Highly Anticipated Trial to Determine If Consolidation Is Driving Up Costs

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Sign in front of Sutter East Bay Medical Foundation, Albany Campus
A Sutter Health office building in Albany, California. Photo: Avram Goldstein

UPDATE — OCTOBER 17, 2019: Sutter Health has reached a tentative settlement agreement with the state of California. Neither side has commented on the terms of the agreement, which must be approved by the court and could be made public during approval hearings in February or March.

Under the watchful gaze of state attorneys general and large hospital systems across the country, a landmark antitrust case is playing out in San Francisco Superior Court. People of the State of California v. Sutter Health, brought by California attorney general Xavier Becerra and a group of employers and unions, alleges that Sutter, the Sacramento-based hospital group, has exploited its market dominance in Northern California to squash competition and drive up health care prices. Sutter denies the allegations.

Essential CoverageOpening statements in the trial were supposed to begin October 10 but were delayed because not enough jurors were present. As Catherine Ho reported in the San Francisco Chronicle, “the pool of 24 jurors lost several jurors to illness, medical conditions, and other issues. Twelve jurors are needed to decide the case, but because the trial is expected to last three months, many backup jurors were added.” Attorneys for both sides will meet to determine whether it is necessary to select additional jurors.

Xavier Bercerra, Attorney General of the State of California
California Attorney General Xavier Becerra

Sutter “has long been viewed as the classic example of a hospital system that got way too big,” Reed Abelson reported in the New York Times. Over the years, the nonprofit organization has expanded its footprint in Northern California by buying up hospitals and physician practices. Today Sutter has 24 hospitals, 5,500 physicians, and annual operating revenue of $13 billion.

The plaintiffs argue that Sutter leveraged this size to engage in anticompetitive practices, including “using an ‘all-or-none’ approach to contracting with insurance companies,” Kaiser Health News’s Jenny Gold reported. Under all-or-nothing contact terms, an insurer that wants to include any Sutter facilities in its network must include the entire health system. This prevents an insurer from negotiating prices with individual Sutter providers and steering patients to more cost-effective ones — all of which leads to higher costs for employers and individuals.

“There’s a point where you’re starting to show signs of a bully,” Becerra told Abelson. In the complaint (PDF), Becerra cited a 2018 study (PDF) from the Nicholas C. Petris Center at UC Berkeley showing that in Northern California, where the health care market is highly concentrated, procedure prices are often 20% to 30% higher than in the Southern California market, which is not as concentrated.

Prices Vary Across California

A newly published study from the Petris Center, funded by CHCF, confirms that patients in Northern California pay more than Southern Californians for the same services. For example, in 2016, Northern California wage-adjusted prices for a routine childbirth (vaginal delivery without complications) were on average 24% higher than in Southern California. At the extreme was Monterey, where an average uncomplicated childbirth costs $22,751, compared to $11,387 in San Diego.

In general, Californians pay significantly more for common health care services than people in the rest of the country. The average wage-adjusted price for a colonoscopy in 2016 was $876 in California, compared with $710 in the rest of the country.

The researchers, led by Petris Center director Richard Scheffler, PhD, pointed to increased economic consolidation as a driving factor in California’s higher health care prices and insurance premiums. Their findings underscore “concerns over the rapid increase of mergers among hospital groups and medical practices,” Abelson wrote.

The acquisition of physician practices by hospital systems like Sutter is of particular concern because “most of it is under the radar, and it doesn’t get picked up by the regulators,” Scheffler told Abelson. “It’s adding more power to a concentrated market” but is not subject to the same scrutiny that big hospital mergers are, he said.

Implications for the US Health Care System

California v. Sutter Health is a combined case that includes Becerra’s lawsuit, which seeks to halt the anticompetitive practices but does not seek monetary damages, and private litigation brought by employers and unions. The latter group seeks “up to $900 million in damages for overpayments that they attribute to Sutter,” Gold reported. “Under California’s antitrust law, the award can be tripled, leaving Sutter liable for up to $2.7 billion.”

Sutter denies any wrongdoing. “There is robust competition in Northern California, and Sutter Health looks forward to demonstrating in court why its integrated care model promotes competition and, most importantly, benefits patients and communities,” Sutter spokesperson Amy Thoma Tan said in a statement to the Chronicle.

The lawsuit is being watched closely because consolidation is a growing national trend that magnifies the potential for antitrust violations. A victory for the plaintiffs could signal other big systems to police their own behavior more rigorously. “It could have a chilling effect on [anticompetitive] practices nationwide,” Leemore Dafny, a Harvard business professor and former Federal Trade Commission official, told Abelson.

Additional litigation and new regulation are other possible outcomes. State and federal authorities have already brought antitrust lawsuits against health systems in Idaho, North Carolina and Washington State. California policymakers have considered changes to hospital and insurer contracting rules during the current legislative session and the previous one.

Although the outcome of the Sutter lawsuit will be binding only in California, it could send a strong message to the health care market nationwide. Anthony Wright, executive director of Health Access California, told Gold, “You want [hospital systems] to compete . . . by providing better quality service at a lower price, not just by who can get bigger and thus leverage a higher price.”

Have you felt the effects of economic consolidation in your health care market? Tweet at me with #EssentialCoverage or email me.

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