Calif. AG’s Suit Targets Hospital-Network Vendor Contracts

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By Meg McEvoy

As hospital systems merge, acquire, and gain market power, certain types of contractual provisions in hospital contracts with network vendors may be in the crosshairs of antitrust regulators.

After six years of investigation, California Attorney General Xavier Becerra (D) recently filed a state law antitrust complaint against Sutter Health, the largest hospital system in Northern California, alleging that Sutter is “contractually insulating itself from price competition” through its agreements with network vendors.

Network vendors are the entities that establish provider networks.

The suit should prompt multihospital systems with a strong market presence to examine potential anticompetitive effects of their contracting practices, according to antitrust attorneys. The case also has the potential to break new ground on the legality of certain contracting practices between hospitals and their networks.

Sutter’s Market Power

Sutter Health consists of at least 24 acute-care hospital facilities, 31 ambulatory surgery centers, nine cancer centers, six specialty care centers, nine major physician organizations, 8,200 physicians, and 48,000 employees located in 19 counties in Northern California, according to Becerra’s complaint.

Sutter has acquired other hospitals in Northern California in “succeeding waves” since the 1990s, the complaint alleges. Sutter overcame the AG’s antitrust challenges to the merger of Alta Bates, owned by Sutter, with Summit Healthcare, in 2000.

The anticompetitive effects of Sutter’s acquisitions are higher prices for health care in Northern California, the AG alleges. The complaint cites a study that found that inpatient procedure prices adjusted for input costs are 32 percent higher in Northern California than in Southern California.

The complaint also alleges that price increases following the Alta-Bates/Summit merger ranged from 29 percent to 72 percent, depending on the insurer, making the Summit post-merger prices among the highest in California.

“What is common these days is the trend of hospitals acquiring other hospitals in their service areas to expand,” Jack Rovner, attorney and co-founder of the Health Law Consultancy, Chicago, told Bloomberg Law. “[Regulators] are monitoring these cases,” Rovner said, highlighting challenges to health-care acquisitions by the Federal Trade Commission in North Dakota and West Virginia.

While hospitals may make claims that anticompetitive effects of mergers and acquisitions can be mitigated, or that the deals could even be pro-competitive, Rovner said, “there is no data that has ever found any of these acquisitions to lead to efficiency, meaning lower price and better quality. Quite the opposite.”

“Other large systems should keep an eye on this case,” Dionne Lomax, a member in Mintz Levin’s antitrust and trade regulation practice in Washington, told Bloomberg Law.

“This case as well as the DOJ’s case against Carolinas Healthcare are certainly examples of the types of enforcement actions that may be taken by state attorneys general, federal authorities, or both, against large systems that they view as having market power,” Lomax said. The Justice Department filed that civil antitrust case against Carolinas Healthcare in June 2016.

The Sutter Health case “raises a lot of significant, cutting-edge issues, and, depending on how it comes out, could provide a lot of guidance,” David Ettinger, partner and head of the antitrust and trade regulation practice group at Honigman in Detroit, told Bloomberg Law.

Anticompetitive Contracts

In the complaint, the AG takes aim at several types of Sutter’s contract terms.

Sutter’s “all-or-nothing” contract terms allegedly require every health plan that contracted with Sutter to include in its provider network the services of every other Sutter hospital or provider. Sutter uses its status as a “must have” hospital in certain markets to force network vendors to include Sutter in all markets where they are assembling networks, according to the complaint.

Alleged anti-tiering and anti-steering provisions are also in the AG’s line of fire. Tiering and steering are mechanisms by which managed care organizations or networks can discipline hospitals for price increases by diverting patients to lower-priced care.

In the Alta Bates merger, Sutter successfully argued that tiering and steering would help keep the merged entity’s prices low. But the AG’s complaint says this isn’t happening because Sutter is preventing it through its contracts.

“How are you going to steer and tier if the only provider in the game won’t contract that way?” Rovner said. “The bottom line becomes: if, in fact, Sutter has gained market power through its acquisitions from Sacramento down to the East Bay, then basically, it’s take it or leave it.”

A discussion of anti-tiering/steering provisions is not new, Ettinger said, but “we don’t have any decisions at this point on the antitrust implications.”

The DOJ’s case against Carolinas Healthcare also involves steering restrictions.

“If I were the general counsel of a large health system, I would want to look at this [Sutter] and follow it, and take a hard look at our contracting practices,” Lomax said.

Contracts between providers and network vendors, the companies that assemble health-care provider networks, are not publicly available documents, so it’s difficult to know what is “standard practice.” But contracts that could be considered standard agreements for a smaller hospital could reach anticompetitive levels if implemented by a hospital with large market share.

“These would only be issues if they were used by a hospital that’s trying to preserve its market power,” Ettinger said.

Out-of-Network Pricing

The Sutter case could also break new ground on whether a hospital’s charging high out-of-network rates for its services is considered an exclusionary practice under the antitrust laws, Ettinger said.

The complaint alleges that Sutter charges “punitively high” out-of-network prices for its services. Networks ordinarily have some tolerance for patients using higher-priced out-of-network services—the question is whether Sutter is unlawfully penalizing this out-of-network utilization by charging exorbitant rates that provider networks can’t tolerate.

The idea of high out-of-network pricing as an exclusionary practice is a novel one in antitrust law, Ettinger said, but “I think the logic there, for a firm with market power, fits within the normal kinds of antitrust analysis.”

Sutter Health’s practices have been challenged in related cases brought by patients under federal antitrust laws in Sidibe v. Sutter Health, and in California state court on behalf of workers’ unions in UFCW & Employers Benefit Trust. v. Sutter Health.

The case is People v. Sutter Health, CGC-18-565398, filed 3/29/18.

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