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Sutter Health Case Sparks Growing Scrutiny of Hospital Consolidation, Contracting Practices

A year after one of the largest hospital systems in Northern California settled for $575 million in response to a lawsuit over anticompetitive behavior, hospital business practices are increasingly coming under a microscope.

Associated Press

A year ago, Sutter Health agreed to a landmark settlement of $575 million to resolve charges that it engaged in anticompetitive business practices against consumers and employers — a first-of-its-kind legal case against the hospital industry. Now, hospital consolidation and the pricing practices dominant systems use to extract higher payments are increasingly being looked at as an important driver of high health care costs for privately-insured consumers.

California Attorney General Xavier Becerra, along with a private class of employers and unions, brought the case against Sutter Health, arguing that the massive Northern California health system wielded its size and influence to control the market, driving up premiums and costs to patients.

“Sutter got big enough that it could use its market power to dominate, to dictate,” Becerra said in an interview with 60 Minutes. “It was abusing of its power.”

The Sutter case and the provisions they agreed to in the settlement can help provide a roadmap for other states grappling with how to address health systems that lack sufficient competition. In addition, Becerra has since been tapped by President-elect Joe Biden as his nominee for Health and Human Services Secretary, which could shape the approach the federal government takes toward addressing unaffordable health care prices.

Here’s what you need to know about the Sutter case and its implications for broader reform.

Status Update: The Case Against Sutter

Sutter’s growing domination and its excessive prices drew the attention of employers, unions, and the California Department of Justice — who joined the private class’ civil lawsuit against the health system in 2018.

In October 2019, moments before the trial was scheduled to open, Sutter Health, the private class, and the California Department of Justice announced a tentative deal where Sutter would pay $575 million in financial damages to the employers and health benefit trusts. The settlement also requires Sutter to cease certain contracting practices and other problematic behaviors that increased prices for consumers and employers going forward.

The tentative settlement is still pending approval by a judge; a preliminary approval hearing is scheduled for March 2021.

How Sutter Came Under Fire

Over the last several decades, Sutter Health aggressively bought out competitors to become one of the nation’s largest, most dominant health systems in Northern California. With 24 hospitals, 4,188 acute care beds, and relationships with 12,000 doctors, Sutter owned a significant share of local provider practices.

Families paid more for their care as Sutter “embarked on ‘an intentional and successful strategy’ of making itself indispensable” by acquiring hospitals and physician practices and then exerting their market dominance to charge higher rates, according to the report by 60 Minutes.

In Northern California — where Sutter has a large presence — hospital and physician services often cost 20-30% more than the same services cost patients in Southern California, even after adjusting for wage differences. This translated into higher premiums and out-of-pocket costs for consumers.

The higher prices did not reflect higher quality care. Despite its higher prices, Sutter’s care “while well-regarded — was only comparable to the other hospitals in the region,” 60 Minutes reported.

Anticompetitive Practices

The most problematic practice raised in the lawsuit is Sutter’s use of a series of anticompetitive contracting terms to protect the system’s position and drive up prices in what would otherwise be a competitive market, said Jaime King, Executive Editor of The Source on Healthcare Price & Competition. Her research focuses on the drivers of healthcare costs and market consolidation.

According to King, Sutter’s most egregious contracting practices include use of all-or-nothing clauses, out-of-network pricing provisions, and gag clauses.

“If any insurance company or self-insured employer or other entity is trying to build a provider network in large parts of Northern California, you can’t actually build it and be in compliance with the state network adequacy laws without having the Sutter entity in your network,” King said. “So they have systematically acquired a lot of those must-have provider organizations, whether it’s a hospital or physicians group. When they have those, they use the all-or-nothing clause.”

Why the Sutter Case Matters

Hospital consolidation has increased in the past several decades, leading to the creation of other massive medical systems like Sutter Health that take advantage of their lack of competitors to extract more revenue from patients. About 90 percent of health care markets in the United States are now highly or super concentrated according to the FTC’s standards.

With the onset of COVID-19, consolidation is likely to accelerate as smaller, independent practices facing financial pressures sell off to larger systems in order to keep their doors open.

Despite claims from industry trade groups, consolidation has not lowered costs for patients, nor improved quality or coordination of care. While hospitals systems like Sutter Health often describe consolidation as an effort to create “integrated health” and a patient-friendly experience, the evidence is clear that consolidation leads to higher prices, not higher quality.

What is Next for Oversight of Hospital and Provider Consolidation?

The case has highlighted how aggressive hospital consolidation allows providers to extract higher prices that result in families having to pay more for coverage and more for health care, without benefitting from an increase in quality.

What happened in Northern California is likely happening in cities and towns across the United States where hospital markets have grown increasingly consolidated and the impacts hit harder than most people realize.

“For a lot of American families, it may be hard to understand why this case matters to them,” said Frederick Isasi, Executive Director of Families USA. “But when health insurance premium costs go up for families or are passed on to taxpayers, it affects where people can live, where they can send their kids to school. It affects if and when they can retire. It affects the basic ingredients of them being able to determine the kind of life they want to live.”

Becerra told 60 Minutes that he thinks the Sutter case will spur similar scrutiny in markets across the United States — a poignant statement from a man in line to become the next head of Health and Human Services.

“This settlement is going to change the life for hundreds of thousands of Californians. And I'd say millions of Americans because I think you're going to see other states take what we did and say, ‘Ah-hah. We've got some facilities that are behaving the same way. Let's push.’”

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