On March 29, 2018, the Attorney General of California filed an antitrust action against Sutter Health and its affiliates (“Sutter”) alleging Sutter engaged in various anticompetitive conduct in violation of California’s Cartwright Act.¹  According to the Complaint, healthcare costs in California have rapidly increased, and prices in Northern California are higher than in other areas of the State.  For example, the State asserts that “unadjusted inpatient procedure prices are 70% higher in Northern California than Southern California, corresponding to hospital market concentration being 110% higher in Northern California than Southern California . . .”

The State believes that the increased cost of healthcare in Northern California is largely “attributable to Sutter and its anticompetitive contractual practices,” which it allegedly imposed as a result of securing market power in certain local markets in Northern California.  The State asserts that Sutter has “compelled all, or nearly all, of the Network vendors operating in Northern California to enter into unduly restrictive and anticompetitive contracts” that have:

• Established, increased and maintained Sutter’s power to control prices and exclude competition;
• Foreclosed price competition by Sutter’s competitors; and
• Enabled Sutter to impose prices for hospital and healthcare services and ancillary services that far exceed the prices it would have been able to charge in an unconstrained, competitive market.

Sutter Health is the largest hospital system in Northern California, with 24 state-licensed acute-care hospitals and 4,311 acute care beds, 35 outpatient centers, a 5,500 member physician organization, and other ancillary providers.

Summary of the State’s Complaint

The State argues that Sutter began to implement a strategy to acquire market power at the time of the merger between Sutter’s Alta Bates Hospital and Summit Medical Center (“Summit”), noting that the transaction enabled Sutter to “increase prices, and thus costs, for its healthcare services.”  According to the complaint, a 2008 Federal Trade Commission retrospective review of the transaction found that contracted price increases for Summit post-merger ranged from approximately 29% to 72% depending on the insurer, compared to approximately 10% to 21% at Alta Bates, and that the Summit post-merger price increases were among the highest in California.”  Sutter defended the merger by arguing, in part, that it would not be able to exercise market power to raise prices post-merger, because insurers could incentivize patients to seek care at lower-cost alternatives through various steering and tiering mechanisms.  The district court agreed.

The State alleges, among other things, that Sutter is now leveraging and maximizing its “market power in certain local healthcare markets across all markets” and preventing insurers from “using steering and tiering to counter its excessive pricing.”  Moreover, Sutter is accused of successfully demanding that all, or nearly all, of its contracts with its “Network Vendors²” include implicitly or explicitly:

• An agreement that contains an “all-or-nothing” contract provision requiring that all Sutter hospitals and healthcare providers throughout Northern California be included in the payor’s provider network.  The State alleges that Sutter has exploited its substantial market power to illegally tie or bundle each of its individual hospitals to all of the other hospitals and providers in its Northern California hospital network.
• An agreement that prohibits anyone offering access to a provider network from giving incentives to patients that encourage them to use the healthcare facilities of Sutter’s competitors.  The State alleges Sutter entered written or oral agreements that forbid or severely penalized health plans that used tiered networks by eliminating or nearly eliminating the health plan’s negotiated discounts off of Sutter’s pricing.
• An agreement prohibiting the disclosure of Sutter’s prices for its general acute care hospital services (including inpatient and outpatient services) and ancillary and other provider services, before the service is utilized and billed.  The State alleges that this has the effect of concealing Sutter’s inflated pricing from the self-funded and other payors, and preventing them from determining the prices they will later have to pay to Sutter for the healthcare services included in their health plans at the time they select among the provider network options offered by competing Network Vendors.  As a result, payors and enrollees in health plans were allegedly “less able to exert commercial pressure on Sutter to moderate its inflated pricing.”

According to the State, Sutter also uses “punitively high Out-of-Network Hospital pricing in combination with the anticompetitive provisions in its agreements with Network Vendors to make it economically unfeasible for Network Vendors to choose higher-quality and/or lower-cost hospital competitors.”

