On March 11, a California federal jury delivered a verdict in favor of Sutter Health, one of the nation’s largest hospital systems, in a $411 million class-action lawsuit alleging Sutter’s contracts with insurers unlawfully inflated insurance premiums. The verdict, which likely marks the end of a decade of antitrust litigation against Sutter, offers important lessons for healthcare providers who engage in similar contracting practices.
The Challenged Contracting Practices
First filed in 2012, the complaint against Sutter alleged that the hospital system used its market power to force insurers to include all Sutter hospitals in their networks while prohibiting the insurers from steering patients to less expensive hospitals. The class comprised approximately three million individuals and employers in Northern California who purchased health insurance from one of several large insurers. The following practices formed the basis of the plaintiffs’ claims:
Sutter allegedly required insurers to include all Sutter hospitals in their networks to have any Sutter hospitals. The plaintiffs claimed that Sutter’s contracts amounted to an unlawful tying arrangement; they alleged that Sutter possessed certain “must have” hospitals that the insurers needed to be commercially viable and that Sutter forced the insurers to include its less desirable hospitals as well. According to the plaintiffs, Sutter put further pressure on the insurers by setting excessive out-of-network rates, making it prohibitively expensive for an insured in a network without Sutter to use a Sutter hospital.
Sutter allegedly refused to participate in insurance programs that tiered providers by cost, preventing insurers from steering their members to more cost-effective providers over Sutter. A Sutter memorandum presented at trial stated, “It is not Sutter’s policy or business practice to participate in networks that we are in a second tier.”
Sutter allegedly prohibited insurers from disclosing upfront to patients the prices of Sutter’s healthcare services, preventing patients from shopping for the best price and insulating Sutter from price competition.
Sutter agreed to cease those contracting practices in 2019 as part of a $575 million antitrust settlement with the State of California arising from the same conduct. Sutter would have been subject to treble damages of more than $1.2 billion if the plaintiffs in the class-action lawsuit prevailed.
Sutter’s Trial Victory
Throughout the four-week trial, Sutter argued before the jury that its contracting practices amounted to a volume discount that had the effect of lowering prices. According to Sutter, it agreed to offer insurers discounted rates on the condition that insurers not take steps to steer patients away from Sutter; otherwise, that would defeat the purpose of the discounts. In response to unfavorable testimony from insurance company executives, Sutter stressed that the insurers had a lot of money at stake in the trial—even though they were not plaintiffs themselves, they would benefit immensely if Sutter’s contracting practices were unlawful.
The jury sided with Sutter following the trial and two days of deliberations. The jury found that Sutter did not tie its hospital services to its more expensive facilities and did not force insurers to agree to contracts that prevented them from steering patients to lower-cost providers. As a result, Sutter was not liable for any damages.
The jury’s verdict suggests that similar all-or-nothing, anti-tiering, and price secrecy provisions in contracts between providers and insurers are now more likely to be deemed permissible, so long as they can be linked to lowering prices or other procompetitive effects. Providers, therefore, may have more leeway in their negotiations with insurers to seek contractual provisions that include all of their facilities and prevent insurers from steering patients to other providers. Nevertheless, the inclusion of these contractual provisions still may raise antitrust risks. Providers should tread carefully before negotiating similar terms with insurers and only after consulting with antitrust counsel.
Sutter’s victory may also offer important lessons for trial strategy to providers facing similar antitrust claims. Juries may favor contracting practices seen as essential components of a volume discount. Moreover, when faced with damaging testimony from the parties on the other side of the negotiating table, emphasizing financial incentives may be particularly persuasive. Jury verdicts in antitrust class action lawsuits are unusual since most cases end in settlements, so the transcript from this proceeding may offer valuable lessons for parties headed to trial in the future.
Although Sutter prevailed in this case, its contracting practices ultimately proved costly; it settled the State of California’s lawsuit for a significant sum and agreed to change its contracting practices. Yet with the benefit of Sutter’s victory, other providers may be able to negotiate more advantageous contractual terms at the onset and favorable settlements in any future litigation involving the same types of contractual provisions.
Contact the authors more information on this case or the antitrust risks of any similar contracting practices.