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Sidibe v. Health

United States District Court, N.D. California, San Francisco Division

August 30, 2019

DJENEBA SIDIBE, et al., Plaintiffs,
v.
SUTTER HEALTH, Defendant. Explanatory Variable Estimates

          (REDACTED) ORDER GRANTING MOTION TO CERTIFY CLASS UNDER RULE 23(B)(2) AND DENYING WITHOUT PREJUDICE MOTION TO CERTIFY CLASS UNDER RULE 23(B)(3) RE: ECF NOS. 348 (UNDER SEAL) AND 379 (REDACTED VERSION)

          LAUREL BEELER UNITED STATES MAGISTRATE JUDGE

         TABLE OF CONTENTS

         INTRODUCTION ............................................................................................................................. 3

         STATEMENT ................................................................................................................................... 5

         1. The Proposed Class ..................................................................................................................... 5

         2. Background ................................................................................................................................. 5

         3. The Plaintiffs' Antitrust Allegations Regarding Sutter's Anticompetitive Practices .................. 7

3.1 Sutter's Systemwide Contracting and Its “All-or-Nothing, ” “Anti-Steering, ” and “Penalty Rate” Provisions ................................................................................................. 7
3.2 The “But For” World ....................................................................................................... 12

         4. The Plaintiffs' Calculations of Antitrust Injury and Damages to Class Members .................... 13

4.1 Calculating Sutter's Overcharges .................................................................................... 15
4.2 Assuming Health Plans “Pass On” 100 Percent of Any Sutter Overcharges They Have to Pay Through to the Premiums That They Charge Their Customers .................. 20

         ANALYSIS ..................................................................................................................................... 27

         1. Rule 23(a) Prerequisites ............................................................................................................ 28

1.1 Numerosity - Rule 23(a)(1) ........................................................................................... 28
1.2 Commonality - Rule 23(a)(2) ....................................................................................... 29
1.3 Typicality - Rule 23(a)(3) ............................................................................................. 30
1.4 Adequacy - Rule 23(a)(4) ............................................................................................. 32
1.4.1 Prosecuting the action vigorously on behalf of the class ....................................... 33
1.4.2 Conflicts of interest ............................................................................................... 33

         2. Rule 23(b) Prerequisites ............................................................................................................ 38

2.1 Predominance - Rule 23(b)(3) ...................................................................................... 38
2.1.1 Antitrust violations ................................................................................................ 39
2.1.2 Antitrust injury and calculating damages .............................................................. 39
2.1.2.1 Calculating Sutter's overcharges ................................................................. 42
2.1.2.2 Assuming health plans “pass on” 100 percent of any Sutter overcharges they have to pay through to the premiums that they charge their customers ..................................................................................................... 44

         2.2 Acting on Grounds That Apply Generally to the Class - Rule 23(b)(2) ....................... 50

         CONCLUSION ............................................................................................................................... 53

         INTRODUCTION

         In this putative class action, six plaintiffs (four individuals who enrolled in health-insurance policies from the health plans Aetna, Anthem Blue Cross, and Blue Shield and two small companies that paid for health insurance for their employees) are suing Sutter Health, which owns and operates a network of hospitals and medical-service providers in Northern California, for violations of the federal Sherman Antitrust Act, the California Cartwright Act, and the California Unfair Competition Law.

         The plaintiffs allege that Sutter has “market power” in seven specific “geographic markets” (the “Tying Markets”) in Northern California, where Sutter's hospitals are either the only hospital (i.e., a monopoly) or the dominant hospital in the market.[1] Health plans like Anthem and Blue Shield must include those Sutter hospitals in their provider networks to be able to assemble health-insurance products that are commercially marketable.[2] Sutter allegedly uses that leverage to require that health plans enter into “systemwide contracts” that include “all-or-nothing” and “anti-steering” provisions. Those provisions (1) require health plans to accept as in-network providers all of Sutter's hospitals, at the prices Sutter dictates, and (2) prevent health plans from incentivizing their enrollees to go to lower-cost hospitals instead of Sutter's higher-cost hospitals.[3]

