Sutter Health will pay $575 million and operate under a monitor for up to 13 years under the terms of a preliminary settlement that California's attorney general called "game changing."
If a judge approves the settlement, the Sacramento, Calif.-based health system will make sweeping changes to the way it operates, including ceasing all-or-nothing contracting practices, anticompetitive bundling of services and denying patients access to cheaper health plans. A court hearing is set for Feb. 25.
"We think this settlement helps address some of the anticompetitive activities we saw in the Northern California healthcare market," California Attorney General Xavier Becerra told reporters at a news conference Friday. "We believe that, with this neutral monitor in place, we'll be able to check any of Sutter's conduct moving forward."
Becerra selected Jesse Caplan, managing director of corporate oversight with Affiliated Monitors in Boston, as the monitor. Caplan will investigate Sutter's compliance with the injunctive relief for 10 years, with the possibility of a one-time renewal for another three years, according to the agreement. He did not return a request for comment.
Sutter's general counsel, Flo Di Benedetto, praised the agreement in a statement for allowing the health system to maintain its integrated network and for selecting an experienced monitor to oversee the specific contracting parameters between Sutter and insurers. The agreement includes no admission of wrongdoing on the part of Sutter, and the court has not found that Sutter violated any laws, she said.
The United Food and Commercial Workers International Union and Employers Benefit Trust and other individual plaintiffs sued the health system in 2014, accusing Sutter of engaging in unlawful, anticompetitive business practices that drove up their healthcare costs. Becerra filed a similar lawsuit in early 2018 that was combined with the original case, which had become a class-action lawsuit. The parties announced in October, the day opening arguments were scheduled to begin, they had reached a preliminary settlement.
The agreement also requires Sutter to limit how much it charges for out-of-network services. The health system will have to allow insurers, employers and self-funded payers to give their members pricing, quality and cost information to make better care decisions.
Insurers, employers and self-funded plans will no longer have to include all of Sutter's hospitals, clinics or other commercial products in their plans' networks. Sutter will also have to stop forcing insurers, employers and self-funded payers to buy more from Sutter for their health plans than necessary. The health system will be required to offer a stand-alone price that must be lower than any bundled package price to offer insurers, employers and self-funded payers more choice.
Court documents detail the "extraordinary" size of the investigation that's taken place, including 2.4 million documents totaling 16.9 million pages from Sutter as well as health plans and providers. Health plans produced 870 million lines of claims data analyzed by the parties' experts. Parties took more than 200 depositions.
Had the case proceeded to trial, plaintiffs would have sought about $980 million in damages, according to court documents. A damages expert working on behalf of the plaintiffs estimated Sutter overcharged them by 15.5% on average.
Northern California's insurance premiums have been 25% to 35% higher than those in Southern California, and healthcare prices have been 40% to 70% higher, said Elizabeth Mitchell, CEO of the Pacific Business Group on Health.
"That is really coming out of wages and business growth and innovation and this will really be a positive impact for the California economy and workforce," she said.
Twenty PBGH members are class members in the Sutter lawsuit. Mitchell said her organization is particularly pleased to see the settlement's injunctive relief, which will create new "rules of the road" to stop anticompetitive practices by Sutter and even other providers in California and beyond.
"This is an issue for all employers and the people for whom they purchase care," she said. "Healthcare costs are really in crisis in this county. We think this is one part of a solution to really create a market in which care can be made affordable."
The settlement details released Friday shed further light on Sutter's business practices, but far less than would have been revealed during a trial. Legal experts told Modern Healthcare that's probably the biggest factor behind Sutter's decision to settle in lieu of going to trial.
The trial had been scheduled to last at least three months, according to the agreement. Parties had identified 340 potential witnesses and 13,000 exhibits.
The $575 million settlement will be significant for the health system. Sutter drew $38 million in operating income on $3.3 billion in revenue in the first quarter of 2019, yielding a slim 1.2% operating margin. It also generated almost $400 million in net income in the quarter.
Sutter's Di Benedetto said the system will have to evaluate further capital investment based on the impact of the settlement, noting that it has spent nearly $10 billion over the past decade rebuilding hospitals to withstand earthquakes, take care of millions of Medicare and Medicaid patients and expand services in rural communities.
"Despite the increasing cost of care and operating in high-wage markets, we remain focused on making healthcare more affordable for our patients," she said.
The American Hospital Association lashed out at the settlement shortly after it was released. In a statement, the group's general counsel, Melinda Hatton, said it benefits the commercial health insurance industry.
"Unfortunately, it will be several dominant commercial health insurance companies—not consumers—that will benefit from terms that will allow those insurers to cherry-pick the hospitals with which they contract, as well as eliminate incentives for them to work with hospitals to develop and sustain value-based care," she said. "Consumers in rural or vulnerable communities are most likely to be disadvantaged by the settlement"
The AHA said the settlement will make contracting with dominant insurers more expensive.