Hospital hallway

Potential contracting issues of “all-or-nothing” clauses: New HHS Secretary, policy priorities

United States Publication March 18, 2021

"All-or-nothing" clauses require health plans to contract with all the hospitals in a hospital system, regardless of their price and quality. These clauses are sometimes present with "anti-tiering" clauses, which require health benefit plans to place the system in the preferred tier in any health plan products; and "gag" clauses which prohibit plan administrators from sharing price and quality data with self-funded payors.

Two events have coincided to increase the dangers to hospital systems regarding these contracting practices. First, we understand that governmental subpoenas are being issued asking hospital systems about "all-or-nothing" clauses. These subpoenas mean that there is active interest in governmental circles on these antitrust related topics. The second event is the confirmation of California Attorney General Xavier Becerra as Secretary of the US Department of Health and Human Services.

With a new administration comes new policy priorities and enforcement prerogatives. The Biden administration has made clear their intention to expand access to coverage and reduce healthcare costs. While the parameters of these policy objectives are not yet clear, a groundbreaking lawsuit brought by Xavier Becerra while Attorney General of California offers important insight and warrants a close reexamination of managed care contracts by health systems. In addition, hospital consolidation driven by the COVID-19 global pandemic is likely to lead to additional scrutiny of hospital contracting practices. The dual policy priorities of antitrust enforcement in healthcare and price transparency encourage a robust consideration of the lessons from the Sutter Health System ("the System") case and the resulting first-of-its-kind settlement.

In 2018, while serving as Attorney General, Xavier Becerra filed a lawsuit against the System, the largest hospital system in Northern California, alleging the System had required anticompetitive clauses in its contracts to increase its market share and the ultimate result was higher healthcare costs for consumers. More specifically, the case focused on incorporating contracting clauses such as "all-or-nothing" clauses, which require an insurer wishing to include one of the System's hospitals or clinics to include all of them, even where those facilities are more expensive than their competitors. The case arose following a 2018 Study from the University of California-Berkeley that found healthcare costs in Northern California were 20-30 percent higher than in Southern California. Four years earlier, United Food and Commercial Workers and Employers Benefit Trust had filed a class action against the System alleging unlawful, anticompetitive practices that led to higher healthcare prices, but those cases had stalled to some degree. In 2018, the cases were consolidated and the resources and experience of the California AG's Office were now brought to bear.

In October 2019, a US$575 million settlement was announced, which included the System's cessation of certain contracting practices that were alleged in the lawsuit to have increased healthcare costs for consumers and employers. A statement released by Attorney General Becerra stated that:

"This first-in-the-nation comprehensive settlement should send a clear message to the markets: if you're looking to consolidate for any reason other than efficiency that delivers better quality for a lower price, think again."

The System denied the allegations and did not acknowledge wrongdoing in the terms of the settlement. The settlement received preliminary approval on March 9, 2021. The System also faces a second class action lawsuit from private insurers, Dejeneba Sidibe v. Sutter Health (Case No. 12-04854), based on similar allegations of overcharging patients, employers, and insurers and was filed by private health insurers. The case resides in the US Federal District Court for the Northern District of California and is set for trial on October 4, 2021.

This case foretells potential contracting pitfalls for hospitals and reveals possible forthcoming shifts in federal policy and enforcement that hospitals should be prepared to address. In addition, the expectation is that the federal and state enforcers will bolster their already collaborative relationship.

The allegations

The 2018 lawsuit filed by the California Attorney General alleged that the System utilized all-or-nothing clauses, out-of-network pricing clauses, and gag clauses in order to increase its market share in Northern California. The idea behind all-or-nothing clauses is that the System utilized its so-called "must have" hospitals to extract the inclusion of other, less commercially necessary facilities in networks. The System would then charge high out-of-network rates, which would make enrollees unlikely to use System facilities, making the health plans less desirable to consumers. Additionally the System, through contractual clauses, would prohibit the use of "tiering" to structure networks that incentivize enrollees to utilize less expensive providers and facilities.

The System also incorporated gag clauses that prevented insurers from disclosing the prices of various items and services at System facilities. This practice was not only alleged to improperly inhibit competition, but conflict with a federal policy priority during the last administration: price transparency (view more information). While the Biden administration has not yet taken a formal position, Xavier Becerra promised "robust enforcement" of price transparency during his February 23, 2021 testimony before the Senate Health, Labor & Pensions Committee. He specifically referenced when his office "went after the largest healthcare provider in Northern California."

Specifically, the complaint alleged that the System "compelled all, or nearly all, of the Network vendors operating in Northern California to enter into unduly restrictive and anticompetitive written Healthcare Provider agreements that have:

  • Established, increased and maintained the System's power to control prices and exclude competition;
  • Foreclosed price competition by the System's competitors; and
  • Enabled the System to impose prices for hospital and healthcare services and ancillary services that far exceed the prices it would have been able to charge in an unconstrained, competitive market."

