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IN THE UNITED STATES DISTRICT COURT
DISTRICT OF RHODE
ISLAND
| | UNITED STATES OF AMERICA, | ) |
[Filed(Feb.29, 1996)]
| | | | ) |
| | | Plaintiff, | ) | Civil
Action No. CA 96 113
| | | | ) |
| | | vs. | ) | | | | | ) | | | | DELTA
DENTAL OF RHODE ISLAND, | ) |
| | | | ) |
| | | Defendant. | ) | | | | | ) | |
COMPLAINT
The
United States of America, acting under the direction of the Attorney General of the
United States, brings this action for equitable and other relief against Delta Dental of Rhode
Island
("Delta"), to prevent and enjoin defendant from continuing to violate the antitrust laws by
means of
a contractual provision that raises barriers to entry and discourages lower prices by, in
effect,
penalizing contracting dentists if they charge less to rival plans or other purchasers of dental
services
than they charge Defendant. Delta's policies and actions have, in violation of Section 1 of
the
Sherman Act, excluded potential rivals, retarded expansion by existing competitors, and
substantially
increased the costs to Rhode Island consumers of dental insurance and dental services.
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I. JURISDICTION AND
VENUE
1. The United States files this Complaint under
Section 4 of the Sherman Act, 15 U.S.C.
§ 4, as amended, to prevent and restrain a continuing violation by Delta of Section 1 of the
Sherman
Act, 15 U.S.C. § 1.
2. The Defendant is an inhabitant of, maintains an
office and transacts business in, and
is found within Rhode Island, all within the meaning of 15 U.S.C. § 22.
II. DEFENDANT
3. Delta, a Rhode Island not-for-profit corporation
with its principal place of business
in Providence, Rhode Island, is engaged in the business of underwriting and administering
group
dental care insurance plans for employers and other group purchasers located in Rhode Island
and
elsewhere. Delta is a member of Delta Dental Plan Association, a nationwide network of
dental
insurance providers.
III.
CONCERTED ACTION
4. Various firms and individuals not named as
defendants in this Complaint have entered
into contracts and combinations and otherwise participated with Delta in the unlawful actions
alleged
in this Complaint, and they have performed acts and made statements in furtherance
thereof.
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IV.
INTERSTATE COMMERCE
5. Certain employers remit across state lines not
insubstantial premium payments to the
Defendant for underwriting and administering dental care insurance for their employees.
6. Many employers that remit premiums to the
Defendant are businesses that sell
products and services in interstate commerce, and the premium levels paid by such businesses
for
dental insurance affect the prices of their products and services.
7. The activities of the Defendant that are the
subject of this Complaint have been within
the flow of, and have substantially affected, interstate trade and commerce.
V.
RESTRAINT OF TRADE
A. DELTA'S POSITION IN THE RHODE ISLAND DENTAL MARKET
8. Delta is Rhode Island's largest dental insurer,
covering nearly 200,000 subscribers in
its service area (Rhode Island and border communities in Massachusetts and Connecticut).
Delta
insures or administers plans for about 35-45% of persons covered by dental insurance in
Rhode
Island. Delta obtains dental care services on behalf of its subscribers by contracting with
approximately 675 actively practicing dentists, whom it refers to as "participating dentists,"
including
about 500 or 90% of the dentists actively practicing in Rhode Island. The balance practice
in
bordering areas of Massachusetts and Connecticut.
9. Each Delta participating dentist agrees to accept
payments from Delta--in addition
to any deductible or co-payment paid by the patient--as payment in full for covered services.
Delta
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made payments of approximately $32 million to participating dentists in 1994. Most
actively
practicing Rhode Island dentists receive a significant portion of their professional income
from
Delta.
10. According to Delta, the dental insurance market
in Rhode Island "is being driven
entirely by price." The cost of dental services generally constitutes about 85-90% of the price
of
dental insurance, as reflected in premiums or payments made by self-insured groups. Delta
acknowledges that once a dentist has agreed to accept its payment levels, the dentist has no
incentive
to charge Delta patients less to attract more Delta patients.
11. Some other payers, however, have attempted
further to reduce their cost of dental
services in Rhode Island by contracting with a limited panel of conveniently located dentists
who
agree to accept fees discounted substantially below the fees paid by Delta.