         In particular, the plaintiffs allege that Sutter (1) requires health plans to include its hospitals in four other geographic markets (the “Tied Markets”), at the prices Sutter dictates, and (2) prevents health plans from incentivizing their enrollees to go to non-Sutter hospitals in the Tied Markets.[4]Unlike in the Tying Markets, where Sutter has market power, in the Tied Markets, there are more hospitals and more hospital competition. This competition normally would drive Sutter's prices down.[5] 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 and maintain supra-competitive prices at its hospitals.[6] The plaintiffs allege that the health plans have to pay Sutter supra-competitive prices and then, in turn, pass on those costs through to their customers in the form of higher premiums.[7] Consequently, it is the health plans' customers - individuals and employers that buy health insurance - that ultimately bear the burden of paying Sutter's supra-competitive prices.[8]

         The plaintiffs seek (1) treble damages and restitution from Sutter to compensate them for the overcharges they incurred from Sutter's alleged anticompetitive behavior and (2) a declaration that Sutter's practices are anticompetitive and an injunction barring Sutter from continuing to engage in anticompetitive behavior, including its “tying, ” “all-or-nothing, ” and “anti-steering” arrangements.[9] They move to certify a class under Federal Rule of Civil Procedure 23(b)(2) and (b)(3) of all individuals and entities located in nine specific California Rating Areas (“RAs”)[10] that paid premiums for fully insured health-insurance policies from the health plans Blue Shield, Anthem, Aetna, Health Net, or UnitedHealthcare from September 28, 2008 to the present.[11]

         Sutter opposes the plaintiffs' motion. Sutter's main arguments are that (1) there are intraclass differences and conflicts that render the plaintiffs atypical and inadequate to represent the class and (2) individual issues about whether class members suffered antitrust injury, and how class members' damages would be calculated, predominate over common issues.

         The court held a hearing and now rules as follows. The court finds that the plaintiffs have not made a showing that issues of antitrust injury and damages are subject to common proof such that certification of a damages class under Rule 23(b)(3) is appropriate. But the court also finds that the plaintiffs have met the requirements for certification of an injunctive- and declaratory-relief class under Rule 23(b)(2). The court thus grants the plaintiffs' motion to certify their proposed class under Rule 23(b)(2) and denies without prejudice their motion to certify their proposed class under Rule 23(b)(3).

         STATEMENT

         1. The Proposed Class

         The plaintiffs seek to certify a proposed class of:

All entities in California Rating area 1, 2, 3, 4, 5, 6, 8, 9 or 10 (the “Nine RAs”), and all individuals that either live or work in one of the Nine RAs, that paid premiums for a fully-insured health insurance policy from Blue Shield, Anthem Blue Cross, Aetna, Health Net or United Healthcare from September 28, 2008 to the present. This class definition includes Class Members that paid premiums for individual health insurance policies that they purchased from these health plans and Class Members that paid premiums, in whole or in part, for health insurance policies provided to them as a benefit from an employer or other group purchaser located in one of the Nine RAs.[12]

         2. Background

         “‘The market for hospital services and medical care is complex.'” Sidibe v. Sutter Health, No. 12-cv-04854-LB, 2019 WL 2078788, at *4 (N.D. Cal. Apr. 12, 2019) (quoting Cascade Health Sols. v. PeaceHealth, 515 F.3d 883, 891 (9th Cir. 2008)). “There are at least three transactions involved in providing hospital services and health care in connection with health insurance.” Id.

         “First, hospitals [such as Sutter] sell hospital services to health-insurance plans [such as Blue Shield, Anthem, Aetna, Health Net, or UnitedHealthcare]. Hospitals and health plans negotiate whether a given hospital will be included in the health plan's network and negotiate the rates that the health plan will pay the hospital for its hospital services.” Id. (citing Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke's Health Sys., Ltd., 778 F.3d 775, 784 & n.10 (9th Cir. 2015) (citing Gregory Vistnes, Hospitals, Mergers, and Two-Stage Competition, 67 Antitrust L.J. 671, 672, 674 (2000))). “These negotiations are highly price-sensitive.” Id. (citing FTC v. Advocate Health Care Network, 841 F.3d 460, 465 (7th Cir. 2016) (citing Vistnes, 67 Antitrust L.J. at 674-75)). “All else being equal, hospitals prefer higher rates and health plans prefer lower rates.” Id. (citing Cascade Health, 515 F.3d at 892).[13]

