Six months after agreeing to a $575 million settlement in a closely watched antitrust case filed by California Attorney General Xavier Becerra, Sutter Health has yet to pay a single dollar, and no operational changes have gone into effect. The nonprofit health care giant was accused of using its market dominance in Northern California to illegally drive up prices.
Late last week, lawyers for Sutter filed a motion requesting that San Francisco Superior Court Judge Anne-Christine Massullo delay approval of the settlement for an additional 90 days, due to “catastrophic” losses stemming from the COVID-19 pandemic. Massullo originally was scheduled to rule on the agreement in February, but in April granted an earlier request from Sutter for a 60-day delay in the proceedings.
In court documents supporting its request, Sutter argues the pandemic has upended the financial landscape for hospitals and made numerous aspects of the agreement untenable. Last month, Sutter reported an operating loss of $404 million through April, citing declining patient revenue and expenses resulting from the pandemic. System officials said that loss took into account the more than $200 million the system received in COVID-19 relief funds from the federal government via the CARES Act.
“We’re in a crisis situation,” David C. Kiernan, a lawyer representing Sutter, told Massullo during a settlement conference earlier this month. “There are certain provisions that, if they went into effect today, would interfere with Sutter’s ability to provide coordinated and integrated care to patients in California.”
The settlement, announced in December, marked a dramatic turn in a long-running legal battle initiated in 2014 as a class-action lawsuit filed by the United Food and Commercial Workers International Union & Employers Benefit Trust, representing employers, unions and local governments whose workers use Sutter services. Becerra’s office joined the case in 2018.
Sutter has 24 hospitals, 34 surgery centers and 5,500 physicians across Northern California, with $13 billion in operating revenue in 2019. Among other allegations, the state’s lawsuit argued Sutter has aggressively bought up hospitals and physician practices throughout the Bay Area and Northern California, and exploited that market dominance for profit.
Health care costs in Northern California, where Sutter is dominant, are 20% to 30% higher than in Southern California, even after adjusting for cost of living, according to a 2018 study from the Nicholas C. Petris Center at the University of California-Berkeley that was cited in the complaint.
In agreeing to the settlement, Sutter did not admit wrongdoing. Throughout the proceedings, it has maintained that its integrated health system offers tangible benefits for patients, including affordable rates and consistent high-quality care.
Still, under terms of the settlement, Sutter agreed to end a host of practices that Becerra alleged unfairly stifled competition. Among other conditions, the settlement requires Sutter to limit what it charges patients for out-of-network services and increase transparency by allowing insurers and employers to give patients pricing information.
Sutter Health spokesperson Amy Thoma Tan, in a statement to KHN, said the health care system “has not objected to any aspect of the settlement” but is asking whether the settlement approval process should be deferred, “given the extreme disruption to the health care industry caused by COVID-19 and the potential for COVID-19 to materially impact certain settlement terms.”
In the court papers filed last week, Sutter’s attorneys went further, arguing that the settlement “may no longer make sense in its current form and could jeopardize Sutter’s ability to continue providing care.
“In this regard, Plaintiffs’ statement that they will not reassess even a single provision of a proposed injunction negotiated prior to COVID-19 is troublesome because it ignores the potentially harmful consequences of railroading the settlement through to approval in such an uncertain time,” they continued.
The court filing notes some specific settlement terms Sutter now considers problematic. Among them is a provision that calls for Sutter to end its all-or-nothing contracting deals with payers, which demanded that an insurer that wanted to include any one of the Sutter hospitals or clinics in its network must include all of them. Also cited is a provision that would limit the size of rate increases. Sutter says in the filing that it now may need to increase prices more than expected to pay for personal protective equipment and other unanticipated costs resulting from the pandemic.
In its filing, Sutter does not specifically object to the $575 million settlement amount. But Jaime King, an associate dean at UC Hastings College of the Law who has followed the case, said the request for a delay could be a tactical strategy to support such a move.
“The longer they can delay, the more they can show they have significant losses from COVID-19, which allows them to plead for a lower settlement,” King said.
While Becerra’s office has acknowledged the difficult circumstances that the pandemic has created for California hospitals, state lawyers said the settlement is binding and should not be delayed further.
“The plaintiffs are not going to renegotiate the settlement,” Emilio Varanini, a lawyer from Becerra’s office, told Massullo last month. “It’s even more in the public interest in an era of COVID-19 that COVID-19 not be an excuse to allow anticompetitive acts that will hurt consumers.”
Richard Grossman, lead counsel for the plaintiffs in the class-action lawsuit, echoed that sentiment. “Every hospital system in California is required to abide by California’s antitrust statutes, and they are all required to abide by the rules of competition that are prescribed by our legislature,” Grossman told KHN. “Sutter does not get an exception to that because there is a pandemic.”
Sutter has earned an average 43% annual profit margin over the past decade from medical treatments paid for by commercial insurers like the plaintiff companies, according to a recent analysis by Glenn Melnick, a health care economist at the University of Southern California. “Google and Apple would be jealous of those profit margins!” Melnick said.
Without a settlement in place, critics said, Sutter can continue to employ the negotiating tactics that the attorney general called anticompetitive. Some noted, with irony, that the more than $200 million in relief funds Sutter received from the federal CARES Act was based on a formula that awarded funds according to a hospital’s prior-year revenues — meaning Sutter was compensated for a pricing system the attorney general argued was artificially inflated.
“I’d be curious if they’re trying to get in their last licks on using these types of tactics to inflate prices in one last round of negotiations with insurers and other payers,” said Anthony Wright, executive director of the advocacy group Health Access California.