United States District Court, N.D. California, San Francisco Division
DJENEBA SIDIBE and DIANE DEWEY, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs,
SUTTER HEALTH, and DOES 1 through 25, inclusive, Defendants
For Djeneba Sidibe, Individually and on Behalf of All Others Similary Situated, Plaintiff: Azra Z. Mehdi, LEAD ATTORNEY, Arcelia Leticia Hurtado, The Mehdi Firm, PC, San Francisco, CA; Allan Steyer, Donald Scott Macrae, Steyer Lowenthal Boodrookas Alvarez & Smith LLP, San Francisco, CA; Axel Bernabe, Jean Kim, Matthew L Cantor, PRO HAC VICE, Constantine Cannon LLP, New York, NY; Charles Ralph Jaeger, David C. Brownstein, William S Farmer, Farmer Brownstein Jaeger LLP, San Francisco, CA.
For Diane Dewey, Jerry Jankowski, Plaintiff: Allan Steyer, Donald Scott Macrae, Steyer Lowenthal Boodrookas Alvarez & Smith LLP, San Francisco, CA; Arcelia Leticia Hurtado, Azra Z. Mehdi, The Mehdi Firm, PC, San Francisco, CA; Axel Bernabe, Jean Kim, Matthew L Cantor, PRO HAC VICE, Constantine Cannon LLP, New York, NY; Charles Ralph Jaeger, David C. Brownstein, William S Farmer, Farmer Brownstein Jaeger LLP, San Francisco, CA.
For Sutter Health, Defendant: Lin W. Kahn, Jones Day, San Francisco, CA; Toby G Singer, Jones Day, Washington, DC.
ORDER GRANTING SUTTER HEALTH'S MOTION TO DISMISS PLAINTIFFS' THIRD AMENDED COMPLAINT
LAUREL BEELER, United States Magistrate Judge.
In this putative class action, Plaintiffs Djeneba Sidibe, Diane Dewey, and Jerry Jankowski sued Sutter Health, a company that owns and operates hospitals and other health care service providers, alleging that Sutter's anticompetitive conduct in the health care services industry in Northern California violates federal and state antitrust laws and California's unfair competition law. See generally Third Amended Complaint (" TAC" ), ECF No. 69. The alleged anticompetitive conduct is Sutter's imposing tying arrangements that require health plans to include in their provider network, and pay supra-competitive rates for, all Inpatient Hospital Services that Sutter supplies in five tied hospital service area (" HSA" ) markets (the San Francisco, Oakland, Sacramento, Modesto, and Santa Rosa HSAs). If the health plans do not, then they cannot have access to Sutter's " must have" Inpatient Hospital Services that Sutter supplies in the nine tying HSA markets (Antioch, Berkeley, Burlingame, Castro Valley, Davis, Roseville, San Leandro, Tracy, and Vallejo). TAC ¶ 5. Without access to the Inpatient Hospital Services in the tying market, health plans cannot compete. Id. The alleged result is that Sutter forces health plans to include Sutter's tied market Inpatient Hospital Services in their provider networks at prices that Sutter dictates. Id.
The arrangement also requires health plans to include every Sutter hospital in the tying markets in their provider networks, and but for this tying, health plans would be able to forego including Sutter hospitals in their networks unless the hospitals offered lower, competitively-priced rates for their Inpatient Hospital Services. Id. ¶ 29. Also, in a competitive market, health plans can steer participants to lower-cost providers in their networks, but Sutter precludes such steering arrangements by requiring health plans to " actively encourage" their members to use Sutter Health Providers and by penalizing the health plans with higher rates for Inpatient Hospital Services if they do not. Id. ¶ ¶ 34-36.
Sutter's anticompetitive conduct allegedly harmed hundreds of thousands of patient health-plan members in Northern California who suffered from these overcharges in the form of higher insurance premiums and co-insurance payments. Id. ¶ ¶ 2, 112.
Sutter moved to dismiss for failure to state a claim. See Motion, ECF No. 70. The court grants the motion for the reasons stated below.