         “Second, health plans sell health insurance to consumers. The consumers are individuals (who directly purchase health insurance for themselves or their families) and employers (which purchase health insurance for their employees).” Id. at *5 (citing Cascade Health, 515 F.3d at 892; St. Luke's, 778 F.3d at 784). “An important way that health plans compete for consumers is their provider networks: the hospitals, physicians, and ancillary providers that the health plan offers ‘in network' and that enrollees are encouraged to use.” Id. (citing Gregory S. Vistnes & Yianis Sarafidis, Cross-Market Hospital Mergers: A Holistic Approach, 79 Antitrust L.J. 253, 267 (2013)). “All else being equal, a health plan with a more comprehensive provider network will be more attractive to consumers.” Id. (citing Vistnes & Sarafidis, 79 Antitrust L.J. at 267). “At the same time, health plans that have high-priced providers in their networks have higher costs.” Id. (citing Vistnes & Sarafidis, 79 Antitrust L.J. at 267). “Thus, in choosing how inclusive their provider network is, health plans balance the benefit of more comprehensive networks with the costs of paying more to providers in their networks.” Id. (citing Vistnes & Sarafidis, 79 Antitrust L.J. at 267).[14]

         “Third, hospitals seek to attract health-plan enrollees who need hospital services to come to them (as opposed to other hospitals).” Id. (citing St. Luke's, 778 F.3d at 784 n.10 (citing Vistnes, 67 Antitrust L.J. at 681-82); Advocate Health, 841 F.3d at 471 (citing Vistnes, 67 Antitrust L.J. at 672); FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 342 (3d Cir. 2016) (citing Vistnes, Antitrust L.J. at 672)). “Unlike health plans, which are sensitive to the prices that hospitals charge for their services, enrollees are ‘largely insensitive' to price because the prices that hospitals charge are largely borne by the enrollees' health plans, not by the enrollees.” Id. (some internal quotation marks omitted) (quoting St. Luke's, 778 F.3d at 784 n.10 (citing Vistnes, 67 Antitrust L.J. at 682) and citing Advocate Health, 841 F.3d at 471 (citing Vistnes, 67 Antitrust L.J. at 677, 680); Penn State Hershey, 838 F.3d at 342). “Instead of taking price into account, enrollees choose hospitals based mostly on non-price factors, such as location or quality of services.” Id. (internal quotation marks omitted) (quoting Penn State Hershey, 838 F.3d at 341 and citing St. Luke's, 778 F.3d at 784 n.10 (citing Vistnes, 67 Antitrust L.J. at 682); Advocate Health, 841 F.3d at 465 (citing Vistnes, 67 Antitrust L.J. at 677, 682)).[15]

         3. The Plaintiffs' Antitrust Allegations Regarding Sutter's Anticompetitive Practices

         3.1 Sutter's Systemwide Contracting and Its “All-or-Nothing, ” “Anti-Steering, ” and “Penalty Rate” Provisions

         As of 2015, Sutter was the largest health system (other than Kaiser Permanente) in Northern California, with 22 hospitals and approximately 4, 000 patient beds.[16] Currently, Sutter has 24 hospitals and approximately 5, 200 patient beds.[17]

         Before the early 2000s, health plans were able to negotiate with Sutter's various hospitals individually. Health plans could include some Sutter hospitals in their provider network while excluding (or threatening to exclude) others. Under that structure, if a health plan determined that a particular Sutter hospital was too expensive, it had the option to exclude that hospital from its provider networks. Consequently, each Sutter hospital had an incentive to offer competitive prices to incentivize health plans to include the hospital in their provider networks (which in turn would result in the hospital getting more patient volume).[18]

         The plaintiffs maintain that beginning in the early 2000s, Sutter began requiring health plans to enter into “systemwide” contracts that included “all-or-nothing” requirements. Sutter's systemwide contracts require, or effectively 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 rather than more expensive Sutter hospitals (i.e., products where enrollees pay lower co-pays to use providers in higher tiers and higher co-pays to use providers in lower tiers where Sutter hospitals are in a lower tier).[19]

