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.

Continuing its annual tradition, the U.S. Department of Justice (“DOJ”) and the U.S. Department of Health and Human Services (“HHS”) announced last week the largest ever health care fraud enforcement action by the Medicare Fraud Strike Force.  As part of the national health care fraud takedown, the government charged 412 defendants with approximately $1.3 billion in alleged fraud. In addition to these charges, HHS Office of Inspector General (“OIG”) is in the process of excluding 295 health care providers from participating in federal health care programs.

Continue Reading DOJ and OIG Announce Largest Ever National Health Care Fraud Takedown; Focus on Opioids

Earlier this week, the Office of Inspector General for the Department of Health and Human Services (“OIG”) posted its fiscal year (“FY”) 2016 data about Medicaid Fraud Control Units (“MFCUs”) across the country.

Federal law requires each state to operate a MFCU separate and distinct from the state Medicaid Agency. MFCUs are charged with investigating and prosecuting fraud committed by Medicaid providers and in the state’s administration of the Medicaid Program, as well as patient abuse/neglect that occurs in a Medicaid-funded facility or at the hands of Medicaid providers.  MFCUs currently operate in 49 states and the District of Columbia (North Dakota presently has a waiver but proposals to create a MFCU have been introduced in the state legislature).  They are typically part of a state’s Attorney General’s office and are required to employ investigators, attorneys and auditors.  The OIG is responsible for overseeing MFCUs.  It annually recertifies MFCUs, assesses their performance and compliance with Federal requirements, and administers a Federal grant award that funds a portion of each MFCU’s operational costs. Continue Reading OIG Releases FY 2016 Statistical Data About Medicaid Fraud Control Units

A popular weapon used to contain health care expenditures is the creation by payors and employers of tiered provider networks, which by differentiated co-pays attempt to steer insureds to less expensive choices.  In connection with such networks, providers will often provide better pricing in order to be placed on more favorable tiers.  In a new antitrust suit, the Antitrust Division of the Department of Justice (“DOJ”) and the State of North Carolina have challenged the attempt by the dominant health care system in North Carolina to use contractual anti-steering provisions to avoid being disfavored.  This Alert analyzes the Government’s complaint and how this lawsuit fits into the DOJ’s views of contractual restraints of this type.

Two West Virginia hospital systems settled a lawsuit filed yesterday by the Department of Justice (“DOJ” or “Department”) alleging that they agreed to allocate territories for marketing health care services in violation of Section 1 of the Sherman Act.  The DOJ alleged that Charleston Area Medical Center (“CAMC”) and St. Mary’s Medical Center (“St. Mary’s”) agreed not to advertise in each other’s geographic territories, which the Department said deprived customers of useful information about competing health care providers.  U.S. v. CAMC, Case No. 2:16-cv-03664 (S.D. W.VA. Apr. 14, 2016).

Certain types of agreements between competitors (e.g., market allocation, price fixing) are strictly prohibited under Section 1 of the Sherman Act.  These types of agreements are considered per se illegal and are presumed as harmful because they deprive consumers of the benefits of competition and provide no offsetting benefit to consumers.  This case is a reminder that the antitrust authorities can, and do, challenge market allocation arrangements and other naked restraints of trade that violate Section 1 of the Sherman Act. Continue Reading Hospitals Settle DOJ Suit Alleging Illegal Division of Marketing Territories

As 2015 comes to a close and you look ahead to the New Year, we hope that you will consider joining us for an informative webinar on health care enforcement trends for 2016. On Wednesday, January 13, 2016, my colleagues Hope Foster, Laurence Freedman, and Bridget Rohde will host “Health Care Enforcement in 2016: A Look Back on 2015 and Forecasting the Year Ahead.” The webinar will highlight key enforcement activities from 2015 and the trends we expect to see in 2016. Continue Reading Upcoming Webinar and Report – Health Care Enforcement in 2016

Over the past year, significant regulatory changes began to take shape that will have lasting effects on the laboratory industry for years to come. After publishing draft guidance regarding the regulation of laboratory developed tests (LDTs) in late 2014, the Food and Drug Administration (FDA) made clear in 2015 that it intends to move forward with its proposal next year, and the Centers for Medicare & Medicaid Services (CMS) published a proposed rule outlining the process for overhauling the Medicare Clinical Laboratory Fee Schedule (MCLFS) for the first time in over 20 years. In addition, laboratories faced more than their fair share of enforcement actions and other litigation, and this level of activity is likely to continue in 2016. Continue Reading Laboratories – 2015 Year in Review [VIDEO]

Written by: Helen Kim and Robert Kidwell 

Under a proposed settlement agreement with the Department of Justice (DOJ), private insurers Humana Inc. (Humana) and Arcadian Management Services, Inc. (Arcadian) must divest certain of Arcadian’s assets in parts of five states in order for Humana to proceed with its $150 million acquisition of Arcadian. 

On March 27, 2012, the DOJ filed a civil lawsuit to block the proposed acquisition, alleging that the deal between Humana, one of the largest Medicare Advantage providers in the country, and Arcadian, an insurer with approximately 62,000 Medicare Advantage members, raised competitive concerns in the market for Medicare Advantage plans.  In its complaint, the DOJ emphasized that Congress intended for Medicare Advantage insurers to compete vigorously, ultimately offering seniors a wider array of health insurance choices, more affordable benefits than traditional Medicare, and more responsiveness to seniors’ demands. 

The DOJ argued that the proposed acquisition would eliminate competition between Humana and Arcadian, and thereby created a combined company accounting for 40 to 100 percent of the Medicare Advantage insurance market in 51 counties and parishes in Arizona, Arkansas, Louisiana, Oklahoma, and Texas.  The DOJ further alleged that eliminating head-to-head competition between the companies would allow Humana to increase prices and reduce the quality of the Medicare Advantage plans sold to seniors in the relevant geographic areas. 

The proposed settlement, which is pending approval from the court, would require the companies to divest certain Medicare Advantage plans to a DOJ-approved competitor.  The proposed settlement would ensure that the buyer(s) of the divested assets would have contracts with nearly all of the same health care providers included in the Humana and Arcadian plans, at substantially the same rates. 

The DOJ’s press release, complaint, and proposed settlement in this matter may be viewed here:

http://www.justice.gov/atr/cases/humana.html