Sutter Health boosts operating income despite high-profile legal battle
Sutter Health's ongoing lawsuit with California's attorney general doesn't appear to be hampering the massive health system's financial position.
The Sacramento, Calif.-based Sutter, Northern California's largest health system, reported operating income in the second quarter of 2018 of $87 million, up from an operating loss of $18 million in the second quarter of 2017. The not-for-profit health system is currently in a legal battle with California Attorney General Xavier Becerra, who sued Sutter in March, accusing it of setting excessively high out-of-network prices, restricting transparency around cost information and engaging in anticompetitive contracting practices with insurers that restricted them from providing low-cost options to California residents.
Although Sutter asked a court to dismiss the case, it was recently consolidated with a separate class-action lawsuit filed in 2014 by the United Food and Commercial Workers and its Employers Benefit Trust. The trust's complaint alleged that the health system's contracting practices led to high prices and reduced competition, violating the state's antitrust and unfair competition laws.
Sutter wrote in the filing that the case could adversely affect its financial position.
The earnings release also revealed that Sutter's finances could take a hit from Verity Health System's bankruptcy filing last week. Two Sutter affiliates participate with Verity and Dignity Health in a multi-employer plan that covers some San Francisco area hospital employees. Sutter wrote in its filing that if any of the contributing employers' obligations are discharged in bankruptcy, the remaining ones could be on the hook for that employers' share.
"As the parent of the Sutter Participants, Sutter Health could be jointly and severally liable for certain liabilities related to plan funding," Sutter wrote. "The amount of such liability, which may be material, is undetermined at this time."
A Sutter spokeswoman could not provide more information on that situation.
Sutter's patient service revenues grew 7.5% year-over-year to $2.7 billion in the second quarter of 2018, which ended June 30, while premium revenue grew 13% during that time to $345 million. Meanwhile, salary and benefits expenses increased slightly to $1.4 billion. Supply expenses rounded out the quarter at $356 million, 4.7% higher than the same time in 2017.
In the six-month period that ended June 30, Sutter managed to draw $765 million in cash from financing activities, mostly from issuing long-term bonds at premiums. During the same six-month period in 2017, the health system had spent $29 million on financing activities.
When factoring in investment income, which was offset by a drop in the value of certain securities and debt extinguishment, Sutter's net income was $70 million, down from $112 million in the second quarter of 2017.
Sutter's filing said the health system is in contractual dispute with third-party payers stemming from a lab outreach program. The health system wrote that it knows how much it owes third-party payers and doesn't expect the issue will put a significant dent in its bottom line. A Sutter spokeswoman said no one with the health system was available to discuss the situation.
Dozens of rural hospitals across the country have gotten caught up in lab billing schemes where out-of-state companies take advantage of their higher reimbursement rates with commercial insurers by striking deals in which the hospitals bill for high volumes of lab tests, whether or not they were actually performed at those hospitals. Insurers have been pushing back, however, demanding repayment or taking the hospitals and lab companies to court. It's unclear whether Sutter's dispute is related to that issue.
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