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Economist tears into Sutter Health prices on the stand in antitrust trial

An antitrust economist told a federal jury that Northern California's largest hospital system drove up health insurance costs through anticompetitive contracts with insurers.

SAN FRANCISCO (CN) — Dr. Tasneem Chipty has been barred from using the word “monopolist” in her testimony in a $411 million antitrust trial against Sutter Health, but the economist said the giant hospital system has enough market power in Northern California to drive up health insurance premiums.

Chipty, whose testimony contributed to the Federal Trade Commission’s landmark antitrust victory against computer chip manufacturer Qualcomm, later overturned on appeal, told a federal jury that Sutter Health imposed onerous systemwide contracts on all five of the major insurance carriers in Northern California, resulting in overcharges that were passed on to patients.

“Sutter's systemwide contracts are anticompetitive tying arrangements that have interfered with the competitive process,” Chipty said.

The lawsuit brought on behalf of 3 million people and employers in Northern California is being led by two small businesses and four people who claim they paid inflated health insurance premiums because Sutter Health forced insurers to accept anti-competitive “all or nothing” tying contracts.

These contracts required them to accept all of Sutter’s hospitals in their networks, even in competitive markets where they could have otherwise chosen to work with cheaper care providers.

Though not plaintiffs in the case, health insurers Anthem Blue Cross, Aetna, Health Net, Blue Shield and United Healthcare have all complained that Sutter’s contracts make it impossible for them to exclude Sutter from networks to lower costs, or at least move them into tiered health plans without Sutter’s consent. They are also prevented from using incentives to steer patients away from Sutter’s higher-cost hospitals.

Chipty said Sutter would have been forced to lower its prices to compete for patients if health plans had been able to create more narrow networks or put Sutter hospitals into more expensive tiered plans that would have incentivized Sutter to lower prices or lose patients to cheaper providers.

“There's a theory in economics and evidence from real world situations where steering, or even the threat of steering, can create competition among hospitals to lower prices,” she told the jury. “Sutter in some cases outright blocked health plans from launching narrow or tiered network products, or even when it didn't outright block, Sutter’s price structure embodied in its systemwide contracts made it commercially difficult for health plans to have narrow and tiered products.”

Sutter Health, which has 24 hospitals in Northern California, has denied its market dominance compared with Kaiser Permanente — an “integrated managed care consortium” with 21 hospitals in the region.

But Chipty said Kaiser does not directly compete with Sutter since it does not accept health plans other than its own. Health plan members could leave their insurers for Kaiser, but many more rural Northern California counties do not have a Kaiser hospital and are serviced only Sutter.

“Even in areas were is a local Kaiser hospital, there isn't enough substitution in the way one would one need in order to discipline Sutter's prices,” Chipty said.

Chipty also presented the jury with a regression analysis showing that Sutter charges higher prices than other hospitals, though her testimony — along with much of the trial — was marked by long periods of closed sessions barring the media and the public from the proceedings.

She said Sutter’s own internal documents informed her conclusion that Sutter’s higher prices were unjustified, including one from 2011 that read, “We often contend we provide a higher value product and can demand a higher price, but in truth our value is only average as there is little differentiation among providers on quality or ratings of care.”

Chipty said, “My understanding is Sutter's quality cannot explain its higher prices,”

Sutter Health attorney David Kiernan with Jones Day assailed Chipty’s theory that tiering and steering incentives would create lower prices for consumers. Health plans say that Sutter currently forces them to pay 95% of a patient’s billed charges if their hospital is out of network, while other hospitals charge a 60% rate.

Kiernan put the blame on insurers, saying they’d rather have the patient pay more for out-of-network care.

“The idea is that will steer them to the other hospitals that are in network. You call it financial incentives. The patients view it as financial penalties to go out of network,” he said during his cross-examination of Chipty.

Chipty said she disagreed with that characterization “There's also the fact that in the but-for world there might not be steering, because steering or the threat of steering is enough to discipline prices. There would be more choice and the fact that more people could be incentivized to leave for lower costs and narrow networks would create pricing pressure," she said.

While Kiernan suggested that tiered networks that exclude Sutter “exposed patients to higher risk of higher than expected medical expenses,” Chipty said the evidence still shows that people would prefer to save money with lower monthly premiums.

She also conceded that some patients may not receive some necessary care, like medical tests, because certain providers are not in their networks.

“In our health care system sometimes people slip through the cracks,” she said. “But Sutter shouldn't be choosing for people.”

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