[Federal Register Volume 63, Number 190 (Thursday, October 1, 1998)]
[Notices]
[Pages 52764-52771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26034]


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DEPARTMENT OF JUSTICE

Antitrust Division


United States of America v. Medical Mutual of Ohio; Proposed 
Final Judgment and Competitive Impact Statement

    Notice is hereby given pursuant to the Antitrust Procedures and 
Penalties Act, 15 U.S.C. Section 16 (b) through (h), that a proposed 
Final Judgment, Stipulation and Competitive Impact Statement have been 
filed with the United States District Court for the Northern District 
of Ohio, in United States of America v. Medical Mutual of Ohio, Civil 
Action No. 1:98-CV-2172. On Sept. 23, 1998, the United states filed a 
Complaint against Medical Mutual of Ohio alleging that Medical Mutual 
had unreasonably restrained competition in the greater Cleveland area 
in violation of Section 1 of the Sherman Act, 15 U.S.C. 1. The proposed 
Final Judgment, filed the same time as the Complaint, restrains Medical 
Mutual from enforcing a Most Favored Rates requirement and from 
requiring its participating hospitals in the Cleveland area to disclose 
to Medical Mutual the rates such hospitals offer or charge any payers. 
Copies of the Complaint, proposed Final Judgment and Competitive Impact 
Statement are available for inspection at the Department of Justice in 
Washington, DC in Room 400, 325 Seventh Street, NW., and at the Office 
of the Clerk of the United States District Court for the Northern 
District of Ohio, Ohio.
    Public comment is invited within 60 days of the date of this 
notice. Such comments, and responses thereto, will be published in the 
Federal Register and filed with the Court. Comments should be directed 
to Gail Kursh, Chief, Healthcare Task Force, 325 Seventh Street, NW., 
Room 404, Antitrust Division, Department of Justice, Washington, DC 
20530, (telephone (202) 307-5799).
Rebecca P. Dick,
Director of Civil Non-Merger Enforcement.

Stipulation for Entry of Final Judgment

    It is stipulated by and between the undersigned parties, by their 
respective attorneys, that:
    1. This Court has jurisdiction over the subject matter of this 
action and over both of the parties, and venue of this action is proper 
in the Northern District of Ohio.
    2. The parties consent that a Final Judgment in the form attached 
may be filed and entered by the Court, upon the motion of either party 
or upon the Court's own action, at any time after compliance with the 
requirements of the Antitrust Procedures and Penalties Act (15 U.S.C. 
16), and without further notice to any party or other proceedings, 
provided that Plaintiff has not withdrawn its consent, which it may do 
at any time before the entry of the proposed Final Judgment by serving 
notice thereof on Defendant and by filing that notice with the Court.
    3. If Plaintiff withdraws its consent, or if the proposed Final 
Judgment is not entered pursuant to the terms of this Stipulation, this 
Stipulation shall be of no effect whatsoever, and the making of this 
Stipulation shall be without prejudice to either party in this or in 
any other proceeding.
    4. Defendant agrees to be bound by the provisions of the proposed 
Final Judgment pending its approval by the Court.

Dated: ________________.


[[Page 52765]]


    For Plaintiff:
Joel I. Klein,
Assistant Attorney General.
Donna E. Patterson,
Deputy Assistant Attorney General.
Rebecca P. Dick,
Director of Civil Non-Merger Enforcement.
Gail Kursh,
Chief, Health Care Task Force.
David C. Jordan,
Assistant Chief, Health Care Task Force.
Paul J. O'Donnell,
Jean Lin,
Abdre Barlow,
Frederick Young,
Attorneys, Antitrust Division, Department of Justice, 325 7th Street, 
NW., Washington, DC 20530, (202) 616-5933.
Emily M. Sweeney,
United States Attorney, Northern District of Ohio, 1800 Bank One 
Center, 600 Superior Ave., E., Cleveland, Ohio 44114-2600, (216) 622-
3600.
    For Defendant:
Wayne C. Dabb, Jr.,
Gerald A. Connell,
Baker & Hostetler, LLP, 3200 National City Center, 1900 East Ninth 
Street, Cleveland, OH 44114-3485, (216) 621-0200.

Final Judgment

    Plantiff, United States of America, filed its Complaint alleging 
violations of Section 1 of the Sherman Act, 15 U.S.C. 1, on September 
23, 1998. Plaintiff and Defendant, by their respective attorneys, have 
consented to the entry of this Final Judgment without trail or final 
adjudication of any issue of fact or law. This Final Judgment shall not 
be evidence against any party or deemed an admission by any party of 
any issue of fact or law, nor shall it be deemed a determination that 
any violation of law has occurred. Therefore, before the taking of any 
trial testimony, without trial of any issue of fact or law, and upon 
consent of the parties, it is
    Ordered, adjudged, and decreed, as follows:

I. Jurisdiction

    This Court has jurisdiction over the subject matter of this action 
and over each of the consenting parties. The Complaint states a claim 
upon which relief may be granted under Section 1 of the Sherman Act, 15 
U.S.c. 1.

II. Definitions

    As used herein, the term:
    (A) Cleveland Region means Ashtabula, Cuyahoga, Geauga, Lake, 
Lorain, Medina, and Wayne Counties of the State of Ohio;
    (B) Defendant of Medical Mutual means Medical Mutual of Ohio, is 
subsidiaries, divisions, successors, assigns, and each other entity 
directly or indirectly owned or controlled by it;
    (C) Hospital means any entity in the Cleveland Region licensed to 
provide acute care in-patient services;
    (D) Hospital Agreement means any agreement between Medical Mutual 
and a Hospital in the Cleveland Region for the provision of in-patient 
or out-patient hospital services to Medical Mutual's subscribers, and 
all amendments and additions to any such agreements;
    (E) Most Favorable Rates Requirement means any policy, practice, 
rule, or contractual provision which (1) requires a Participating 
Hospital to charge any Third Party Payer as much as or more than the 
rate charged to Medical Mutual by such Participating Hospital, or (2) 
requires a Participating Hospital to charge Medical Mutual rates equal 
to or lower than the lowest rate it charges any Third Party Payer;
    (F) Participating Hospital means any Hospital in the Cleveland 
Region that has entered into a Hospital Agreement with Medical Mutual;
    (G) Third Party Payer means any non-governmental entity, other than 
Medical Mutual, that pays for all or part of any expense for health 
care services provided by a Hospital to another person or group of 
persons.