         More specifically, Sutter's systemwide contracts include provisions under which health plans must pay Sutter what they have characterized as “penalty rates”[20] for any Sutter hospital that they place out-of-network or in a lower tier. Typically, when health-plan enrollees use a hospital that is not in-network, the hospital can charge the health plan only the “reasonable and customary value” of the hospital services provided, as mandated by state law. Sutter, however, requires health plans to sign contracts that supersede the “reasonable and customary value” limit on charges and instead require health plans to pay 95 percent of Sutter's “full billed charges” - a substantially higher amount - if their enrollees use Sutter hospitals that they have placed out-of-network or in a lower tier. No matter how a health plan might structure its health-insurance products, it is inevitable that some enrollees will have to use Sutter hospitals (e.g., if they need emergency care and a Sutter hospital is the nearest hospital), in which case Sutter's “penalty rates” would apply. These higher “penalty rates” reduce or eliminate any savings the health plans could achieve by excluding or tiering Sutter hospitals in the first place. Consequently, even where health plans technically are permitted under their contracts to exclude or tier Sutter hospitals, they are effectively prevented from doing so in a way that would give Sutter any incentive to lower its prices.[21]

         The plaintiffs maintain that Sutter can impose these systemwide contracts on health plans because it has “market power” in seven specific geographic markets - the Tying Markets - in Northern California. Sutter hospitals are either the only hospital or the predominant hospital in those markets. 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.[22]

         The plaintiffs maintain that Sutter's systemwide contracts allow it to charge higher prices at its hospitals in certain other geographic markets - the Tied Markets. Unlike in the Tying Markets, in the Tied Markets, there are more hospitals and more competition among hospitals. Those other hospitals normally would act as price constraints on Sutter hospitals. Health plans could threaten to exclude Sutter hospitals in favor of those other hospitals or place Sutter hospitals in lower tiers - thereby reducing Sutter hospitals' patient volume (and, thus, their revenues) - to negotiate with Sutter to get it to lower its prices. But the systemwide contracts that Sutter imposes on health plans effectively bar health plans from using these negotiating tactics. Health plans thus are prevented from exposing Sutter to price competition. As a result, Sutter is free to charge supra-competitive prices at its hospitals in the Tied Markets.[23]

         The plaintiffs maintain that Sutter engages in systemwide contracting with its all-or-nothing, anti-steering, and penalty-rate provisions with each of the health plans Blue Shield, Anthem, Aetna, Health Net, or UnitedHealthcare in the same general way. Sutter also charges these health plans the same allegedly supra-competitive prices, across different insurance products offered by any one health plan, and across different health plans.[24]

         3.2 The “But For” World

         The plaintiffs maintain that in the “but for” world - the counterfactual world where Sutter did not tie its hospitals or engage in anticompetitive practices[25] - health plans would be able to negotiate lower rates from Sutter. While health plans might still have no choice but to contract with Sutter hospitals in the Tying Markets, in the but-for world, health plans could threaten to exclude Sutter hospitals in the Tied Markets from their provider networks or place those Sutter hospitals in a lower tier in lieu of other competitor hospitals. In the face of this competition, Sutter would no longer be able to charge supra-competitive prices at its Tied Market hospitals and instead would have to lower its prices to stay competitive. The plaintiffs maintain that this would benefit all healthcare consumers and class members.[26]

         For example, suppose a health plan currently offers a health-insurance policy that costs $100 a month and includes Tied Market Sutter hospitals in the top tier of its in-network providers. Under Sutter's systemwide contracts, the health plan effectively is barred from offering an alternative health-insurance policy for, say, $80 a month, [27] that excludes those Sutter hospitals or places them in a lower tier.[28] In the but-for world, however, the health plan could offer such a policy. Some health-insurance buyers who prioritize having in-network access to Sutter hospitals might continue to enroll in the first policy. But others who place less importance on access to Sutter hospitals or more importance on lowering their insurance premiums might enroll in the new second policy instead. Under the second policy, those latter buyers would use Sutter hospitals less often to avoid the higher co-pays associated with using out-of-network or lower-tiered providers. This would reduce Sutter's patient volume and, consequently, its revenues. In response, the plaintiffs argue, Sutter would reduce the prices it charges the health plan, so that, in turn, the health plan could reduce the premiums it has to charge for the first policy (perhaps down to, say, $90 a month instead of $100), which in turn would entice more customers to sign up for the first policy again instead of the second and use more Sutter hospitals, which in turn would restore some of Sutter's lost patient volume. As a result, even Sutter loyalists who would not enroll in a tiered health-insurance policy (even if one were offered) nonetheless would be better off in the but-for world because they would be able to enroll in the first non-tiered policy at a cheaper rate.[29]

         4. The Plaintiffs' Calculations of Antitrust Injury and Damages to Class Members

         One of the central issues in the litigation and in the plaintiffs' motion for class certification (and Sutter's opposition thereto) is how to assess the antitrust injury that class members allegedly have sustained and how to calculate class members' purported damages.

