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State of California vs. Sutter Health: A Ruthless Monopolist or Visionary-Integrated Health System Simply Executing on Acceptable Models?

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State of California vs. Sutter Health: A Ruthless Monopolist or Visionary-Integrated Health System Simply Executing on Acceptable Models?

The State of California joined a major class action lawsuit against Northern California’s largest health system (Sutter) for illegally using its market dominance to restrict choice and ultimately overcharge for services and is headed for a jury trial.

Our PriceWatch team will monitor this carefully. All Americans can relate to rapidly increasing health care costs, from drugs and devices, hospital and office visits to lab charges that boggle the mind. On the other hand, providers are businesses that must execute strategies to ensure they not only survive but thrive. Who will win this legal battle?

The Background

The San Francisco Chronicle reports that the lawsuit was filed in 2014 and later certified for class action status on behalf of 1,500 self-insured employers and employer trusts that cover health care for their workers. The plaintiff seeks $500 million in damages. As this is an antitrust case “triple damages” are on the table—hence Sutter could be taken for up to $1.5 billion. The jury system introduces the wildcard, not necessarily in favor of the defendant health care system.

Sutter Health

Sutter Health operates 24 hospitals and 35 outpatient clinics in Northern California serving about 3 million patients. A not-for-profit health system, the Sacramento-based group includes doctors, hospitals, and other health care services in over 100 Northern California cities and towns.

Sutter goes Way Back

Named after Mr. John Sutter, Sutter Health’s genesis occurred after the 1918 flu pandemic when community leaders in Northern California constructed the first Sutter Hospital in the vicinity of the early Sutter fort. Other Sutter Health-affiliated hospitals date back to the 1800s and were some of Northern California’s earliest health care providers.

Consolidations and Mergers

Over the decades and much consolidation of various charitable hospitals, arises the powerful health network that is Sutter Health today. See their history from the days of the “Barbary Coast” during the Gold Rush in San Francisco till today.

Costs

With growth in size and position, prices increases. Even back in 2004, 13 Sutter Health hospitals were among 25 statewide networks dropped by the financially powerful California Public Employees Retirement System from one of its HMO networks due to concerns of rising health care costs.

Sutter has attempted to address costs by introducing more information and transparency, including a website dedicated to the topic. 

The Core Charge in the Lawsuit

The core claim centers on the so-called “all or nothing” contracting terms. This means that the health system compels insurers and employers to contract with all Sutter hospitals or none at all. The San Francisco Chronicle reports that this tactic stops payers and employers from negotiating with individual hospitals for lower prices.

Sutter Response

Sutter claims that the lawsuit “irresponsibly targets Sutter’s integrated system of hospitals, clinics and urgent care centers and affiliated doctors” reports a spokeswoman who goes on to say that “the lawsuit wrongly blames Sutter’s integrated network for higher healthcare prices. While insurance companies want to sell narrow networks to employers, integrated networks like Sutter’s benefit patient care and experience, which lead to greater patient choice. Sutter is disappointed that insurance companies and the state of California ignore these realities.”

Sutter positions that the State of California is overstepping its boundaries and that its prices are actually lower than comparable hospitals for key indicators, such as average total charges for a patient stay, which equal $39,000 at Sutter and $54,000 at other Northern California hospitals, according to Sutter Health records.

NorCal Prices Higher than the SoCal

Apparently Northern California health care prices are higher than Southern California due to greater consolidation among those systems in the north according to a 2018 report by UC Berkeley’s Petris Center on Health Care Markets and Consumer Welfare.

Other Antitrust Cases

In November 2018, North Carolina Attorney General’s Office reached a settlement with Atrium Health, a large hospital system accused of illegally restricting competition in the Charlotte, NC region. Moving forward, Atrium was precluded from entering into or enforcing specified contract terms with payers that impacted consumer options for lower cost options.

Sutter Case Monitored Carefully

Health policy and antitrust experts are closely watching the Sutter Health California case. That is because the decision will have a ripple effect throughout the healthcare industry across America as many health systems have designed similar schemes driven by consolidation and contracting practices that could be deemed to limit payer and consumer choice.

Provider Leverage over Payer

In markets such as California, there are more payers than providers. Hence, it could be deemed that providers have the leverage—the upper-hand. A 2016 study revealed that in regions dominated by large medical groups, payers have less leverage for negotiating rational rates. In California, from 2004 to 2013, health care prices grew 113% at hospitals that were part of large, consolidated and integrated systems while prices grew by 70% across all hospitals in the state.

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