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State and feds say Carolinas HealthCare drove up costs by curbing competition

aalexander@charlotteobserver.com

Carolinas Medical Center is the flagship hospital of Carolinas HealthCare System.
Carolinas Medical Center is the flagship hospital of Carolinas HealthCare System. rlahser@charlotteobserver.com

Patients in the Charlotte region face higher health care costs and fewer choices because of efforts by the state’s largest hospital chain to prevent competition, the U.S. Justice Department and the N.C. Attorney General’s office contend in a newly filed lawsuit.

The federal antitrust lawsuit against Carolinas HealthCare System alleges the chain illegally reduces competition in the local health care market.

“Pushing medical costs artificially higher and limiting choices harms North Carolina families,” said state Attorney General Roy Cooper, who is running for governor this year. “Consumers who need health care deserve accurate information and access to quality, affordable options.”

Carolinas HealthCare said Thursday that it has “neither violated any law nor deviated from accepted healthcare industry practices for contracting and negotiation.”

In a prepared statement, the system said it is “dedicated to making healthcare more affordable” and is “committed to fair competition.” It said that its contracts with insurers are similar to those in place across the country.

“In fact, we have been applauded by the United States government for the quality care and cost reduction programs we’ve implemented, programs it hopes to model in other parts of the country,” the system said.

Jim Cooney, a Charlotte lawyer who will help represent CHS, says the hospital system will fight the lawsuit. “CHS thinks it’s wrong,” he said.

Hospital powerhouse

Based in Charlotte, Carolinas HealthCare operates Carolinas Medical Center and nine other hospitals in the Charlotte area. It is one of the nation’s largest nonprofit health care systems.

CHS is the dominant hospital system in the Charlotte area, controlling about 50 percent of the market. It had more than $9 billion in net operating revenue last year.

Its closest competitor is Novant Health, which owns five hospitals in the Charlotte area and has less than half of CHS’ revenue, the lawsuit states. After Novant, the next-largest hospital system in the Charlotte area is CaroMont Health, which has less than one-tenth of CHS’ revenue, according to the complaint.

CHS uses its dominance to get its way with insurers, the lawsuit alleges.

Carolinas HealthCare – a public nonprofit hospital system – has 60,000 employees across 40 hospitals and 900 health care locations in the Carolinas. Its retiring CEO, Michael Tarwater, received $6.6 million in total compensation last year, and 10 other top executives were paid more than $1 million.

In a 2012 investigation, The Charlotte Observer and The (Raleigh) News & Observer found that Carolinas HealthCare and other large nonprofit hospitals in North Carolina have pushed up health care costs, paid executives millions and left thousands with bills they struggle to pay.

Steering patients

The lawsuit alleges that Carolinas HealthCare uses its market power to negotiate “unlawful contract restrictions,” which prevent consumers from taking advantage of lower prices at other hospitals.

The lawsuit also contends that CHS encourages insurers to steer patients its way and uses its influence to prevent insurers from giving the same deal to competing hospitals.

For example, the complaint states, one contract stipulates that an insurer “shall not directly or indirectly steer business away from” CHS.

In other cases, the contracts give CHS the right to terminate their agreements if the insurers try to steer patients from CHS. These contracts give CHS the ability to deny the insurer and its consumers access to the dominant hospital system in the area “unless the steering ends,” the lawsuit states.

“Deprived of the option to benefit from choosing more cost-efficient providers, Charlotte area patients incur higher out-of-pocket costs for their healthcare,” the lawsuit contends.

Size gives CHS leverage

The suit says that the hospital system imposes such “steering restrictions” in its contracts with four major health insurance carriers – Blue Cross and Blue Shield of North Carolina, Aetna Health of the Carolinas, Cigna Healthcare of North Carolina and United Healthcare of North Carolina. They cover 85 percent of the commercially insured residents in the Charlotte area.

An insurer selling health insurance plans in the Charlotte area must have CHS as a participant to have a viable business in the Charlotte area, according to the lawsuit. This is what gives CHS so much leverage.

“For years, insurers have tried to negotiate the removal of steering restrictions from their contracts with CHS, but cannot because of CHS’ market power,” the lawsuit states.

The complaint also alleges that the hospital system imposes restrictions that “impede insurers from providing truthful information to consumers about the value (cost and quality) of CHS’ healthcare services compared to CHS’ competitors.”

Spokesmen for both Blue Cross and Aetna declined to comment for this story.

Cooney, the lawyer for CHS, says the system’s contract provisions are similar to those in place between many hospitals and insurers.

“The system is being sued for something that takes place on a regular basis across the country,” he said.

Growing hospitals, rising prices

The suit says Carolinas HealthCare has “long had a reputation for being a high-priced healthcare provider.” In a 2013 presentation, an internal strategy group recognized that CHS “has enjoyed years of annual reimbursement rate increases that are premium to the market,” the lawsuit states.

In one 2012 story, the Observer showed how large nonprofit hospitals in North Carolina were dramatically inflating prices on chemotherapy drugs at a time when they were cornering more of the market on cancer care. Another story showed that North Carolina patients are likely to pay more for routine care if their doctors are employed by a hospital.

After the newspapers published their investigation, Cooper told the Observer he would examine whether to use antitrust laws or new legislation to reduce the state’s artificially high health care costs.

In an interview Thursday, Cooper said he has been concerned for some time about how hospital mergers and reduced competition affect health care prices.

He declined to discuss why state and federal authorities singled out Carolinas HealthCare in their lawsuit. But for his office, he said, litigation is usually “a last resort.”

U.S. Attorney Jill Rose said that as health care costs rise, vigilant antitrust enforcement “is essential to protecting the interests of consumers.”

“This lawsuit will stop a dominant hospital from using its market power to undermine its smaller competitors’ efforts to attract patients by competing on the price and quality of their services,” said Principal Deputy Assistant Attorney General Renata Hesse, who heads the Justice Department’s antitrust division.

The N.C. Hospital Association declined to comment on the lawsuit but noted that “hospitals are only a piece of the healthcare cost issue.”

“We hope that any investigation will also extend to insurance companies and their tactics to limit patient choice,” the hospital association said in a statement.

Ames Alexander: 704-358-5060, @amesalex

Statement from Carolinas HealthCare System

On June 9, 2016, the U.S. Department of Justice Antitrust Division filed a civil action against Carolinas HealthCare System in the United States District Court for the Western District of North Carolina regarding a dispute over certain language in contracts between CHS and insurance companies.

Carolinas HealthCare System is committed to fair competition and looks forward to presenting our position in court. Our arrangements with insurers are similar to those in place between insurers and healthcare systems across the country. We have neither violated any law nor deviated from accepted healthcare industry practices for contracting and negotiation. In fact, we have been applauded by the United States government for the quality care and cost reduction programs we’ve implemented, programs it hopes to model in other parts of the country.

Carolinas HealthCare System is strongly committed to providing accurate and useful information to consumers and patients as it relates to cost, quality and overall value of the care they receive. We remain dedicated to making healthcare more affordable, while ensuring that we fulfill our mission. We provide financial assistance to patients in need, as well as medical education and research in the communities we serve. These and other mission-based service totaled over $1.65 billion or 19% of total operating expenses.

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