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.

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 Federal Trade Commission (“FTC”) and the State of Illinois successfully concluded their challenge to the proposed merger of Advocate Health Care and NorthShore University Health System earlier this month, when the U.S. District Court for the Northern District of Illinois granted the plaintiffs’ request for a preliminary injunction enjoining the health systems from consummating their proposed merger.  The parties subsequently abandoned the transaction without appealing the district court’s decision.

The district court had previously denied the motion for a preliminary injunction.  It believed that the geographic market proposed by the plaintiffs was too narrow and found the evidence “equivocal” regarding the importance of patients having access to hospitals close to their homes.  As such, it held that the plaintiffs had not met their burden of proving a relevant geographic market and thus, did not demonstrate a likelihood of success on the merits.  However, in October 2016, the U.S. Court of Appeals for the Seventh Circuit reversed and remanded for further proceedings on the issue of geographic market definition, holding that the lower court erred in its factual findings regarding critical aspects of the geographic market, as well as the remaining preliminary injunction elements that the district court did reach in its first decision.

This alert examines the court’s decision, which not only supports the FTC’s hospital merger enforcement program but continues to up the ante for merging parties attempting to persuade a court that the proposed efficiencies are sufficient to offset alleged anticompetitive effects.

The Federal Trade Commission (“FTC”) and the state of Pennsylvania have two weeks to persuade the Court of Appeals for the Third Circuit that the pending merger of Penn State Hershey Medical Center (“Hershey”) and Pinnacle Health System (“Pinnacle”) is anticompetitive.  The FTC’s request for a preliminary injunction against the pending merger was denied on Monday by the U.S. District Court for the Middle District of Pennsylvania which found that the deal was likely to benefit patients.  FTC v. Penn State Hershey Medical Center, 1:15-cv-02362 (M.D. Penn May 9, 2016).  That decision is analyzed here.  On Tuesday, the government filed a motion in the district court seeking an injunction enjoining the proposed merger pending an emergency appeal to the Third Circuit.

Pursuant to a December stipulated temporary restraining order (“TRO”), the hospitals are entitled to consummate the merger within three business days following a ruling denying the preliminary injunction.  Thus, under that TRO, the merger could have closed today.  In their opposition to the FTC’s motion for an injunction pending appeal, the hospitals indicated that they would not oppose a two week extension of the TRO if the government filed for an injunction with the Third Circuit.  The FTC filed its emergency appeal and the district court granted the two week extension, setting the new TRO expiration date to May 27.  The hospitals’ response to the emergency motion is due Wednesday May 18th. Continue Reading FTC Granted 2-Week Reprieve in Effort to Block Pennsylvania Hospital Merger

Last week, the Federal Trade Commission (“FTC” or “Commission”) authorized staff to file an administrative complaint and to seek in federal court a temporary restraining order and a preliminary injunction to block the proposed merger of Advocate Health Care Network (Advocate) and NorthShore University HealthSystem (NorthShore) in the Chicago area.  In the Matter of Advocate Health Care Network, Advocate Health and Hospitals Corporation, and NorthShore University HealthSystem, FTC Docket No. 9369 (December 17, 2015).  The FTC alleged that the combined entity would operate the majority of the hospitals in the North Shore area of Chicago, and control more than 50% of the general acute care inpatient hospital services. Continue Reading A Return to Evanston: FTC Revisits Old Ground in Yet Another Hospital Merger Challenge

The Federal Trade Commission (“FTC”) and Department of Justice Antitrust Division (“DOJ”) (collectively, “agencies”) issued a joint statement to Virginia’s Certificate of Public Need (“COPN”) Work Group, which was recently charged with reviewing Virginia’s certificate of public need process and its impact on health care services in Virginia, including the development of “specific recommendations for changes to the certificate of public need process to address any problems or challenges identified during [its] review.” The agencies’ statement encourages the Work Group and the General Assembly to reconsider whether “Virginia’s COPN laws best serve its citizens” and suggests that the Work Group consider the repeal or retrenchment of the COPN laws in order to promote the efficient functioning of health care markets. This statement is another example of the agencies’ continued vigilance in their efforts to prevent CON laws from suppressing competition by “limiting the availability of new or expanded health care services.”

Virginia’s CON program requires providers such as hospitals, nursing homes, rehabilitation facilities and other general acute care service providers to obtain a COPN from the State Health Commissioner (“Commissioner”) before initiating certain projects. The Commissioner can only issue a COPN after determining that there is a public need for the project. According to Virginia’s Department of Health, the review process can take six to seven months to complete — applications are examined during 190-day review cycles designated for certain batch groups which occurs just twice a year for most groups. Aggrieved parties, including incumbent providers, can appeal the Commissioner’s decision to the circuit court. From the agencies’ perspective, this time-consuming and costly process may deter beneficial entry “since a potential entrant may decide that the process itself is too costly.” Continue Reading FTC-DOJ Join Forces: Encourage Repeal/Retrenchment of Virginia CON Laws

In an April 22, 2015 letter to the New York State Department of Health, the Federal Trade Commission (FTC) cautioned that part of the state’s Medicaid reform program may sanction anticompetitive behavior. The FTC’s concern stems from the Certificate of Public Advantage (COPA) regulations, which offer federal antitrust immunity for certain collaborations among providers participating in the Delivery System Reform Incentive Payments (DSRIP) program.  Mintz Levin has prepared an advisory examining the FTC’s letter and its antitrust warnings, and what they mean for hospitals and providers looking to achieve greater efficiencies through collaborative activities.

A small regional hospital’s antitrust suit alleging illegal exclusive dealing and attempted monopolization against its largest competitor will move forward following a district court’s denial of the defendant hospital’s motion for judgment on the pleadings.  Methodist Health Svcs. Corp. v. OFS Healthcare System, d/b/a Saint Francis Med. Ctr., No. 1:13-cv-01054 (C.D. Ill. Mar. 25, 2015).  The complaint alleges that defendant is a “must have” for health insurers, and that defendant leverages that status to prevent health insurers from contracting with plaintiff and other competing hospitals.  Saint Francis filed a motion for judgment on the pleadings, arguing that the complaint failed to plead, and cannot adequately plead, plausible relevant product markets or substantial foreclosure in those markets.  The court disagreed.

In “Hospital Wins First Round Against Largest Rival” Mintz Levin antitrust attorneys explain the importance of this case, noting that it has the potential to create important precedent and guidance regarding the use of exclusive contracts, particularly when employed by parties with market power.  The case also serves as an important reminder that private antitrust litigation can often spark the interest of federal antitrust enforcers, as was the case in the FTC’s seminal St. Luke’s matter.  Beyond private litigants, the potential competitive harm from exclusive dealing has been and continues to be scrutinized by the federal antitrust enforcers.

This week, the Sixth Circuit unanimously upheld the March 28, 2012 Federal Trade Commission (FTC) administrative decision that ordered ProMedica Health System, Inc. to divest itself of its August 2010 purchase of St. Luke’s Hospital in Lucas County, Ohio.

The Sixth Circuit held that the merger created no substantive or compelling efficiencies and that it would increase ProMedica’s pricing and bargaining power anticompetitively.

Mintz Levin’s Antitrust Practice attorneys Bruce Sokler, Helen Kim, and Timothy Slattery analyze the Sixth Circuit’s decision and discuss how this landmark decision could be a harbinger of greater scrutiny and enforcement against health care provider mergers that the FTC view as anticompetitive.  Read the Antitrust Practice Alert at this link.