Anti-Steering Provisions
In the healthcare context, steering is a strategy used by insurers to direct patients to less expensive or higher-value healthcare providers. Insurers design health plans that give consumers financial incentives to choose more cost-effective and/or high-value healthcare professionals and facilities. In addition to matching patients to the appropriate type and cost of care, steering may increase price and quality competition between providers. In competitive healthcare contracting, insurers’ negotiating leverage with providers takes the form of threats to exclude a provider from the network and/or employ economic incentives that encourage members to choose more cost-effective alternatives to a given provider. Because exclusion is often infeasible in concentrated hospital markets, steering patients to lower-cost, higher-value providers can be the primary mechanism by which insurers manage costs where competing providers are limited.
Anti-steering provisions are providers’ response to insurers’ steering efforts, and typically prohibit insurers from incentivizing their members—i.e., patients—from seeking care at alternate providers. For instance, when one hospital system implements anti-steering provisions, it can disincentivize its competitors from offering discounted rates to insurers because doing so would not yield an increase in patients due to the price decrease. Where anti-steering mechanisms are successful, patients face similar or the same out-of-pocket costs regardless of how much better (or worse) in terms of quality or price a competing provider may be. Thus, such anti-steering clauses in contractual agreements between healthcare providers and insurers can inhibit insurers’ ability to accentuate certain aspects of patient choice, such as prioritizing cost-effectiveness.
“Anti-tiering” provisions are similar to anti-steering provisions but prevent insurers from placing a healthcare provider in anything other than the most favorable tier of a tiered insurance network. Typically, in a tiered network, the insurer separates providers into distinct tiers based on cost and/or quality and assigns corresponding cost-sharing amounts for each tier. Insurers attempt to promote low-cost and/or high-quality providers by placing them in favorable tiers, thereby spurring competition and providing savings for both the insurer and the patient. In this way, absent anti-tiering provisions, insurers can more freely steer their members to higher-value providers. In particular, this type of mechanism can be used by insurers to resist a dominant provider’s higher rate structure.
The potentially anticompetitive effects of anti-tiering or anti-steering clauses can be reinforced when they are coupled with price secrecy provisions. Often referred to as “anti-transparency” or “gag” clauses, these are provisions in which providers and insurers agree not to disclose prices, including negotiated rates to patients or plan sponsors. Price secrecy provisions can insulate providers from competition based on price and quality, and stifle competitors’ incentive and ability to negotiate lower prices with insurers. Accordingly, price secrecy terms can allow providers to negotiate prices above the competitive level.
United States v. Atrium Health Litigation and Settlement
As the first federal antitrust challenge of anti-steering provisions in healthcare contracts following the Ohio v. American Express decision, the Atrium resolution stands as the current leading case against anti-steering clauses in healthcare contracts.
In June 2016, the U.S. Department of Justice (DOJ) and the North Carolina Attorney General (NC AG) jointly filed suit in the United States District Court for the Western District of North Carolina, alleging that Atrium, a dominant provider in the Charlotte area, used its market power to require anticompetitive restrictions in its contracts with insurers that prevented the promotion of more cost-effective healthcare services in those insurers’ networks. The contract provisions at issue prohibited insurers from offering financial incentives to steer patients to competing providers that offered lower-cost and higher-value services, which the DOJ and the NC AG alleged was in violation of Section 1 of the Sherman Act. Some restrictions granted Atrium the right to terminate the contract if the insurers steered patients to other competitors. The contracts also allegedly contained provisions that prevented insurers from disclosing Atrium’s price and quality information for comparison. The complaint alleged that Atrium included these restrictions in its contracts with Aetna, Blue Cross and Blue Shield of North Carolina, Cigna, and UnitedHealthcare, which together insured 85% of the commercially insured population in the Charlotte area.
