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DOJ allows joint purchasing by hospitals

Last year, two otherwise independent hospital systems, Memorial Health and St. Joseph’s/Calder Health System, asked the Department of Justice if they could form an exclusive joint purchasing agreement for their hospitals in southeast Georgia. Although the subject hospitals accounted for 100 percent of the inpatient hospital admissions in that region, the DOJ agreed that it would not challenge the agreement on antitrust grounds.

The DOJ’s favorable review demonstrates the breadth of the antitrust joint purchasing safety zone, which in this case permits a joint venture that controls 100 percent of a market to purchase hospital supplies and services.

Joint purchasing agreements can lower the price of purchased goods and services paid by health care providers and others, which can potentially lower the prices charged by health care providers to consumers or otherwise enhance the services offered by health care providers.

To encourage such behavior, in 1996, the DOJ and the Federal Trade Commission established guidelines for joint purchasing arrangements among health care providers. The guidelines include a safety zone under which those agencies will not challenge the joint venture, absent extraordinary circumstances.

To fall within the safety zone, the joint venture must satisfy two requirements: (1) the joint venture’s purchases must account for less than 35 percent of the vendor’s total sales of the purchased product or service in the relevant market; and (2) the cost of the products and services purchased jointly must account for less than 20 percent of the total revenues from all products or services sold by each competing participant in the joint purchasing arrangement.

The first requirement prevents joint purchasing arrangements from exercising too much market power in a particular product or service. The DOJ and FTC are concerned that a “powerful enough” joint venture could artificially exert pressure on sellers, and lower the sellers’ prices to an anti-competitive level.

However, the 35 percent rule is usually easily satisfied because the relevant market for hospital supplies is often national or at least regional, and it is unlikely that the joint venture would account for 35 percent of the total sales in such a market.

The second requirement addresses any possibility that a joint purchasing arrangement might result in standardized costs, thus facilitating price fixing or other anti-competitive actions among the joint purchasers. The arrangement is not likely to facilitate collusion if the goods and services being purchased jointly account for a small fraction of the final price of the services provided by the participants.

The 20 percent of total revenues test is used because in the health care field it may be difficult to determine the specific final service in which the jointly purchased products are used, as well as the price at which that final service is sold.

Moreover, this second condition applies only where some or all of the participants are direct competitors. In other words, two hospitals located in separate geographic areas that do not compete for the same patients would satisfy this second part.

Joint purchasing arrangements that fall outside of the safety zone do not necessarily raise antitrust concerns. The DOJ and FTC note several safeguards that joint purchasing arrangements can adopt to reduce the risk of raising antitrust concerns, including (1) allowing members to purchase outside of the joint venture, at least in some circumstances, (2) providing for negotiations to be conducted on behalf of the joint purchasing arrangement by an independent employee or agent, and (3) limiting communications between the purchasing group and each individual participant.

Finally, the DOJ and FTC have cautioned that even if a joint venture falls within the safety zone, any price fixing, division of markets or other anti-competitive activity may still be challenged by the agencies.

The DOJ letter

In the case of the Memorial and St. Joseph’s/Candler joint venture, the DOJ concluded that the joint venture was within the antitrust safety zone, and that the DOJ would not challenge the venture on antitrust grounds. However, the DOJ reminded the joint venture that ancillary joint activity outside the scope of the joint venture between the member hospitals would not be protected from a DOJ challenge.

Pursuant to the joint venture, certain “covered products,” initially to include spinal implants, total joint implants, cardiac rhythm management devices, drug-eluting stents and generic hospital supplies, would be purchased only through designated vendors.

The DOJ determined that the joint venture’s proposed purchases would satisfy the first condition of the safety zone because (1) the joint venture would initially acquire the covered products only from national vendors, and (2) in the event a local or regional supplier were used, the joint venture said it would ensure that its purchases would not account for more than 35 percent of those vendors’ sales.

The DOJ was also satisfied that the joint venture would satisfy the second condition of the safety zone because the hospitals participating in the arrangement would use real-time information systems to monitor their purchasing to ensure that the cost of all covered products purchased by each of them would not exceed 20 percent of either hospital’s total revenues.

In regard to ancillary activities between the hospitals, each member of the joint venture agreed not to discuss prices of its health care services or to allocate patients, payors or services.

The DOJ noted that, because the hospitals in the joint venture collectively controlled the market in southeast Georgia, there was the possibility that the hospitals could use the arrangement with respect to matters beyond the scope of the joint venture, and such activity may be anti-competitive. Accordingly, the DOJ reserved the right to bring an enforcement action if the actual activities of the hospitals proved to be anti-competitive in purpose or effect.

Barry F. Rosen is the chairman and CEO of the law firm of Gordon, Feinblatt, Rothman, Hoffberger & Hollander LLC, and he can be reached at 410-576-4224 or brosen@gfrlaw.com. Cynthia A. Shay is a member of Gordon, Feinblatt’s Health Care and Business Law Practice Groups, and she can be reached at 410-576-4082 or cshay@gfrlaw.com.