EXECUTIVE SUMMARY

Hospital mergers have been rising steadily for the past decade. From 2010 through 2014, 451 mergers were completed in the United States, an average of 90 a year. From 2015 to 2019, the number rose to 511, a rate of 102 a year. Numerous studies have shown a strong relationship between concentrated ownership of hospitals and physician practices on the one side and higher prices for procedures and insurance premiums on the other. Among the privately insured, hospital costs account for 44% of health care spending and explain virtually all of the increases in spending in recent years.

Over the past 20 years, Sutter Health, a nonprofit hospital chain based in Sacramento, California, made numerous acquisitions and reported an operating revenue of $13.3 billion in 2019. In 2014, a group of large payers sued Sutter in a case that was later joined by the California attorney general. Plaintiffs argued that Sutter had used its dominance to force insurers to place Sutter facilities in favored positions in health plan networks and to withhold from payers information about pricing.

In October 2019, the parties reached a tentative settlement, with Sutter agreeing to pay $575 million and to refrain from engaging in a set of specific behaviors that had given the health system an unfair advantage. Among the key settlement provisions, Sutter agreed:

• To end its “all-or-nothing” practice of requiring health plans to contract with all Sutter hospitals and facilities if they wanted to get access to any Sutter facility.
• Not to interfere with or block health plans from establishing tiers—rankings of providers that assign more favorable positions to those offering better pricing or quality. Plans charge patients lower copays or deductibles when they use providers in favored tiers.
• To limit what it charges when health plan members are treated out of network, including for emergency room or trauma care, helping ensure that members don’t receive surprise medical bills from out-of-network providers.
• To increase transparency by ending the practice of preventing health plans from giving insurers, employers, and self-funded payers access to pricing, quality, and cost information.
• To allow health plans to freely designate as centers of excellence those providers that deliver high-quality care and to exclude Sutter providers from these centers if they don’t meet predetermined criteria.

“The Sutter settlement was a landmark,” said Shawn Gremminger, a Washington, DC–based health policy analyst who tracks federal issues for Pacific Business Group on Health, an alliance of employers and public purchasers of health insurance. “This is really the first time where we’ve actually seen success getting a major system to cease and desist.”

The provisions agreed to by the parties may now help inform other efforts around the country to control the behavior of large health systems with dominant positions in health care markets. Health law scholar Jaime King said the Sutter case may act as a guide for policymakers and litigators in other states—once they are able to turn their attention to issues other than COVID-19. “I think the provisions in this case can directly lead to a road map,” she said.

In addition, states may want to pursue broader policies such as antimerger legislation, rules requiring health care price transparency, and the imposition of price controls to help reduce health care consolidation, create a more competitive playing field, and limit the power of hospitals to dominate markets and increase prices.

In the era of COVID-19, the vast disparities in out-comes that have long been a feature of the US health system have never been more apparent. If state and federal policymakers, along with health care payers, wish to reverse these trends and create transformative change, they will need to pursue new strategies to impede and roll back consolidation in the health care industry and the power of dominant hospital systems. The successful litigation against Sutter Health may offer a useful guide.