Third Circuit Reverses Eastern District of Pennsylvania’s Dismissal of Horizontal Buyer-Side Antitrust Claims

Bethany Caracuzzo
Pritzker Levine LLP

On August 28, 2018, the Third Circuit Court of Appeals in LifeWatch Services, Inc. v. Highmark Inc., et al., case No. 17-1990, 2018 WL 4087882, reversed the Eastern District of Pennsylvania’s dismissal of an antitrust action against a health insurance association and its member insurance plan administrators arising out of their denial of coverage for telemetry monitors. The case was also remanded for further analysis of whether Plaintiff’s claims would still fail under the McCarran-Ferguson Act, which exempts private insurers from federal antitrust liability in certain circumstances, an issue the District Court did not reach.

Plaintiff LifeWatch alleged that it was shut out of the market for the medical device it sells as a result of an agreement entered into by the defendants, an insurance association, Blue Cross Blue Shield Association (“Association”), and five of its member insurance plans, in violation of § 1 of the Sherman Act and the Clayton Act. The District Court dismissed LifeWatch’s suit pursuant to Defendants’ 12(b)(6) motion on the grounds that LifeWatch failed to allege anticompetitive effects, and therefore failed to establish the restraint on trade was unreasonable. 2018 WL 4087882, at *3.

Background

LifeWatch is a manufacturer of telemetry monitors, an outpatient medical device that monitors cardiac activity. There are other types of cardiac monitors with which telemetry monitors compete, including but not limited to event monitors, Holter monitors, and insertable monitors, though they vary widely in price. While telemetry monitors are about three times more expensive than event monitors, they capture up to 30 days of cardiac activity and automatically transmit the data to an analyst center, while event monitors record a much shorter window of data (in some case no more than a minute), and the patient is required to actively transmit the data. Insertable monitors, which are surgically implanted, are the most expensive, costing eight to ten times more than event monitors. 2018 WL 4087882, at *1.

Defendant Association and its members were alleged to be the largest commercial health insurance group in the country, collectively insuring 105 million Americans, with a national network that covers 96% of hospitals and 92% of doctors. The Association, which is not an insurer itself, owns the right to the Blue Cross and Blue Shield trademarks and trade names, and licenses the rights to 36 insurers nationwide. Five of those member plans are named as defendants in this action (the “Blue Plans”).

The Association maintains a “model medical policy” that recommends to the Blue Plans which treatments, devices, or services to cover. Id., at *2. For more than a decade, the model policy has recommended against covering prescriptions for telemetry monitors, claiming that they are not “medical necessary” or that they are “investigational”, despite multiple medical studies and at least 20 patient coverage appeals where the review board determined that telemetry monitors were a standard of care or clinically necessary. Despite these review board decisions and studies, the Association’s model policy has been adopted in near lockstep by all the member Blue Plans. Yet, Medicare, Medicaid, and other private insurers, including Aetna, cover telemetry monitors. Id., at *2. As a result of the Association’s and the Blue Plans’ refusal to cover the telemetry monitors, LifeWatch claims its sales and cardiac monitoring treatment have suffered. Id.

Defendants moved to dismiss on the grounds that Plaintiff failed to allege either agreement or anticompetitive effects in the relevant product market, that LifeWatch lacks antitrust standing because it could not show antitrust injury, and that Blue Cross’s telemetry monitor coverage decisions are immune from antitrust challenge under the McCarran-Ferguson Act. The Eastern District of Pennsylvania dismissed for failing to allege anticompetitive effects, and therefore failing to establish the restraint was unreasonable. Id., at *3.

The District Court found that because each Blue Plan “treats all telemetry providers equally” LifeWatch failed to alleged “competition-reducing” conduct, and that the Defendants’ refusal to purchase any telemetry device is not an antitrust violation, but rather a legal exercise of Defendants’ monopsony power. Id., at *3, citing underlying decision, 248 F.Supp.3d 641, 650 (E.D.Pa. 2017). The Court also suggested in dicta that LifeWatch failed to allege an agreement, believing that the Plans could have independently decided not to permit coverage. It did not explicitly reach antitrust standing or the application of the McCarron-Ferguson Act. Id.

Antitrust Analysis

A. Agreement

In reversing, the Third Circuit found that LifeWatch pled sufficient circumstantial evidence of agreement; that Plaintiff had alleged both parallel conduct and the “plus factor” required when relying upon circumstantial evidence of an agreement. Id., at *4. The “parallel conduct” requirement was met because LifeWatch alleged that the Association’s model policy recommended that the Blue Plans deny coverage for telemetry monitors, and, as result the Blue Plans adopted the policy in near total uniformity, using similar or identical language in their denials (which LifeWatch dubbed “the Uniformity Rule”). Id., at *4. The Court found that the Association’s argument that the model policy explicitly disclaims that the Plans are bound to follow it misunderstood the nature of the alleged agreement: LifeWatch instead claimed that the Blue Plans’ agreements that they would substantially comply with the model policy, which was then enforced by the Association through audits and sanctions, including losing the right to use the Blue Cross name. Id., at *5 (emphasis in original). These allegations in the Complaint, including of an example of one Plan being pressured to conform to the model policy, satisfied the plus factor. Id., at *6.

