Antitrust Law Daily Damages class in tying case against Sutter Health denied
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Monday, October 21, 2019

Damages class in tying case against Sutter Health denied

By Nicole D. Prysby, J.D.

The proposed damages model was insufficient to demonstrate a method for proving antitrust impact or calculating damages on a class-wide basis across the entire class.

A proposed damages class in an illegal tying case against health care network operator Sutter Health failed, because the plaintiffs failed to show that issues of antitrust injury and damages were subject to common proof, held the federal district court in San Francisco. Individuals and small companies that paid for health insurance sued the provider network, alleging that it used its leverage in dominant markets to require health plans to enter into systemwide contracts, thus foreclosing competition in markets in which the provider was less dominant. But the plaintiffs’ proposed damages class as presented by the plaintiffs’ damages expert had two major flaws. The model calculated overcharges for only two of the five health plans relevant to the case. The court also found no support for the expert’s assumption that health plans pass on 100 percent of any overcharges through premiums. Absent a sound methodology for proving on a class-wide basis what the alleged overcharges were and how those overcharges were passed through to the class, the plaintiffs did not meet their burden of showing that common issues predominate. However, the court did grant class certification to an injunctive- and declaratory-relief class under Rule 23(b)(2) (Sidibe v. Sutter Health, October 18, 2019, Beeler, L.).

Allegations of tying. In this putative class action, six plaintiffs (four individuals and two small companies that paid for health insurance) sued Sutter Health, which owns and operates a network of hospitals and providers in Northern California, for violations of the federal Sherman Antitrust Act, the California Cartwright Act, and the California Unfair Competition Law. The plaintiffs alleged that Sutter has market power in seven specific geographic markets (the "Tying Markets") in Northern California and that Sutter requires health plans to include its hospitals in four other geographic markets (the "Tied Markets"), at the prices Sutter dictates, and prevents health plans from incentivizing their enrollees to go to non-Sutter hospitals in the Tied Markets. Unlike in the Tying Markets, where Sutter has market power, in the Tied Markets, there are more hospitals and competition. But by tying its hospitals in the Tied Markets to its "must have" hospitals in the Tying Markets, Sutter forecloses competition by other hospitals in the Tied Markets and thus is able to charge supra-competitive prices at its hospitals. The plaintiffs alleged that Sutter’s systemwide contracts require a health plan that wants to include one Sutter hospital in its provider network to include all Sutter hospitals. Additionally, Sutter’s systemwide contracts contain "anti-steering" provisions that effectively bar health plans from creating "tiered" insurance products to incentivize their enrollees to use lower-cost non-Sutter hospitals.

The plaintiffs also alleged that Sutter charges "penalty rates" for any Sutter hospital that plans place out of network or in a lower tier. Because health plans are required to offer their enrollees at least one nearby in network hospital, they have no choice but to contract with Sutter so that they can include those Tying Market hospitals in their provider networks. Sutter then uses the fact that health plans have no choice but to contract with it to force health plans to accept its systemwide-contract terms, including its all-or-nothing, anti-steering, and penalty-rate provisions.

In a prior ruling, the court determined that because there were disputes of material fact about whether the putative plaintiff class could establish that their candidate markets—drawn from an industry source called the Dartmouth Atlas of Health Care—were properly defined geographic markets, summary judgment in favor of Sutter on the claims would be improper. Summary judgment was granted, however, with respect to an eighth tying market (Davis HSA), which the plaintiffs conceded should be discarded from the suit via summary judgment. The court also denied each party’s motion to exclude the other side’s expert. Before the court was the plaintiffs’ motion to certify a class under Federal Rule of Civil Procedure 23(b)(2) and (b)(3).

Class certification. The court granted the plaintiffs’ motion to certify their proposed injunctive and declaratory relief class and denied their motion to certify their proposed damages class.

The court first concluded that Rule 23(a) prerequisites were met. Numerosity was met as the class contains hundreds of thousands of members. Commonality was met through the common question of whether Sutter’s systemwide contracting is anticompetitive. Typicality was met because the challenged conduct—Sutter’s systemwide contracting with its all-or-nothing, anti-steering, and penalty-rate provisions—is not unique to any plaintiff. The court also concluded that the named plaintiffs will prosecute the action vigorously on behalf of the class and no conflicts existed.

Regarding the proposed damages class, the court concluded that the plaintiffs demonstrated that the alleged antitrust violations are subject to common proof, but failed to do the same for antitrust injury and damages. The plaintiffs’ expert developed a model that calculated Sutter’s alleged overcharges and assumed that the health plans would pass on 100 percent of any Sutter overcharges through the premiums charged to customers. The plaintiffs’ liability theory was that Sutter charged the five health plans at issue in this case—Blue Shield, Anthem, Aetna, Health Net, and UnitedHealthcare—supra-competitive rates. But the alleged antitrust injury was indirect: the class members’ harm comes only to the extent the health plans passed on Sutter’s alleged overcharges through to class members in the form of higher premiums than the health plans would have charged in the "but-for" world. As a result, the plaintiffs must demonstrate that the five health plans paid Sutter inflated prices for inpatient hospital services, and then those overcharges were passed on to class members in the form of inflated premiums.

The plaintiffs’ proposed methodology had two significant deficiencies (1) it did not include a reliable method for proving or calculating Sutter’s overcharges to the five health plans, and (2) it did not include a reliable method for proving or calculating how the overcharges were passed through to health-insurance premiums paid by class members. The plaintiffs’ expert used a regression analysis model to calculate overages for Anthem and Blue Shield, but did not offer an overcharge model with respect to Aetna, Health Net, or UnitedHealthcare. Her regression model returned significantly different overages between Anthem and Blue Shield and she did not explain how she could reconcile those differences and use them to extrapolate rates for the other plans. Therefore, the court ruled, even if her model for Anthem and Blue Shield was sound, the plaintiffs failed to demonstrate that they can prove or calculate Sutter’s overcharges on a class-wide basis given that they have not offered a method (or hedged between various methods) for calculating overcharges for the remaining three health plans, customers of which comprise 30 percent of the class.

The court also rejected the expert’s assumption that health plans pass on 100 percent of any Sutter overcharges. The fact that health plans try to set premiums at a level that covers all their expenses as a whole, or that their premiums generally increase when their costs increase, did not establish that health plans pass on 100 percent of any given cost increase or overcharge through to their customers. The expert’s regression model also failed to take into account that competition from rivals (for example, Kaiser Permanente) affects a health plan’s decision to pass on costs.

The court did conclude that the plaintiffs satisfied the requirements for certifying a class for injunctive or declaratory relief. The plaintiffs sought a single injunction barring Sutter from engaging in anticompetitive behavior, including its systemwide-contracting practices with their all-or-nothing, anti-steering, and penalty rate provisions or a declaration that Sutter’s practices are anticompetitive and violate the antitrust laws. These remedies would provide relief to each member of the class.

This case is No. 3:12-cv-04854-LB.

Attorneys: Azra Z. Mehdi (Mehdi Firm PC) for Djeneba Sidibe. Jeffrey Alan Levee (Jones Day) and Oliver Quinn Dunlap (Bartko Zankel Bunzel & Miller) for Sutter Health.

Companies: Sutter Health

MainStory: TopStory Antitrust CaliforniaNews

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