More specifically, California alleged that the System required contracts to contain implicitly or explicitly:

  • A de facto anticompetitive agreement requiring that all the System Hospitals and Healthcare Providers throughout Northern California be included in the Provider Network. The System thereby abuses its market power derived from its "must have" hospitals, or other "must have" providers in some geographic areas, to force Health Plans to include all the System hospitals and Healthcare Providers in their Healthcare Provider Networks—even those System hospitals and providers that are located in areas where it would be far less costly to assemble a Provider Network using the System's lower-priced and/or higher quality competitors instead of the System;
  • An anticompetitive agreement that prohibits anyone offering access to a Provider Network from giving incentives to patients that encourage them to use the healthcare facilities of the System's competitors—even when those competitors could offer higher quality healthcare and/or lower pricing; and
  • An anticompetitive agreement requiring that the System's inflated prices for its general acute care hospital services (including inpatient and outpatient services) and ancillary and other provider services may not be disclosed to anyone before the service is utilized and billed. The inflated pricing in the System's agreements with the Network Vendors is thereby concealed from everyone else—including historically from the Self-Funded Payors and Healthcare Benefits Trusts that ultimately would have to pay those prices.

California alleged that as a result of "the anticompetitive terms in its contracts with the Network Vendors, [the System] has considerable market power within every market that is relevant to the claims described in this complaint and is reflected in the System's ability to charge prices on a systemwide level that are in excess of the prices in a more competitive market."

The complexity and cost of antitrust litigation can be staggering. For instance, according to the Motion for Preliminary Approval of Settlement, fact discovery in the case included "22 sets of requests for production of documents totaling 460 requests, 18 sets of form interrogatories, 20 sets of special interrogatories totaling 297 interrogatories, and 12 sets of requests for admission totaling 186 requests." This produced 2.4 million documents including documents from 160 nonparties and health plans produced 870 million lines of claims data.

The parties reached a settlement agreement on the eve of trial. At the time of the settlement, a jury had been selected and the trial was expected to last three months.

The settlement

The press release from the California Attorney General's Office provided the following description of the settlement terms:

  • Pay US$575 million to compensate employers, unions, and others covered under the class action and to cover costs and fees associated with the legal efforts;
  • Limit what it charges patients for out-of-network services, helping ensure that patients visiting an out-of-network hospital do not face outsized, surprise medical bills;
  • Increase transparency by permitting insurers, employers, and self-funded payers to provide plan members with access to pricing, quality, and cost information, which helps patients make better care decisions;
  • Halt measures that deny patients access to lower-cost plans, thus allowing health insurers, employers, and self-funded payers to offer and direct patients to more affordable health plan options for networks or products;
  • Stop all-or-nothing contracting deals, thus allowing insurers, employers, and self-funded payers to include some but not necessarily all of the System's hospitals, clinics, or other commercial products in their plans' network.
  • Cease anticompetitive bundling of services and products which forced insurers, employers, and self-funded payers to purchase for their plan offerings more services or products from the System than were needed. The System must now offer a stand-alone price that must be lower than any bundled package price to give insurers, employers, and self-funded payers more choice;
  • Cooperate with a court-approved compliance monitor to ensure that the System is following the terms of the settlement for at least 10 years. The monitor will receive and investigate complaints and may present evidence to the court; and
  • Clearly set definitions on clinical integration and patient access considerations. The settlement makes clear that for the System to claim it has clinically integrated a system, it must meet strict standards beyond regional similarities or the mere sharing of an electronic health record, and must be integrating care in a manner that takes into consideration the quality of care to the patient population. This is important because clinical integration can be used to mask market consolidation efforts by hospital systems, when in fact there is no true integration of a patient's care. For example, saying that hospitals are regionally close or that hospitals are sharing electronic health records is not enough, there must be close coordination that will lead to less costly, higher quality care for local communities.

Appendix 1 to the Motion for Preliminary Approval of Settlement is the Settlement Agreement, and Exhibit B was the Proposed Final Judgment. There will also be a court-appointed monitor for a period of at least ten years to ensure compliance with the settlement. According to the Motion for Preliminary Approval of Settlement, the settlement amount represents "approximately 60 percent of the damages Plaintiffs would have sought at trial."

What this means for hospitals

The increasing hospital consolidation in recent years has resulted in expanding market share for many systems and the financial strain on struggling healthcare system from the COVID-19 pandemic will only increase that consolidation. This case revealed the significant penalties that may be extracted from a health system where such allegations of anticompetitive practices have been utilized.

For many years federal and state enforcers have partnered together to investigate and litigate matters. In particular, healthcare has always been top of mind for state AG's. It is anticipated that the federal government, state attorneys general and plaintiffs will begin incorporating theories learned from the System to pursue cases against systems that have expanded their regional footprint in recent years. The settlement provides an important blueprint for contractual clauses that could put a health system at legal risk. Additionally, Congress could take action to expand the Federal Trade Commission's authority to take action against perceived anticompetitive behavior.

The new administrations healthcare and antitrust priorities will soon reveal themselves through enforcement actions. Health systems with a significant footprint in geographic areas should evaluate their contracting practices and proactively identify clauses that may raise concerns if faced with federal or state antitrust scrutiny.

For additional information, please contact the Norton Rose Fulbright team listed below.

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