July 15, 2019

July 15, 2019

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California Sues Sutter Health Alleging Anti-Competitive Practices

California Attorney General Xavier Becerra filed a civil antitrust lawsuit in San Francisco County Superior Court on March 29, 2018 (the “Complaint”), alleging that Sutter Health (“Sutter”), one of Northern California’s largest healthcare providers, engaged in unlawful conduct in violation of California’s Cartwright Act (the “Act”).1  Sutter Health has a substantial healthcare network that includes: 24 hospitals, 35 outpatient centers, physician’s organizations with over 5,500 members, and over 12,000 other physicians who partner with Sutter.

The Cartwright Act is California’s primary state antitrust law. The Act generally prohibits agreements among competitors to restrict trade, fix prices, or otherwise reduce competition in the market. Any person who is injured by anti-competitive acts may bring a civil action to enforce the Act, regardless of whether the person dealt directly or indirectly with the defendant. Violations of the Act are also considered a conspiracy against trade, punishable by fines and, for any individual that participates, aids, or advises, the anticompetitive activity, imprisonment for up to three years.

California’s investigation into Sutter’s business activities began in 2012 when the Attorney General’s Office issued subpoenas to several health systems and insurers seeking information about market concentration and healthcare prices. Based on the information obtained by the Attorney General’s Office, the Complaint alleges three violations of the Act: (1) unlawful price tampering and fixing; (2) unreasonable restraint of trade; and (3) combination to monopolize within the Northern California healthcare market. These allegations arise from Sutter’s contractual agreements with health plans, providers, and provider groups through the use of so-called “Anti-Incentive, Price Secrecy and All-or-Nothing Terms” (the “Terms”):

  • The Complaint alleges that Anti-Incentive Terms require providers who contract with Sutter Health to enter into agreements with health plans that prevent the health plans from offering cost or quality-based incentives to direct patients to hospitals or provider networks not owned or affiliated with Sutter.
  • The Complaint asserts that Price Secrecy Terms prevent contracting parties from disclosing the prices that Sutter Health has negotiated for healthcare services.
  • Per the Complaint, All-or-Nothing Terms effectively require contracted health plans that offer services and products at one Sutter hospital to offer the same healthcare services and products at all Sutter Health hospitals and providers.

It is through the combined use of the Terms in most, or all, of Sutter’s contracts with health plans and providers that Sutter allegedly violated the Act. The Complaint alleges that the purpose and combined effect of the Terms is to insulate Sutter from price competition and restrain competitors from competing with Sutter. As the argument goes, Sutter effectively forces health plans to accept provider networks that encompass all of Sutter’s hospitals and providers, preventing the plan from selecting Sutter providers that offer competitive pricing. The Complaint contends that this issue is compounded by Sutter’s ownership of multiple “must have” hospitals across Northern California. If a health plan wants to cover patients at one hospital, it must provide the same coverage across all Sutter hospitals and providers. This supposedly increases the cost of healthcare services, and does not allow health plans to be selective about the hospitals or providers that may have lower costs or higher quality care.

According to the Complaint, the use of these terms limits or eliminates the ability of health plans to offer incentives to enrollees to use lower-priced competing hospitals or provider networks, as Terms forbid health plans from offering incentives to enrollees to choose cheaper alternatives to Sutter’s network. It is contended that this combination of the Terms effectively stifles competing hospitals or providers, as health plan enrollees have no incentive to choose competitors that may provide higher quality or lower-cost healthcare services.

By compelling health plans to agree to the Terms, the Complaint argues, Sutter is able to demand and obtain supra-competitive pricing. The use of the Terms has allegedly allowed Sutter to establish a sweeping network of healthcare providers and health plans, and allowed Sutter to stifle competition and inflate prices for its own healthcare services. The Complaint alleges that Sutter’s used the Terms with the purpose and effect of creating, or maintaining, monopoly power over healthcare services in Northern California.

The Attorney General is seeking injunctive relief and monetary penalties against Stutter for the alleged anti-competitive actions in violation of the Cartwright Act, including:

  • An injunction against Sutter from continuing, maintaining, or renewing the current contracts and other agreements in which Sutter used the Terms for anti-competitive purposes;
  • An injunction to prevent Sutter from using the Terms in future contracts for anti-competitive purposes; and
  • Requirements that Sutter change the way it negotiates contracts with payors and providers; and
  • Restitution to damaged parties of overcharges arising from Sutter’s anti-competitive actions.

So far, Sutter has not publicly commented on the specific claims in the Complaint; instead, Sutter issued a statement claiming that its pricing is lower than other nearby hospitals and that “healthy competition and choice exists across Northern California” for patients seeking healthcare services.2 If the State prevails, the court’s decision could dramatically change the way large healthcare groups negotiate agreements with health plans and providers in California.

1. Complaint, California v. Sutter Health, CGC-18-565398 (San Francisco County Superior Court) (Mar. 29, 2018).

2. Chad Terhune and Ana B. Ibarra, California Takes On Health Giant Over High Costs Kaiser Health News (April 1, 2018),

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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David Garcia Sheppard Mullin complex civil litigation attorneyantitrust law
Partner

David Garcia is a partner in Sheppard, Mullin, Richter & Hampton LLP's Century City office, where he is also the Office Managing Partner. He is a litigator with a broad background in complex civil litigation for major U.S. companies, including extensive class action and multidistrict litigation experience. His practice focuses  principally on antitrust litigation and counseling with particular emphasis on the entertainment industry, provider side healthcare mergers and the intersection between antitrust and intellectual property in litigation and joint ventures.

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Matthew Goldman, Corporate Attorney, Sheppard Mullin Law Firm
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Matthew Goldman is an associate in the Corporate Practice Group in the firm's Century City office and is a member of the firm's healthcare practice team.

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Matthew’s practice blends the regulatory and transactional components of healthcare law, and includes representation of hospitals, managed care organizations, medical groups, and other healthcare entities and providers. On the regulatory side, Matthew’s practice is focused on licensing, regulatory compliance, and managed care arrangements. Matthew has extensive experience preparing Knox-Keene HMO license applications and assisting clients with structuring shared-risk arrangements, developing and utilizing innovative payment methodologies, and ensuring compliance with applicable federal and state law. Matthew’s transactional practice is focused on mergers and acquisitions, joint ventures, and strategic alliances in the healthcare sector. 

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Jordan Grushkin, Attorney, Sheppard Mullin Law Firm, Health Care
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Jordan Grushkin is an associate in the Corporate Practice group in the firm's Century City office.

  • J.D., Georgetown University Law Center, 2015

  • B.A., Georgetown University, 2015, magna cum laude

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Samuel Gilkeson, Sheppard Mullin Law Firm, Century City, Corporate Law Attorney
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Samuel T. Gilkeson IV is an associate in the Corporate Practice Group in the firm's Century City office and is a member of the firm’s Healthcare Team.

Education

  • J.D., Pepperdine University, 2017

  • B.A., West Virginia University, 2012

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