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 Vendors[2]” 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.

In March, the Medicare Payment Advisory Commission (MedPAC) released its biannual report to Congress on matters affecting the Medicare program. MedPAC is an independent congressional agency that advises Congress on issues relating to Medicare.

Though the March report includes several policy proposals, one of the most significant is MedPAC’s recommendation that Congress eliminate the Merit-based Incentive Payment System (MIPS) passed as part of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). The report formalizes a vote the Commission took back in January to recommend repealing MIPS and replacing it with a voluntary value program (VVP) that MedPAC predicts would better achieve the goals put forth in MACRA. Continue Reading MedPAC Recommends Significant Changes to MACRA

The Department of Justice (“DOJ”) Antitrust Division recently announced plans to hold a series of public roundtable discussions to analyze the relationship between competition and regulation, and its implications for antitrust enforcement policy.  As the Antitrust Division continues to scrutinize the healthcare industry, these roundtables may give a window into the Division’s current thinking about mergers and acquisitions and contracting practices in the industry.  The roundtable series starts on Wednesday, March 14, 2018, with a focus on antitrust exemptions and immunities, including a focus on the appropriate role of the state action doctrine.  The roundables will include perspectives from various industry participants as well as “academics, think tanks, and other interested parties to discuss the economic and legal analyses of competition and deregulation.”  The second roundtable will be held on April 26, 2018, and will focus on consent decrees.  The third roundtable will be held on May 31, 2018, and will analyze the consumer costs of anticompetitive regulations.  The DOJ will accept public comments (not to exceed 20 pages) in advance of each of the roundtables.  The federal antitrust agencies often hold public events of this nature to further inform their antitrust enforcement agendas.  It will be interesting to see if this roundtable series results in any major enforcement policy changes for the Antitrust Division, which is now under the leadership of Assistant Attorney General, Makan Delrahim.

The Department of Health and Human Services Office of the Inspector General (OIG) has issued an Advisory Opinion (Opinion) in connection with a hospital’s gainsharing arrangement (Arrangement) with a designated group of neurosurgeons who perform spinal fusion surgeries at the hospital. According to the Opinion, the OIG would not impose sanctions because the Arrangement, when viewed in its entirety, is not designed or likely to induce the neurosurgeons to (i) reduce or limit medically necessary services to their Medicare or Medicaid patients, or (ii) increase referrals to the hospital. This Opinion is the latest in a line of earlier advisory opinions to “bless” gainsharing arrangements that meet certain criteria for minimizing the risk of fraud and abuse. Continue Reading OIG Reaffirms Permissibility of Certain Gainsharing Arrangements

In both civil and criminal enforcement proceedings, 2017 was perhaps most notable for the cases brought against individual health care providers and small physician practice owners.  Among the factors that may have resulted in the uptick in cases against individuals are the Yates Memo issued in late 2015, improved and increased reliance on sophisticated data analytics, and the aggressive focus on opioid addiction and its causes. Continue Reading Health Care Enforcement Review and 2018 Outlook: Criminal and Civil Enforcement Trends

Correction: An earlier version of this post incorrectly noted that the American Medical Association opposed the rule. The post has been updated to include the AMA’s full statement expressing support for proposed rule. [October 10, 2017]

The U.S. Department of Veterans Affairs (“VA”) is taking a significant step towards expanding needed services to Veterans by proposing a rule to preempt state restrictions on telehealth.

Most states currently restrict providers (including VA employees) from treating patients that are located in that state if the provider is not licensed there. As a result, the VA has had difficulty getting a sufficient number of providers to furnish services via telemedicine for fear that they will face discipline from those states for the unlicensed practice of medicine. Continue Reading Department of Veterans Affairs Aims to Trump State Telemedicine Rules

A New Jersey Supreme Court case earlier this summer has New Jersey lawyers re-examining their clients’ business structures under the State’s corporate practice of medicine doctrine.

Many states prohibit the corporate practice of medicine (“CPOM”) in order to prevent or limit a lay person from interfering with a physician’s independent medical judgment. In New Jersey, for example, the State Board of Medical Examiners’ regulations prohibit a licensee with a more limited scope of practice (e.g., physical therapists, chiropractors, nurse practitioners, etc.) from employing physicians.

In Allstate Ins. Co. v. Northfield Med. Ctr., P.C., 2017 BL 148804 (N.J. May 4, 2017), the New Jersey Supreme Court  ruled that a chiropractor (and his attorney that advised on the structure) may have violated the Insurance Fraud Prevention Act because, under the structure,  a chiropractor could terminate a physician’s employment at any time and had more control over the practice’s profits than the physician (who is required to own a majority interest of the practice in New Jersey).  Thus, the court ruled that the medical practice was controlled by the chiropractor instead of the physician in violation of the New Jersey CPOM prohibition.

Submitting claims while a practice is structured in violation of the CPOM doctrine can lead to insurers recouping payments as false claims. Individual physicians, corporations, and attorneys can also face disciplinary action for their involvement in setting up or operating the fraudulent entity.

It is important that the organizational documents are set up to give the physician control over the practice, but this control should be exercised in reality and not just on paper. Physicians often have managers run many of the business aspects of the practice, but the physician should have the final say with respect to the medical and financial decisions of the practice and the hiring and firing of professionals.  Courts may look past the face of the documents to see who is really calling the shots on a daily basis.

While this recent case is spurring attorneys to evaluate their clients’ structures in New Jersey, this is a good reminder to take a fresh look at CPOM restrictions in other states as well.  Make sure your structure works at the outset and re-examine every so often to adapt with evolving laws and court interpretations of such laws.

In a major public move that has been long-awaited by proponents of evidence-based stem cell science, FDA Commissioner Scott Gottlieb issued a lengthy statement on August 28, 2017 “on the FDA’s new policy steps and enforcement efforts to ensure proper oversight of stem cell therapies and regenerative medicine.” Continue Reading FDA Commissioner Announces Stem Cell Enforcement Shift, Plans to Develop Comprehensive Regenerative Medicine Policies

Last week, a number of health care industry associations sent letters to Congress detailing ways in which the government could relieve them of the burdens associated with “red tape.” The letters are in response to the first stage of a House initiative dubbed the “Medicare Red Tape Relief Project,” which was announced earlier this summer by the House Committee on Ways and Means’ Subcommittee on Health.  Continue Reading Hospitals and Others Respond to “Red Tape Relief Project” Requests

On the eve of trial, and after years of litigation (including an appeal to the Sixth Circuit), all claims by Dayton, Ohio hospital The Medical Center at Elizabeth Place (“MCEP”) against Premier Health Partners (“Premier”) have been dismissed with prejudice. This case represents an important development in the body of case law addressing the antitrust risk introduced by joint ventures.  Continue Reading District Court Finds Hospital’s Joint Venture Not “Per Se” Unlawful