New York ex rel. Spitzer v. Saint Francis Hosp., 98 Civ. 0939(WCC).

• Decision Date: 10 April 2000
• Docket Number: No. 98 Civ. 0939(WCC).,98 Civ. 0939(WCC).
• Citation: 94 F.Supp.2d 399
• Parties: State of NEW YORK by Eliot SPITZER, Attorney General, Plaintiff, v. SAINT FRANCIS HOSPITAL, Vassar Brothers Hospital and Mid-Hudson Health, Defendants.
• Court: U.S. District Court — Southern District of New York

94 F.Supp.2d 399

State of NEW YORK by Eliot SPITZER, Attorney General, Plaintiff, v. SAINT FRANCIS HOSPITAL, Vassar Brothers Hospital and Mid-Hudson Health, Defendants.

No. 98 Civ. 0939(WCC).

United States District Court, S.D. New York.

April 10, 2000.

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Eliot Spitzer, Attorney General of State of New York, New York City (Harry First, Bureau Chief, Antitrust Bureau, Susan E. Raitt, Robert L. Hubbard, Gary Weinstein, Asst. Attorneys General, Antitrust Bureau, Matt Siegel, Jody Boudreault, James Yoon, Chris DeSantis, Abe Laks, Samuel Brooks, Interns, Antitrust Bureau, of counsel), for Plaintiff.

Bleakley Platt & Schmidt, White Plains, NY (William F. Harrington, Mary Ann Wirth, of counsel), Buchanan Ingersoll Professional Corp., Pittsburgh, PA (Wendelynne J. Newton, Joy Flowers Conti, James M. Evans, of counsel), for Defendant Saint Francis Hosp.

Winston & Strawn, New York City (Robert S. Fischler, of counsel), Winston & Strawn, Chicago, IL (R. Mark McCareins, Jeffrey A. Leon, Nicole J. Ottmer, Brooke B. Holley, of counsel), Garfunkel, Wild & Travis, P.C., Great Neck, NY (Robert Andrew Wild, Roy Breitenbach, of counsel), for Defendants Vassar Brothers Hosp. and Mid-Hudson Health.

OPINION AND ORDER

WILLIAM C. CONNER, Senior District Judge.

The State of New York (the "State"), by Attorney General Eliot Spitzer, brings this civil action pursuant to state and federal antitrust laws against defendants St. Francis Hospital ("St.Francis"), Vassar Brothers Hospital ("Vassar") and Mid-Hudson Health ("Mid-Hudson"). The State claims that St. Francis and Vassar, through their agent Mid-Hudson, fixed the rates, terms and conditions for services provided at defendant hospitals and that defendant hospitals wrongfully divided the market for the provision of various services between them, in violation of Section One of the Sherman Act, 15 U.S.C. § 1, and the Donnelly Act, N.Y.Gen.Bus.Law, Art. 22 §§ 340-47. The State seeks injunctive relief, civil penalties of up to one million dollars per violation pursuant to Section 342-a of the Donnelly Act, N.Y.Gen Bus. Law, Art. 22, attorneys' fees and costs of suit.

In April 1999, defendants filed a motion to dismiss the State's complaint under Fed.R.Civ.P. 12(b)(6), which was converted to a motion for summary judgment pursuant to Fed.R.Civ.P. 56 in June 1999. On September 8, 1999, the State filed a cross motion for summary judgment seeking a determination that defendants' alleged activities are illegal per se and that defendants are not entitled to state-action immunity. On September 27, 1999, defendants filed an expanded motion for summary judgment asking this Court to rule: (1) that the defendants are entitled to state-action immunity; (2) that defendants' activities are not illegal per se and must be evaluated pursuant to the Rule of Reason; (3) that the State is estopped from bringing this lawsuit; (4) that the State's market allocation claim is timebarred; and (5) that the State has failed to demonstrate antitrust injury. For the reasons that follow, the State's motion for summary judgment is granted and defendants' motion for summary judgment is denied.

BACKGROUND

Defendants Vassar and St. Francis are both not-for-profit hospital corporations organized and existing under the laws of the State of New York. Prior to the establishment of Mid-Hudson, they were the only hospitals in Poughkeepsie, New York.¹ St. Francis, a 295-bed hospital with more than 2,100 employees, is affiliated with the Roman Catholic Church and must comply with the Ethical and Religious Directive for Catholic Health Care Facilities approved by the Archdiocese of New York. Vassar, a 315-bed hospital with more than 1,200 employees, is not church-affiliated. The hospitals have different bond financing sources which cannot be commingled.

In the 1980s, the hospitals began to experience financial difficulties resulting from increased competition from neighboring hospitals. In an internal memorandum regarding the defendants' application to establish Mid-Hudson, the state Department of Health (the "DOH") found that services in the two hospitals began to deteriorate in the mid to late-1980s: "Problems common to both institutions began to surface, such as reduced quality of care, increasing patient out-migration, duplication of certain services and support areas, market share shifts, competition for scarce skilled professional staff, and operating losses which hindered investment in aging physical plants and new technologies." (McCareins Decl., Ex. 4 at NYAG 539.)