The DOJ and the NC AG argued that steering gives providers an incentive to be efficient, maintain low prices, and offer high-quality, innovative healthcare services. Such steering, the DOJ and the NC AG argued, would have encouraged competition, potentially causing Atrium to lower its own prices. Without the promise of attracting more patients, Atrium’s competitors had less incentive to offer lower prices or increased value. In response to the allegations, Atrium argued that the anti-steering provisions served to prevent insurers from reneging on an existing bargain. Rather than harming competition, Atrium contended that its anti-steering provisions instead promoted competition because Atrium provided discounted services it otherwise would not have provided in exchange for greater volume.
Atrium settled the lawsuit by agreeing to eliminate its existing contractual prohibitions on insurers and adhere to ten years of Antitrust Division oversight of the terms and conditions of Atrium’s contracts with health insurers. The settlement, a mere five months after the Supreme Court decision in Amex, signaled that the analysis of anti-steering provisions in healthcare markets is likely distinct from that of two-sided transaction markets, such as credit card markets.
Sutter Health: The Northern California “Must-Have” Hospital System
UFCW v. Sutter Health
The California Attorney General (California AG) and two putative classes of end payors sued Sutter Health (Sutter), the largest provider of general acute hospital services in Northern California, for anticompetitive contracting practices. The complaint alleged that Sutter leveraged its market dominance to: demand contract terms with insurance carriers that significantly reduced competition, charge supra-competitive prices across Northern California, prevent insurers from using steering to counter its high prices, require “all-or-nothing” contracting, and prohibit insurers from disclosing prices for healthcare services to plan sponsors and patients before the services were billed. The plaintiffs claimed that Sutter’s contracting practices violated Section 1 of the Sherman Act because patients used higher-priced Sutter hospitals over a more cost-effective competing hospital instead, thus foreclosing millions of dollars that would have otherwise gone to lower-priced hospital competitors at substantial savings to patients. The plaintiffs additionally alleged that Sutter unlawfully restrained trade with the purpose of obtaining and maintaining monopoly power in violation of Section 2 of the Sherman Act, and violated California’s Cartwright Act by engaging in price-fixing and tampering, unreasonable restraints of trade, and a combination to monopolize.
After three years of litigation, the parties reached a settlement in October 2019. Sutter agreed to pay $575 million in damages to resolve private claims that the hospital system used its market power to force patients to pay inflated prices for healthcare services. The settlement enjoined Sutter from enforcing any all-or-nothing, anti-steering or anti-tiering, or price secrecy terms in all prior, existing, or future contracts with insurers. Additionally, the settlement prohibited Sutter from using anti-incentive contract terms that hinder insurers’ use of differences in co-payments, co-insurance, and information as to quality and cost-effectiveness, to direct patients to cheaper and higher-value healthcare providers. The settlement prohibited gag clauses and required Sutter to increase price transparency by allowing insurers and employers to give their members access to pricing, quality, and cost information for purposes of comparison and making better healthcare decisions.
While the scope of the settlement terms suggest that the types of contracting practices proscribed by the settlement present significant risk for large healthcare providers, the simultaneous federal class-action lawsuit, which arose from the substantially the same facts, points in the opposite direction, as Sutter prevailed in the federal jury trial. The state settlement also leaves open the issue of whether the risk is limited to California state laws or more is broadly applicable to federal laws.
Sidibe v. Sutter Health
Sidibe v. Sutter Health, a private antitrust class action, stems from largely the same facts as UFCW v. Sutter Health. Class plaintiffs alleged that Sutter’s various contracting practices, including tying and coercive anti-steering provisions with five of the largest commercial health insurance companies, inflated the insurers’ premiums and co-pays, costing individuals and employers who purchased commercial health insurance $411 million more for health insurance. According to the plaintiffs’ tying theory, Sutter used its market power in certain rural areas in Northern California, where it was the only or dominant provider for inpatient services, to force insurers to also include in their networks the other Sutter hospitals in more competitive regions. The plaintiffs also alleged that Sutter included anti-steering clauses in its contracts with health plans that disincentivized members from seeking care from other lower-cost, in-network providers, and that health plans would be penalized with higher rates for failing to encourage members to use Sutter services, as opposed to their cheaper alternatives.
