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Date:
03/15/2021
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Consumer Class Action Against Sutter Health Allowed to Proceed

A recent case in the Northern District of California presents a reminder that hospital systems need to consider antitrust issues when negotiating multi-hospital contracts with health plans. Unfortunately, even when hospitals reach mutually satisfactory agreements with health plans, the contracts are still subject to attack by third parties that view the contracts as anticompetitive.

In Sidbe v. Sutter Health, Sutter negotiated a series of systemwide contracts with major health plans (each of which was large and sophisticated and would presumably have significant bargaining power).  Although the health plans were presumably happy with the contracts that they negotiated, the legality of the contracts was challenged in a consumer class action in which the class representatives alleged that, by bargaining to have its hospitals included in the health plan networks, Sutter violated antitrust laws by depriving the plaintiff class of a hypothetical opportunity to purchase cheaper health insurance with a narrow network that excluded Sutter hospitals. In its recent rulings on Sutter’s motion for summary judgement, the court granted summary judgment on a number of the plaintiff’s claims, but allowed claims for illegal tying to proceed to trial. This ruling raises issues that should be considered by hospital systems attempting to negotiate multi hospital contracts.

In Sidbe, four employees who purchased health insurance and two employers who purchased health insurance for their employees brought a class action against Sutter Heath alleging that Sutter Health violated state and federal antitrust law.  The employment purchasers alleged that Sutter had tied the purchase of health care services in geographic areas in which it had market power (the tying market) with the purchase of services in geographic areas where Sutter did not have market power (the tied market). The purchasers also claimed that Sutter had monopolized the tying markets and had attempted to monopolize the tied markets.   

Sutter recently attempted to obtain summary resolution of these claims in its favor, without having to go to trial. The court denied summary judgment on the tying claims and granted it on the monopolization and attempted monopolization claims.

1.      The Court Denied Summary Judgment on the Tying Claims

It is a violation of state and federal antitrust law for a seller with market power in the tying market (in which the seller has market power) to extend its market power to additional products or markets by conditioning the sale of the tying product on the purchase of a second product, the tied product, that the purchaser either did not want or wanted to purchase on different terms or from a different seller.

The plaintiffs alleged that Sutter required health plans that wanted to contract with its hospitals to enter into systemwide contracts covering all Sutter hospitals that contained several anticompetitive elements: (1) high reimbursement rates (generally 95 percent of billed charges) for out-of-network services provided by Sutter hospitals that were applicable if the health plan chose to exclude a Sutter hospital from its network (such as by introducing a narrow network health plan that excluded Sutter hospitals); (2) a prohibition against steering patients away from Sutter hospitals; and (3) a prohibition against informing members of Sutter’s higher prices or allegedly lower quality. The plaintiffs alleged that the health plans were forced to agree to these systemwide terms in order to contract with Sutter hospitals in geographic areas in which Sutter had market power.

Sutter moved for summary judgment, claiming that it was not engaged in illegal tying and that all it had done is agreed to give the health plans a discount from its billed charges in exchange for the each of the hospitals being included in its network.

The court denied summary judgment, holding that there were disputed issues of material fact that precluded summary judgment because there were factual issues regarding: (1) whether Sutter used the tying hospitals to force higher prices in the tied markets; and (2) whether Sutter used the contracts to force the health plans to include the tied hospitals in all of the health plans that they offered, or if Sutter allowed the health plans to exclude Sutter hospitals from their lower priced offerings. These claims will proceed to trial.

 

2.     The Court Granted Summary Judgment on the Monopolization and Attempted Monopolization Claims

The plaintiffs’ monopolization claims were based on the high market share that Sutter has in the seven tying markets.  In order to prevail on a claim for monopolization, a plaintiff must prove both the possession of monopoly power in the relevant market and that the market power was willfully acquired or maintained.  

The court granted summary judgment on the monopolization claim, finding that the plaintiffs presented no evidence that Sutter’s market power in the tying markets at issue was willful. The court held that six of the seven markets that plaintiffs alleged Sutter monopolized were rural markets and that the rural nature of these markets gave Sutter its high market share, not Sutter’s willful conduct. As to the remaining market, the court found that there was no evidence that Sutter did anything to prevent competitors from entering the market. 

The court also granted summary judgment on the attempted monopolization claims. In order to prevail on a claim for attempted monopolization, a plaintiff must prove: (1) that the defendant engaged in predatory or anticompetitive conduct; (2) with specific intent to monopolize; and (3) the defendant has a dangerous probability of achieving monopoly power. 

The plaintiffs alleged that Sutter’s systemwide contracts constituted an attempt to monopolize the tied markets. The court granted summary judgment in this claim, finding that the plaintiffs presented no evidence that Sutter’s alleged conduct posed a dangerous probability of success in monopolizing the tied markets.

3.     The Role of the Emergency Treatment and Active Labor Act on the Lawsuit

One interesting point was not addressed by the parties or the court. Sutter’s alleged ability to force health plans to include hospitals in the tied markets in their networks was based on the fact that Sutter required health plans to agree to pay high prices for any out-of-network services provided by Sutter hospitals. In order to avoid paying the high out-of-network price, health plans would agree to put the Sutter hospitals in the tied market in their networks. 

Sutter, however, did not force health plans to purchase any out-of-network services from its hospitals.  Rather, all hospitals are required by law to provide emergency services to members of out-of-network health plans and the health plans are required to pay for such services. Because these out-of-network transactions for emergency services are forced transactions with no agreed upon reimbursement rate, health plans often pay much less than the normal price for these services, knowing that the hospital is unlikely to sue for higher reimbursement given the cost of litigation. 

It appears that Sutter may have used its systemwide contracts as a means of attempting to obtain a negotiated rate for out-of-network services that it is required by law to provide and the health plans are required by law to pay for. Sutter’s ability to pressure health plans to include hospitals in the tied markets in their networks appears to have been the result of the legal requirement to provide emergency services to members of non-contracted health plans, and not necessarily on any anticompetitive conduct by Sutter.

Authors

C. Darryl Cordero, Partner
Partner
cdc [at] paynefears.com
Robert C. Leventhal, Partner
Partner
rcl [at] paynefears.com