice, but it
declined to file a case of its own. Methodist could have tried
to persuade the four other hospitals in the tri-county area to
join its suit as additional plaintiffs, but there is no indication
that it did.
Methodist argues that Saint Francis’s exclusive contracts
“forced insurers and ultimately consumers to pay nearly $30

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million more than they would have paid in a competitive
market.” But Methodist is not the representative of any insurer or of any consumer; it’s simply an unsuccessful competitor with a hospital that offers patients insured by health
insurance companies more health care than it does. And
Methodist doesn’t have any theory of how Saint Francis’s
exclusive contracts could have caused prices to rise.
As the district judge concluded and we now conclude,
Methodist failed to make a case. The grant of summary
judgment in favor of Saint Francis is therefore
AFFIRMED.