III. Applicability

    This Final Judgment applies to Medical Mutual and all other persons 
(including all Participating Hospitals) in active concert or 
participation with it who have received actual notice of the Final 
Judgment by personal service or otherwise.

IV. Prohibited Conduct

    Medical Mutual is enjoined and restrained from:
    (A) Adopting, maintaining, or enforcing in the Cleveland Region a 
Most Favorable Rates Requirement or any policy, practice, rule, or 
contractual provision having the same purpose or effect;
    (B) Adopting, maintaining, or enforcing any policy, practice, or 
agreement that requires a Participating Hospital to disclose to Medical 
Mutual, directly or indirectly, through audit or any other means, the 
rates such Hospital offers or charges any Third Party Payer(s), except 
as necessary for coordination of benefits in connection with specific 
claims.

V. Permitted Activities

    Provided that such activities do not violate any provision of 
Section IV, nothing herein shall be construed to prohibit Medical 
Mutual from:
    (A) Negotiating for or obtaining rate arrangements, reimbursement 
levels, or payment methodologies with any Participating Hospital, 
whether on an overall or product line basis, including negotiating for 
or obtaining the lowest rate(s) or largest discount(s) from any 
Participating Hospital;
    (B) Receiving or accepting information regarding the rates a 
Hospital offers or charges any Third Party Payer so long as the 
Hospital provides such information without any request from Medical 
Mutual and without any offer or promise of consideration for such 
information from Medical Mutual;
    (C) Establishing preferred provider networks, other forms of 
provider panels, or alternative delivery systems;
    (D) Recruiting hospitals who have contracts with or are 
participating in hospital networks or panels of Third Party Payers;
    (E) Having different rate arrangements, reimbursement levels, or 
payment methodologies for different product lines, for different 
hospitals, or for different networks or panels of hospitals;
    (F) Declining or refusing to contract or do business with any 
hospital, or terminating any hospital agreement.

VI. Nullification

    All Most Favorable Rates Requirements in the Cleveland Region are 
hereby declared null and void and shall impose no obligation on any 
Participating Hospital.

VII. Compliance Measures

    Medical Mutual shall:
    (A) Distribute, within 60 days of the entry of this Final Judgment, 
a copy of this Final Judgment to: (1) all of Medical Mutual's officers 
and trustees; and (2) all of Medical Mutual's employees and agents who 
are responsible for negotiating, approving, disapproving, or enforcing 
any Hospital Agreement, except employees and agents primarily involved 
in the administration of payments to and collections from Hospitals;
    (B) Distribute in a timely manner a copy of this Final Judgment to 
any officer, trustee employee, or agent who succeeds to a position 
described in Section VII(A);
    (C) Obtain from each present of future officer, trustee, employee, 
or agent designated in Section VII(A), within 60 days of entry of this 
Final Judgment or of the person's succession to a designated position, 
a written certification that he or she: (1) has read, understands, and 
agrees to abide by the terms of this Final Judgment; and (2) has

[[Page 52766]]

been advised and understands that his or her failure to comply with 
this Final Judgment may result in conviction for criminal contempt of 
court;
    (D) Maintain a record of persons to whom the Final judgment has 
been distributed and from whom, pursuant to Section VII(C), the 
Certification has been obtained;
    (E) Distribute, within 60 days of the entry of this Final Judgment, 
a copy of this Judgment, by first-class mail, to all currently 
Participating Hospitals;
    (F) Provide a copy of this Final Judgment to any Hospital in the 
Cleveland Region not covered by Section VII(E) with which Medical 
Mutual enters into negotiations for a Hospital Agreement after the 
effective date of this Judgment;
    (G) Promptly report to the Plaintiff any violation of the Final 
Judgment.

VIII. Certification

    (A) Within 75 days of the entry of this Final Judgment, Medical 
Mutual shall certify to the Plaintiff that it has: (1) distributed the 
Final Judgment in accordance with Section VII(A) and (E); and (2) 
obtained certifications in accordance with Section VII(C).
    (B) For ten years after the entry of this Final Judgment, on or 
before its anniversary date, Medical Mutual shall file with the 
Plaintiff an annual Declaration as to the fact and manner of its 
compliance with the provisions of Sections IV, VI, and VII.

