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April 10, 2000


The opinion of the court was delivered by: 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.


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.*fn1 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' "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 provision of services. In addition to variable costs, the model also accounts for any special investments for a "Center of Excellence." Once gross revenue at each hospital is calculated for each applicable service, it is reduced by the variable cost assumption as well as by any depreciation for capital acquisitions, costs and advertising expenses for Centers of Excellence. The amount of net market share is compared to the base year of 1991 to determine whether any imbalance exists. Defendants agreed to ask physicians who had privileges at each hospital to redirect patients from the advantaged hospital to the disadvantaged hospital to help keep defendants' market shares roughly fixed at their 1991 levels. (Pl.Rule 56.1 Stmt., Ex. 6 at 301-02.) However, defendants' attempt to redirect admissions was ineffective due to the fact that medical admissions frequently go through the emergency room, and thus the hospital to which a patient was admitted was a "patient-driven decision as opposed to a physician-driven decision." (Id. at 301-302.)

The "trades" are an allocation of services between defendant hospitals. Marianne L. Muise, vice president of finance and administrative services for St. Francis, states that "[t]he trades were a balancing formula" pursuant to which the hospitals agreed not to compete against one another. (McCareins Decl., Ex. 18 at 155, 19293.) The "trades" are set forth in an undated document which shows specialties divided between the two hospitals. (Id., Ex. 28.) Once a hospital reached a "certain criteria level of expertise, high technology, it would be classified as a Center of Excellence." (Id., Ex. 18 at 193.) Vassar's campus is the designated site for the cardiac catheterization laboratory and the cardiology center; obstetrics; the predominant site for gynecology; cancer admissions dependent on high technology; fifty percent of general surgery; and the medical pediatrics unit. St. Francis is designated for selected cancer admissions not dependent upon high technology; orthopedics/neurology; MRI; mobile lithotripsy; the predominant site for ambulatory surgery and the laser center; the predominant diagnostic outpatient center; plastic surgery; fifty-percent of general surgery; an expanded emergency room, trauma II; and a guaranteed percentage of the market share of medical admissions. (Id.) The State admits in its Amended Objections and Responses to Defendants' Requests for Admissions that "at some point representatives of DOH looked at this `trades' document, and did not object to it." (Id., Ex. 13 at 4.) However, the "trades" document was not included in defendants' CON application for the establishment of Mid-Hudson.

In January 1995, defendants entered into an agreement (the "1995 Agreement") in which the parties state that:

[Vassar] and [St. Francis] originally caused [Mid-Hudson] to be formed to carry out the intent of [Vassar] and [St. Francis] to jointly own and operate, directly or indirectly, and to delegate to [Mid-Hudson] direct control of the three clinical services described in the original Certificate of Need application. . . . Since that time the parties have deemed it in their best interests to expand the delegation of authority to [Mid-Hudson] in order to more closely integrate Vassar Brothers and St. Francis to carry on further activities to eliminate costly duplication of services. . . .

(Pl.Rule 56.1 Stmt., Ex. 5 at 1.)

Defendants agreed not to compete with Mid-Hudson, nor with one another, for the provision of "the same or substantially similar services." (Id. at 2.) The 1995 Agreement also states that the hospitals will "unify substantially all hospital operations, including creating a single parent board, merging medical staffs into [Mid-Hudson], combining development and control over clinical services and integrating administrative services." (Id.) Despite the 1995 Agreement, Defendants state that the hospitals continue to duplicate some services. For example, Vassar continues to provide orthopedic surgery, although "they're not investing in the resources to bring it to a different level of service as St. Francis is. . . ." (McCareins Decl., Ex. 18 at 195.) Muise states in her deposition that the hospitals have not to this date substantially unified their operations, created a single parent board, nor merged their medical staffs. (Pl.Rule 56.1 Stmt., Ex. 6 at 355-57.)

