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‘800 pound gorilla’ Sutter Health imposed onerous contract terms on employers and health plans, witnesses say

The largest hospital system in Northern California faces claims of using its market power to stifle competition, resulting in higher health care costs for insurers and patients

SAN FRANCISCO (CN) — When Catherine Dodd took the job as director of San Francisco’s health service system in 2009, she was shocked by how much taxpayers were shelling out for city employee health benefits.

“The cost to the taxpayers was going up at a rate of 7% to 8% per year before I started, which was of course unsustainable. So I had to figure out how I was going to bend or flatten that curve. The rates were unacceptable and taking up a larger and larger portion of our general fund money that could have gone to police or homelessness or parks, but instead we were spending it on very expensive healthcare,” Dodd said on the witness stand Friday in a federal trial over whether Sutter Health abused its market power to drive up insurance costs in violation of antitrust laws.

Dodd is one of a slew of witnesses to testify about how Sutter Health’s contracting practices prevented insurers from steering health plan members toward more affordable care. The City and County of San Francisco contracted with Blue Shield to provide insurance coverage for more than 112,000 employees and retirees, and its premiums were contingent on what it could negotiate with Sutter, the largest hospital system in Northern California.

Chandra Welsh, a former Aetna executive who negotiated contracts with Sutter, said its dominance in the market made it all but impossible for the insurer to exclude it from its health plan. Employer groups wanted it, and in some rural areas of Northern California, a Sutter hospital was the only hospital around.

“They are the true 800 pound gorilla in our market,” Welsh said, testifying about a memo she wrote to colleagues in 2011.

Being the only game in town gave Sutter enormous leverage in negotiating contracts, Welsh said, and led to Sutter demanding that Aetna accept all kinds of onerous provisions. Aetna was prohibited from putting Sutter in a tiered health plan that would cause a member to pay more to go to a Sutter hospital versus somewhere else. If one of Sutter provider's was not included in a network or benefit plan Aetna offered, also called a "non-participating provider” in healthcare parlance, then Aetna had to pay 95% of the patient’s billed charges.

Welsh objected to these provisions, but Sutter refused to take them out of the contract. Having no choice in the matter, Welsh said Aetna acquiesced and signed.

“We needed them more than they needed us,” she said.

For Dodd with the City and County of San Francisco, Sutter posed one of the biggest obstacles to creating more competition and lowering prices while giving employees the choices they wanted. While Sutter refused to turn over data on exactly how much its services costs, she got a sense that its prices were higher than other hospitals and medical groups in Northern California because Sutter consistently failed to meet actuarial cost targets.

“I got a sense that Sutter's cost were higher than Hill Physicians, that's for sure,” Dodd said.

So she spoke with Peter Anderson, who at the time was Sutter Health’s senior vice president of strategy about prices.

“I said ‘I’m really worried about the prices at Sutter. The costs keep going up and that drives our Blue Shield costs up and people leave and go to Kaiser and I want people to have the choice to go to Sutter or UCSF,’” Dodd said. “He said he'd look into it.”

She also floated the idea of creating a tiered network where city employees could choose to go to a Sutter provider at a higher cost. Blue Shield balked, citing Sutter’s prohibition on participating in tiered health plans. "I wanted to create some competition. Blue Shield said we can't do that. They said we can't create different levels.”

“I called Peter Anderson and I explained what I wanted to do and he said, ‘No you can't do that. We negotiate with all our insurers that we have to be in the lowest tier of premium.’ I said, ‘that precludes competition,’ and he said, ‘that's the contractual relationship.’

When Sutter broke ground on a new 274-bed, $2.1 billion hospital in downtown San Francisco, she grew worried that Sutter would fund it through higher premiums.

“I had said to the mayor's office that their new hospital isn't paid for and I don't want the cost of that new hospital to come out of our premiums and ultimately from the taxpayers,” Dodd said.

On a conference call on the issue, Dodd told Sutter’s chief contracting officer Melissa Brendt that she wanted to make sure that Sutter did not charge patients non-participating provider rates for ER visits, and she wanted a cap on rates.

“I said this what we want and Melissa Brendt said that's unrealistic and it's a ridiculous request,” Dodd said “She screamed at me on the phone and said ‘you're absolutely ridiculous.’ I was just stunned.”

Dodd, who left the director job in 2017, said Sutter eventually agreed to cap premium rates at the medical cost of inflation for three years, and then a 5% rate cap for the next seven years. Premiums stabilized, she said, because hospital use decreased and the city received Affordable Care Act money from the federal government to buy down the rates.

“I know that Sutter's contract practice of now allowing us to charge different rates based on quality and cost have harmed the city and our ability to negotiate lower rates,” Dodd said. Sutter’s practice of withholding claims data also prevents the city’s health service system from doing any real data comparison between healthcare providers to this day.

A jury will decide whether Sutter’s contracting practices caused 3 million Californians and their employers to collectively pay nearly $411 million more than they should have for health insurance premiums and in-patient services.

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