         The plaintiffs offer the following formula, developed by their expert Dr. Tasneem Chipty, to assess the purported antitrust injury and calculate damages for each class member. Broadly speaking, the plaintiffs' formula is as follows:

1. For each year between 2006 and 2015, calculate as a percentage how much of the amount that each relevant Sutter hospital charged each health plan and its patients was an overcharge (i.e., was beyond what the Sutter hospital would have charged in the but-for world).[30]
2. Disaggregate the total amount each health plan paid to each Sutter hospital into “cohorts” based on (1) the geographic Rating Area where health-plan enrollees live or work, (2) the “group type” of the insurance buyer (individual buyers versus “small-group”[31] employer buyers versus “large-group”[32] employer buyers) and (3) year, and, using the overcharge percentage from step one, calculate as a dollar figure each cohort's per-member-per-month (“PMPM”) share of the overcharge.[33]
3. Assume that (1) health plans pass on 100 percent of any Sutter overcharge they have to pay through to the premiums they charge their customers and (2) there is a lag between when a health plan is overcharged and when it passes that overcharge on to its customers in the form of higher premiums, and, based on those assumptions, divide each cohort's PMPM overcharge for each year between 2006 and 2015 from step two by the cohort's total PMPM premium for each year between 2008 and 2017, respectively (i.e., the PMPM premium two years later), to calculate as a percentage how much of the premium was part of the Sutter overcharge.[34]
4. Multiply the individual premiums each class member paid by the premium-overcharge percentage from step three to calculate that class member's share of damages.[35] Where an employer and an employee both paid a portion of the employee's health-insurance premium, split the damages proportionately based on the amount that the employer and employee respectively contributed toward the total premium.[36]

         For the purposes of this order, the court focuses on two aspects of the plaintiffs' formula: (1) calculating Sutter's overcharges and (2) the assumption that health plans pass on 100 percent of any Sutter overcharges through to the premiums they charge their customers.[37]

         4.1 Calculating Sutter's Overcharges

         To calculate the amount that Sutter allegedly has overcharged health plans, Dr. Chipty developed a regression-analysis model.[38]

         Regression analysis is a statistical methodology for determining the relationship between a dependent variable and a set of explanatory variables that can influence or drive the dependent variable.[39] In Dr. Chipty's model, the dependent variable is hospital prices, or, more specifically, “case-mixed adjusted hospital prices.”[40] The explanatory variables are factors that Dr. Chipty identified as being likely to drive hospital prices, such as the hospital's operating costs, its perceived quality, the size of its system, and how many competitors it has (or variables that are measures or proxies of those factors).[41] Dr. Chipty states that her regression model measures how much Sutter hospital prices are driven by her explanatory variables (costs, perceived quality, size, or number of competitors) versus how much they are driven by the hospital's being in the Sutter system - with the latter being a measure of how much the hospital is overcharging health plans by virtue of being Sutter and benefiting from Sutter's anticompetitive practices.[42]

         Dr. Chipty examined Sutter hospitals in the Tied Markets and in one Tying Market (Berkeley-Oakland) and group of “benchmark” hospitals that purportedly resemble Sutter hospitals except that (unlike Sutter) they do not impose tying or other similar anticompetitive restrictions on health plans.[43] Dr. Chipty initially used claims data from the health plan Anthem to calculate the case-mix adjusted hospital prices charged to Anthem enrollees for each of these hospitals from 2006 to 2015.[44] Dr. Chipty ran her regression model twice on the Anthem-based case-mixed adjusted hospital prices, (1) once on only the benchmark hospitals to calculate an "out-of-sample prediction" and (2) once on a sample of both Sutter and benchmark hospitals to calculate an "in-sample prediction."[45] (Dr. Chipty explained that, among other things, the out-of-sample regression generates year-by-year estimates of Sutter hospital overcharges, whereas the in-sample regression generates only a single average estimate of Sutter hospital overcharges.[46]) Based on her regression model, Dr. Chipty estimated Sutter's overcharges of Anthem by year and hospital as set forth in the chart below.

