United States: HealthAmerica v. Susquehanna Health System Joint Ventures and Copperweld: A New Perspective

On July 21, 2003, the U.S. District Court for the Middle District of Pennsylvania ruled that an alliance of two separately owned hospitals operating as a single entity were incapable of conspiring to violate the antitrust laws. The case is notable for its application of the Copperweld doctrine. Under Copperweld, a corporation and its wholly-owned subsidiary are legally incapable of conspiring under the Sherman Act. In analyzing joint ventures and other combinations Courts have applied Copperweld in various ways. Some courts have focused on structure to determine if the parties can be deemed a single economic actor incapable of conspiring, and others have focused on operations to determine single entity status. In Susquehanna, the court focused on operations rather than structure, and applied the Copperweld doctrine to permit joint pricing between two hospital systems that maintained separate legal identities and retained the ownership of all of their respective assets.

The opinion provides the following background. In 1994 the two hospital systems in North Central Pennsylvania -- Providence Health System and North Central Pennsylvania Health System -- created Susquehanna Health System. Susquehanna was established as the parent company, with Providence and North Central as the sole corporate members. The Board of Directors consists of 18 directors, half of whom were appointed by each member. The alliance agreement, among other things: (1) gives Susquehanna the authority to manage and operate both hospital systems (including the establishment of overall policy, oversight of the management, long range planning, coordination of managed care plans, responsibility for programs and services and responsibility for the unified budget); (2) permits each party to retain its respective separate legal identity and the ownership of all of its tangible and intangible assets; (3) permits each member (with certain exceptions) to be governed by its respective Board of Directors; and (4) prohibits members from terminating or initiating any program or service without the prior approval of Susquehanna.

HealthAmerica and other insurance companies sued Susquehanna claiming that Susquehanna successfully demanded price increases from health plans that resulted in a 21% increase in hospital rates. Plaintiffs’ complaint contended, among other things, that the parties’ combination was illegal and in violation of Section 1 of the Sherman Act, which make certain agreements (e.g., price-fixing agreements) between separate entities illegal. The hospitals argued that they were no longer two separate entities and therefore legally incapable of conspiring, as they had integrated to such a degree that Susquehanna, pursuant to the Supreme Court’s opinion in Copperweld, constituted a single entity incapable of conspiring or engaging in concerted activity. Plaintiffs disagreed, arguing that the parties’ arrangement was tantamount to an illegal joint operating arrangement by separate independent entities.

The court concluded that Copperweld applied to the alliance, stating that "substance, not form, should determine whether a separately incorporated entity is capable of conspiring under Section 1" of the Sherman Act. The court held that the defendants’ corporate structure did not prohibit a finding of single entity status because Susquehanna has: (1) "substantial and significant control" over the affiliate hospitals; (2) "sole authority for the management of the hospitals, including establishing overall policy, coordination of programs and services and the preparation and implementation of a unified budget" (e.g., a member hospital must obtain Susquehanna’s approval before acquiring, selling, leasing, or transferring property); and (3) combined the medical staffs of the member hospitals under a centralized system of human resources (sharing one risk manager, one facilities manager, one chief nursing officer, one pension plan, one set of administrative policies, one health insurance program, etc.). The court stated that "substantial authority is centralized in Susquehanna and it is readily apparent that defendants’ actions are guided ‘not by two separate corporate consciousnesses, but one.’" It felt, therefore, that the defendants "shared common objectives and have complete unity of interests."

The Susquehanna decision is of note in several respects. First, it places a greater emphasis on function rather than form. Second, it supports the extension of the Copperweld doctrine to situations other than that of parents and wholly owned subsidiaries, acknowledging that the doctrine could apply to corporations that share no common corporate ownership, provided that the two separate entities act as a single corporation.