Seizing on the Sutter Health Settlement to Create Competitive Health Care Markets Nationwide

The recent settlement of the antitrust lawsuits against the Sutter Health System in California is a watershed moment in the evolution of US health care markets and public policy. The settlement’s recognition of the anti-competitive practices that health systems have used to gain market power and raise prices, as well as the size of the settlement’s financial penalties and its prohibitions on future contracting practices, have the potential to reset US health care.

Over the last decade, hospital prices in the US have risen by double digits, driving a significant portion of the overall US healthcare cost growth, but there’s been no corresponding increase in quality or outcomes. In any other industry, as products mature and suppliers grow, prices come down and value improves. But US health care is plagued with market dysfunction and monopolistic hospital consolidation that burdens employers, their employees, and state governments. Through the Sutter lawsuits, for the first time, state policy leaders, large employers, and unions joined forces to say enough—and prevailed.

Terms of the Settlement

In 2014, the United Food and Commercial Workers (UFCW) & Employers Benefit Trust brought a class action lawsuit against Sutter Health and its affiliates, alleging antitrust violations and anti-competitive market actions, resulting in self-funded payors being overcharged for general acute care hospital services. Four years later, the California Attorney General joined the lawsuit.  The plaintiffs accused Sutter of using anti-competitive contract terms that increased their market power, including:

• “All-or-nothing” clauses, which required health plans to contract with all the hospitals in the Sutter network, regardless of their price and quality;
• “Anti-tiering” clauses, which required health benefit plans to place Sutter in the preferred tier in any health plan products; and
• “Gag” clauses, which prohibited plan administrators from sharing price and quality data with self-funded payors.

Furthermore, the plaintiffs accused Sutter of using very high out-of-network prices to force health plans to include Sutter in their provider networks. The result was higher prices paid to Sutter. A recent University of California, Berkeley report found that the average in-network hospital inpatient procedure prices are 70 percent higher in Northern California (where Sutter operates) than in Southern California.

In December 2019, Sutter Health and the plaintiffs filed a proposed settlement under which Sutter agreed to pay $575 million in damages.  Perhaps more significantly, Sutter is required to comply with the following terms in contracts:

• Discontinue all-or-nothing contracting deals so that insurers, employers, and self-funded payers can include some but not all of Sutter’s hospitals and clinics in their health benefit plans;
• End contracting tactics that prevent health plans and self-insured employers from distinguishing Sutter from other providers in tiered health services products;
• Stop anticompetitive bundling of services and products and offer a stand-alone price for each service that must be lower than what could be obtained in any bundled package price, giving insurers, employers, and self-funded payers more options;
• Increase transparency by allowing insurers, employers, and self-funded payers to share pricing, quality, and cost information with plan members;
• Limit charges for out-of-network services to help mitigate surprise medical bills that occur when Sutter is an out-of-network provider.

Creating Healthy Competition Across States

Why are the new rules imposed by the settlement so important? Not only do they force Sutter to compete fairly, they also send a strong message to other health systems in California and throughout the country that it’s time to compete based on cost, quality, and patient experience.

While the settlement creates an opportunity to make health care more affordable in every state, it will require a multisector response. For example:

• If state attorneys general and private law firms have evidence that health systems in their state are engaging in similar anti-competitive practices, they can launch lawsuits under federal and state antitrust laws.
• If state legislators and governors want to contain health spending and encourage a healthy competitive market, they can prohibit in legislation the anti-competitive practices Sutter agreed to change as part of the settlement.
• If large employers, labor trust funds, and public sector purchasers want to contain health benefits costs and implement value-based benefit designs, they can insist that their health plans prohibit anti-competitive clauses in their provider contracts.
• If investors want to maximize their financial returns, they can channel their capital to health systems that deliver better value: low costs, high quality, and good patient experience.

The first step in changing the market dynamic in other states is to make sure all stakeholders understand the terms and implications of the Sutter settlement. Then, in each market, local public, employer, and health care leaders will need to customize their approach based on the unique market characteristics and political environment.

The multistakeholder group that brought about the Sutter settlement, including the Pacific Business Group on Health, has accrued years of experience, and we want to share lessons to scale this success. But change will only occur in other states if policymakers, purchasers, and investors step up—and if providers move away from business models based on accruing and using economic power and embrace healthy competition and value-based delivery models.

Elizabeth Mitchell is the president and CEO of the Pacific Business Group on Health