Defendants expressly told the DOH that they were not merging. In the establishment CON application, defendants state that "[e]ach hospital will remain a financially independent structure and will retain all governance responsibilities not specifically given to the new corporation." (Murphy Aff., Ex. A at NYAG 827.) The State claims that the hospitals' plan as submitted to the DOH called for the hospitals to delegate to Mid-Hudson authority only for the three new services and for future planning and CON submissions. (See id. at NYAG 828-29.) The State contends that "[t]he hospitals were to remain separate with no formal linkage except for the new services established under the new company." (Id. ¶¶ 16-22.) The State claims that the DOH did not contemplate that the hospitals would negotiate jointly with third-party payers regarding contract terms and prices for hospital services. (Id. ¶¶ 46-47, Ex. M.) In addition, the State claims defendants explicitly stated that each hospital's billing and reimbursement for the jointly operated services would be kept separate. (Id. ¶ 45, Ex. A at NYAG 833.)

Prior to health care deregulation on January 1, 1997, rates for health maintenance organizations ("HMOs") were pervasively regulated by the State of New York. HMOs were permitted to negotiate some rates subject to State approval prior to the formation of Mid-Hudson, but they rarely exercised that power. During the course of the establishment of Mid-Hudson, the State was regulating prices related to reimbursement rates for HMOs; thus joint negotiation with HMOs was not an issue defendants discussed with the DOH. However, prior to deregulation, on October 2, 1996, a DOH attorney wrote to Mid-Hudson that while the Mid-Hudson CON application did not expressly contemplate joint negotiation with third-party payers for services outside the three services for which Mid-Hudson was certified, "it was implicit in the proposal that upon the establishment of [Mid-Hudson], competition between the sponsoring hospitals would be substantially lessened. Furthermore, given that the establishment of [Mid-Hudson] was represented and accepted as the precursor to further merging of services and activities, it would appear that joint negotiations of rates is a logical step to achieving those ends." (McCareins Decl., Ex. 24 at 2.)

The Health Care Reform Act of 1996 (the "Act") replaced DOH regulation of hospital rates for most third-party payers with a competitive system. As the health care market in New York became deregulated, defendants began jointly negotiating contracts and rates for all services except those proscribed by the Catholic Church and minor services offered by the hospitals' affiliates with managed care companies through Mid-Hudson. Marianne Muise was appointed the chief negotiator for Mid-Hudson.

In the CON application for the establishment of Mid-Hudson, defendants state that they plan to apply for full review CONs through the new entity unless the projects are needed to maintain existing programs or services or are needed for general maintenance purposes. The only CONs submitted by Mid-Hudson are: (1) the CON to establish Mid-Hudson and oversee the three initial services, MRI, lithotripsy and cardiac catheterization; (2) a CON to be certified as a co-operator of an outpatient cancer center at Vassar Brothers, which was withdrawn and submitted by Vassar alone; and (3) a CON to certify the cardiac surgery service at Vassar Brothers. In 1996, the Public Health Council approved Mid-Hudson and Vassar to provide cardiac surgery, with an approved capital cost of almost seventeen million dollars.

The hospitals have sought individual approvals from the DOH for various items, although defendants claim that all CON applications are discussed and approved by Mid-Hudson prior to filing. Vassar has applied for CONs to construct: (1) an extension clinic for ambulatory surgery in Fishkill; (2) an outpatient radiation therapy clinic in Fishkill; (3) an outpatient cancer center on its campus; and (4) an electrophysiology laboratory on its campus. Vassar, in conjunction with another hospital, not St. Francis, completed a one million-dollar clinic in Kingston and has entered into a joint venture agreement with Northern Dutchess Community Hospital. St. Francis has applied for more than twenty CONs on its own since filing the Mid-Hudson establishment CON.