IX. Plaintiff's Access to Information

    (A) To determine or secure compliance with this Final Judgment, 
duly authorized representatives of the Plaintiff, upon written request 
of the Assistant Attorney General in charge of the Antitrust Division, 
and on reasonable notice to Medical Mutual made to its principal 
office, shall be permitted, subject to any legally recognized 
privilege:
    (1) Access during Medical Mutual's office hours to inspect and copy 
all documents in the possession or under the control of Medical Mutual, 
which may have counsel present, relating to any matters contained in 
this Final Judgment; and
    (2) Subject to the reasonable convenience of Medical Mutual and 
without restraint or interference from it, to interview officers, 
trustees, employees, or agents of Medical Mutual, who may have Medical 
Mutual's counsel and/or their own counsel present, regarding such 
matters.
    (B) Upon the written request of the Assistant Attorney General in 
charge of the Antitrust Division made to Medical Mutual's principal 
office, Medical Mutual shall submit such written reports, under oath if 
requested, relating to any matters contained in this Final Judgment as 
may be reasonably requested, subject to any legally recognized 
privilege.
    (C) Medical Mutual shall have the right to be represented by 
counsel in any process under this Section.
    (D) No information or documents obtained by the means provided in 
Section IX shall be divulged by the Plaintiff to any person other than 
duly authorized representatives of the Executive Branch of the United 
States, except in the course of legal proceedings to which the United 
States is a party, or for the purpose of securing compliance with this 
Final Judgment, or as otherwise required by law.
    (E) If at the time information or documents are furnished by 
Medical Mutual to Plaintiff, Medical Mutual represents and identifies 
in writing the material in any such information or documents to which a 
claim of protection may be asserted under Rule 26(c)(7) of the Federal 
Rules of Civil Procedure, and Medical Mutual marks each pertinent page 
of such material, ``subject to claim of protection under Rule 26(c)(7) 
of the Federal Rules of Civil Procedure,'' then 10 days notice shall be 
given by Plaintiff to Medical Mutual prior to divulging such material 
in any legal proceeding (other than a grand jury proceeding) to which 
Medical Mutual is not a party.
    (F) Nothing in this Final Judgment prohibits the Plaintiff from 
using any other investigatory method authorized by law.

X. Further Elements of the Final Judgment

    (A) This Final Judgment shall expire ten years from the date of its 
entry.
    (B) Jurisdiction is retained by this Court for the purpose of 
enabling either of the parties to this Final Judgment, but no other 
person, to apply to this Court at any time for further orders and 
directions as may be necessary or appropriate to carry out or construe 
this Final Judgment; to modify or terminate any of its provisions, 
based on changed circumstances of fact or law warranting such action; 
to enforce compliance; or to punish violations of its provisions.
    (C) The Court finds that this Final Judgment is in the public 
interest.

----------------------------------------------------------------------
United States District Judge

    Dated: ________________.

Competitive Impact Statement

    Pursuant to Section 2(b) of the Antitrust Procedures and Penalties 
Act, 15 U.S.C. 16(b)-(h), the United States submits this Competitive 
Impact Statement to provide the information necessary to enable the 
Court and the public to evaluate the proposed Final Judgment that the 
parties have jointly filed.

I. Nature and Purpose of This Proceeding

    Simultaneous with the filing of this Statement, the United States 
filed a civil antitrust complaint against Medical Mutual of Ohio 
(``Medical Mutual''), the largest health care insurer in Ohio, for 
unreasonably restraining competition in the hospital services and 
commercial health plan markets in violation of Section 1 of the Sherman 
Act, 15 U.S.C. 1. The Complaint alleges that for over ten years Medical 
Mutual required that any hospital wishing to do business with it in the 
``Cleveland Region,'' a seven-county area consisting of Cuyahoga, 
Ashtabula, Geauga, Lake, Lorain, Medina, and Wayne Counties, agree to a 
``Most Favorable Rates'' (``MFR'') clause; that this MFR clause had the 
effect of requiring those hospitals to charge Medical Mutual's 
competitors significantly more than they charged Medical Mutual or pay 
substantial penalties; that the MFR clause stifled the development of 
innovative and less costly health plans; and that, as a result, 
businesses and consumers in the Cleveland Region paid higher than 
competitive prices and were deprived of innovative and less costly 
alternatives for health care services.
    The parties have stipulated that the proposed Final Judgment may be 
entered after compliance with the requirements of the Antitrust 
Procedures and Penalties Act (15 U.S.C. 16), and that Medical Mutual 
shall be bound by the provisions of the proposed Final Judgment pending 
the Court's approval. The parties also agreed that the United States 
may withdraw its consent at any time prior to the entry of the Final 
Judgment by serving notice of that withdrawal on Medical Mutual and by 
filing that notice with the Court. Entry of the proposed Final Judgment 
will terminate this action, except that the Court will retain 
jurisdiction over the matter for any further proceedings that may be 
required to interpret, enforce, or modify the Judgment or to punish 
violations of any of its provisions. This Court is required by 15 
U.S.C. 16(e) to determine whether the proposed Final Judgment is in the 
public interest.

II. Practices Giving Rise to the Alleged Violation

    Medical Mutual, a non-for-profit mutual insurance company organized

[[Page 52767]]

under Ohio law, is by far the largest commercial health care insurer in 
the Cleveland Region. With more than 730,000 enrollees there, it covers 
approximately 36% of the commercially insured population and is roughly 
twice the size of its closest competitor. Medical Mutual also accounts 
for approximately 25 to 30% of commercial payments to local hospitals, 
and nearly all of these hospitals depend on Medical Mutual for the 
largest share of their commercial business.

