Steward Health Care Sys., LLC v. Blue Cross & Blue Shield Island

• Decision Date: 19 February 2014
• Docket Number: C.A. No. 13–405 S.
• Citation: 997 F.Supp.2d 142
• Parties: STEWARD HEALTH CARE SYSTEM, LLC, Blackstone Medical Center, Inc., f/k/a Steward Medical Holding Subsidiary Four, Inc., Blackstone Rehabilitation Hospital, Inc., f/k/a Steward Medical Holding Subsidiary Four Rehab, Inc., Plaintiffs, v. BLUE CROSS & BLUE SHIELD OF RHODE ISLAND, Defendant.
• Court: U.S. District Court — District of Rhode Island

997 F.Supp.2d 142

STEWARD HEALTH CARE SYSTEM, LLC, Blackstone Medical Center, Inc., f/k/a Steward Medical Holding Subsidiary Four, Inc., Blackstone Rehabilitation Hospital, Inc., f/k/a Steward Medical Holding Subsidiary Four Rehab, Inc., Plaintiffs,

v.BLUE CROSS & BLUE SHIELD OF RHODE ISLAND, Defendant.

C.A. No. 13–405 S.

United States District Court,

D. Rhode Island.

Feb. 19, 2014.

Robert Clark Corrente, Burns & Levinson LLP, Providence, RI, Greg Hillson, Kevin Hardy, Steven R. Kuney, Williams & Connolly, LLP, Washington, DC, Thomas T. Reith, Burns & Levinson, LLP, Boston, MA, for Plaintiffs.

John A. Tarantino, Joseph Avanzato, Patricia K. Rocha, Adler Pollock & Sheehan P.C., Providence, RI, Michael Tarantino, Adler Pollock & Sheehan, PC, Boston, MA, Emily M. Yinger, N. Thomas Connally, III, Hogan Lovells U.S. LLP, McLean, VA, Justin Bernick, Robert F. Leibenluft, Hogan Lovells U.S. LLP, Washington, DC, for Defendant.

OPINION AND ORDER

WILLIAM E. SMITH, Chief Judge.

The Landmark Medical Center (“Landmark”) is a 214–bed, general acute care community hospital located in Woonsocket, Rhode Island. Each year, it provides some 175,000 patients with a wide array of medical services ranging from ambulatory surgery and orthopedics to radiology and cancer treatment. In May 2011, Steward Health Care System, LLC submitted a proposal to acquire Landmark and its subsidiary, the Rehabilitation Hospital of Rhode Island. Approximately a year and a half later, the proposed acquisition was deemed a failure and abandoned. The circumstances surrounding the ill-fated acquisition form the basis of this lawsuit.

The Plaintiffs, Steward Health Care System, LLC, Blackstone Medical Center, Inc., and Blackstone Rehabilitation Hospital, Inc. (collectively, “Steward”) allege that the Defendant, Blue Cross & Blue Shield of Rhode Island (“Blue Cross”), violated state and federal antitrust law, and tortuously interfered with contractual relations, by engaging in a series of anticompetitive steps designed to block Steward's acquisition of Landmark and its entry into the Rhode Island markets for the sale of commercial health insurance and the purchase of commercial hospital services. In response, Blue Cross contends that it acted legally when it refused to accept the reimbursement rates at Landmark that Steward was offering, and otherwise operated within its rights in order to promote its business interests.

Now pending is a Motion to Dismiss (ECF No. 16) filed by Blue Cross pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth, the Motion to Dismiss is DENIED.

I. The Complaint

The facts, as alleged in the Complaint, are as follows: Steward employs a business model focused on the acquisition and development of financially distressed community hospitals, which Steward believes are better suited to provide quality medical services efficiently, as compared to more expensive teaching hospitals. (Compl. ¶¶ 17–18.) Steward also sells health insurance, and provides much of the care under those policies within its network of community hospitals. ( Id. at ¶ 19.) This model has achieved a level of success in Massachusetts, where Steward is based. ( Id. at ¶¶ 5, 18.)

In 2008, against the backdrop of the deterioration of Landmark's finances, the Providence County Superior Court appointed a special master to oversee Landmark's operations (the “Special Master”).¹ ( Id. at ¶ 21.) In February 2011, the Special Master sought a potential buyer to acquire Landmark as a means of resolving Landmark's ongoing fiscal woes. ( Id. at ¶ 24.) In May 2011, Steward submitted a bid and the Special Master recommended that it be accepted. ( Id.) Steward's plan for Landmark involved investing approximately 35 million dollars in capital improvements and physician recruitment, and using Landmark as a base from which to offer limited network insurance plans, as it had done in Massachusetts. ( Id. at ¶ 26.) To bolster Landmark's precarious financial situation, Steward extended Landmark a five million dollar line of credit. ( Id.)

Steward alleges that its proposal to acquire Landmark triggered a series of anticompetitive steps by Blue Cross aimed at blocking Steward's entry into the Rhode Island market. The first of these steps, Steward alleges, took place when Blue Cross filed an objection with the Special Master to Steward's proposal. ( Id. at ¶ 25.) Despite the objection, however, Steward and the Special Master executed an asset purchase agreement in June 2011 (the “Purchase Agreement”).² ( Id.)

