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Sutter Health’s finances scrutinized in antitrust trial

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) — Lawyers for a class of more than 3 million patients and employers zeroed in on Sutter Health’s revenues in a trial that will determine whether Northern California’s largest health system abused its market power to drive up insurance costs.

Sutter Health’s former chief financial officer Robert Reed took the stand Thursday to testify that from 2006 through the end of his tenure in 2015, Sutter faced significant cost burdens even though its services were more expensive than those of other hospital systems.

Reed said that keeping a not-for-profit hospital afloat is “a very difficult economic proposition,” which is why Sutter did not face significant competition in Northern California. “It’s a lousy business," he said.

Employee salaries, pension funds, and tech innovations like electronic records make up a large portion of Sutter’s costs, along with the seismic retrofitting and hospital rebuilds demanded by Senate Bill 1953, and meager reimbursements for Medicare and Medi-Cal.

Reed said 20% of Sutter’s patients are on Medi-Cal, a statewide version of the federal Medicaid program that pays a portion of healthcare services for low-income adults and children, an “enormous burden” that he said Sutter's biggest Northern California competitor Kaiser Permanente doesn't have.

"Kaiser does not participate in any significant degree in the Medi-Cal program,” Reed said. “Kaiser doesn’t have that burden, so they don't have to build that huge money losing part of the business into their business plan.”

He conceded under examination from plaintiffs’ counsel Matthew Cantor that Kaiser does accept Medicare and Medi-Cal patients, but has some hospitals that don’t. "Kaiser has a lot of hospitals in Northern California and they have a low percentage of Medi-Cal patients,” Reed said.

Unlike for-profit hospitals, he explained, Sutter can't focus on providing profitable services while eschewing the unprofitable ones. And without shareholders, any revenue it earns gets reinvested back into the hospital.

“Non-profit is a misnomer because it’s a business and it has to make money. It's just what happens with the money it makes,” Reed said.

Though not plaintiffs in the case, health insurers Anthem Blue Cross, Aetna, Health Net, Blue Shield and United Healthcare have all complained that Sutter’s contracts make it impossible for them to exclude Sutter from networks to lower costs, or at least move them into tiered health plans without Sutter’s consent. They are also prevented from using incentives to steer patients away from Sutter’s higher-cost hospitals.

Reed said Sutter’s contracting practices were intended to protect its hospitals, who had built-in expectations about patient volume. Any sudden changes would have resulted in hospitals suddenly finding themselves out of network or pushed into a more expensive insurance plan tier, diminishing patient volume and crippling their budgets.

The landmark antitrust case is being led by two small businesses and four people who claim they paid inflated health insurance premiums because Sutter Health forced insurers to accept anti-competitive “all or nothing” tying contracts. These systemwide contracts required them to accept all of Sutter’s hospitals in their networks, even in competitive markets where they could have otherwise chosen to work with cheaper care providers.

Sutter Health in turn, has downplayed its market share in Northern California, arguing that Kaiser maintains a sizable hospital system with 12.5 million members.

Whether Kaiser actually competes with Sutter Health is in dispute. Plaintiffs argue that Sutter patients cannot receive services from Kaiser since it is a health insurer and does not offer to contract with non-Kaiser plans.

While Sutter says Kaiser’s closed system means it is not a significant competitor, numerous documents have already come in that show Sutter was, at the very least, worried about Kaiser’s growing dominance in Northern California.

At the end of the scheduled four-week trial, a jury will be expected to decide whether Sutter’s tying contracts caused patients to collectively pay nearly $411 million more than they should have for health insurance premiums and in-patient services.

“By taking away the choice from health plans, Sutter caused employers and families to pay much higher prices for hospital services," Cantor told the jury during opening arguments. “Why did Sutter do this? To pad its multibillion-dollar investment portfolio to the detriment of health insurance premium payers. Sutter, which markets itself as a not-for-profit system, reaped billions in revenue from premiums paid by health care payers.”

On Thursday, he attacked the notion that Sutter’s burdens were any greater than other hospitals.

He pointed out that all hospitals are required to comply with the earthquake retrofits mandated under SB 1953. All hospitals are required to fund their employee pensions, if they have them, and pay for salaries. All hospitals treat Medicare patients.

Representing Sutter, Jeffrey LeVee with Jones Day showed the jury a Powerpoint presentation Reed gave at a financial symposium in 2013 entitled "investing in the future of our mission” as evidence that Sutter was primarily concerned with cutting waste and lowering costs for consumers while providing quality care.

"Since 2006, were the purpose of Sutter's contract practices to pad its investment portfolio?” LeVee asked, to which Reed answered, “Not at all.”

“Was it designed to build a powerful hospital system to impose price increases?” LeVee asked.

“The strategy was not that complicated,” Reed said. “We had to build a balance sheet to meet the SB 1953 state mandated earthquake retrofit, and the technology around the electronic health records, but it had nothing to do with trying to build a bank.”

Cantor also used Reed’s presentation to highlight one distinguishing feature of Sutter’s financial health — a 6.7% annual growth rate for revenue. From 2008-through 2013, Sutter Health enjoyed revenues between $8.5 billion and $9 billion, with $9.5 billion in revenue in 2014, Reed’s last year on the job. During that same time period, Sutter had only eliminated $250 million from its cost structure.

Meanwhile, he noted, a consultant Sutter Health hired to review its pricing strategy recommended in 2014 that it cut its costs to increase affordability for consumers.

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