 A. Medical Mutual's MFR Clause

    Starting in 1986, Medical Mutual required a MFR clause as a 
precondition for entering into an agreement with any hospital in the 
Cleveland Region. Those provisions, in effect, compelled the hospitals 
to charge non-governmental health plans with a lower total dollar 
volume of business than Medical Mutual rates equal to or greater than 
the rates the hospital charged Medical Mutual. Not content with 
ensuring that it had the best rate, Medical Mutual--through its MFR 
clause--also required that the hospitals maintain certain percentage 
differentials between the rates charged Medical Mutual and all other 
smaller commercial payers. Those differentials provided Medical Mutual 
with a cost advantage of 15-30% over its competitors in the purchase of 
hospital services.
    Medical Mutual's MFR clause created such rate differentials in 
several ways. First, it required that the hospitals charge all other 
payers with less volume at the hospital at least as much as they 
charged Medical Mutual for services to Medical Mutual's indemnity 
subscribers. Since Medical Mutual typically paid hospitals 15-20% less 
for services provided to its managed care subscribers, pegging the MFR 
clause to its indemnity prices automatically gave Medical Mutual a 
substantial cost advantage over its managed care competitors. In 
effect, the MFR created a buffer of at least 15-20% between Medical 
Mutual's managed care costs and the managed care costs of its rivals.
    Second, starting in 1990, Medical Mutual began insisting that the 
hospitals charge all other health plans 1-10% more than they charged 
Medical Mutual for its indemnity plan. This requirement not only 
protected Medical Mutual's indemnity plan against competition, but also 
further widened the cost differential between Medical Mutual's managed 
care plans and those of its rivals. Hospitals were required to charge 
rival payers up to 30% more than they charged Medical Mutual for the 
same services.
    Finally, while Medical Mutual reluctantly agreed in certain 
instances to a ``like-product'' MFR clause in which rates were compared 
on a product-line basis (indemnity to indemnity, managed care to 
managed care), it still sought to retain the cost advantage that the 
traditional MFR clause had given it. It did so by explicitly requiring 
hospitals with such agreements to charge all other plans with less 
total volume 10-15% more than they charged Medical Mutual.

B. Medical Mutual's Enforcement of the MFR Clause

    Medical Mutual vigorously enforced its MFR clause--and the rate 
differentials--with the express purpose of protecting Medical Mutual 
against competition and significantly raising its competitor's hospital 
costs. Typically, if a rival player received discounts greater than 
those given to Medical Mutual, the auditor would multiply the 
percentage difference by Medical Mutual's total payments to that 
hospital. Thus, a rate 10% lower than Medical Mutual's would yield a 
$200,000 penalty if Medical Mutual's total business for the relevant 
contract year at that hospital was as little as $2 million. As Medical 
Mutual accounted for the largest share of nearly every hospital's 
commercial business--dwarfing the volume of most other payers in the 
market--the MFR penalties could be quite large and were often grossly 
disproportionate to the benefit received by the rival plan, i.e., the 
amount that would have allowed the hospital to avoid violating the MFR 
provision.\1\
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    \1\ For example, in 1991, Medical Mutual assessed a penalty of 
$342,916 against St. John West Shore Hospital for giving a rival 
payer a discount below Medical Mutual totaling $13,831; and in 1992, 
it assessed a penalty of $417,373 against Fairview Hospital System 
(then known as HealthCleveland) for giving a different rival payer a 
discount below Medical Mutual's rates totaling $30,781.
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    Even more significant was Medical Mutual's requirement that MFR 
compliance audits be conducted retrospectively--i.e., after the other 
payers had reimbursed the hospital for its enrollees' claims. Concerned 
about the ability of competitors to lower their hospital costs through 
better management of hospital services, Medical Mutual decided--despite 
protests of unfairness by both hospitals and its own consultants--that 
the auditor was to determine the rates charged other payers, and thus 
violations of the MFR clause, retrospectively, i.e., it was to look at 
actual reimbursement levels and not the contractual rate. By doing so 
it was able to impose penalties in those situations where the 
contractual discounts did not violate the MFR clause but where the 
effective discount, after factoring case mix and utilization 
management, was below the MFR rate. As one hospital complained to 
Medical Mutual: ``[under] this clause we could find ourselves in 
violation of the Favored Nations provision if a per diem payer through 
strong utilization review efforts reduced their length of stay and also 
their aggregate payments.'' In effect, the hospital would be penalized 
for a rival payer's greater efficiency.

C. Anticompetitive Effects of Medical Mutual's MFR Clause

    As alleged in detail in the Complaint, Medical Mutual's MFR 
provision harmed competition and reduced consumer welfare in the 
hospital services and hospital insurance markets in the Cleveland 
Region by increasing the costs of hospital services for other plans, 
businesses, and consumers, and by discouraging innovation in the design 
of health insurance plans and the delivery of hospital services.
1. Medical Mutual's MFR Provision Substantially Increased the Cost of 
Hospital Services for Rival Plans
    Because the MFR provisions required that hospitals charge Medical 
Mutual's competitors substantially more than they charged Medical 
Mutual or suffer significant penalties, various hospitals and hospitals 
systems, including MetroHealth, the Cleveland Clinic, University, 
Meridia, Lake, Marymount, Southwest General, Mt Sinai, and Fairview, 
were deterred from offering significant additional discounts--discounts 
up to 20% or more--to competing health plans. The result has been to 
increase the cost of hospital services to Medical Mutual's rivals and, 
ultimately to consumers.\2\
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    \2\ Indeed, where the MFR clause has been inapplicable--whether 
due to an exemption or for some other reason--hospitals have 
demonstrated a willingness to give lower rates to Medical Mutual's 
rivals. Thus, when Kaiser Permanente became the largest payer at the 
Cleveland Clinic in 1994, and therefore exempt from the MFR 
provision, its per case rate for cardiac services alone declined by 
$2,000. Similarly, when Total Health Care and other payers handling 
Medicare and Medicaid enrollees obtained an exemption from the MFR 
clause, University Hospital and MetroHealth gave those plans rates 
below the MFR rate. Starting in 1996, when it entered the Medicaid 
and Medicare market, Medical Mutual stopped granting such exemptions 
and, as a result, those plans have been required to pay higher rates 
for hospital services.
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    In addition, Medical Mutual's aggressive enforcement of the MFR 
clause discouraged hospitals from offering rates to rival plans even 
approaching the MFR rate. Since the differences between payment 
methods,

