Sutter Settles Antitrust Case for $575 Million and Restrictions on Its Payer Contracting

This holiday season health care lawyers around the country were treated to a first look at the settlement of the long-running antitrust litigation against Sutter Health. The settlement requires Sutter to pay $575 million. Perhaps even more newsworthy, Sutter has also agreed to several restrictions on its payer contracting that will constrain its operations for at least the next decade. In this post mortem of a half decade with Sutter in the antitrust hotseat,¹ we say Happy New Year with our takeaways for others in the healthcare industry to help keep you out of the antitrust crosshairs in the 2020s.

Background

To understand how Sutter got here, let’s rewind to Sutter’s last major run-in with the antitrust laws. In August 2000, the California AG sued Sutter to block its proposed acquisition of Oakland’s Summit Medical Center. The AG asserted that the East Bay was a cognizable geographic market in which Sutter, with its Alta Bates Medical Center in Berkeley, would acquire market power through the transaction. The district court denied the AG’s requested preliminary injunction, holding that the East Bay was too narrow a market:

If you believe the plaintiff's market, you would believe that Conestoga wagons are still being used today, that no one ever goes over the hills because the hills are too high and you have to build a boat to take you across the Bay.²

Thereafter, Sutter grew into one of the largest health systems in California, if not the country. With that growth came close antitrust scrutiny. By 2010, Sutter was drawing the attention of patient advocacy groups claiming that “it can dictate higher prices … because it has a lock on certain markets.”³ In an August 2012 Wall Street Journal article about how physician practice acquisitions lead to higher prices, Sutter was singled out for a physician practice transaction that caused an immediate 140% jump in rates for those physicians.⁴ In 2013, a New York Times article titled “As Hospital Prices Soar, a Single Stitch Tops $500” used Sutter as a target to highlight rising hospital prices.⁵

Beginning in September 2012, Sutter was sued in a series of cases alleging that its contracting practices with commercial payers violated the antitrust laws. The complaints challenged Sutter for contracting with payers on an “all or nothing” basis. System-wide contracts are common, often procompetitive, and not on their own problematic; but the complaints alleged that Sutter refused to allow payers to exclude some of Sutter’s hospitals (in markets with cheaper alternatives) from their networks. The complaints also alleged that Sutter refused to allow payers to steer patients to lower cost providers and insisted that Sutter facilities always be in the best tier of a network. These allegations were packaged into a number of different antitrust claims in the federal and state court cases: unlawful tying in violation of Section 1 of the Sherman Act and California’s Cartwright Act (asserted under both per se rule and the rule of reason); vertical price tampering in violation of the Cartwright Act; and monopolization, under Section 2 of the Sherman Act and the Cartwright Act.

For a time, it seemed that Sutter might carry on its tradition of winning early on the antitrust battlefield. It successfully moved to dismiss the federal putative class action three times at the district court level. But three strikes wasn’t an out for the plaintiffs in that case. It was an appeal, and a reversal, a resuscitated complaint, and then a long, drawn out discovery phase that saw both sides seeking swaths of documents and data from third parties all over California. In the parallel state court putative class action, Sutter was unable to compel the named plaintiff, the United Food and Commercial Workers & Employers Benefit Trust, to arbitrate its claims. Sutter was stuck in an antitrust quagmire with no clear path out.

The plaintiffs’ got a boost in March 2018, when the California Attorney General joined the antitrust litigation against Sutter. The AG’s complaint targeted the same conduct as the class actions: Sutter’s contracting practices with payers. What was new about the AG’s case was its request for relief, which sought injunctive relief of a nature and scale that would completely overhaul Sutter’s payer contracting operations. The State’s proposed injunction would have required Sutter to create separate negotiating teams for each of the payers with which Sutter deals and to conduct negotiations a staggered basis. The State also asked for mandatory arbitration of rate disputes with payers.⁶

The Settlement

With the California AG and an army of plaintiffs’ lawyers on the attack, Sutter was careening toward what promised to be an extraordinarily expensive and disruptive three month trial with massive stakes. The pressure was heightened with the spotlight shining brightly on a trial about healthcare costs at a time when the political and public discourse around healthcare is highly critical of the cost of healthcare in the country. So it was unsurprising to see a settlement announcement on the eve of trial. The details of that settlement were finally revealed a couple of months later. The settlement’s key components:

• $575 million in cash to be paid within ten days after approval of the settlement.
• A broad and multifaceted injunction both (a) restricting Sutter’s conduct in contracting with payers; and (b) forcing Sutter to engage in a smorgasbord of behavior ostensibly intended to keep costs down, and quality and access up.
• Sutter has to stop its all-or-nothing contracting and permit payers and employers to exclude some but not all of its facilities from their networks. Sutter also has to make a number of its facilities in less competitive markets, like rural hospitals and Alta Bates Summit Medical Center, available to payers and employers.
• Sutter has to meet certain clinical integration criteria to require a bundle of its providers be included in a network together.
• Sutter has to stop using anti-steering provisions that prohibit payers or employers from steering patients to other hospitals.
• Sutter rates for out-of-network services will be capped.
• Sutter is subject to a compliance monitor for at least 10 years.