The State alleges that such provisions have had significant anticompetitive effects in Northern California, including: (1) creating barriers to entry and expansion for existing and potential general acute care competitors in each of the geographic markets where Sutter’s hospitals are located; (2) depriving patients of the ability and the incentive to choose a better-quality and/or lower cost competing hospital or ancillary provider; and (3) depriving Sutter’s competitors of the ability to effectively compete based on price or quality, which allows Sutter to maintain system-wide prices at levels that are significantly higher than the prices currently charged by its competitors and substantially higher than prices that could be charged in a competitive market.

Relevant Market Definition

In an interesting twist, the State notes that it need not define and identify “the particular economic markets that Sutter’s conduct has harmed” given evidence of the direct negative effects Sutter’s “anticompetitive conduct has caused Network Vendors and Self-Funded Payors,” who the State alleges have paid substantial overcharges compared to what they would have paid in a competitive market for healthcare services.  The State notes that Sutter’s ability to impose anticompetitive contract terms in all of its agreements with payors and its ability to “persistently and directly charge supracompetitive prices to payors on a system-wide basis” are direct evidence of its market power  that “obviates any need for further analysis of competitive effects in particular defined markets.”³  Notwithstanding this assertion, the State also defines 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 asserts that the relevant geographic market can alternatively be defined either (1) as 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 (2) based on the regions set out in Paragraph 84 of a complaint filed against Sutter by the UFCW & Employers Benefit Trust (UFCW & Employers Benefit Trust v. Sutter Health, et al., Case No. 15-53841), in which one or more Sutter facilities are located.

The State alleges that health plan enrollees who live and work in the vicinity of a Sutter facility do not view hospitals located outside of the relevant geographic market as viable substitutes for facilities located within the geographic market.  Similarly, the State alleges that not only are network vendors (who seek to assemble provider networks for health plan enrollees), unwilling to consider hospitals outside of the relevant geographic market to include in their networks, due to Sutter’s market shares in a large number of zip codes and the existence of “must have” Sutter hospitals, the Network Vendors are “unable to assemble commercially viable Providers Networks that exclude all Sutter hospitals.”

Conclusion

This case serves as an important reminder that State Attorneys General can be just as aggressive in enforcing the antitrust laws as the federal antitrust authorities.  While integrated health care systems can often provide a number of efficiencies and benefits to consumers, under certain circumstances the antitrust authorities may view specific business and contracting practices with skepticism.  Large health care providers with significant market share in one or more geographic areas need to be mindful of their contracting practices and ensure that their business strategies are closely scrutinized by antitrust counsel prior to implementation.  This matter, as well as the ongoing litigation the Department of Justice Antitrust Division and the State of North Carolina have against the Carolina’s Healthcare System, is another example that contractual provisions that reference competitors and/or anti-tiering or anti-steering clauses in payers contacts may, depending on local market conditions, raise antitrust concerns.

1. The Cartwright Act is California’s principal state antitrust law.  It is intended to prevent anticompetitive activity, and it mirrors the same concepts as the federal antitrust laws (the Sherman Act and the Clayton Acts).  It prohibits agreements between competitors to restrain trade, fix prices or production, or lessen competition, and other conduct that unreasonably restrains trade.

2. Network Vendors are defined in the complaint as a small group of specialized insurers that possess the expertise necessary to develop and assemble provider networks that will be useful to all of the people enrolled in the health plans offered by a variety of employers and Healthcare Benefits Trusts operating in a variety of locations in Northern California.  Healthcare benefits are sometimes funded through a trust that is established and maintained under the terms of a collective bargaining agreement between a labor union and one or more employers (i.e.,  Healthcare Benefits Trusts).

3. Direct effects evidence is evidence indicating the likely competitive effects of a practice (or transaction) that is not based on traditional inferences drawn solely from market concentration.  Such evidence can include price increases or a reduction in output following a consummated merger or other indicia that helps to determine the presence or the likelihood of the exercise of market power.