[[Page 52768]]

patient mix, and case management, combined with Medical Mutual's 
retrospective review of actual reimbursement levels, made it difficult, 
if not impossible, for a hospital to accurately predict whether a 
contract would violate the MFR clause, hospitals simply refused to 
price anywhere near the MFR rate, routinely demanding rates from rival 
plans significantly above the MFR rate in order to protect against what 
could be a financially devastating penalty.
2. Hospitals and Rival Plans Entered Into Costly Contractual 
Arrangements Designed to Avoid Medical Mutual's MFR Provision
    In addition to discouraging hospitals from offering favorable 
prices to rival payers. Medical Mutual's MFR clause forced hospitals to 
manipulate their contractual arrangements with other payers to avoid 
incurring a MFR penalty. The effect was to increase the cost of 
hospital services to Medical Mutual's competitors and ultimately to 
consumers.
    For example, some hospitals insisted on using `'stop-loss'' 
provisions in their contracts with other payers to avoid MFR penalties. 
These clauses typically required their party payers to reimburse the 
hospital at a specified percentage of charges for claims that lay 
outside predetermined thresholds. MetroHealth Hospital, for example, 
insisted on such MFR-related ``stop-loss'' provisions in 90% of its 
contracts. University Hospital and Fairview Health System have similar 
provisions in a number of their contracts as well.\3\ The additional 
costs due to these stop-loss provisions were borne by Medical Mutual's 
competitors and, ultimately, by the consumer.
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    \3\ Even those hospitals that would have insisted on ``stop-
loss'' provisions were there no MFR clause (to avoid the financial 
risk associated with catastrophic or high acuity cases) demanded 
lower ``stop-loss'' thresholds because of the MFR clause. By 
lowering the ``stop-loss'' threshold, the hospital ensured that more 
services were priced above the competitive rate--increasing the 
total cost of hospital care. For example, the Columbia/HCA hospitals 
(St. Vincent Charity Hospital, St. Luke's Medical Center, and St. 
John Westshore Hospital) would have agreed to higher ``stop-loss'' 
thresholds but for the MFR provisions.
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    Similary, some hospitals required payers to make payments over and 
above contracted rates to avoid a MFR penalty or to reimburse the 
hospital for any penalty incurred due to the MFR clause. Both 
mechanisms had the effect of raising the costs of Medical Mutual's 
rivals and, ultimately, to consumers. For example, Mt. Sinai Medial 
Center and CIGNA entered into ``reconciliation agreements'' beginning 
in 1992 which required CIGNA to reimburse Mt. Sinai any amounts 
necessary to avoid a MFR violation. CIGNA made retrospective payments 
to Mt. Sinai of over $600,000 for the years 1990-1992 alone so that Mt. 
Sinai could avoid over $4 million in MFR penalties that it would 
otherwise have owed to Medical Mutual.
    Nor was Mt. Sinai the only hospital to do so. The Cleveland Clinic 
has a reconciliation agreement with Kaiser in the event its volume ever 
falls below Medical Mutual's volume. MetroHealth demanded that various 
payers, including Prudential, Aetna, QualChoice, and Personal Physician 
Care, make additional payments if MetroHealth's own MFR audit suggested 
a violation. Meridia Health System required some payers to reimburse if 
for any amount paid for a MFR violation University Hospital's contracts 
with Prudential required Prudential to make additional payments of 
$409,232.82 in 1996 alone.
    Hospitals also demanded to re-negotiate existing agreements when 
faced with potential MFR violations. MetroHealth Hospital, for 
instance, requested HealthStar to re-negotiate rates in the midst of 
its 1993-94 contract because the patient mix was not as anticipated and 
would have caused a MFR violation, and required that Aetna agree to re-
negotiate its rates if a MFR violation appeared likely. Southwest 
General increased Emerald's inpatient reimbursement in the middle of 
its contact period in 1993 and in 1995 demanded to re-negotiate several 
contracts, including the contract with HMO Aetna, to avoid a MFR 
violation. In 1995, the Cleveland Clinic re-negotiated Aetna's contract 
because the Clinic's new contract with Medical Mutual generated a 
higher MFR benchmark, one requiring a 20% increase in Aetna's inpatient 
rates. Still other examples include Lake Hospital demanding that CIGNA 
re-negotiate its contract after lake paid a $225,000 MFR pentaly; 
Meridia Health System terminating a contract with Affordable Health and 
re-negotiating a new contract of substantially higher rates after 
having been found in violation of the MFR provisions; and Meridia 
entering into an agreement with United HealthCare requiring the latter 
to re-negotiate its rates if the MFR clause was violated.
    Finally, some hospitals simply terminated contacts with other 
payers when they were unable to re-negotiate terms: thus, Southwest 
General terminated its 1994 contract with CIGNA for behavioral services 
after it learned from Medical Mutual's auditor that CIGNA's 1992 
contract violated the MFR clause and CIGNA refused to re-negotiate' 
Lake Hospital terminated its contract with Prudential because of the 
MFR and lost is contract with CostLogics after a 1992 MFR audit 
prompted lake to request a substantial rate increase; Lakewood lost its 
HMO Agreement with Metlife in 1992 because of the MFR; and University 
Hospital and Mutual of Omaha agreed to higher rates when Mutual of 
Omaha declined University's proposal to incorporate a reconciliation 
provision in their contract.
    Medial Mutual has been well aware of the significant effect the MFR 
had on its rivals's costs, the demands by hospitals for retroactive 
payments from its rivals, the re-negotiation of contracts to increase 
existing rates, and even the termination of such contracts. Indeed, its 
recent contracts expressly provide that the hospital may elect, in 
order to avoid a violation of the MFR provision, to terminate, modify, 
or amend its contract with the other payer. The MFR's purpose and clear 
effect has been to increase the costs paid by other plans and, 
ultimately, by the consumer.
3. Medical Mutual's MFR Provision Hindered Innovation in the Delivery 
of Health Care Insurance
    Medical Mutual's MFR provision also discouraged the development of 
innovative approaches to the efficient delivery of health insurance, 
particularly new contracting methodologies and novel health plan 
designs. Confronted by the threat posed by rival payers willing to 
invest in additional tools and resources to provide more efficient and 
better quality health care plans, Medical Mutual, through its MFR 
clause, required that all payers, regardless of utilization management, 
case mix, or other factors, pay a hospital at least as much or more 
than Medical Mutual for similar services. It a hospital's actual price 
to another payer was below the MFR benchmark for any reason, including 
more efficient management, Medical Mutual would assess a penalty 
against the hospital. The result was to force hospitals to raise all 
rates to Medical Mutual's level (or above), removing the principal 
incentive for other payers to invest in more efficient case management. 
Unable to obtain the benefits of more efficient case management, rival 
payers declined to invest in less costly methods and consumers were 
deprived of the choice of alternative plans.
    Medical Mutual's MFR provisions also created a significance 
disincentive to the development of low-cost, narrow-panel health care 
plans in the Cleveland Region, thus depriving consumers of the choice 
of such plans. By limiting its