I. THE PARTIES
A. Sutter Health
Defendant Sutter Health is a California corporation with its principal place of business
in Sacramento, California. TAC ¶ 19. Sutter controls the largest and most dominant network of hospitals and medical service providers in Northern California. See TAC ¶ 19. Sutter's network includes at least 31 acute care hospitals with approximately 4,500 beds. Id. Over the last 30 years, sutter has acquired approximately 20 hospitals and now owns the only acute care hospitals in several Northern California Health Service Areas. Id. ¶ 20. In 2012, Sutter's operating revenues were approximately $9.6 billion. Id. ¶ 21. Other persons, firms, corporations, organizations, and other entities have participated as co-conspirators in Sutter's antitrust violations, and Sutter has some degree of ownership or control over various entities and organizations that are a party to, benefit from, or are a respository for the proceeds generated by the alleged antitrust violations. Id. ¶ 22.
B. Plaintiffs and the Putative Class
Plaintiff Djeneba Sidibe lives or has lived in San Mateo County (before November 2009), Alameda County (November 2009 to January 2012), and Marin County (since January 2012). Id. ¶ 16. She was enrolled in a health plan with Anthem Blue Cross (October 2005 to March 2012) and now is enrolled in an Aetna plan. Id. Plaintiff Diane Dewey has lived in San Francisco County since 1994, was enrolled in health plans with Anthem Blue Cross (2008 to 2010) and Regence Blue Cross Blue Shield (2010 to 2012), and now is enrolled in a Premera Blue Cross health plan. Id. ¶ 17. Plaintiff Jerry Jankowski has lived in San Francisco County since August 1992, was enrolled in the Anthem Blue Cross health plan (July 2012 to June 2013), and is now enrolled the Blue Shield health plan. Id. ¶ 18. All three Plaintiffs paid premiums to be to be enrolled as a plan member in a health plan. Id. ¶ ¶ 16-18. Plaintiffs claim that they were injured by Sutter's allegedly anti-competitive conduct by paying higher premiums, co-payments, deductibles, and other out-of-pocket payments not covered by their health plans. Id.
Plaintiffs seek to represent a class of persons under Federal Rule of Civil Procedure 23(b)(3), defined as follows:
Any person in the six relevant commercial health insurance markets who during all or part of the period beginning September 17, 2008 to the present was or is enrolled in a licensed health plan offered by Anthem Blue Cross, Aetna, Blue Shield, Regence Blue Cross Blue Shield and Premera Blue Cross.
Id. ¶ 105. Plaintiffs also seek to represent a class under Rule 23(b)(2), defined as " all members of the Rule (b)(3) Class, and all consumers who are threatened with injury by the violations alleged herein." Id. ¶ 108.
II. THE ALLEGED ANTI-COMPETITIVE CONDUCT
In the health insurance market, commercial health plans such as Anthem Blue Cross, Aetna, Blue Shield, Regence Blue Cross Blue Shield, and Premera Blue Cross purchase medical services, including Inpatient Hospital Services, for the benefit of their insured members: consumers who purchase commercial health insurance from these health plans. Id. ¶ 23. Commercial health plans contract with hospitals for Inpatient Hospital Services and
pass those costs on to health plan members, such as Plaintiffs, in the form of commercial health insurance premiums. Id. Accordingly, the insurance premiums paid by health plan members increase when their health plans are forced to purchase Inpatient Hospital Services at supra-competitive rates. Health plan members also directly pay for the costs of medical services provided by hospitals in the form of co-insurance payments. Id.
A. The Tying Arrangements
Sutter has forced health plans -- including Anthem Blue Cross, Aetna, Blue Shield, Regence Blue Cross Blue Shield, and Premera Blue Cross -- to include Sutter's higher-priced Inpatient Hospital Services in the Tied Markets in their health plan networks. Id. ¶ 28. For example, Sutter has forced health plans to include language in their contracts with Sutter that is identical or similar to the following:
Each payer [i.e., commercial health plan] accessing Sutter Health providers shall designate ALL Sutter Health providers . . . as participating providers unless a Payer excludes the entire Sutter Health provider network.
Id. ¶ 28 (alterations in TAC). Sutter has also forced health plans to include its higher-priced Tied Market Inpatient Hospital Services in their networks by orally threatening that failure to do so would mean that health plans could not include Sutter's Tying Market Inpatient Hospital Services in their networks. Id. As a result of these " all or nothing" contracts and Sutter's market power in the Tying Markets, health plans are forced to include in their provider networks the Sutter Inpatient Hospital Services in both the Tied Markets and the Tying Markets. Id. ¶ 29. But for these tying arrangements, health plans would have the ability to forego including Sutter hospitals in their provider networks unless those hospitals offered the health plans lower, competitively-priced rates for Inpatient Hospital Services. Id.