I. Summary Judgment Standards

Rule 56(c) provides that the court may grant summary judgment where there are no genuine issues of material fact for trial. Fed.R.Civ.P. 56(c). If there are no genuine issues, the movant is entitled to judgment as a matter of law. "An issue is genuine if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Agritronics Corp. v. National Dairy Herd Ass'n, 914 F. Supp. 814, 820 (N.D.N.Y. 1996). On cross-motions for summary judgment, the standard is the same as that for individual motions. In evaluating each motion, the court must look at the facts in the light most favorable to the non-moving party. Aviall, Inc. v. Ryder Sys., Inc., 913 F. Supp. 826, 828 (S.D.N.Y. 1996). "Simply because the parties have cross-moved, and therefore have implicitly agreed that no material issues of fact exist, does not mean that the court must join in that agreement and grant judgment as a matter of the law for one side or the other. The court may conclude that material issues of fact do exist and deny both motions." Id. (internal citation omitted). The Second Circuit has recognized that summary judgment is a "vital procedural tool to avoid wasteful trials and may be particularly important in antitrust litigation to prevent lengthy and drawn-out litigation that has a chilling effect on competitive market forces." Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537 (2d Cir. 1993), cert. denied, 510 U.S. 947, 114 S.Ct. 388, 126 L.Ed.2d 337 (1993).

II. State-Action Immunity

Defendants claim that the State's lawsuit is barred by the doctrine of stateaction immunity as enunciated by the Supreme Court in Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943). There, the Supreme Court found that an anticompetitive marketing program which "derived its authority and its efficacy from the legislative command of the state" did not violate the Sherman Act because the Act was promulgated to regulate private action, not to prohibit a state from imposing restraints on competition as an act of government. 317 U.S. at 350-52, 63 S.Ct. at 313-14. The Supreme Court has articulated a two-part test for determining whether there is state-action immunity for anticompetitive activity. First, the challenged restraint must be "one clearly articulated and affirmatively expressed as state policy." California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 100 S.Ct. 937, 943 (1980) (internal citations and quotations omitted) ("Midcal"). Second, the policy must be "actively supervised" by the State itself. Id.

A. The First Prong of the Midcal Test

The first prong of the Midcal test was further refined by the Supreme Court in Southern Motor Carriers Rate Conference, Inc. v. United States, 471 U.S. 48, 105 S.Ct. 1721, 85 L.Ed.2d 36 (1985). In Southern Motor Carriers, the United States challenged the collective ratemaking of motor common carriers operating through private rate bureaus, which was authorized, but not compelled, by the states in which the rate bureaus operated. See 471 U.S. at 50, 105 S.Ct. at 1723. The Court held that "a state policy that expressly permits, but does not compel, anticompetitive conduct may be `clearly articulated' within the meaning of Midcal." 471 U.S. at 61, 105 S.Ct. at 1729. The Court ruled that "[a] private party acting pursuant to an anticompetitive regulatory program need not point to a specific, detailed legislative authorization for its challenged conduct." 471 U.S. at 64, 105 S.Ct. at 1730 (internal quotations and citations omitted). Rather, "[a]s long as the State as sovereign clearly intends to displace competition in a particular field with a regulatory structure, the first prong of the Midcal test is satisfied." Id.

In Town of Hallie v. City of Eau Claire, 471 U.S. 34, 105 S.Ct. 1713, 85 L.Ed.2d 24 (1985), the Supreme Court ruled in the case of a municipality charged with anticompetitive conduct that the municipality was entitled to state-action immunity because its conduct was "a foreseeable result" of state legislation. See 471 U.S. at 42, 105 S.Ct. at 1718; see also City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 373, 111 S.Ct. 1344, 1350, 113 L.Ed.2d 382 (1991) (holding municipality entitled to state-action immunity where "suppression of competition is the `foreseeable result' of what the statute authorizes"); Cine 42nd Street Theater Corp. v. Nederlander Org., Inc., 790 F.2d 1032, 1043 (2d Cir. 1986) ("When the challenged actor is a private party, both foreseeability and supervision must be demonstrated.").

Prior to January 1, 1997, New York subjected its hospitals to pervasive regulation, including setting rates for HMOs. HMOs were permitted to negotiate some rates subject to State approval, but rarely exercised that power. The DOH's ...

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