[[Page 52769]]

enrollees to fewer hospitals, a small-panel plan provides higher volume 
to each of the participating hospitals in exchange for more aggressive 
discounts from the hospitals. In the Cleveland Region, however, Medical 
Mutual's MFR clause discouraged hospitals from offering a discount 
large enough to make such plans marketable.
    Medical Mutual's MFR provisions also discouraged the use of 
``carve-out'' contracts--contracts of such speciality services as 
obstetrics, organ transplants, or invasive cardiology. These specialty 
contracts can reduce hospital costs for payers and consumers by 
allowing a payer to contracts for those services in which the hospital 
has developed a particular expertise and by allowing the hospital to 
more efficiently use its resources. Medical Mutual's MFR provisions, 
however, discouraged hospitals in the Cleveland Region from entering 
into such specialty contracts by requiring that those payers be charged 
at least as much as Medical Mutual for such services. For examples, 
both University Hospital and the Cleveland Clinic requested exemptions 
from the MFR clause in order to enter into such carve-out contracts. 
University for both soft tissue transplant and obstetrics services; the 
Clinic for certain cardiology services. Medical Mutual refused them 
both, and neither participated in the program because of the 
significant penalties they would have incurred.

III. Explanation of the Proposed Final Judgment

    The parties have stipulated that the Court may enter the proposed 
Final Judgment after compliance with the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16(b)-(h).

A. Scope of the Proposed Final Judgment

    Section III of the proposed Final Judgment provides that the Final 
Judgment shall apply to Medical Mutual and all other persons (including 
Medical Mutual's Participating Hospitals \4\) in active concert or 
participating with it who shall have received actual notice of the 
Final Judgment by personal service or otherwise.
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    \4\ Participating Hospitals are all hospitals in the Cleveland 
Region that have hospital agreements with Medical Mutual.
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B. Prohibitions and Obligations

    Section IV sets forth the conduct prohibited by the Final 
Judgment.\5\ Section IV(A) enjoins and restrains Medical Mutual from 
adopting, maintaining, or enforcing for the next ten years a Most 
Favorable Rates Requirement, defined as any policy, practice, rule, or 
contractual provision which (1) requires a Participating Hospital to 
charge any third party payer as much as or more than the rate charged 
to Medical Mutual by such Participating Hospital, or (2) requires a 
Participating Hospital to charge Medical Mutual rates equal to or lower 
than the lowest rate it charges any third party payer. Section IV(A) 
further enjoins and restrains Medical Mutual for a similar period from 
adopting, maintaining, or enforcing any policy, practice, rule, or 
contractual provision having the same purpose or effect.
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    \5\ While the relief here is limited to the Cleveland Region, 
the proposed Final Judgment does not foreclose the United States 
from investigating and subsequently seeking relief for comparably 
anticompetitive conduct by Medical Mutual in other geographic areas.
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    Section IV(B) enjoins Medical Mutual from adopting, maintaining, or 
enforcing any policy, practice or agreement that requires a hospital to 
disclose to Medical Mutual directly or indirectly the rates such 
hospital offers or charges any other commercial payer. This section is 
intended to prevent Medical Mutual from achieving an effect comparable 
to that of the MFR clause by compelling hospitals to disclose 
information to it or its agents regarding the rates the hospitals 
charge other payers.
    Section V lists various activities Medical Mutual may engage in so 
long as they do not violate the prohibitions of Section IV in doing so. 
These activities include negotiating rate arrangements and payment 
methodologies with hospitals, receiving information about rates charged 
others under certain conditions, establishing provider networks, 
recruiting hospitals participating in other plans, having different 
reimbursement levels for different participating hospitals or panels, 
and terminating or refusing to contract with hospitals. All such 
activities are specifically made subject to the prohibitions of Section 
IV so that they not become surrogates for the MFR clause.
    More specifically, Section V(A) permits Medical Mutual to negotiate 
for or obtain the lowest rate(s) or largest discount(s) from any 
participating hospital whether on an overall or product line basis. 
Consistent with Section IV(A)'s prohibition against Medical Mutual's 
requiring or compelling a hospital to give it the lowest rates, this 
section allows Medical Mutual to use it bargaining skills to obtain the 
lowest rates, this section allows Medical Mutual to use its bargaining 
skills to obtain the lowest rate. In addition, Section V(B) permits 
Medical Mutual to receive rate information from a Participating 
Hospital when the provision of such confidential information is purely 
voluntary and not the result of a bargain. Since the disclosure of any 
rate information, if coerced or purchased, may affect a hospital's 
willingness to discount, Section V(B) together with Section IV(B) make 
clear that Medical Mutual cannot request that a hospital disclose the 
rates it charges other payers, cannot compel a hospital to disclose 
such rates, and cannot offer consideration for such information. 
Sections IV(C) and (D) specifically allow Medical Mutual to establish 
preferred provider networks or alternative delivery systems, to recruit 
hospitals who have contracts with other payers, and to have different 
rate arrangements or payment methods for different product lines, 
hospitals or networks. These activities are least likely to violate the 
prohibitions of Section IV. Finally, in Section V(F), Medical Mutual is 
permitted to decline or to refuse to contract or do business with any 
hospital or terminate any hospital agreement. As with the rest of 
Section V, however, Section V(F) is permitted only to the extent it 
does not violate the prohibitions of Section IV. Thus, for example, 
while Medical Mutual may be permitted to terminate a hospital 
agreement, the grounds for doing so cannot violate Section IV.
    Section VI of the Final Judgment declares all Medical Mutual's MFR 
provisions null and void, making it clear that no Most Favorable Rates 
Requirement imposes any obligation on any of Medical Mutual's 
Participating Hospitals in the Cleveland Region.
    Section VII of the Final Judgment sets forth various compliance 
measures. Section VII(A) requires Medical Mutual to distribute, within 
60 days of the entry of the Final Judgment, a copy of the Final 
Judgment to: (1) all Medical Mutual officers and trustees; and (2) all 
Medical Mutual employees and agents who are responsible for 
negotiating, approving, disapproving, or enforcing any of Medical 
Mutual's hospital agreements with Participating Hospitals, excepting 
only those employees and agents primarily involved in the 
administration of payments to and collections from hospitals. Sections 
VII(B)-(D) require Medical Mutual to provide a copy of the Final 
Judgment to persons who succeed to the positions of those covered by 
VII(A), and to obtain and maintain records of present and future 
officers', trustees', agents', and