After almost a decade of contentious litigation, the allegations made it to trial in the federal district court in San Francisco. Two central questions were before the jury: (1) whether Sutter sold inpatient hospital services that were tied to the more expensive hospital facilities and (2) whether Sutter forced the class health plans to agree to contracts that had terms that prevented them from steering patients to lower-cost options. At trial, Sutter argued that it did not have market power because of the vigorous competition it faced primarily from Kaiser Permanente’s large and growing market share in Northern California. Additionally, Sutter argued that its contracting practices amounted to a volume discount that had the effect of lowering prices, and that it agreed to offer insurers discounted rates on the condition that insurers did not steer patients away from Sutter. Without this agreement, Sutter claimed, the purpose of the discounts would be defeated. Sutter argued that its contracting practices were economically rational and allowed them to better predict patient volume and revenue. Though Sutter claimed that its higher prices were attributable to its investments in hospital quality, patient care, and innovation, former Sutter executives testified that the health system’s prices were 32% higher than other providers in the Bay Area and, as evidenced by inconsistent patient ratings, were not justified by higher value or quality.
The month-long trial culminated in a unanimous jury verdict that Sutter did not use tying practices in its insurer contracts, nor did it force insurers into anti-steering contracts. As one of the few antitrust jury trials, the outcome in Sidibe v. Sutter Health represents a departure from the Atrium and UFCW settlements proscribing allegedly anticompetitive contracting practices like anti-steering. Jury trials are rare in antitrust, and like any litigation, Sutter did not walk away unscathed. The trial exposed that Sutter’s Vice President and Chief Contracting Officer purposefully destroyed 192 boxes of highly relevant evidence in violation of a court order. Testimony from insurers’ network management personnel suggested that Sutter was the only healthcare system in California that did not participate in tiered plans. Further, testimony from Sutter’s Human Resource executives revealed that 20 of Sutter’s top executives were paid more than $1 million as of 2019, which might have undermined Sutter’s argument that the contract terms it demanded from insurers were necessary to offset costs of charity care required by Sutter’s nonprofit status.
The outcome of the Sutter jury trial cannot be viewed as a clear pathway for large healthcare providers to impose anti-steering provisions in contracts with insurers. In California in particular, the California AG has been very active in analyzing anti-steering provisions in the context of healthcare provider consolidation. Moreover, as described in more detail below, the California AG’s imposition of “competitive impact conditions” in recent transaction approvals suggests that providers should evaluate the risk involved in using anti-steering provisions. As discussed below, California is also considering legislation that would prohibit the use of such contractual restrictions.
California’s Approach to Anti-Steering Provisions: Competitive Impact Conditions and Legislation
California’s scrutiny of recent hospital transactions stems from a concern that merged provider systems may leverage the loss of two providers simultaneously to threaten insurers during contract negotiations. In particular, several of the conditional transaction approvals have been aimed at curtailing “cross-market” mergers, which occur between hospitals that have non-overlapping service areas and are located outside of each other’s relevant geographic market (based on the location of their patients).
