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Sutter Health on trial in antitrust action over hospital charges

The largest hospital system in Northern California faces claims of using its market power to stifle competition, resulting in higher health care costs for insurers and patients.

SAN FRANCISCO (CN) — Health care giant Sutter Health denied price gouging and bullying insurers at the opening of a jury trial in San Francisco that will determine whether the rates it charged for inpatient hospital services violated federal antitrust law.

In opening arguments Thursday, attorney Matthew Cantor told a 10-member jury that Sutter Health used its economic muscle to thwart competition and force families and businesses to collectively pay nearly $411 million more than they should have for health insurance.

With 24 acute care hospitals, Sutter Health is the largest hospital system in Northern California. In some regions, like Berkeley-Oakland, Antioch, Auburn, Crescent City, Davis, Jackson, Lakeport and Tracy, it’s the only game in town.

“Health plan members that live in these areas don't want to to travel far for inpatient hospital services,” said Cantor, who is with Constantine Cannon LLP. “They want to be close in case they or their loved ones need emergency care.”

Sutter took advantage of its market power, Cantor said, and forced insurers to accept anticompetitive “all or nothing” tying contracts. If they wanted to include the Alta Bates Medical Center in their networks, they were also going to have to accept hospitals in San Francisco, Sacramento, Santa Rosa and Modesto — areas where they could have otherwise chosen to work with cheaper care providers.

This illegal tying arrangement, Cantor said, was not an offer the insurers could refuse.

“Arrangements are anticompetitive when the seller has the power to force the buyer to buy or contract for two more products together at terms the seller demands,” Cantor said. "If you want our sole hospital in Crescent City and in the East Bay, then you have to enter in to a contract that also covers San Francisco and Sacramento at exorbitant prices and anticompetitive terms.

“By taking away the choice from health plans, Sutter caused employers and families to pay much higher prices for hospital services," he continued, noting that Sutter’s prices have historically been significantly higher than those charged by competing hospitals. “Why did Sutter do this? To pad its multibillion-dollar investment portfolio to the detriment of health insurance premium payers. Sutter, which markets itself as a not-for-profit system, reaped billions in revenue from premiums paid by health care payers.”

Representing Sutter, Jeffrey LeVee with Jones Day told the jury a completely different story, painting Sutter as just one of a pool of competitors.

“Sutter faces vigorous competition in Northern California and does not have market power,” he said. How can, he added, it when Kaiser Permanente — one of the nation’s largest nonprofit health plans with 12.5 million members — operates a sizable network of hospitals throughout Northern California?

“The plaintiffs want you to ignore the elephant in the room,” LeVee said, showing the jury a photo of an elephant labeled “Kaiser.”

“Most people can select Kaiser during open enrollment, and Kaiser has been increasing its market share over at least a decade,” LeVee said. “It's an odd notion that Kaiser is not in the market for hospital services and yet is increasing its market share for hospital services.”

LeVee presented the jury with a pie chart indicating that Sutter only has 25% market share in Northern California. Factoring in Kaiser, Sutter’s share goes down to 17%.

Kaiser is excluded from the plaintiffs’ market definition since Kaiser itself is a health insurer and does not offer to contract with non-Kaiser plans. Kaiser also isn’t an option for many people, Cantor said, since there is no Kaiser hospital located in certain geographic markets.

“Even if plaintiffs are right about Kaiser, evidence will show Sutter still doesn't have sufficient market power because of all the other competition in Northern California,” LeVee said. “But the fact of Kaiser’s presence will make it easy for you because it will be overwhelming that Sutter and Kaiser compete directly.”

LeVee also said Sutter never disallowed narrow or tiered markets as the plaintiffs have claimed, but only asked that the health insurers inform them before moving Sutter hospitals into more expensive plan tiers. “Sutter doesn't want to collect a significant bill from a patient when it thought it was going to receive insurance money,” LeVee said.

While much of the arguments have revolved around five California health insurance companies — Anthem Blue Cross, Aetna, Health Net, Blue Shield and United Healthcare — they are not plaintiffs in the case.

Instead, the class action representing 3 million people and employers in Northern California is being spearheaded by two small businesses, a network support specialist and a retired San Francisco police officer. If they succeed, the class is eligible to recover treble damages of $1.2 billion.

The trial, estimated to last four weeks, is the culmination of 10 years of legal wrangling. Originally filed in 2012, it’s survived multiple motions to dismiss and a trip to the Ninth Circuit Court of Appeals. In 2016, the appellate court reversed a federal judge’s order dismissing the case, finding the plaintiffs had alleged sufficiently detailed geographic markets for inpatient hospital services.

The case marks the first antitrust class action against the giant hospital network to go before a jury. Two similar state actions brought by a group of employers and unions in 2014 and California's Attorney General in 2018 settled just hours before the start of trial. Sutter agreed to pay $575 million and change some of its business practices "to restore competition in Northern California’s health care market."

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