A San Francisco federal judge dismissed without prejudice allegations that Sutter Health (Sutter), a large hospital system in northern California, unreasonably restrained trade and monopolized the market for healthcare services in northern California through imposing tying and exclusive dealing arrangements in its contracts with health plans. U.S. Magistrate Judge Laurel Beeler dismissed the class action complaint because it contained conclusory allegations that failed to provide factual support showing that Sutter engaged in predatory conduct or imposed supracompetitive prices.

The lawsuit originated in September when two Sutter customers filed a class action lawsuit on behalf of a putative class consisting of any person in Northern California who had been enrolled in a licensed healthcare service plan since September 2008 that had a contractual relationship with Sutter. The complaint alleges that Sutter required health plans to use Sutter providers or affiliated physician groups — even if there were lower priced alternatives — or be denied access to any Sutter facility. Plaintiffs also alleged that Sutter’s contracts require health plans to incentivize the use of Sutter services and penalize plan members who fail to use them. Plaintiffs claim that the putative class has had to pay “at least several thousand dollars per year” more for healthcare services as a result of Sutter’s contracts.

Judge Beeler dismissed nearly all of plaintiffs’ claims under Bell Atlantic v. Twombly, 550 U.S. 544,555 (2007), as lacking sufficient factual support for what he characterized as simply conclusory allegations. For example, Judge Beeler dismissed plaintiffs’ claims of tying and exclusive dealing because the complaint failed to include allegations that Sutter had mandated that patients can choose only Sutter providers. While plaintiffs alleged that Sutter required health plans to include all Sutter providers in-network and to “actively encourage” patients who use Sutter providers to use other Sutter providers, there were no allegations that health plans could not include non-Sutter providers in-network or direct patients to non-Sutter providers.

Judge Beeler also found fault in the product and geographic market allegations. Plaintiffs alleged that the relevant product market was

“the provision of health care and related services,” which included but was not limited to: inpatient hospital services; outpatient hospitals services; physician services; services of other providers such as nurses, optometrists, psychologists, or nutritionist; diagnostic laboratory services; home health services; rehabilitation; physical or occupational therapy; preventive health services; emergency services; hospice services; chemical dependency services; and psychiatric services. Judge Beeler ruled that this was an insufficient product market because plaintiffs failed to plead “specific product markets” and it was not a case where all the services could be combined into a single relevant market. The complaint also contained insufficient allegations of a relevant geographic market because it simply pled a market consisting of “an amorphous region of 22 counties that is not tethered to any factual allegations about Sutter’s market power.”

Despite dismissing plaintiffs’ substantive claims, Judge Beeler did uphold plaintiffs’ antitrust standing to pursue the case, at least at the motion to dismiss phase. Although the complaint did not specifically allege that plaintiffs were actual Sutter customers, Judge Beeler found sufficient to survive a motion to dismiss the allegations that plaintiffs have had to pay higher premiums, co-payments, and out-of-pocket costs for other services. Plaintiffs therefore have 28 days from the date of the decision to amend and refile the complaint, and they have indicated they intend to do so. Overall, the dismissal marks a short term win for Sutter and provides insight into the high level of particularity and factual support required to successfully plead a private antitrust suit. The decision also is noteworthy for the following additional reasons:

  • At the motion to dismiss phase under Twombly, mere allegations of predatory conduct itself are not enough to establish a valid antitrust lawsuit. Private plaintiffs must back those allegations up with concrete factual support for each essential element of the violations alleged.
  • Antitrust challenges to the contracting practices of a healthcare system are not common, but as demonstrated by this lawsuit, can and do occur. Of course it remains to be seen whether plaintiffs will amend and re-file a complaint capable of withstanding Sutter’s motion to dismiss.
  • In a time of increasing healthcare consolidation, providers and insurers should remain cautious of lawsuits not just from antitrust enforcement agencies and other healthcare entities, but from private consumers as well.

On a related note, the recent spike in healthcare provider consolidation has garnered a significant amount of attention as speculation grows about how it is affecting market competition. The American Hospital Association and the Center for Healthcare Economics and Policy recently released a report concluding that hospital mergers and acquisitions generally result in higher quality and more efficient care. The report finds that the “overwhelming majority of those transactions are procompetitive and fully support the twin goals of higher quality and more affordable health care.”