B. DELTA'S MOST FAVORED NATION
CLAUSE
12. Each Delta participating dentist agrees to
comply with Delta's Participating Dentist's
Agreement, which incorporates by reference Delta's Rules and Regulations (together, the
"Agreement"). The Agreement governs the participating dentists' provision of dental care
services
to Delta subscribers and the fees that they may charge Delta subscribers. As applied, the
Agreement
also establishes the minimum fees that participating dentists may charge patients who are not
Delta
subscribers without incurring a potential financial penalty. Specifically, Rule 10,
commonly
characterized by Delta as its "Prudent Buyer Policy," provides as follows:
Reimbursement Policy. Delta Dental
reserves the right to limit
reimbursements to dentists to such levels as such dentists have
agreed
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to accept as reimbursement from other non-governmental
dental
benefits reimbursement programs.
Provisions such as Rule 10 are known as Most Favored Nation ("MFN") clauses. Such
clauses
restrict a seller's ability to charge the buyer enforcing the provision more than the lowest price
that
the seller charges to any other purchaser.
13. According to Delta, it enforces its MFN clause
whenever the fees that a participating
dentist accepts from another non-governmental third-party payer are "demonstrably
significantly
lower than [Delta's]." Once the fees in issue are determined to be "demonstrably
significantly
lower," Delta claims that it will look at several "mitigating factors" before deciding whether to
apply
the MFN clause: whether the fee differential will soon be eliminated by a fee increase adopted
by
the other plan, Delta's administrative cost of applying the MFN clause, and Delta's ability
to
overcome the difference in reimbursement through its efforts to manage use of dental services.
Delta
also has not enforced its MFN clause when a dentist, who had considered or agreed to charge
another
plan substantially lower fees, then raised the fees to Delta's level or disaffiliated from the other
plan.
14. Rule 7 of Delta's Rules and Regulations further
allows Delta to audit the records of
any participating dentist:
Verification program. Delta Dental at all
times reserves
the right to review services rendered and fees charged by
participating and non-participating dentists or group
practices with respect to which benefits are sought. Such
review may encompass, without limitation, verification
of . . . fees charged and collections made with respect to
non-subscriber patients . . . .
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Delta's audits ensure that no dentist charges any patient for any procedure a fee less than what
the
dentist charges to Delta.
15. Although Rule 10, as written, pertains only to
dentists' payments from non-
governmental dental benefits reimbursement programs, Delta also applies its MFN policy to
dentists
offering discounts to uninsured patients or patients with indemnity insurance. When Delta
determines--either through an audit under Rule 7 or otherwise--that a dentist has charged
an
uninsured patient less for a procedure than the dentist charged Delta or has advertised price
specials
to uninsured patients, it will, except in limited circumstances, contact the dentist and demand
that
the discounted fees be discontinued or that the lower charges apply also to Delta
subscribers.
C. THE MFN CLAUSE'S
ANTICOMPETITIVE EFFECTS
16. Delta's MFN clause has harmed competition and
reduced consumer welfare in the
dental services and related dental insurance plan markets in Rhode Island and localized areas
within
Rhode Island. Delta's MFN clause has reduced competition in Rhode Island dental services
markets
by inhibiting participating dentists from lowering their fees below the level paid by Delta.
The
clause's deterrent effect on discounting of dental services has led to the further exclusionary
effect
of preventing competing dental plans from offering limited-panel insurance plans at
premiums
significantly below those of Delta.
17. The MFN clause inhibits lower fees for dental
services by generally requiring a
participating dentist who charges a fee lower than Delta's for any non-Delta patient to
accept
commensurately lower fees for all Delta patients. Because Delta patients are a significant
portion
of the practice of most Rhode Island dentists, the MFN clause effectively imposes a large
financial
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penalty on Delta participating dentists who wish to charge fees significantly lower than those
paid
by Delta. Because Delta represents such a large source of income for most Rhode Island
dentists,
relative to other payers that have sought to pay fees significantly lower than Delta, Delta's
MFN
clause makes it unprofitable for a dentist to accept lower fees from non-Delta patients, even if
the
dentist would have otherwise been willing to accept those lower fees. As a result, most
participating
dentists are unwilling to charge uninsured or indemnity plan patients, or to contract with other
dental
insurance plans, at fee levels below Delta's. The result is higher prices for and reduced output
of
dental services in Rhode Island.
18. The financial disincentive to discount posed by
Delta's MFN clause also impedes
competing dental insurance plans' ability to contract with Rhode Island dentists at fee
levels
significantly lower than Delta's. In some cases, Delta's MFN clause has caused participating
dentists
to disaffiliate from--or refuse to join--competing dental plans offering fees below those paid
by
Delta. In other cases, Delta participating dentists have insisted as a condition of their
participation
that payments be increased to Delta's levels. In either case, the high percentage of dentists in
Rhode
Island who participate in Delta means that the MFN clause has made it substantially more
difficult
for new plans to find enough dentists to serve their subscribers at lower fees. When Delta
participating dentists are faced with the prospect of substantially reduced payments for all of
their
Delta patients if they participate in a reduced-fee plan, especially where such a plan would send
them
considerably fewer patients than Delta, participating dentists have uniformly opted not to
participate
in such lower-price plans, even though they would have been willing to do so in the absence of
the
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MFN clause. Thus Delta's MFN clause has deprived consumers of the benefits that discounted
fee
plans can offer: increased competition, lower premiums, and greater availability of dental
care.