         [Opening Declaration] Exhibit 14A[47]

         Hospital Case-Mix Adjusted Price Overcharge Percentages, Anthem Baseline Regression 2006-2015

         (Table Omitted)

         In response to criticisms by Sutter's expert Dr. Robert Willig that Dr. Chipty's overcharge estimates were based on data only from Anthem, [48] Dr. Chipty applied her regression model to claims data from the health plan Blue Shield.[49] After processing the data, Dr. Chipty ran her regression model twice on the Blue Shield-based case-mixed adjusted hospital prices to calculate an "out-of-sample" and an "in-sample" prediction.[50] Based on the Blue Shield claims data and her regression model, Dr. Chipty estimated Sutter's overcharges at its hospitals by year and hospital, as set forth in the chart below.

         [Reply Declaration] Exhibit 17[51]

         Hospital Case-Mix Adjusted Price Overcharge Percentages, Blue Shield Baseline Regression 2006-2015

         (Table Omitted)

         Dr. Chipty has not conducted similar regression analyses on claims data from the health plans Aetna, Health Net, or UnitedHealthcare. She testified at her deposition that she has not offered an overcharge model for class members who bought insurance through those health plans.[52] She stated that she had two approaches for addressing those three health plans: (1) if she had access to the same types of data for each health plan, she could run her regression models on each health plan separately, or (2) she could try to extrapolate her findings from some health plans to other health plans.[53] She testified, "I have not reached an opinion as to whether I have a preferred method between those two as yet.”[54] With respect to the first approach, she stated that she did not fully know whether she had sufficient data from Aetna, Health Net, or UnitedHealthcare to run her regression analyses and would not know until she tried to run the analyses.[55] With respect to the second approach, she stated that she has not reached an opinion as to whether it would be reasonable to use extrapolation as an overcharge-damages model.[56]

         Sutter noted that Dr. Chipty's regression model, when applied to Blue Shield claims data, shows an undercharge (as opposed to an overcharge) at one of Sutter's hospitals in a Tied Market, Sutter Santa Rosa. When asked about it during her deposition, Dr. Chipty stated that this reflects that her regression model has “an inability to measure the overcharge for Sutter-Santa Rosa.”[57] Dr. Chipty did not propose an alternative model for estimating the overcharge percentage for Sutter Santa Rosa for Blue Shield class members.[58]

         4.2 Assuming Health Plans “Pass On” 100 Percent of Any Sutter Overcharges They Have to Pay Through to the Premiums That They Charge Their Customers

         Dr. Chipty's formula for converting the amount that Sutter allegedly overcharged health plans to the amount that class members were overcharged for their insurance premiums relies on an assumption that health plans “pass on” 100 percent of any Sutter overcharges they have to pay through to the premiums that they charge their customers.[59] In other words, her formula assumes that if Sutter charged, say, Anthem $100, 000 more than it would have been able to charge in the but-for world, Anthem charged its customers (i.e., class members) $100, 000 more in premiums than it would have charged in the but-for world as well.

         Dr. Chipty stated in her report that health plans may actually pass on less than 100 percent of hospital overcharges through to increased premiums to their customers. She explained in her report:

Basic economic principles indicate that health plans will pass through at least some portion of medical cost increases on to their consumers in the form of higher premiums. How much is passed through depends on market conditions. Given competitive conditions, a health plan may decide to absorb some portion of a medical cost increase, by cutting into [its] margins, to remain price competitive with other health plans who do not experience similar cost increases.[60]

         As she testified in her deposition, “the different health plans may have different administrative costs, the different health plans may have different medical loss ratios or profit margins that they're targeting.”[61]

         Among other things, Dr. Chipty acknowledges that health plans like Anthem and Blue Shield might decide not to pass on 100 percent of hospital overcharges because of the competitive pressures they face from Kaiser Permanente.[62] Kaiser is the largest health system in Northern California (and California generally).[63] Kaiser is a “closed” health system consisting of a Kaiser health plan and Kaiser hospitals and other medical providers, where Kaiser health-plan enrollees can receive healthcare only from Kaiser hospitals and medical providers (other than in emergencies).[64] Because Kaiser is a closed system that maintains its own network of hospitals, Kaiser's health plan does not contract with Sutter to include Sutter hospitals within its network and thus is not subject to Sutter's alleged systemwide contracting with its all-or-nothing, anti-steering, and penalty-rate provisions.[65] Kaiser's health plan competes with health plans like Anthem and Blue Shield in the sale of commercial health insurance to individuals and employers.[66] Dr. Chipty stated in her report that “[t]o the extent health plans like Anthem and Blue Shield would absorb cost increases to compete with Kaiser, pass-through may be less than 100 percent.”[67] She explained in her deposition:

