California AG Files Complaint Against Sutter Health Alleging State Antitrust Law Violations

This Bulletin is from the American Health Lawyer’s Antitrust Practice Group.

On March 29, 2018, following a six-year investigation by his office, Xavier Becerra, California Attorney General, filed suit against Sutter Health (Sutter) in the Superior Court of the State of California for the City and County of San Francisco alleging that Sutter engaged in price tampering and fixing, unreasonable restraint of trade, and monopolization in violation of California’s Cartwright Act—the state’s primary antitrust law—seeking disgorgement of overcharges and the restoration of competition in health care markets in Northern California. The state asserts that, taken together, Sutter’s practices “improperly block any and all practical efforts to foster or encourage price competition between Sutter and any rival Healthcare Providers or Hospital Systems.”

Sutter, a nonprofit health system comprised of 24 state-licensed acute-care hospitals, 35 outpatient centers, a 5,500 member physician organization, and other ancillary providers, is the largest provider of general acute care hospital services and ancillary services in Northern California.

Summary of the Complaint
The state’s complaint alleges that, beginning in the 1990’s, Sutter implemented a deliberate strategy to achieve market power through mergers and acquisitions, culminating in Sutter’s acquisitions of the California Healthcare System in 1996 and Summit Medical Center in 2000, and subsequently leveraged that market power in certain local health care markets to prevent insurers from “using steering and tiering to counter its excessive pricing.”

According to the complaint, a 2008 Federal Trade Commission retrospective study of the merger between Sutter and Summit Medical Center found that post-merger contracted price increases for Summit ranged from approximately 29% to 72%, compared to approximately 10% to 21% at Alta Bates, and that the Summit post-merger price increases were among the highest in California. Similarly, researchers at University of California, Berkeley recently issued a report that examined the consolidation of the hospital, physician, and health insurance markets in California from 2010 to 2016. The authors said 44 of California’s 58 counties had “highly concentrated” hospital markets.

The state alleged that Sutter anticompetitively leveraged its market power in local health care markets, including forcing payors to accept agreements with contractual terms that:

  1. Exploited its market power to illegally tie/bundle each of its individual hospitals to all of the other hospitals and providers in Sutter’s Northern California hospital network through the use of “all-or-nothing” market provisions;
  2. Entered into written or oral agreements that either prohibited or severely penalized health plans that used tiered networks by eliminating or nearly eliminating the health plan’s negotiated discounts; and
  3. Prohibited the disclosure of its prices for general acute care hospital services, ancillary, and other provider services before the service is utilized and billed, concealing Sutter’s inflated pricing from payors.

The state argues that these provisions have had significant anticompetitive effects in Northern California, including creating barriers to entry and expansion, depriving patients of the ability and incentive to choose better-quality/lower-cost competing providers, and reducing competition based on price or quality.

Market Definition
Initially, the state contended that they need not define “the particular economic markets (product or geographic) (parenthetical added) that Sutter’s conduct has harmed” as there is direct evidence of the negative effects that Sutter’s allegedly anticompetitive behavior has caused Network Vendors1 and self-funded payors. Accordingly, Sutter’s ability to force anticompetitive contract terms into all of its agreements and its ability to charge “supracompetitive prices to payors on a system-wide basis” eliminate the need to conduct “further analysis of competitive effects in particular defined markets.”

Alternatively, in the event the court rejects their initial argument, the state also defined the relevant product market as “the cluster of general acute care hospital services (including inpatient and outpatient services), as well as ancillary services, that are made available for purchase, in whole or in part, through Network Vendors out of the funds of self-funded payors.” The state then defined the relevant geographic market as either a 15-mile/30-minute driving time from any Sutter hospital or on the basis of counties in which a Sutter hospital is located, or, alternatively, based on the regions set out in Paragraph 84 of a complaint filed against Sutter in UFCW & Employers Benefit Trust v. Sutter Health, et al., Case No. 15-53841 , in which one or more Sutter facilities are located.

In the UFCW & Employers Benefit Trust case, a grocery workers’ health plan sued Sutter and alleged it was violating antitrust and unfair competition laws relating to contracting practices, such as “gag clauses” that prevent patients from seeing negotiated rates and choosing a cheaper provider and “all-or-nothing” terms that require every facility in a health system to be included in insurance networks.

The California AG’s suit against Sutter, much like the Department of Justice Antitrust Division and the State of North Carolina anti-steering lawsuit against Carolina’s Healthcare System, provides yet another example of the scrutiny the government, both federal and state, are placing on potentially anticompetitive contract provisions, particularly when the contracting parties possess significant market power. Federal antitrust enforcers, state AGs, and private plaintiffs can actively enforce both federal and state antitrust laws. Health care providers, particularly those with significant market share, should evaluate their contracting practices to ensure that they are not engaged in anticompetitive behavior that could trigger review under federal or state antitrust laws.