19. The experiences of the Dental Blue PPO in
Rhode Island illustrate the anticompetitive
effects of Delta's MFN clause. In the fall of 1993, Blue Cross and Blue Shield of
Massachusetts
("Blue Cross of Massachusetts") recruited dentists in Rhode Island for Dental Blue PPO, a
preferred
provider organization (PPO) established for Raytheon employees and their families,
including
approximately 1,000 employees (plus family members) at Raytheon's facility in Portsmouth,
Rhode
Island. Dental Blue PPO sought to recruit and contract at substantially reduced fees with
dentists
used by a number of Raytheon Portsmouth plan members, including Rhode Island dentists
practicing
in Portsmouth, Tiverton, Jamestown, and Newport, who are located conveniently for most
Portsmouth plant employees and their families. Dental Blue PPO was one of three dental
benefit
options for Raytheon employees. Blue Cross of Massachusetts also offered the employees
coverage
from a large, "traditional" network (including most dentists in the area) and from
out-of-network
dentists. However, Raytheon employees would incur the lowest out-of-pocket cost--often no
cost
or at least substantial savings--if they used dentists participating in Dental Blue PPO.
20. Dental Blue PPO recruited a number of Rhode
Island dentists who practiced in the
area around Portsmouth, and it expected to contract with more dentists in the area. All of the
Rhode
Island dentists who joined Dental Blue PPO also participated in Delta. Delta calculated that
Dental
Blue PPO would have paid these dentists at a substantial discount--14% lower, on average,
than
Delta's fees.
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21. Identifying Dental Blue PPO as a long-run
competitive threat, and in particular
fearing that the Dental Blue PPO would be expanded beyond Raytheon, Delta's senior
management
met on or around December 9, 1993, and agreed to pursue three related tactics: (a) to
establish
communications with the Rhode Island Dental Association ("RIDA") regarding Dental Blue
PPO;
(b) to apply Delta's MFN clause to all dentists who had agreed to join Dental Blue PPO in order
to,
in the words of Delta's Vice President for Strategic Planning, "send a strong message to the
provider
community"; and (c) to develop its own limited-panel PPO.
22. Implementing the first tactic, Delta's president
contacted the chairman of RIDA's
Council on Dental Programs, who Delta's president knew to be a vociferous opponent of low
fees
and managed care programs, and who supports Delta's MFN clause because he believes it
functions
to set a floor on dentist's fees. Shortly after, RIDA sent its members a letter, dated December
14,
1993, warning that:
[T]he fee schedule proposed [by Dental Blue PPO] is below
your
current Delta profile, and if accepted may subject you to
retroactive repayment of your collected Delta fees since by
contract you have agreed to provide Delta patients your lowest
fees (except from Medicaid).
Though the letter went on to say that each dentist must make an individual decision whether
to
participate in Dental Blue PPO, the RIDA letter reminded each member to "be aware that
your
decision may have severe financial penalties."
23. Soon after, Delta implemented its second tactic
by informing the Rhode Island
dentists, who it knew were participating in the Dental Blue PPO, of its intent to apply its
MFN
clause. Delta similarly informed several Massachusetts dentists who participate in Delta and
who
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had also agreed to participate in Dental Blue PPO. Following up on telephone conversations
with
many of the dentists, on December 30, 1993, as part of its yearly update of dental fees, Delta
sent
letters to these dentists, informing them that their payment levels would be lowered to the
amounts
that they had agreed to accept from Dental Blue PPO. Delta sent a second letter to each of
those
dentists in January, 1994, enclosing their new, reduced-fee schedule. This letter stated
that:
[Y]our profile reflects certain adjustments necessitated by our
reimbursement
policy. We understand that you have agreed to accept these fees
from the
Dental Blue PPO. As a result, your Delta Dental of Rhode
Island
reimbursement has been limited to these levels.
24. By the end of January, 1994, the dental
community had received Delta's "message."
