Omnicare: The Rationality of Unilateral Actions and Proof of antitrust Conspiracy

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EI Principal David A. Argue submitted expert reports and provided deposition testimony on behalf of defendants. Senior Vice President Kent W Mikkelsen and Vice President John M. Gale assisted with the analysis. This article is drawn from a more detailed version that appears in the Spring 2011 Antitrust Healthcare Chronicle.

The Seventh Circuit recently affirmed a lower court decision granting summary judgment to defendants in Omnicare, Inc. v. UnitedHealth Group, Inc. et al. Among other things, plaintiff alleged a complex “gun-jumping” conspiracy by UnitedHealth Group (“United”) and PacifiCare Health Systems, Inc. (“PacifiCare”) to extract below-competitive pricing from Omnicare. Although the matter also presented the question of whether the alleged behavior could have constituted antitrust injury, both courts focused on the likelihood of a conspiracy. Ultimately, both found that PacifiCare’s behavior was consistent with economically rational unilateral action and that Omnicare presented insufficient evidence to infer an agreement between United and PacifiCare.

Omnicare’s allegations arose in the context of a June 2005 agreement between United and PacifiCare to merge, a transaction that was ultimately completed in December 2005. In the intervening months, both firms were preparing to offer insurance under the Medicare Part D prescription drug program, which would commence in January 2006. To obtain government approval to offer Part D insurance, United and PacifiCare were each required to assemble a network of pharmacies from which their enrollees could obtain prescriptions. The networks needed to include pharmacies like Omnicare that deliver drugs to patients in long-term care (“LTC”) facilities. United brought Omnicare into its network through a contract with payment rates favorable to Omnicare. Negotiations between PacifiCare and Omnicare, however, failed to reach an agreement. Subsequently, PacifiCare obtained government approval of its pharmacy network without including Omnicare.

In October 2005, Omnicare interpreted an email from United to mean that after the merger, PacifiCare would maintain its own pharmacy network, which would include Omnicare only if a separate PacifiCare-Omnicare contract were signed. As a result, Omnicare contacted PacifiCare in early November 2005 and asked for its “best offer.” PacifiCare sent back its standard first-offer contract, which Omnicare signed without any counteroffer or amendment. Importantly, a provision of the contract permitted PacifiCare to invite any other insurer to join the contract and pay the same rate as PacifiCare. After the merger, United learned about the PacifiCare-Omnicare contract, which was more favorable than the United-Omnicare contract. United then informed Omnicare that United would join the PacifiCare-Omnicare contract. Omnicare filed suit, alleging fraud and various antitrust violations.

Among Omnicare’s antitrust allegations was the claim that, prior to consummation of the merger, United and PacifiCare conspired to pay below-competitive rates to Omnicare. Omnicare had scant, if any, direct evidence of a conspiracy, but it argued that a conspiracy could be inferred from the actions of PacifiCare and United. Omnicare’s inference might be sustained if it were able to show that PacifiCare’s behavior was inconsistent with economically rational unilateral action. According to Omnicare, PacifiCare and United agreed that PacifiCare would refuse to negotiate with Omnicare for any rate other than the relatively low rate contained in Pacifi­Care’s standard first-offer contract. Omnicare argued that this supposed no-compromise position was not in Pacifi­Care’s unilateral interests because PacifiCare allegedly incurred enormous risks by adhering to that position and proceeding without Omnicare in its network.

The risks alleged by Omnicare were three-fold. First, Omnicare claimed that without Omnicare in its network, PacifiCare might not obtain government approval to offer Part D insurance. Second, Omnicare also claimed that PacifiCare’s Part D business might be severely damaged when PacifiCare enrollees in LTC facilities served exclusively by Omnicare were unable to get their drugs. Third, Omnicare alleged that United might respond to either of these events by canceling the merger or renegotiating the merger on terms less favorable to PacifiCare than if PacifiCare had a successful Part D business. Omnicare argued that PacifiCare would not have tolerated these risks if it were acting independently, but under the alleged conspiracy with United it would have a “safety net” to sustain its alleged inflexible bargaining position. The safety net allegedly enabled United to bring Omnicare into the PacifiCare network through the United-Omnicare contract if no PacifiCare-Omnicare agreement were reached. United allegedly furthered the conspiracy through a deceptive email that caused Omnicare to sign the PacifiCare contract. The alleged conspiracy resulted in Omnicare’s receiving below-competitive rates from United and PacifiCare that were ostensibly lower than rates paid by any other major insurer.

To avoid summary judgment, Omnicare had to produce evidence that “tended[ed] to exclude the possibility that the alleged conspirators acted independently rather than in concert.” Neither court agreed with Omnicare’s arguments. Both concluded, among other things, that PacifiCare could reasonably have been following a tough negotiating strategy on its own, not in coordination with United. PacifiCare never refused to compromise with Omnicare over the payment rate. Ultimately, Omnicare simply signed the PacifiCare contract without attempting to negotiate a higher payment rate. The rationality of PacifiCare’s actions did not depend on the existence of a conspiracy-induced safety net. Indeed, PacifiCare did not need a safety net at all since, if necessary, it could simply have signed with Omnicare after Medicare Part D started. There was no reason to believe Omnicare would have refused PacifiCare’s acceptance of Omnicare’s contract at the later date. Nor did the supposed safety net of the United contract protect PacifiCare if it did not get a contract with Omnicare. PacifiCare could not rely on United’s contract with Omnicare because the United-Omnicare contract required Omnicare’s consent to add PacifiCare. Furthermore, if PacifiCare’s negotiating strategy had damaged its Part D business, an illegal PacifiCare-United conspiracy would not have prevented United from backing out of or renegotiating the merger agreement. Moreover, the mere existence of a low payment rate does not imply that it was necessarily a below-competitive rate achieved by a conspiracy. Omnicare had other contracts with lower rates for which no allegations of conspiracy were raised. In addition, PacifiCare’s low rate can readily be explained by Omnicare’s failure to negotiate for a higher one.

The Omnicare appeals decision comports with well-established precedent on proof of a conspiracy. Omnicare’s arguments failed to persuade either court that PacifiCare’s actions were economically rational only in the context of a conspiracy with United. Thus, the courts granted the defense summary judgment on the conspiracy allegations, but some interesting antitrust issues as to whether the alleged behavior could have even constituted antitrust injury remain unaddressed.