Sutter Health faces antitrust trial with national implications

A legal showdown over a large Northern California health care nonprofit's business practices, set to start jury selection next week in San Francisco County Superior Court, is expected to determine whether Sutter Health violated state antitrust law or has a legitimate business model that experts say would be adopted across the country if the defense wins.

A class action of 1,500 small employers and unions that pay for health care services, joined in a separate lawsuit last year by state Attorney General Xavier Becerra, say Sutter Health illegally uses its market power to overcharge customers by forcing health care insurers to include Sutter hospitals and clinics in its plans and to bar strategies that encourage patients to find cheaper services.

The result of Sutter Health's anticompetitive conduct, plaintiffs' attorneys and the state attorney general's office argue, is health care costs are at least 20% to 30% higher in Northern California than for the same services in Southern California.

"Because Sutter was so successful here, the price of health care in Northern California is dramatically elevated in price," said Richard L. Grossman of Pillsbury & Coleman LLP and lead counsel for the private plaintiffs. UFCW & Employers Benefit Trust v. Sutter Health, CGC-14-538451 (S.F. Super. Ct., filed April 7, 2014; People v. Sutter Health, CGC-18-565398 (S.F. Super. Ct., filed March 29, 2018).

Sutter Health's competitors, with little chance to woo business away, keep their prices higher in Northern California, as well, Grossman said.

The health care company, which operates 24 hospitals in Northern California as well as outpatient centers, maintains it is following the objectives of the Affordable Care Act, commonly known as Obamacare, by adopting a large, integrated network that negotiates the best prices with insurance companies.

"Sutter is not violating antitrust laws by integrating its hospital system and negotiating system-wide contracts with insurance companies," said company spokeswoman Amy Thoma Tan in a prepared statement. "There is no evidence that Sutter has hurt competition, as demonstrated by the fact that new hospitals continue to open and existing facilities continue to expand in markets that Sutter Health services, including in the San Francisco Bay Area and the greater Sacramento region."

Grossman said the plaintiffs are seeking some $700 million in damages from Sutter Health which -- if trebled under the Cartwright Act, the state's antitrust law -- would require the company to pay more than $2 billion in damages.

The plaintiffs also are seeking injunctive relief on claims of price tampering, unreasonable restraint of trade and a combination to monopolize under antitrust law.

Deputy Attorney General Emilio E. Varanini IV argued in the state complaint Sutter Health should stagger its negotiations between providers of health care services so health insurers can avoid the possibility of an en masse termination and a trustee be appointed to oversee the talks, among other conditions.

Attorneys representing hospitals that support Sutter Health fear the state's proposed cure will be worse than the disease.

Allison A. Davis, a partner with Davis Wright Tremaine LLP who represents the American Hospital Association, wrote in an amicus brief last year the state's proposed remedy risks "inadvertently inflicting on consumers the very things the state professes it wants to avoid -- increased health care costs, reduced access to care, and less innovation."

Legal experts say the importance of the case goes beyond its potential impact on Sutter Health.

Jaime S. King, a professor at UC Hastings College of the Law, said the lawsuits -- which allege wrongdoing by Sutter Health dating to 2003 -- tackle practices that have expanded over the years.

A similar lawsuit brought by the U.S. Department of Justice and the North Carolina attorney general's office against Atrium Health, challenging a company policy prohibiting insurers from "steering" consumers in the Charlotte area away from less expensive health care options, was settled last November.

"This is a much bigger case, and the impact of these contract terms is just coming to light," King said. "You can't build a health plan in Northern California without having Sutter in your network."

The Sutter Health case also addresses unreasonable restraint of trade, the company's alleged practice of "tying" claims which bar health insurance companies and businesses from excluding its facilities.

Grossman said Sutter includes specific contract terms, described by plaintiffs as "all or nothing," that effectively eliminate insurers' ability to "exclude overpriced Sutter providers from their networks unless all Sutter providers were excluded -- a commercial impossibility," he wrote in a successful motion for class certification.

Last month, Judge Anne-Christine Massullo issued a split decision on whether Sutter Health's practices are per se illegal, if proven, or if they must be evaluated by the more defendant-friendly "rule of reason" standard.

The rule of reason analysis allows defense lawyers to argue that the procompetitive benefits of Sutter Health's system outweigh the drawbacks. "There's no doubt there are efficiencies that can come from integrated care," King said.

Two of the three claims must be tested under a rule of reason analysis, the judge ruled, but plaintiffs did score a victory on their "tying" claim, which Massullo ruled is illegal if proven.

While San Francisco County Superior Court Judge Curtis E.A. Karnow sanctioned Sutter Health in 2017 because company executive Melissa Brendt ordered the destruction of 10 years of evidence, Massullo rejected a plaintiffs' bid to bar her from testifying about pro-competitive reasons and business justifications for Sutter's contract terms during the trial.

Massullo deferred a decision on whether to issue an adverse jury instruction until the end of the trial but expressed little enthusiasm for it. "Moreoever, to the extent documents were lost as a result of spoliation, neither the court nor the finder of fact will ever know with certainty whether those documents would have aided plaintiffs in their efforts to impeach Brendt," she wrote in a June order.

A team of attorneys from Jones Day -- Jeffrey A. LeVee of Los Angeles, along with David C. Kiernan, Brian G. Selden and Matthew J. Silveira of San Francisco -- will defend Sutter Health along with Robert H. Bunzel, Patrick M. Ryan and Oliver Q. Dunlap of Bartko Zankel Bunzel & Miller of San Francisco; and Christa M. Anderson, Reid P. Mullen and Thomas E. Gorman of Keker, Van Nest & Peters LLP of San Francisco.

Defense attorneys did not answer messages seeking comment.

Along with Varanini, the state attorney general's office is represented by Senior Assistant Attorney General Kathleen E. Foote and Supervising Deputy Attorney General Michael W. Jorgenson, along with Deputy Attorneys General Cheryl Lee Johnson and Esther H. La.

Private plaintiffs' attorneys include John L. Cooper, Roderick M. Thompson, and Christopher C. Wheeler of San Francisco-based Farella Braun & Martel LLP; Steven L. Stemerman and Sarah Grossman-Swenson of McCracken, Stemerman & Holsberry LLP of San Francisco, along with attorneys from Washington, D.C.-based Cohen Milstein Sellers & Toll PLLC and Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC.

Jury selection starts Monday, and the trial is expected to last until January.

Health care "providers across the country are watching this case very closely" to determine if Sutter Health's business practices are found to violate antitrust law or have the court's blessing, Grossman said. "There's a lot at stake."