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Economists hopeful about outcome of antitrust trial against Northern California hospital giant

Experts closely watching a federal antitrust trial against Sutter Health weigh in on what the aftermath means for the health care industry and consumers.

SAN FRANCISCO (CN) — A jury will soon decide whether Northern California’s largest hospital system had the market power to drive up health care costs in a closely watched federal antitrust trial, the outcome of which could affect insurance premiums for millions of Californians.

The case centers on Sutter Health’s “all-or-nothing” contracts with five major California health insurers — Anthem Blue Cross, Blue Shield, Aetna, Health Net, and United Healthcare — which demand that they accept all of Sutter’s hospitals in their network, even if there are more options in certain geographic areas like San Francisco, if they want to include a hospital in rural California where Sutter is the only game in town.

Sutter’s contract terms also prevented health insurers from steering consumers toward cheaper care providers, or using tiered plans as an incentive for patients to go elsewhere.

The lead plaintiffs — a handful of individuals and two small businesses — claim these practices caused 3 million California families and businesses to collectively pay nearly $411 million in insurance premium overcharges between 2011 and 2017.

Testimony in the month-long trial has been dense and jargon-heavy. But in essence Sutter has argued it doesn’t dominate the Northern California market for hospital services, in large part because Kaiser Permanente, one of the nation’s largest nonprofit health plans, has a huge presence there and gets a lot of business.

That argument might be attractive to a jury, but it doesn’t hold much sway with experts.

“That's not a frivolous argument, but I think it's an argument that doesn’t reflect the facts,” said Duke Law professor Barak Richman, an expert on antitrust and health care policy. “I think the proper way to define the market includes the conclusion that Sutter has market power and really was exercising market power when it was limiting insurers to all-or-nothing.”

The prevailing consensus among many economists is that Kaiser doesn’t compete directly with Sutter Health because it is a closed system that does not contract with non-Kaiser plans like Anthem Blue Cross and Blue Shield.

“The fact that Kaiser is prominent is certainly a good argument to make, but it serves a rather selective market of people and employers who choose to go with Kaiser,” said Tim Greaney, an antitrust expert and law professor at University of California at Hastings.

Dr. Glenn Melnick, a health care economist and professor at the University of Southern California, put it more bluntly.

“Kaiser doesn’t compete in the market. The issue is: how much do Blue Cross and Aetna have to pay Sutter hospitals to include them in the market? Kaiser hospitals are not a relevant choice for them because Kaiser does not contract with Blue Shield and Anthem. There could be 20 Kaiser hospitals around a Sutter hospital, but it doesn't represent a competitive alternative.”

Melnick said he did some early econometric analysis for the plaintiffs’ legal team but he was not involved in the case.

Through testimony offered by its executives, Sutter has also maintained it is more efficient to contract as one system rather than by individual hospital.

A systemwide contract is a more stable predictor of patient volume, which equals revenue. For a nonprofit system like Sutter Health, more revenue means more resources that can be put back into improving hospital quality and patient care, and more funds to invest in innovative treatments and technology. Sutter’s experts described these results as procompetitive justifications for its conduct.

“It sounds like Sutter is conceding that its contracting strategies generated more income. They were designed to try to limit choice and exploit some monopoly power. That to me sounds like a concession,” Richman, the Duke professor, said. “There's little evidence that health care prices are correlated with quality, especially when there's market power.”

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Plaintiffs’ expert witness Dr. Tasneem Chipty has testified that premium prices should go down if Sutter is forced to change its ways, an outcome also predicted by prominent antitrust economists who view Sutter’s practices as anticompetitive.

“There's a mountain of economic evidence that the pricing by dominant hospitals is a leading, if not the leading, cause of the high cost of health care in the United States,” Greaney said. “Health systems are well positioned to exercise market power, to use techniques like anti-steering clauses and all-or-nothing clauses that squeeze out higher prices than payers would otherwise provide absent that market power. Costs are really driven by provider prices. If you limit dominant pricing that would lower premiums.”

With 24 hospitals, 36 surgery centers, and 12,000 doctors, Sutter has been described as an 800-pound gorilla in Northern California. Greaney said insurance companies have limited options to put pressure on Sutter to lower prices. Forming a narrow network health plan that limits coverage to a select group of hospitals and health care providers is one.

“The opportunity to form a network that is selective is really the only tool that insurers have to get lower prices,” Greaney said.

Melnick said Sutter recognized its market power years ago and has been exploiting it ever since.

“Health plans sell insurance products. They would like to include every single provider in California. What they have learned is that if they threatened providers by saying ‘we'll limit our provider list and the way to get on the list is to lower price.’ But then we have systems evolve that have market power. We have systems where they are the only hospital in the county. Sutter figured this out way back when.”

Melnick said Sutter realized that because of California Department of Managed Care regulations, insurance companies like Blue Cross couldn’t sell its plans without including hospitals in rural areas where Sutter is the only option.

“They figured that out and brought Blue Cross to their knees. Then they started doing it with everybody,” he said.

But doing away with all-or-nothing contracting would allow insurers to negotiate separately with their must-have hospitals. "They might have to pay rural hospitals more, but they won't have to pay other Sutter hospitals also,” Melnick said.

The prevailing consensus among some antitrust experts is that a verdict in favor of the class will bring more competition to the market.

"Certainly there would be a different kind of negotiation tactic. There would be different insurance offerings. You would be able to tailor what you would get and that would probably unleash more competition, leading to better prices, availability and more entry,” Richman said.

Melnick said a prohibition on all-or-nothing contracts and anti-tiering provisions would also force Sutter to “prove to consumers” that it is actually worth the extra cost. “If this hospital isn't able to convince enough patients that they're worth it, that puts pressure on them to lower their prices.

“If we move to more of a tiered model where Blue Cross could say Cedars-Sinai is in network but if you go there you have to pay more, patients may start to ask is it worth it for me to pay $10,000 extra to deliver my baby at Cedars? And Silicon Valley folks will analyze the data and do rankings to help consumers make those trade off decisions. But the plans and employers need to be free to construct those alternatives and that will put pricing pressure on hospitals.”

He added: “Economists are hopeful that this will be the start of a trend of restoring competition to the healthcare industry."

Also, Melnick said, if Sutter loses the case, Northern Californians win.

“Sutter has set this really high price point in Northern California. Non-Sutter hospitals can allow their prices to go up and insurers still had to include them because they were still less than Sutter. So it will have a secondary effect if they lose. We could see a slowdown in premium growth for the first time in 20 years in California.”

Greaney said a Sutter loss would also set a nationwide precedent for other hospital chains with a lot of market power.

“This should send a signal to other hospitals comparably situated to make these kind of demands,” he said. “It sometimes takes a leading antitrust precedent to get lawyers to tell their clients, ‘maybe you should stop this practice because Sutter got in big trouble and it cost them.’"

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