[[Page 52770]]

employees' written certifications that they have read, will abide by, 
and understand the consequences of their failure to comply with the 
terms of the Final Judgment. Sections VII(E) and (F) require Medical 
Mutual to distribute a copy of the Final Judgment to all currently 
Participating Hospitals and all other hospitals who enter into 
negotiations with Medical Mutual for a hospital agreement after the 
entry of the Final Judgment. Finally, Section VII(G) obligates Medical 
Mutual to report to the United States any violation of the Final 
Judgment.
    Section VIII obligates Medical Mutual to certify its compliance 
with the requirements of Section IV, VI, and VII of the Final Judgment. 
In addition, Section IX sets forth a series of measures by which the 
Plaintiff may have access to information needed to determine or secure 
Medical Mutual's compliance with the Final Judgment. Section X limits 
the term of the Final Judgment to ten years.

C. Entry of the Proposed Final Judgment Is in the Public Interest

    Section 2(e) of the Antitrust Procedures and Penalties Act, 15 
U.S.C 16(e), requires that the Court's entry of the proposed Final 
Judgment be in the public interest. The Act permits a court to 
consider, among other things, the relationship between the remedy 
secured and the specific allegations set forth in the government's 
complaint, whether the decree is sufficiently clear, whether 
enforcement and compliance mechanisms are adequate, whether the decree 
may harm third parties. See United States v. Microsoft Corp., 56 F.3d 
1448, 1461-62 (D.C. Cir. 1995). Consistent with Congress' intent to use 
consent decrees as an effective tool of antitrust enforcement, the 
Court's function is ``not to determine whether the resulting array of 
rights and liabilities is the one that will best serve society, but 
only to confirm that the resulting settlement is within the reaches of 
the public interest.'' Id at 1460 (internal quotations omitted); see 
also United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir.), 
cert. denied, 454 U.S. 1083 (1981). The United States submits that 
entry of this proposed Final Judgment is in the public interest because 
it addresses the anticompetitive effects alleged in the Complaint and 
forecloses Medical Mutual from achieving the MFG clause's 
anticompetitive effects in other ways.
    More specifically, by nullifying Medical Mutual's MFR clause and 
enjoining any policy, practice or rule having the same purpose or 
effect under Section IV(A), the proposed Final Judgment will ensure 
unrestrained price competition between Medical Mutual and other health 
insurance plans and among hospitals in the Cleveland area. Without a 
price floor set by MFR clauses or other similar provisions, hospitals 
will have a greater incentive to discount, thereby lowering health care 
costs for consumers as well as encouraging more innovation in the 
delivery of health care services. In addition, Section IV(B) restricts 
Medical Mutual's ability to compel from its Participating Hospitals, or 
bargain for, information on the rates the hospitals charge other 
payers, ensuring that Medical Mutual does not indirectly impose a MFR 
provision.
    Finally, Section V of the proposed Final Judgment allows Medical 
Mutual to continue to compete on largely the same terms as other health 
insurance plans. Medical Mutual will not be restricted from negotiating 
different rate arrangements for different hospitals, establishing 
preferred provider networks or other forms of provider panels, 
recruiting hospitals who are participating in other provider panels, or 
even receiving rate information from its participating hospitals when 
the disclosure of such information is purely voluntary.

