Sutter win a setback for antitrust enforcement

Insurers fail to prove pricing, tying claims against big California hospital chain

Over the past decade, health care reformers have vacillated between two schools of thought on how best to rein in soaring hospital prices. The debate pitted trustbusters who want to wield antitrust law to curb the monopolists against payment reformers who want to change reimbursement policy to promote better health at lower cost.

The trustbusters were dealt a severe blow Friday in northern California’s federal district court when a jury found Sutter Health, one of the highest priced and most profitable “non-profit” hospital chains in the country, not guilty of forcing insurers to buy its services in every market where Sutter does business. Such tying arrangements are illegal under federal and state antitrust law.

The five major insurers who brought the case failed to prove Sutter’s restrictions and prices resulted in higher premiums or that its contracts prevented insurers from steering their members to lower-cost hospitals. The class-action suit sought $411 million in damages, which the court could have tripled as a deterrent.

The jury’s decision was surprising given Sutter paid $575 million in 2019 to settle similar charges brought by a union benefits fund and self-insured employers. That case, led by then state Attorney General Xavier Becerra, led to predictions antitrust action would become a cornerstone of the Biden administration’s strategy for reining in soaring health care costs after Becerra was named Secretary of Health and Human Services.

Sutter certainly represents a juicy target for trustbusters. Based in Sacramento, the 23-hospital chain with over 55,000 employees dominates about a dozen markets in the northern half of the state. Pre-pandemic, the hospital routinely posted operating margins in the 7-8% range.

In 2020, the first pandemic year when many major hospital chains posted losses, it remained profitable, posting a 1.6% margin on $13.2 billion in revenue. By the third quarter of last year, it was well on its way to regaining its pre-pandemic level of profitability when it posted a 2.9% margin on $3.6 billion in revenue after posting a loss in the same quarter the previous year.

But those numbers appeared to have little impact on the 10-person federal jury. According to news reports, the insurer expert’s analysis of 140 million hospital-health plan transactions showed “97% of the higher costs allegedly caused by Sutter’s actions were passed onto premium payers.” But Sutter’s expert countered the analysis ignored Kaiser Permanente, its main rival, which combines an insurance arm with its delivery network.

Tech expertise, not health care

The defeat could put a damper on filing new health care-related cases. The administration has installed an aggressive team to lead its antitrust efforts. But most of their expertise was formed in combatting information technology behemoths, not health care providers and hospital systems.

Jonathan Kanter, who leads the Justice Department’s antitrust division, previously represented rival companies fighting Facebook and Google. Timothy Wu, a former Columbia scholar, serves as special assistant to the president for technology and competition policy. He is a long-time proponent of net neutrality.

And Lina Khan, a renowned antitrust legal scholar at Columbia University Law School, now runs the Federal Trade Commission. Her most famous essay, “Amazon’s Antitrust Paradox,” which appeared in the Yale Law Journal in 2017 while she was still a law student, focused on the anti-competitive effects of platform-based businesses like Amazon, even though they offered low prices.

While the FTC has brought the most health care-related antitrust cases over the years, it has mostly focused on pharmaceutical industry combinations in the 14 months since Biden took office.