Will Sutter Health Settlement Dampen Provider Systems’ Anti-Competitive Tactics or Prompt More States to Take Action on Costs?

Emily Curran and Sabrina Corlette

On October 16, just before trial was expected to begin, Sutter Health announced that it had reached a tentative agreement to settle the class-action lawsuit against it, which alleged that the system has used its market dominance to drive up the cost of care. Sutter Health is one of California’s largest hospital systems, with 24 hospitals, 34 surgery centers, and roughly 5,500 physicians concentrated in Northern California. Employers and unions first filed suit against the system in 2014. After a multi-year investigation, California’s Attorney General, Xavier Becerra, filed a second lawsuit. Both lawsuits alleged that Sutter has engaged in numerous anticompetitive practices, which have led to prices in Northern California being higher than anywhere else in the state. Indeed, a 2018 study by the University of California-Berkeley found that healthcare costs in Northern California – where Sutter saturates the market – are 20 to 30 percent higher than in Southern California. One study even found that a cesarean delivery performed in Sacramento cost nearly double what it costs in New York City or Los Angeles. Though the details of the settlement have not been made public, one source estimated that Sutter could have faced damages of up to $2.7 billion.

Sutter has denied all allegations that it used its market power to increase profits. (It also destroyed 192 boxes of evidence along the way.) However, the plaintiffs argued that it regularly relies on three core tactics to maintain a competitive edge and control prices, including: all-or-nothing contracting, anti-incentive contract terms, and price secrecy contract terms. Though the case has reached a tentative settlement, some believe that it serves as a warning to large provider groups and hospital systems, putting them on notice that these negotiating tactics can trigger legal action.

All-or-Nothing Contracting

In their suit, plaintiffs argued that Sutter Health requires every health insurance plan that offers enrollees coverage of a service or product at a single Sutter hospital, to also provide coverage of services and products offered at all other Sutter hospitals (aka “All-or-Nothing”). These terms apply even when the prices charged by a Sutter facility are significantly higher than competing healthcare facilities that provide the same services in the same geographic area. Insurance companies and employers who self-fund insurance plans are thus forced to include high cost Sutter facilities in their network even in communities with competitive provider markets, because Sutter has a monopoly in another community and is thus a “must have” provider for local residents. The plaintiffs argued that this tactic prevents them from assembling lower-cost, higher quality provider networks. Plaintiffs wrote that this strategy allows Sutter “to immunize itself from price competition,” by “making it impossible” for a lower-priced competitor to be substituted in its place in the plan’s provider network. In turn, plaintiffs reasoned that Sutter’s all-or-nothing contracting makes it “futile” for other hospitals to even try to expand or for new entities to enter Sutter’s markets.

Anti-Incentive Contract Terms

In theory, insurance companies can steer enrollees to use lower-cost providers in their networks, through cost-sharing incentives. For example, an insurance company could set a $100 co-payment for an ER visit to a Sutter facility and a $50 co-payment for an ER visit to a lower cost competitor. Consumers can still seek care from whichever provider they choose, but they are given a financial incentive to go to the provider that charges the lower price.

According to plaintiffs, Sutter recognized that such incentives (i.e., network tiering) might drive enrollees to avoid its services. It therefore threatened to “forbid or severely penalize” any plan that used provider network tiering, as well as any other type of incentive that might motivate enrollees to choose a competitor. The plaintiffs alleged that these penalties could include losing the negotiated price discount that plans were able to secure off of Sutter’s charges. Plaintiffs felt that this threat reduced the ability of any health plan to steer consumers towards more cost-effective or better-quality services. The terms also prevented price competition in the delivery of ancillary care, ultimately forcing self-funded entities and insurance plans to pay higher prices for those services as well.

Price Secrecy Contract Terms

Plaintiffs also alleged that Sutter’s contract terms forbid payers from informing consumers about the costs of services and products. Therefore, enrollees have not been able to seek out or demand better pricing. When they do select a provider within the network, it is not clear what they will have to pay for using Sutter’s services. The plaintiffs argued that this secrecy prevents consumers from “exert[ing] commercial pressure” and “effectively eliminate[s] price competition [.]”

Market Dominance Concerns Aren’t New, But They Are Increasing

This is not the first time a large health system has been accused of using its market clout to increase prices and ward off competition. In recent years, there has been in increase in hospital and provider consolidation, with the result that nine out of ten metropolitan areas are now considered “highly concentrated.” This consolidation has been a significant factor driving higher prices for consumers. Indeed, the average annual family premium is now above $20,000, and deductibles have grown 100 percent in the last decade. Yet the pace of consolidation has not abated; 2018 was a “record setting” year for healthcare mergers and acquisitions, and the pace in 2019 shows no signs of slowing down.

A recently published Georgetown CHIR study examined six healthcare markets that are considered moderately or highly concentrated as a result of recent provider consolidation. The study found that hospital systems shared at least one motivation for consolidating: to increase market share in order to increase their negotiating leverage with payers. This “leverage” is used to secure higher reimbursement rates, which in turn, often translates into higher premiums for consumers. Sutter’s negotiating tactics provide one example of how a health system can create this dominance by shutting out competition, and then using that leverage to secure generous pricing.

Take-Away: The parties in the Sutter case have not publicly shared the terms of their settlement. Many believed that if the plaintiffs had been successful, prices in Northern California would decline and large health systems would have to think twice about using similar contracting terms. Now it is less clear how much of an impact this case will have on the industry. Some still believe that the mere fact that California’s Attorney General brought the suit sends a signal to dominant provider systems that these contracting tactics will be viewed as anticompetitive and unacceptable. Others are waiting to learn what the terms of the settlement are and whether Sutter has agreed to change any of its contracting practices. If the settlement amounts to a slap on the wrist, it could serve as a green light for dominant provider systems to continue with anti-competitive contracting tactics. A hearing to approve Sutter’s settlement will take place in Spring 2020; it continues to face a federal antitrust lawsuit.

At the same time, some states aren’t waiting for the courts to weigh in. For example, Massachusetts, Delaware, Oregon and Rhode Island have set annual healthcare spending benchmarks to reduce the rate of cost growth. Other states have prohibited anti-competitive clauses from payer-provider contracts, such as the all-or-nothing, anti-tiering, and gag clauses deployed by Sutter. Still more states are using claims data to shed greater light on hospital pricing, and California recently enacted legislation requiring insurers to submit data demonstrating the difference between the price they pay for services and the Medicare rate, further exposing those providers that charge excessive rates.

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The opinions expressed here are solely those of the individual blog post authors and do not represent the views of Georgetown University, the Center on Health Insurance Reforms, any organization that the author is affiliated with, or the opinions of any other author who publishes on this blog.