DOJ Sues Hospitals for Allocating Marketing

 

Economists Ink: A Brief Analysis of Policy and Litigation

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EI Senior Economist Clarissa A. Yeap specializes in empirical microeconomic analysis in the assessment of liability and damages in antitrust, intellectual property, and class action matters

The US Department of Justice (DOJ), joined by the State of Michigan, recently filed suit against four Michigan hospital systems for allegedly limiting competition by agreeing to allocate geographic territories for marketing efforts. Three of the four systems have reached settlements that will bar them from similar agreements and from communicating about their marketing efforts for five years. The fourth, W.A. Foote Memorial Hospital, doing business as Allegiance Health (Allegiance), continues to litigate the charges.

The four defendants own general acute care hospitals located in adjacent counties in south-central Michigan. Each defendant operates the only hospital or hospitals in its county and competes directly with the other defendants to provide the same hospital and physician services. Marketing is an important means of informing patients, physicians, and employers about the quality and range of a hospital’s services, which are important factors in consumers’ healthcare choices. Defendants’ marketing efforts include advertising, free health screenings, physician seminars and health fairs for consumers, educational and relationship-building meetings with physicians and, in Allegiance’s case, informational meetings with employers.

Economists view marketing efforts by competitors as strategic complements, meaning that a competitor will respond to a rival’s increased marketing efforts by increasing its own marketing activities. A market with robust competition should include efforts by all competitors to sell their services. Nonetheless, marketing activities are costly. Moreover, they may reduce prices by making potential buyers better able to compare suppliers’ prices and services. Thus, firms have incentives to jointly raise their profits by agreeing to reduce competition in marketing.

One means of reducing competition may be to allocate geographic areas for marketing efforts, as DOJ accuses the defendants of doing. DOJ alleges that the defendants had long-standing agreements to restrict marketing activities in each other’s counties and actively controlled compliance with the agreements. For example, according to DOJ, Allegiance did not market oncology services in Hillsdale County and restricted its physicians from providing free seminars in that county. DOJ also cites several instances when the agreements were violated, complaints ensued, and the infringing efforts were withdrawn. According to DOJ, the defendants’ actions deprived consumers, physicians, and employers of important information affecting their choice of healthcare providers and also deprived consumers of free health screenings and education.

DOJ argues that the allocation of marketing areas is a per se antitrust violation under Section 1 of the Sherman Act. Thus, the agreement allegedly is a naked restraint of trade that does not require analysis to show its anticompetitive effects on consumers or to weigh those effects against procompetitive justifications. Allegiance has yet to indicate its defense to the charges.