A ..... So the way I understand the premiums work is, at least actuarially, they're built to cover health care expenses. And actuarially, if health care expenses go u[p], premiums will go up, but there's also some room to adjust profit margin. So [my report] is recognizing that a health plan might decide to absorb a cost increase to better compete with Kaiser. . . .
Q. Okay. And one way that you've described is to - rather than passing through 100 percent, is pass through a portion of it and then either lower the profit margin or perhaps cut expenses and maintain their profit margin?
A. Perhaps.[68]

         Sutter agrees and submits evidence (unrebutted by the plaintiffs) that supports Dr. Chipty's assessment that health plans might decide to not pass on their costs (including hospital costs) through to the premiums they charge their customers, in order to remain competitive vis-à-vis rival health plans. To take one example, in 2011, XXXXX was discussing insurance rates for 2012 for one of its customers, Woodruff Sayer, and originally proposed XXXXX.[69] Woodruff Sayer responded that XXXXX.[70] In response XXXXX, [71] To take another example, in 2014, Blue Shield was discussing insurance rates for 2015 for one of its customers, the City and County of San Francisco.[72] Blue Shield acknowledged that it was in a “difficult position” given that competitor health plans Kaiser and UnitedHealthcare had both proposed rate decreases.[73] In response, Blue Shield offered the City a “rate pass” (a 0 percent increase in premium rates) for 2015.[74]

         Dr. Chipty's damages-calculation formula nonetheless assumes that the rate at which health plans pass on Sutter's alleged overcharges through to their customers' premiums will be 100 percent.[75] Dr. Chipty stated that one of the things she relies on to assume that (1) health plans pass on 100 percent of any Sutter overcharges and (2) the passthrough rate is the same across all health plans and class members, is a slide from a PowerPoint presentation drafted by Sutter's former CFO Bob Reed.[76] XXXXX [77] The presentation discussed a hypothetical scenario where Sutter reduced its prices by XXXXX and then examined how that might cause health plans to reduce their premiums XXXXX, assuming the health plans passed on 100 percent of Sutter's price reductions to their customers.[78] XXXXX [79] Dr. Chipty also cited other documents and analyses that she said indicates that health plans try to set premiums at a level that covers all their expenses and that when their costs increase, their premiums do as well.[80]

         Dr. Chipty also conducted a regression analysis that she claims supports her formula's assumption that health plans pass on 100 percent of alleged overcharges through to their customers. For her regression, Dr. Chipty used health plans' PMPM health-care costs and premiums between 2012 and 2015 for small-group-employer insurance buyers, as disclosed by the plans in their annual Uniform Rate Review Template filings.[81] (She did not include data from individual or large-group-employer buyers.[82]) In her analysis, her dependent variable was the natural logarithm of PMPM premium in a given year, and her sole explanatory variable was the natural logarithm of PMPM cost in that year.[83] She acknowledged that this was “a very simple regression model.”[84] Her regression analysis calculated an estimated passthrough coefficient for small-group-employer insurance of approximately 0.9 (where a coefficient of 1 indicates 100-percent passthrough[85]), as set forth in the chart below.

         [Opening Declaration] Exhibit 17[86]

         Pass-Through Analysis for Small Groups Dependent Variable = Log ($ Premium)

Explanatory Variable
Estimates

Log(Cost)

0.914***

Includes Health Plan Fixed Effects

Yes

Observations

41

R-squared

0.965

         Notes:

1. Standard errors shown in parentheses below coefficient estimate. The estimate is statistically significant at 1 percent significance level.
2. Coefficient estimated using ordinary least squares.

         In response to criticisms by Sutter's expert Dr. Willig that Dr. Chipty's analysis did not examine whether passthrough rates vary across different health plans, across health-plan business lines (individual buyers versus small-group employer buyers versus large-group employer buyers), or across different health-insurance products, or whether passthrough rates vary based on how much competition a health plan faces (including competition from Kaiser), [87] Dr. Chipty ran additional regression analyses, as set forth in the charts below.

         [Reply Declaration] Exhibit 7[88]

         Dr. Willig's Table 1, Showing More Information

         Notes:

1. Asterisks *** indicates statistical significance at the one percent level.
2. The data upon which the model relies are aggregated at the year-level for ...

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