## Facts

- Healthsource operated an IPA-model HMO in New Hampshire that contracted with independent physicians, using primary care physicians as “gatekeepers” for patient referrals and utilization control.
- Healthsource offered physicians either (a) a lower-paid nonexclusive contract or (b) an optional exclusive-dealing contract paying substantially more if the physician agreed not to contract with competing HMOs.
- U.S. Healthcare, a large HMO based outside New Hampshire, attempted to enter the New Hampshire market and sought to sign primary care physicians.
- U.S. Healthcare alleged that Healthsource’s exclusive contracts limited physician availability and impeded U.S. Healthcare’s ability to compete effectively.
- U.S. Healthcare sued under Sherman Act § 1, asserting that the exclusivity arrangement was either a per se unlawful group boycott or an unreasonable restraint under the rule of reason.
- After a bench trial before a magistrate judge, judgment entered for Healthsource; U.S. Healthcare appealed.

## Issues

1. Whether Healthsource’s incentive-based physician exclusivity contracts constituted a per se unlawful group refusal to deal (group boycott) under Sherman Act § 1.
2. Whether, under the rule of reason, the exclusivity contracts unreasonably restrained trade by substantially foreclosing competition in the relevant market.

## Decision

- The First Circuit affirmed judgment for Healthsource.
- The court rejected per se treatment, characterizing the arrangement as primarily vertical exclusive dealing between a single HMO and individual physicians, not a horizontal boycott agreement among competing physicians.
- Applying the rule of reason, the court held U.S. Healthcare failed to prove substantial market foreclosure or anticompetitive effects.
- The court credited legitimate business explanations for the exclusivity incentives, including cost control and administrative efficiency associated with network stability.
- Because the record showed difficulty for a rival entrant but not demonstrable harm to overall competition, no Sherman Act § 1 violation was established.

## Legal Principles

- Per se condemnation is limited to restraint types with predictable, plainly anticompetitive effects; courts are reluctant to extend per se rules to arrangements that are plausibly efficiency-enhancing or economically ambiguous.
- Physician exclusivity incentives offered by an HMO to individual doctors are generally analyzed as vertical exclusive dealing, not as a horizontal group boycott, absent proof of a concerted agreement among competing providers.
- Under the rule of reason, exclusive dealing violates Sherman Act § 1 only if it substantially forecloses rivals from access to necessary inputs or customers and thereby harms competition, not merely a competitor.
- Foreclosure analysis considers the share of the market affected, the availability of alternative contracting partners, the practical ability of rivals to enter or expand, and contractual flexibility such as duration and termination rights.
- Legitimate justifications—such as improving coordination, reducing costs, and stabilizing supply relationships—can support exclusive dealing where anticompetitive effects are not shown.

## Conclusion

The First Circuit held that an HMO’s optional, bonus-based physician exclusivity contracts were not per se unlawful and, on the record presented, did not unreasonably restrain trade under the rule of reason because substantial foreclosure and harm to competition were not proven.


United States Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589 (1st Cir. 1993)