All of the Rhode Island dentists contacted by Delta disaffiliated from Dental Blue PPO, some
of
them making clear to Delta at the time that their reason for resigning was Delta's decision to
apply
its MFN clause. For example, on January 6, 1994, one dentist sent Delta copies of his letters
to
Dental Blue PPO of the same date resigning from Dental Blue PPO, and specifically asked that
Delta
update his fee profile because of his resignation. On January 25, 1994, another dentist did the
same.
A third dentist did not even wait until he received his new fee schedule from Delta. As he
explained
in his January 3, 1994 letter to Delta's Vice President for Provider Relations, he resigned from
Dental
Blue PPO once he received RIDA's letter detailing how participation with Dental Blue PPO
would
affect his payments from Delta.
25. Delta's MFN clause prevented Dental Blue PPO
from developing a marketable
network of Rhode Island dentists willing to accept fees substantially below those paid by Delta.
By
doing so it denied Raytheon employees and their families a meaningful choice of dental
coverage
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through Dental Blue PPO, and the substantial savings that it represented to them. Delta's
tactics
prevented Dental Blue PPO from successfully offering a lower-price, dental insurance plan in
Rhode
Island.
26. Delta's decision to apply its MFN clause to
Dental Blue PPO also had an adverse
impact upon the dental insurance market beyond its immediate effect on Raytheon employees
and
their families. Delta had feared that Blue Cross might ultimately expand Dental Blue
beyond
Raytheon, and offer it to other employers in Rhode Island. The disaffiliation of the Dental
Blue
dentists enabled Delta to postpone indefinitely its originally planned third response to Dental
Blue:
the development of its own limited-panel, reduced-fee PPO. With the collapse of the Dental
Blue
PPO network in Rhode Island, Delta felt no competitive pressure to offer an alternative
low-cost
product, and returned development of its own PPO to the back-burner. Over two years later,
Delta
still has not established a PPO in the market. Had Dental Blue PPO succeeded and had Delta
been
forced to respond as planned with its own PPO, Rhode Island consumers would have had
dental
insurance plan choices that could have been significantly lower-priced than those now available
to
them.
27. At least two organizations--a self-insured
employee group and an uninsured retiree
group--currently have contracted with limited panels of dentists in Rhode Island who have
agreed
to fees substantially below Delta's. Although all of these dentists also participate in Delta, they
have
avoided the application of Delta's MFN clause--despite Delta's commitment to consistently
enforce
the clause--because Delta had been unaware of the operation of their reduced-fee panels. Even
now,
Delta may remain unaware of which dentists participate in the panels. Both organizations
have
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reason to believe that the dentists currently in their panels would disaffiliate if Delta were to
apply
its MFN to them. Despite their preference for more Rhode Island dentists to serve their
members
at reduced fees, both have decided not to recruit additional dentists to avoid bringing
themselves to
Delta's attention and causing Delta to apply its MFN to their currently participating dentists.
For
members of each group, moreover, the availability of such discounted fees sometimes makes
the
difference between being able to afford dental care or not. Enforcement of Delta's MFN
clause
would consequently preclude some consumers from obtaining necessary dental care.
28. Delta's MFN clause also caused dentists to
disaffiliate from or refuse to join a dental
insurance plan--established by Dental Benefit Providers, Inc., on behalf of Harvard
Community
Health Plan--until the plan increased its payments to the levels paid by Delta. Because this plan
has
been forced to compete in Rhode Island with a network of dentists paid at higher fees than
planned,
consumers are being deprived of the opportunity to obtain lower-cost dental services and
dental
insurance. Delta's MFN clause has consequently restricted the ability of this plan to serve
groups
of patients in Rhode Island at lower, more competitive prices.
29. A plan operated by U.S. Healthcare seeks to
contract with Rhode Island dentists to
provide basic preventive services in return for a monthly capitated (fixed amount per
patient)
payment and to provide other services for payment according to a substantially discounted
fee-for-
service schedule. U.S. Healthcare has similarly encountered consistent resistance from dentists
who
fear that Delta would apply its MFN clause, lowering the fees they would receive for their
Delta
patients to the substantially lower level of U.S. Healthcare's discounted fee schedule.
Indeed,
concern with Delta's MFN clause among dentists has prevented U.S. Healthcare from
contracting
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with any Rhode Island dentists, and U.S. Healthcare has consequently been unable to offer its
low-
cost dental plan in Rhode Island.
30. As discussed above, Delta's MFN clause is not
limited to third-party payer plans.
Delta has applied it to any participating dentist who offers fees below Delta's fee schedule to
patients
with indemnity coverage or no insurance at all. The result of Delta's application of its MFN
clause
to such patients has been to discourage discounting, thereby increasing the price and
diminishing the
availability of dental services in Rhode Island.