The DOH oversees the establishment and construction of hospitals in New York State pursuant to Article 28 of the Public Health Law and issues operating certificates specifying the kinds of services the facilities are authorized to provide. Hospitals that want to add a service or project with capital costs of more than $3 million must apply to the DOH for construction approval through the Certificate of Need ("CON") process. The CON process must also be followed in seeking DOH approval for the establishment of a new hospital corporation via the DOH's Public Health Council. N.Y.Pub.Health Law § 2801-a(1).

To obtain approval from the Public Health Council, a facility must go through a three-step process. First, the facility submits an application for approval of its proposed certificate of incorporation to the Public Health Council. N.Y.Pub.Health Law § 2801-a(2). The Council then forwards the certificate and other supporting documents to the state hospital review and planning council and the health systems agency that has geographical jurisdiction of the area where the proposed hospital is to be located, in this case, the Hudson Valley Health Systems Agency, Inc. See id. The state hospital review and planning council and the health systems agency then offer their recommendations to the Public Health Council. Id.

In 1988 St. Francis and Vassar each independently sought DOH approval for a CON to operate a cardiac catheterization laboratory at their respective hospitals. On January 6, 1989, the DOH denied both requests, recommending instead that the hospitals devise a plan to implement the laboratory jointly at the site of one of the hospitals. (McCareins Decl., Ex. 14 at NYAG 555.) In 1992, the hospitals sought DOH approval of CONs to provide three new services jointly. These services were: (1) a free-standing diagnostic cardiac catheterization program for adults at Vassar; (2) a fixed-site Magnetic Resonance Imaging ("MRI") unit at St. Francis; and (3) a mobile lithotripsy unit at St. Francis.

At the same time, the hospitals sought approval from the Public Health Council to establish a joint venture, an Article 28 hospital, Mid-Hudson Medical Center (the name was subsequently changed to Mid-Hudson Health). (Id., Ex. 14 at NYAG 557.) Mid-Hudson proposed to "have no physical facility or staff of its own" but instead would be "empowered with shared operational and management authority for new clinical services for each of the sponsoring hospitals." (Id., Ex. 16 at NYAG 2978.) On October 7, 1994, Mid-Hudson's application was approved. (Murphy Aff., Ex. B.) Mid-Hudson was issued an operating certificate pursuant to Article 28 of the Public Health Law for adult cardiac catheterization, a lithotripter, and MRI. (Id., Ex. C.)

Defendants claim that the DOH contemplated that the Mid-Hudson joint venture would extend collaboration by the two hospitals beyond the three new services. The State denies this, and it is this further collaboration the State now challenges.

Defendants offer the testimony of Raymond D. Sweeney, who served as director of the Office of Health Systems Management for the DOH for twelve years, to support their argument that further collaboration was envisioned and approved by the DOH. Sweeney states that the goal of the DOH "was to actively encourage as much collaboration between the hospitals as possible, and our encouragement and approval of the Hospitals' joint activities was not conditioned on any type of merger." (Sweeney Aff. ¶ 10.) Sweeney also states:

Although the Mid-Hudson plan originally focused on three services ... it was intended to go beyond these three services to effectively eliminate competition between the hospitals. The Department of Health's acknowledgment of that fact is clearly demonstrated by our approval of the Fairness Formula, which was intended to maintain an economic balance between the hospitals and ensure that neither hospital would be adversely affected by Mid-Hudson, including by allocation and siting of services at one or the other of the hospital campuses. I was aware of the intent to make "trades", and that the Fairness Formula was designed to eliminate the incentive for the Hospitals to compete against one another in the provision of services or on the price that those services would be offered.

(Id. ¶ 14.)

Defendants further point to the CON application itself in which the hospitals state that they sought to "maintain[] the existing specialized services" and "eliminate[] unnecessary service duplication."² (McCareins Decl., Ex. 16 at NYAG 2986.) In the CON application, defendants state that Mid-Hudson's board would have the responsibility of "assuring fairness to each hospital through adoption of a `fairness formula' — a doctrine that guarantees each hospital a fair share in the financial losses and gains resulting from alterations in services." (Id., Ex. 8 at NYAG 826-27.) The application states that Mid-Hudson "will strive to maintain the necessary inpatient and outpatient activity levels at St. Francis and Vassar Brothers Hospital (currently 40/60 market-share split respectively) to ensure balanced financial performance." (Id. at NYAG 829.)

Defendants' "Fairness Formula" is a revenue/market share-oriented model that allocates revenue between the hospitals while at the same time recognizing that there are variable costs associated with the...