At a time when many California hospitals are cutting their losses by shedding unprofitable facilities, Sacramento-based Sutter Health is bolstering its market dominance by snapping up even the most financially troubled community hospitals.
Through ambitious acquisitions, Sutter has strengthened its bottom line and gained a formidable stronghold in the Northern California hospital market. But critics say the not-for-profit system's seemingly insatiable appetite for market share is threatening community healthcare by creating a virtual monopoly in certain areas.
Sutter had just two facilities in the late 1970s. Its network has since ballooned to 26 hospitals, nine cancer centers, six long-term-care facilities, 19 home health and hospice centers, and 17 affiliated medical groups, mostly concentrated in the Sacramento and San Francisco Bay areas.
System officials say the growth-which has included the recent additions of beleaguered St. Luke's Hospital in San Francisco and Summit Medical Center in Oakland-has always been based on charitable ideals.
"There was never a grand design for us to become Northern California's major system," says Sutter Chief Executive Officer Van Johnson. "The metamorphosis wasn't for power; it was to fund our mission of helping preserve not-for-profit hospitals in their communities."
Johnson adds that Sutter doesn't typically pursue acquisitions; more often, it's courted by hospitals looking for the skilled management, capital and purchasing discounts that a large parent can provide. "We're invited into the communities we're in," he says.
Nevertheless, Sutter's impressive expansion has served it well. It now controls 11 of the 55 hospitals (20%) in the greater Bay Area and six of the 24 hospitals (25%) in the Sacramento area.
The increased market control has allowed Sutter to wield greater bargaining clout with insurers. In 1998, the company was the first healthcare system to wrest higher reimbursement rates from Blue Cross of California after a much-publicized contract dispute.
Partly as a result, Sutter's operating income soared to $35 million in 2000 from $2 million in 1999. Including investment income, net profit last year reached $111 million, up from $51 million the year before. Revenue rose 21% to $3.5 billion from $2.9 billion in 1999. The company does not release midyear results, but Johnson says Sutter is doing "better than budget" so far this year.
"Sutter's measured growth strategy has allowed them to remain remarkably stable in a highly volatile market environment," says Lisa Zuckerman, director at Standard & Poor's in San Francisco. "They've gained the critical mass to achieve greater efficiency and economies of scale."
Not everyone is impressed, however. Critics says Sutter's acquisition streak has far less to do with preserving community healthcare than with ensuring market control.
Beth Cappell, an advocate for the Oakland-based consumer group Health Access California, pointed out that Sutter has rejected affiliation bids from a number of struggling Northern California hospitals while going to great financial and legal lengths to acquire money-losing-yet strategically valuable-facilities in prime markets such as the Inner East Bay, where it now commands a 40% market share.
"And then (Sutter) consolidates patient services and reduces access to care," Cappell says. "They've done it to community after community. It's their modus operandi."
According to a court document filed by California Attorney General Bill Lockyer in January 2000, Sutter decided to buy Eden Medical Center in Castro Valley in 1997 as part of a strategy that Sutter officials referred to in internal planning memos as the "East Bay Monopoly Game." One memo said acquiring Eden, 17 miles from Sutter's 468-bed Alta Bates Medical Center in Berkeley, "would protect our market from a takeover by competitors that could develop competing physician networks." The documents were filed as part of a lawsuit appealing the approval of another deal involving Alta Bates.
In December 1999, Sutter outbid Tenet Healthcare Corp. to acquire struggling Summit Medical Center and merged the 420-bed hospital with Alta Bates. Again, an internal document written at the time reads, "The integration with Alta Bates and Summit would be a big win for the system and is key to achieving market share in the East Bay."
After winning a yearlong court battle with Lockyer, who challenged the merger on antitrust grounds, Sutter plowed $450 million into the new operation for capital improvements and to pay off debt.
Since then, Sutter has raised rates at Eden and Summit to match those of Alta Bates, according to court documents. And now Alta Bates Summit, faced with mounting losses, is laying off 300 workers, or 6% of its workforce, and planning to cut the amount of building space it owns by as much as 40%.
In May, the system hired the Hunter Group, a Fort Lauderdale, Fla.-based turnaround firm despised by unions because of its reputation for cost-cutting, to lead the effort. Alta Bates Summit CEO Irwin Hansen says the drastic measures were necessary to stem what otherwise could amount to $40 million in losses by year-end.
But Service Employees International Union Local 250, a Sutter critic, asserts that the cutbacks at Alta Bates Summit were planned long ago. The SEIU points to a Sutter planning document written in June 1999 that discloses executives' plans to cut $27.8 million from the hospitals' operating budgets each year by eliminating and downsizing departments and services.
"Executives' claims that these cuts were caused by recent financial shortfalls are merely a smokescreen, part of an effort to win public acceptance of cutbacks that will reduce access to healthcare for local residents," says Sal Rosselli, president of SEIU's Local 250.
Rosselli says the cuts raise serious concerns about Sutter's plans for St. Luke's Hospital, which the company acquired last month. Sutter says it's not planning any layoffs at the struggling 260-bed facility, but added that those decisions usually are made by local management.
Sutter maintains that its buyout of St. Luke's was the only way to keep the money-losing hospital from closing. However, Sutter cut the deal only after it was sued by St. Luke's, which charged that the system nearly put the hospital out of business.
In an antitrust lawsuit filed in 1999, St. Luke's accused Sutter of hiring away 20 of its doctors and then requiring them to admit patients only to Sutter's California Pacific Medical Center, also in San Francisco.
To settle the suit, Sutter offered the hospital a chance to join the chain. As part of the deal, the company agreed to fund capital improvements at St. Luke's by paying $15 million upfront plus $4 million per year for 10 years.
"Sutter rides in like a knight on a white horse to save St. Luke's, but it was their predatory business practices that endangered St. Luke's in the first place," Rosselli says.
Despite Sutter's promises otherwise, some consumer groups fear that the company will reduce the level of care that St. Luke's provides to the poor and uninsured.
In recent years, critics say, the company has spent only 0.6% of its revenue on charity care, compared with a 3% national average for not-for-profit hospitals. But Sutter officials say critics are ignoring the money it spends on free health screenings, educational programs, research and other community-based services. With those costs factored in, Sutter says, it spends roughly 8.9% of revenue on "broader community benefits."