B. Unreasonable Restraint of Trade

LifeWatch asserted that the Blue Plans engaged in a horizontal concerted refusal to deal; therefore, the parties agreed that the rule of reason framework applied. Id., at *7. LifeWatch could satisfy the unreasonable-restraint element in two ways: by pleading actual detrimental effects on competition, such as reduced output, increased prices, or decreased quality in the relevant market, or it can plead that the Defendants have market power, plus some evidence that the challenged restraint harms competition. Id., at *7 (internal citations omitted).

First, the Third Circuit analyzed the relevant market. While LifeWatch had plead the existence of both national and regional markets for the sale of health insurance plans, on appeal it only asserted a national market, and so the court focused its inquiry there. Id., at *8. While the Complaint explained that the Blue Plans operate nationwide, Defendants argued that telemetry monitors do not compete in the same market as other cardiac monitors, such as the Holter, event, and insertable monitors. Id.While the District Court’s opinion did not explicitly reject LifeWatch’s market theory that all cardiac monitors compete with each other, the Third Circuit found that it implicitly rejected it. Id. The Third Circuit disagreed, finding that differences in monitors did not mean that they did not compete for the same customers, likening it to the markets for copiers, computers, and automobiles Id., at *9.

The Third Circuit also found a “more fundamental problem” with the District Court’s analysis: that in a buyer-side conspiracy case, the unreasonable-restraint analysis is whether the defendants’ purchasing power is constrained by competition from other purchasers in the relevant market; the interchangeabilty that matters is for purchasers of outpatient monitors, not the sellers, as the District Court suggested. Id., at *9 (emphasis in original). LifeWatch’s allegations that health insurers are the gatekeepers in controlling patient purchases, and that other insurers like Aetna, Medicaid, etc., did fund purchases of outpatient cardiac monitors was found to be sufficient to plead a plausible unreasonable restraint on trade.

Finding a proper market definition, the Third Circuit next found LifeWatch had adequately and plausibly alleged anticompetitive effects: that the denial of coverage harmed consumers by reducing demand for and output of more effective devices, interfering with a patient’s choice of treatment, and reducing the quality of cardiac monitors in general.. Disagreeing with the District Court, the Third Circuit found that the relevant choice wasn’t between different telemetry monitors, but between different types of cardiac monitors in the marketplace. The Plans’ refusal to fund telemetry monitor prescriptions while funding comparable treatment with other monitors, induced doctors and insureds alike to choose cardiac monitor devices other than telemetry monitors and this was sufficient to support a claim of anticompetitive effects at this stage. Id., at *10.

C. Antitrust Standing

The Court laid out the five factors for finding antitrust standing under the Clayton Act, relying on In re. Lower Lake Erie Iron Ore Antitrust Litig., 998 F.2d 1144, 1165-66 (3d Cir. 19993). The parties did not dispute that LifeWatch had pled four of the factors: a causal connection between the violation and the harm to the plaintiff and the intent by the defendant; the directness of the injury; the existence of more direct victims of the alleged antitrust violations; and the potential for duplicative recovery, but were in disagreement as to whether Plaintiff had plausibly alleged antitrust injury. Id., at *11. The Association argued that the intervening factors of each Plan’s independent ability to deny coverage, a doctor’s choice not to prescribe a telemetry device, and a patient’s desire for alternative treatments, broke the causal chain. Id.

The Court of Appeal was not persuaded. The Complaint alleged that the Plans’ near-universal decision to deny coverage would not have occurred without their agreement and the Association’s enforcement via audits and sanctions. Id., at *12. LifeWatch also alleged doctors were deterred from prescribing telemetry monitors because of prior denials and the hassle of not knowing if a patient’s insurer will cover the device, and that the Uniformity Rule insulated the Plans from demand for telemetry treatment. These facts sufficiently alleged a causal link between Plaintiff’s injury (lost profits) and the Plans’ denial of coverage. Id. This injury, the Third Circuit held, is “of the type” that antitrust laws were meant to prevent. Id.

D. McCarran-Ferguson Act

Because it dismissed the case on other grounds, the District Court did not analyze whether Defendants had shown it was exempt from antitrust liability under the Act. The Third Circuit remanded the issue to the District Court.

Conclusion

While many of the facts are unique to how the Association and the Blue Cross Plans operated in the marketplace and with one another, the LifeWatch opinion provides helpful insight in defining a market in alleging a buyer-side horizontal conspiracy.