Takeaways

This watershed settlement of a healthcare antitrust case highlights the need for antitrust compliance programs for healthcare providers’ payer contracting practices. Here are our specific takeaways:

• All-or-nothing contracting may create antitrust risk for systems with market power in some but not all markets. Selling multiple products or services in a single transaction is not inherently problematic. It’s more administratively efficient and often driven by consumer demand for one-stop shopping. What got Sutter in trouble was its alleged refusal to allow payers to negotiate for some but not all of Sutter’s facilities to be in their networks. Unfortunately, the resolution of the Sutter case doesn’t tell us much about when it’s permissible for to engage in all-or-nothing contracting with payers. What we know: (1) there’s no problem with a system that has no market power in any market offering its services on an all-or-nothing basis; (2) the California AG and the plaintiffs’ bar believe all-or-nothing contracting presents an antitrust problem when a system has some hospitals with market power (e.g., rural hospitals) and other hospitals that don’t have market power (e.g., major metropolitan area hospitals). The second point is certainly not a matter of established antitrust law, even after this case. However, it would be wise for any health system that has a hospital that faces minimal competition—which is often the case for rural hospitals—to be careful in its use of all-or-nothing contracting practices.

• "No steering" provisions will likely continue to receive scrutiny. The Sutter settlement includes injunctive relief prohibiting Sutter from using anti-steering in its contracts with payers. These provisions will raise antitrust concerns if a dominant system puts them in payer contracts because anti-steering provisions may weaken competition from other area providers. The Sutter case was the second major litigation that put that kind of contracting in the cross-hairs. The first was the Department of Justice’s case against the largest hospital system in the Charlotte, North Carolina area, which used anti-steering provisions to prevent payers from steering patients to cheaper hospitals in the area. That case settled too, based on the health system’s agreement not to enforce the anti-steering provisions or impose them on payers in future.⁷

• Financial exposure in antitrust cases is high because of treble damages. Outside Sutter’s highest echelon, nobody will know why Sutter settled the case. But we can make some educated guesses. Plaintiffs’ damages expert was expected to testify that Sutter’s conduct caused $980 million in damages. Because antitrust laws require treble damages, if the jury had found $980 million in damages, Sutter would have been liable for three times that amount, or $2.94 billion, plus all of plaintiffs’ attorneys’ fees and costs. Staring down the barrel of a $3 billion worst case scenario, a $575 million settlement figure to resolve damages appears reasonable.

• All that money and time, no binding precedent. The sprawling discovery in the Sutter litigation included collection and analysis of over 800 million lines of claims data, along with huge productions of documents from dozens of third parties. The case presented novel theories of anticompetitive conduct and sought unprecedented relief. All these years later we’re left without a clear roadmap for compliance.

FOOTNOTES

1  Sutter’s not actually all the way out of its hotseat: the settlement only resolves the state court cases, leaving open a parallel federal case.
2  The district court’s decision in the Sutter case espouses a broad view of geographic markets in major metropolitan areas that is at odds with more recent hospital merger decisions. For instance, in the FTC’s recent challenge to a hospital merger in the Chicagoland area the Seventh Circuit found that the FTC properly defined a relevant geographic market that carved up the city in a way that the merging parties and some commentators had referred to as gerrymandering for aggressive merger enforcement. See Amet Sachdev, Northshore CEO Says FTC Gerrymandered Hospital Market to Challenge Merger, CHICAGO TRIB., Jan. 5, 2016, https://www.chicagotribune.com/business/ct-advocate-northshore-ftc-0106-biz-20160105-story.html.
3  Jordan Rau, As Hospital System Expands, Patient Advocates Worry, N.P.R., Nov. 20, 2010, https://www.npr.org/2010/11/18/131413075/as-hospital-system-expands-patient-advocates-worry.
4  Anna Wilde Matthews, Same Doctor Visit, Double the Cost, Wall Street J., Aug. 27, 2012, https://www.wsj.com/articles/SB10000872396390443713704577601113671007448. A change in prices when a doctor—or a group of doctors—joins a health system’s and is billed out on the system’s preexisting contracts with payers isn’t an antitrust problem. The antitrust laws are only concerned with price increases from newfound market power, and a doctor joining a system’s existing contracts with payers isn’t an exercise of new market power. See In re Evanston, 2007 WL 2286195, *54 (F.T.C. Aug. 6, 2007).
5  Elizabeth Rosenthal, As Hospital Prices Soar, a Single Stitch Tops $500, N.Y. Times, Dec. 3, 2013.
6  The State’s request for a complicated set of conduct remedies is at odds with the federal antitrust enforcers’ policy in favor of structural remedies. See Assistant Attorney General Makan Delrahim Keynote Address at the American Bar Association’s Antitrust Fall Forum, Nov. 16, 2017, available at https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-keynote-address-american-bar (“When competition policy works well, it maintains economic liberty and leaves decision-making to the markets. As Bork explained: ‘Antitrust was originally conceived as a limited intervention in free and private processes for the purpose of keeping those processes free.’… Unfortunately, behavioral remedies often fail to do that. Instead of protecting the competition … a behavioral remedy supplants competition with regulation; it replaces disaggregated decision making with central planning.”).
7  Unlike Sutter, that case didn’t result in a massive payout, but only because it was a public hospital being sued and the court held that damages weren’t recoverable under the Local Government Antitrust Act of 1984. The Sutter case showcases the massive monetary exposure that nonprofit systems face in the same kind of case.