Few doubt that Sutter Health is one of the Golden State's most far reaching hospital systems. With 24 hospitals and more than 5,000 affiliated physicians, it is a linchpin to acute care in Northern California.
Sutter may also be a ruthless negotiator with payers, demanding reimbursement rates so high it has skewed the region's healthcare costs out of proportion to the rest of the state.
That assertion will be put to the test this week, as a trial over Sutter's business practices begins in San Francisco County Superior Court. The United Food and Commercial Workers labor union — which operates a trust for employee healthcare benefits — sued Sutter in 2014. California Attorney General Xavier Becerra filed a second suit in March 2018. The litigation was eventually combined.
Despite such streamlining, the legal wrangling has been so complex that dozens of lawyers have already made nearly 4,000 filings, records show. And that's all before a jury has even been seated. Jury selection starts Monday, with opening arguments expected next month.
The basic charges made in the combined suits are straightforward: Sutter insists that payers ink deals that include all of their hospitals, or none at all. Many are forced to reluctantly accept. "After weighing the harm they would sustain from inclusion of the offending terms against the harm they would sustain by excluding all Sutter hospitals from their provider networks, each … has been compelled to agree to Sutter’s terms," the union's lawsuit claims. Locked-in providers in turn allows Sutter to increase prices for care without regard for competition, the combined suits allege.
An adverse judgment against Sutter could send shock waves through the hundreds of hospitals and healthcare systems that have been steadily consolidating over the past 25 years. But should Sutter — which is a predominant provider in San Francisco, Sacramento and surrounding areas — prevail, it could drive healthcare prices both in California and the rest of the U.S. even higher as providers gain even more leverage.
Healthcare costs are significantly higher in Northern California versus Southern California. A study published last year by the Nicholas C. Petris Center at the University of California, Berkeley, found that inpatient prices were 70% higher in the north, while outpatient prices were between 17% and 55% higher. Premiums for health insurance purchased on the Covered California insurance exchange were 35% higher in the north versus the south for the same levels of coverage.
Although the study did not blame Sutter directly, it noted concentration of ownership of hospitals in Northern California were much higher than in the southern part of the state. And, between 2010 and 2016, the mean proportion of physicians who work for foundations owned by a hospital system increased from 24% to 39%, with some of the biggest shifts occurring in counties where Sutter owns hospitals.
"Sutter has over a third of the market in Northern California, and half of the market (that does not involve hospitals operated by) Kaiser Permanente. That allows them to negotiate aggressively," said Jack Needleman, chairman of the department of health policy and management at the UCLA Fielding School of Public Health. He added that can account for a substantial difference in prices.
"It's well-established in academic literature that Sutter is a dominant force in Northern California," said Anthony Wright, executive director of Health Access California, a Sacramento-based patient advocacy group. "They have grown to a point where they can dominate the Northern California hospital market and as a result charge higher prices, which is reflected in our insurance premiums."
Sutter spokesperson Amy Thoma Tan said the system denied the allegations made in the combined suits.
"Sutter is not violating antitrust laws by integrating its hospital system and negotiating systemwide contracts with insurance companies. There is no evidence that Sutter has hurt competition, as demonstrated by the fact that new hospitals continue to open and existing facilities continue to expand in markets that Sutter Health serves, including in the San Francisco Bay Area and the greater Sacramento region," the statement reads.
Sutter also denies that it exclusively engages in all-or-nothing negotiations regarding its provider network, noting that there are hundreds of insurance products that currently include only some Sutter hospitals in their networks. "We simply ask that insurance companies check with us for consent before changing participation status in the middle of a service contract," the statement notes.
Sutter does acknowledge price disparities between Northern and Southern California, but blames it on high wages in the regions where it operates. However, the Petris Center study concluded that even accounting for wage and other economic disparities, prices "are still often 20%-30% higher in Northern California than Southern California."
Needleman sees three potential outcomes from the suit. The first and most radical is that Sutter loses and is ordered by the court to be broken up into more disparate components, although he believes that is highly unlikely. Sutter could negotiate a settlement where it eases off on all-or-nothing contract negotiations. Or, it might agree to having its prices closely policed, which might be the most palatable outcome for the hospital system.
No matter the outcome, the trial will be closed watched across the country, according to Wright.
"It is nationally important litigation for people around the country," he says. "We'll be watching it with bated breath."