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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