D. THE MFN CLAUSE'S FUTURE
ANTICOMPETITIVE EFFECTS
31. Delta intends to continue to enforce its MFN
clause against those dentists who offer
fees discounted below Delta's either to other dental insurance plans, patients covered by
indemnity
plans, or to uninsured patients. This enforcement will continue to prevent other dental
insurance
plans from paying fees for dental services discounted to levels below those paid by Delta
and,
therefore, will deter low-fee dental insurance plans from entering, or expanding their presence
in,
Rhode Island unless they raise their fees to Delta's level. By deterring low-cost plans' entry
or
expansion, Delta's MFN clause will deprive consumers of the benefits that such plans can
offer:
increased competition, lower premiums, and greater use of dental care. By discouraging
dentists'
discounting to patients covered by indemnity insurance and to uninsured patients, Delta's
MFN
clause will have similar adverse effects upon the cost and availability of dental care for
indemnity-
insured and uninsured consumers in Rhode Island.
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E. THE MFN CLAUSE'S LACK OF
PROCOMPETITIVE EFFECTS
32. In contrast to Delta's MFN clause's actual
anticompetitive effects, the MFN clause,
by Delta's own admissions, has not generated any meaningful savings or other
procompetitive
benefits. Delta has not considered the MFN clause a cost-savings device, has not sought to
calculate
any savings from its application, and has not factored any such savings into determining
the
premiums it charges its customers.
VI. VIOLATION
ALLEGED
33. Beginning at a time unknown to the Plaintiff and
continuing to date, the Defendant
has entered into agreements with its participating dentists in unreasonable restraint of interstate
trade
and commerce in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. This offense is
likely
to continue or recur unless the relief hereinafter sought is granted.
34. For the purpose of forming and effectuating
these agreements, the Defendant did the
following things, among others:
(a) required participating dentists to agree to the MFN clause;
(b) enforced the MFN clause; and
(c) made clear its intention to continue enforcing the MFN clause.
35. These agreements have had the following
effects, among others:
(a) caused Delta participating dentists to disaffiliate from, or charge higher
fees
to, reduced-fee dental plans in Rhode Island;
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(b) unreasonably restrained price competition among dental insurance plans
in
Rhode Island because the clause has substantially foreclosed other
dental
plans from obtaining or retaining a sufficient number of
conveniently located
Rhode Island dentists to provide low-cost services to their
members at
competitive prices;
(c) deterred the entry or expansion of limited-panel PPOs and other
low-priced
dental insurance plans in Rhode Island;
(d) raised prices for the provision of dental services to non-Delta patients and
dental plans in Rhode Island because Delta-participating dentists
have opted
not to discount their fees, below levels received from Delta, to
other dental
plans, patients with indemnity insurance, or to uninsured patients;
and
(e) deprived consumers of dental services and dental insurance in Rhode Island
of the benefits of free and open competition.
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VII.
REQUEST FOR RELIEF
WHEREFORE, the Plaintiff requests:
1.
That the Court adjudge and decree that the Defendant entered into
unlawful
agreements in unreasonable restraint of interstate trade and commerce in violation of Section 1
of
the Sherman Act, 15 U.S.C. § 1.
2.
That the Defendant, its members, officers, directors, agents, employees,
and
successors, and all other persons acting or claiming to act on its behalf, be enjoined, restrained
and
prohibited from, in any manner, directly or indirectly, continuing, maintaining, or renewing
these
agreements, or from engaging in any other combination, conspiracy, agreement, understanding,
plan,
program, or other arrangement having the same effect as the alleged violation.
3. That the United States recover the costs of this
action.
4.
That the United States have such other relief as the nature of the case
may require and
the Court may deem just and proper.
Dated:
For Plaintiff:
/s/
/s/
Anne
K. Bingaman Steven Kramer
Assistant Attorney General
/s/
/s/ Paul J.
O'Donnell
Joel
I. Klein
Deputy Assistant Attorney General
/s/
Michael S. Spector
/s/
Attorneys
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Rebecca P. Dick Antitrust Division
Deputy Director U.S. Dept. of Justice
Office of Operations 600 E Street, N.W. (until 3/15/96)
325 7th Street,
N.W. (after 3/15/96)
Washington, D.C. 20530
/s/ (202)
307-0997
Gail
Kursh
Chief
Health Care Task Force
Sheldon Whitehouse
/s/ United
States Attorney
David C. Jordan District of Rhode Island
Ass't.
Chief
Health Care Task Force /s/
By: Anthony DiGioia
Ass't. United States Attorney
Westminster Square Building
10 Dorrance Street
Providence, RI 02903
(401) 528-5477
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