A number of authorities support Plaintiffs' assertion that Sutter's " all-or-nothing policy" results in anticompetitive conduct. For example, the Federal Trade Commission and Department of Justice, Antitrust Division, recently identified tying of health care services by providers with market power as " conduct to avoid." Id. ¶ 32 (citing Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations (" ACOs" ) Participating in the Medicare Shared Savings Program) (the " DOJ/FTC Policy Statement" ). Id. There, these enforcement agencies noted that a group of providers (e.g., an ACO) " should not require a purchaser to contract with all of the hospitals under common ownership with a hospital that participates in the ACO." According to Plaintiffs, this statement applies to Sutter's tying arrangement because " Sutter's dominant market shares in the Tying Markets far exceed the 30% provider market share threshold that the FTC and DOJ identify as causing a need for heightened antitrust scrutiny of providers." Id. ¶ 32.
Plaintiffs also point to a February 2013 FTC advisory opinion to show the anticompetitive nature of " all or nothing" tying arrangements required by hospitals with market power such as Sutter's. Id. ¶ 33. There, the FTC stated that a proposed physician-hospital organization did not violate antitrust law because
the proposal does not appear to include 'vertical' arrangements that would enable [the organization] to use any market power that [it] might possess in selling certain services to limit competition in the sale of any other services. For example, [it] does not propose to use any contracting requirements that would require
payers to do business with all of [the organization's] participating hospitals . . .
Id. ¶ 33 (citing Norman PHO Advisory Opinion, Op. FTC 19 (Feb. 13, 2013)) (emphasis omitted).
B. Sutter's " Anti-Steering" Contract Provisions
Plaintiffs also challenge Sutter's alleged policy of including " anti-steering" clauses in a number of its agreements with health plans. See id. ¶ ¶ 34-38. In a competitive market, commercial health plans have the ability to steer some of their members to lower-cost, quality providers that participate in their provider networks, thus reducing the costs of medical expenses. Id. ¶ 34. Sutter, however, precludes such " steering" by including contract provisions in a number of its agreements that Plaintiffs allege force health insurers to steer patients away from lower-cost hospitals and to higher-cost Sutter hospitals. Id. ¶ ¶ 35-37. For example, one Sutter contract requires the health plan:
. . . to actively encourage members obtaining medical care to use Sutter Health providers. " Actively encourage" or " active encouragement" means incentivizing members to use participating providers [i.e., defined elsewhere as only Sutter providers] through the use of one of more of the following: reduced co-payments, reduced deductibles, premium discounts directly attributable to the use of the participating provider, financial penalties, or requiring such members to pay additional sums directly attributable to the non-use of a participating provider.
If Sutter Health or any provider learns that a payer . . . does not actively encourage its members to use network participating providers [i.e., Sutter only providers] . . . Sutter shall have the right upon not less than thirty (30) days' written notice to terminate that payer's right to negotiated rates. In the event of such termination, the terminated payer shall pay for covered services rendered by providers at 100% of billed charges until such time as Sutter reasonably believes and notices that the payer does in fact actively encourage its members to use network participating providers . . .
Id. ¶ 35 (emphasis and alterations in TAC).
Plaintiffs cite the DOJ/FTC Policy Statement as showing Sutter's anti-steering policy to be anticompetitive in that it proscribes a provider group (such as Sutter) from " preventing or discouraging private payers from directing or incentivizing patients to choose certain providers . . . through 'anti-steering' clauses." Id. ¶ 38. Other economic literature identifies anti-steering provisions such as Sutter's as compromising price competition. Id. (citing Havighurst, Clark C. & Richman, Barak D., The Provider Monopoly Problem in Health Care, 89 Oregon L. Rev. 847-83 (2011)). The February 2013 FTC advisory opinion discussed above also identifies anti-steering provisions forced upon health plans by entities with market power as anticompetitive. Id. ¶ 38. In the FTC advisory opinion, " that proposed physician-hospital organization at issue . . . did not appear to be 'limit[ing] competition' because, among other things, it did not ...