D. Medical Mutual's Voluntary Termination of the MFR Clause Does Not 
Eliminate the Need for Injunctive Relief

    Despite Medical Mutual's recent promise to cease enforcing its MFR 
provisions and terminate the MFR audits, there is substantial 
likelihood of future violations of the antitrust laws and recurring 
harm to consumers in the absence of an harm injunction. In the absence 
of an injunction, Medical Mutual's promise is not enforceable, and 
nothing prevents Medical Mutual from reneging at any time, a 
possibility made more probable by its apparently strongly held belief 
that its conduct was lawful.\6\ See United States v. Cleveland Trust 
Co., 393 F. Supp. 699, 710 (N.D. Ohio, 1974)
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    \6\ In its challenge to the Civil Investigative Demand issued to 
it in 1995, Medical Mutual, then known as Blue Cross and Blue Shield 
of Ohio, vigorously contended that its conduct could not be 
investigated as it was procompetitive as a matter of law. The Court 
(Aldrich, J) soundly rejected that position in Blue Cross and Blue 
Shield of Ohio v. Bingaman, 1996 WL 677094 (N.D. Ohio), 1996-2 Trade 
Cas. 71600, aff'd, 113 F.3d 1420 (Table, text at 1997 WL 400095) 
(6th Cir. 1997).
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    In addition, Medical Mutual has clearly not precluded itself from 
instituting schemes short of reinstituting the MFR provision, schemes 
which could include auditing participating hospitals to determine other 
payers' rates or simply requiring the hospitals to disclose the rates 
they charged other payers, and then demanding comparable or lower 
rates. Given Medical Mutual's high market share in the Cleveland area 
relative to other payers and thus its correspondingly significant 
bargaining power, all of those arrangements, contractual or otherwise, 
are real options for Medical Mutual, and if implemented, could have the 
similar anticompetitive effects of deterring hospitals from discounting 
to other payers or participating in more innovative and efficient 
health care delivery systems.
    Moreover, injunctive relief is particularly appropriate in this 
instance because Medical Mutual's voluntary abandonment was clearly 
occasioned by the government's then-imminent enforcement action. If an 
antitrust defendant is allowed to simply abandon its challenged conduct 
on the eve of a government action, then the enforcement of antitrust 
laws by the United States would be significantly hampered. United 
States v. W.T. Grant Co., 345 U.S. 629, 632 (1953). A trial court's 
wide discretion ``is not to be exercised to deny relief altogether by 
lightly inferring an abandonment of the unlawful activities from a 
cessation which seems timed to anticipate suit.'' United States v. 
Parke, Davis & Co., 362 U.S. 29, 48 (1960).

IV. Alternatives to the Proposed Final Judgment

    An alternative to the proposed Final Judgment would be a full trial 
on the merits of the case, which would involve substantial time and 
expense to the United States and Medical Mutual and create uncertainty 
in the ultimate relief to be obtained by the United States. A trial is 
also undesirable because the United States believes that the proposed 
Final Judgment fully remedies the violations of the Sherman Act alleged 
in the Complaint.
    The United States considered a claim for treble damages arising 
from overcharges the United States paid for the health insurance of 
federal employees in the Cleveland Region. Because Medical Mutual's use 
of a MFR clause had artificially inflated the cost of health insurance 
of the Cleveland Region, it similarly increased the amount of 
contribution the United States paid on behalf of its employees through 
the Federal Employees Health Benefit Program (``FEHBP'') to rival 
health plans in Cleveland.
    However, in light of the costs and delay associated with litigation 
necessary to secure damages, and the fact that payments by the United 
States

[[Page 52771]]

for its employees' health insurance constitute only a modest percentage 
of the total health insurance cost in the Cleveland area, it was 
determined that the time and resources required to pursue damages were 
unwarranted. Moreover, private litigants, such as competing health 
plans, may be in position to pursue damages claims against Medical 
Mutual. Should health plans whose enrollees include federal employees 
succeed in recovering damages from Medical Mutual, such recovery would 
also likely be passed on to the United States in the form either of 
rebates under the cost-plus provisions of such contracts or through 
lower premiums. The United States concluded, therefore, that the public 
interest is better served by securing the immediate, certain, and 
substantial relief set forth in the proposed Final Judgment without 
pursuing a damages claim.

V. Remedies Available to Private Litigants

    Section 4 of the Clayton Act, 15 U.S.C. 15, provides that any 
person who has been injured as a result of conduct prohibited by the 
antitrust laws may bring suit in federal court to recover three times 
the damages suffered, as well as costs and reasonable attorney's fees. 
Entry of the proposed Final Judgment will neither impair nor assist in 
the bringing of such actions. Under the provisions of Section 5(a) of 
the Clayton Act, 15 U.S.C. Sec. 16(a), the Final Judgment has no prima 
facie effect in any subsequent lawsuits that may be against Medical 
Mutual in this matter.

VI. Procedures Available for Modification of the Proposed Final 
Judgment

    As provided by the Antitrust Procedures and Penalties Act, any 
person believing that the proposed Final Judgment should be modified 
may submit written comments to Gail Kursh, Chief, Health Care Task 
Force; Department of Justice; Antitrust Division; 325 7th Street, N.W.; 
Room 404; Washington, D.C. 20530, within the 60-day period provided by 
the Act. Comments received, and the Government's responses to them, 
will be filed with the Court and published in the Federal Register. All 
comments will be given due consideration by the Department of Justice, 
which remains free, pursuant to Paragraph 2 of the Stipulation, to 
withdraw its consent to the proposed Final Judgment at any time before 
its entry if the Department should determine that some modification of 
the Judgment is necessary to protect the public interest. The proposed 
Final Judgment itself provides that the Court will retain jurisdiction 
over this action, and that the Parties may apply to the Court for such 
orders as may be necessary or appropriate for the modification, 
interpretation, or enforcement of the Judgment.

VII. Determinative Documents

    No materials and documents of the type described in Section 2(b) of 
the Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b), were 
considered in formulating the proposed Final Judgment. Consequently, 
none are filed herewith.

    Dated: ________________.

        Respectfully submitted,
Paul J. O'Donnell
Jean Lin
Andre Barlow
Frederick S. Young,
Attorneys, Antitrust Division, U.S. Department of Justice, 325 7th 
Street, N.W., Washington, D.C. 20530, (202) 616-5933.
[FR Doc. 98-26034 Filed 9-30-98; 8:45 am]
BILLING CODE 4410-11-M