When competing health care providers affiliate by contract, rather than by merger or acquisition, they often face the challenge of structuring their joint activities to avoid liability under § 1 of the Sherman Act, which prohibits contracts that unreasonably restrain trade. A recent court decision, The Medical Center at Elizabeth Place LLC v. Midamerica Health Systems Corporation, provides guidance on how providers can structure their joint venture to create a single entity rather than an ongoing conspiracy under § 1.

The case holds that where a joint operating agreement creates central system management and tight financial integration, including sharing of all the providers' income, profits and losses, the resulting hospital system is a single entity and its members are incapable of conspiring with each other in violation of the Sherman Act.

One important source immunity from claims of Sherman Act violation has been the Supreme Court's opinion in Copperweld Corp. v. Independence Tube Corp., which holds that a parent company and its wholly owned subsidiary are a single economic entity, and therefore are incapable of conspiring in violation of § 1. The Supreme Court later suggested in dicta that Copperweld may apply to corporate joint ventures, because "[w]hen 'persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit . . . such joint ventures [are] regarded as a single firm competing with other sellers in the market.'" And one lower court decision applied Copperweld to a contractual joint venture (a hospital joint operating agreement), relying on the Court's instruction that "substance, not form, should determine whether a separately incorporated entity is capable of conspiring under § 1." Now, a new district court decision adds additional support for the proposition that parties can create a "single entity" purely through contract, without jointly owning assets or sharing liabilities.

The Medical Center at Elizabeth Place LLC v. Midamerica Health Systems Corporation: The Court Decision

Premier Health, a hospital system in southwest Ohio, was formed by a joint operating agreement among five independent hospitals. The hospitals remained separate corporations with their own assets, liabilities and governing boards, in part because some of them were Catholic hospitals that wished to retain their Catholic identity. However, the hospitals ceded operational, strategic, and financial control, including managed care contracting authority, to a joint management entity called Premier Health Partners.

The plaintiff, a small physician-owned hospital in Dayton, alleged that the hospital members of Premier Health conspired with each other to "deny Plaintiff access to supply (managed care contracts and physicians) and demand (physician referrals) that Plaintiff needed to compete." A threshold issue was whether the defendant hospitals could conspire with each other in violation of the Sherman Act. The hospitals argued that they could not, because Premier Health was a single entity.

In granting the defendants' motion for summary judgment, the court emphasized elements of the joint operating agreement that showed control of the participating entities had been delegated to Premier Health. For example, the court noted that Premier Health "negotiates and enters into payor contracts that bind all of the Hospital Participants . . . and manages all relationships with payors, including managed care companies." "Not only is Premier a legitimate joint venture, but the challenged conduct in this case — managed care contracting and physician relations — is a core function of the Premier health system." The court concluded that the financial integration between the hospitals was so complete that the hospitals had ceased to be competitors of each other: "Defendants are not competitors because they are not separate economic actors — all of the money goes to one bottom line — the Network Net Income" which the hospitals shared pursuant to their joint operating agreement.

What Providers Need to Know

• Health care providers that delegate all "operational, strategic, and financial control" to a joint venture manager via contract have the strongest argument that they are a single economic unit and therefore incapable of conspiring under § 1.

• The fact that "there is no shared ownership of assets used in the Joint Venture" is "immaterial" to the Copperweld immunity question.

• The participating entities can remain separately responsible for their respective debt, so long as the joint venture manager has authority to approve participants' incurrence of new debt.

• The joint venture manager can and should be authorized to negotiate all managed care contracts for the participating providers.

• The parties can and should share the income, profits and losses of the joint venture by agreeing on a formula to allocate the system's combined net income.