Following execution of the Purchase Agreement, Steward began negotiating contracts with third parties. In September and October 2011, Steward and Blue Cross exchanged proposals for reimbursement rates that Blue Cross would pay for services rendered to its subscribers at Landmark. ( Id. at ¶ 28.)

As these negotiations were ongoing, a separate storyline was unfolding in the Rhode Island legislature. In October 2011, Steward filed an application pursuant to the Rhode Island Hospital Conversion Act (the “Hospital Conversion Act”) for permission to acquire Landmark. ( Id. at ¶ 29.) In January 2012, as the Hospital Conversion Act filing was pending, a bill was introduced in both houses of the state legislature that would have had a significant bearing on Landmark's plans to operate in Rhode Island. That bill proposed to eliminate a provision of state law barring any owner of a for-profit hospital from converting more than one non-profit Rhode Island hospital to for-profit status in any three-year period—a change that would have enabled Steward to acquire other facilities and implement its community hospital care model in Rhode Island. ( Id. at ¶ 31.) Blue Cross engaged in an intense lobbying effort against passage of the bill, including offering testimony before the House Corporations Committee. ( Id. at ¶ 32.)

In May 2012, the Rhode Island Department of Health (the “Department of Health”) and the State Attorney General each approved Steward's Hospital Conversion Act application. ( Id. at ¶ 35.) Just prior to this approval, however, Blue Cross had filed an application with the Department of Health to make a “material plan modification” to remove Landmark from its provider network. ( Id. at ¶ 36.)

Meanwhile, negotiations between Steward and Blue Cross regarding reimbursement rates at Landmark were ongoing. Steward alleges that it offered to accept rates that were 5% less than the average rates Blue Cross was paying to other providers in Rhode Island. ( Id. at ¶ 37.) Blue Cross declined the proposal.

Blue Cross' hardline stance at the bargaining table, Steward alleges, was part and parcel with its ongoing attempt to financially destabilize Landmark and undermine Steward's entry into the Rhode Island market. In furtherance of these aims, Steward alleges, in July 2012, while Blue Cross' application to remove Landmark from its provider network was still pending before the Department of Health, Blue Cross sent out letters to its subscribers and doctors informing them that Landmark was likely to be removed from its network. ( Id. at ¶ 39.) These letters led to a decline in the number of patients seeking treatment at Landmark and a resulting decline in revenues. ( Id. at ¶ 40.) At approximately the same time, Blue Cross stopped making reimbursement payments to Landmark, further undermining Landmark's financial viability. ( Id. at ¶ 39.) In September 2012, facing an increasingly desperate financial situation, the Special Master sought permission from the state court to drop Landmark's lawsuit against Blue Cross, previously filed in March 2011, in exchange for Blue Cross recommencing payments. ( Id. at ¶ 42.)

Steward alleges that Blue Cross' anticompetitive conduct went beyond direct interference with the Landmark acquisition. More specifically, Steward alleges that Blue Cross discouraged third parties, including Thundermist Health Center, from dealing with Steward, and indicated to these third parties that dealing with Steward might jeopardize their relationships with Blue Cross. ( Id. at ¶ 41.)

Likewise, in May 2012, Blue Cross notified Steward that it would not renew its contracts with St. Anne's Hospital, a Steward-owned facility in Fall River, Massachusetts on the Rhode Island border (“St. Anne's”). ( Id. at ¶ 45.) Because St. Anne's was located in Massachusetts, once Blue Cross removed it from its provider network, Rhode Island Blue Cross subscribers could obtain services at St. Anne's only by using the “BlueCard Program.” ³ ( Id. at ¶ 46.) When its Rhode Island subscriberswould obtain services at St. Anne's, Blue Cross would reimburse St. Anne's at rates negotiated by Blue Cross & Blue Shield of Massachusetts, plus a BlueCard fee. ( Id. at ¶ 47.) In an effort to renew an agreement with Blue Cross for St. Anne's, Steward offered to continue reimbursement at the Blue Cross & Blue Shield of Massachusetts rates, less the BlueCard fee that Blue Cross was currently paying. ( Id. at ¶ 48.) Blue Cross declined. ( Id.)

At the same time, Steward alleges, Blue Cross began falsely telling doctors that St. Anne's reimbursement rates were unnecessarily high, leading doctors to believe that referring patients to St. Anne's would jeopardize their entitlement to certain savings that Blue Cross pays to doctors utilizing cost-efficient providers. ( Id. at ¶ 49.) The net effect of these actions was to decrease patient and revenue flow at St. Anne's. ( Id. at ¶ 51.)

After further efforts to negotiate a deal with Blue Cross for reimbursement rates at Landmark failed, Steward announced on September 27, 2012 that it was terminating its effort to acquire Landmark. ( Id. at ¶ 43.) Steward now brings claims for actual and attempted monopolization and monopsonization ⁴ in violation of § 2 of the Sherman Act and § 6–36–5 of the Rhode Island Antitrust Act, as well as for tortious interference with existing and prospective contractual relations. Blue Cross has moved to dismiss...