Cedars-Sinai/Huntington
On March 30, 2021, Pasadena-based Huntington Memorial Hospital and Cedars-Sinai Health System filed a lawsuit against the California Department of Justice and Office of the California Attorney General challenging the conditions imposed on the hospitals’ affiliation. Under California law, proposed affiliations of nonprofit hospitals are subject to approval by the California AG, which may impose conditions to protect the availability or accessibility of healthcare services in affected communities. California required as a condition for approval the hospitals’ acceptance of competitive impact conditions that included price caps on Huntington’s rates to insurers for at least ten years, a firewall separating the entities for insurer negotiations, and the availability of arbitration to resolve on any rate or terms of contracts in disputes with insurance companies. Though the affiliation did not trigger an extended review from the Federal Trade Commission, the California AG raised concerns about the potential anticompetitive effects of this type of cross-market merger. The California AG concluded the affiliation enabled Huntington and Cedars-Sinai to engage in tying that would force insurers to accept some or all of the merged entity’s facilities in their network. In challenging the conditions, the hospitals argued they would be at a distinct competitive disadvantage compared to other hospitals in the region, all to the benefit of health insurance companies and not to California patients. The hospitals alleged that the price cap conditions primarily benefit the insurance companies, as the cost savings are not required to be passed on to consumers, and that no other hospital in California was required to agree to “winner-take-all” arbitration in contract negotiations with insurance companies.
Four months later, the parties reached a settlement that revised the previous conditions. The parties agreed to a 10-year prohibition of all-or-nothing contracting, and instead of a default firewall, the revised conditions allow a payer to request separate negotiating teams with firewalls to remedy any violations of the condition. Additionally, price caps on any new post-merger contracts were adjusted to an annual increase of 4.8% per year for five years. The settlement also included a ten-year prohibition on interference with tiering or steering practices, and a court-appointed monitor.
Acadia/Adventist Vallejo
On October 5, 2021, the California AG conditionally approved the sale of Adventist Health Vallejo, an acute psychiatric inpatient hospital, to Acadia Healthcare Company Inc., a national for-profit behavioral health system. The California AG reasoned that, as owners of both San Jose Behavioral and Adventist Vallejo, Acadia could leverage both hospitals to increase prices, potentially reducing the quality, availability, and accessibility of the vital services. To address these risks to acute psychiatric services in Northern California, the California AG included competition impact conditions that required price caps for five years, with the option of a three-year extension. In addition, the settlement prohibited the hospital from engaging in all-or-nothing contracting for facility services, penalizing payors or contracting with individual facilities, and interfering with certain payor practices for ten years, with the possibility of extension for three additional years. The parties abandoned the transaction after the conditions were disclosed.
Kaiser/Providence St. Mary
On December 17, 2021, the California AG conditionally approved a partnership between Kaiser Permanente and Providence St. Mary Medical Center, a general acute care hospital in San Bernardino County. To address concerns that the affiliation agreement could lead to anticompetitive effects in the region’s healthcare market, the California AG required caps on price increases for current St. Mary contracts, a restriction on profit sharing between St. Mary and Kaiser, and a cap on the discount St. Mary gives Kaiser for its reimbursement rates. Among other things, the approval also prohibited the new entity from engaging in all-or-nothing contracting and proscribed requiring that insurers enter into anti-steering or anti-tiering contract terms.
Assembly Bill 2080
The California legislature has engaged in repeated efforts to prohibit anti-steering, all-or-nothing contracting, and price secrecy provisions. Most recently, in February 2022, Assembly member Jim Wood introduced the Health Care Consolidation and Contracting Fairness Act of 2022 which would prohibit a contract between a health insurer and a healthcare provider from containing terms that restrict the insurer from steering an insured enrollee to another provider or require the insurer to contract with other affiliated providers. The bill would authorize the California AG or another state entity charged with reviewing healthcare market competition to review any contract that contains specified terms. Importantly, under the proposed legislation, a violation of these provisions would be a crime. While the legislation is pending approval, the California AG’s conditional approvals of cross-market hospital mergers make an effort to address some of these same contracting practices.
Conclusion
California is leading the charge to prohibit restrictive contracting clauses in the healthcare provider contracts. The state’s law-making efforts to prohibit anti-steering clauses have been bolstered by the California AG’s conditioning the approval of hospital transactions on bans of these sorts of contracts. As demonstrated by the cases outlined here, the risk of federal enforcement, state enforcement (particularly in California), and private actions is high. Healthcare providers and facilities, especially those in California, should watch closely as the enforcement of these allegedly anticompetitive contracting practices develops.