Note: This transcript has been created with a combination of machine ears and human eyes. There may be small differences between this document and the audio version, which is one of many reasons we encourage you to listen to the episode!

Dan Gorenstein
From the Annenberg Studios at the University of Pennsylvania, I’m Dan Gorenstein, and this is Tradeoffs. A new podcast that looks to evidence to help make sense of our confusing, costly and often counterintuitive health care system. If you listen to our first episode, comparing Medicare for All and a public option, this episode is going to sound a little different. Just like there’s no one perfect solution to our health care problems, we think there’s no one best way to tell you about our health care policy tradeoffs. Sometimes we’re going to bring you more in depth conversations with experts to put breaking news or important research into context. This is one of those episodes and it starts in California.

News tape
Sutter Health, Sutter Health, Sutter Health, Sutter Health Care.

Dan Gorenstein
Sutter Health is one of the biggest hospital systems in the country.

News tape
A six year investigation by California’s Attorney General found that Sutter Health patients in Northern California are paying as much as 56% more than patients in Southern California.

Dan Gorenstein
For years Sutter’s sky-high prices have been the source of resentment and even rage from business owners unions and patients. That boiled over last year when the state’s Attorney General Xavier Becerra filed a lawsuit alleging that Sutter, which has 24 hospitals, 17,000 physicians, and more than 50,000 employees, used its stranglehold on the Northern California market to drive up prices. 

Xavier Becerra
It’s time to hold health care corporations accountable and bring down illegally inflated health care costs that are imposed on California’s families. 

Gorenstein
Sutter was due in court this month to defend itself. But right before the trial was supposed to start, it was over.

News tape
Sutter Health has settled a massive class-action lawsuit over allegations it abused its market power to snuff out competition and overcharge patients.

Dan Gorenstein
Details of the settlement remain under seal until early next year, but this case sends a clear signal. We’re approaching a breaking point when it comes to hospital prices. And let’s not just pick on Sutter. Many hospitals have spent the last 30 years on one giant shopping spree, buying up their competitors, big and small. Today, most of our cities are dominated by just a handful of hospitals. Those hospitals have a lot of leverage to determine what we pay for an overnight stay, a trip to the ER, delivering your baby. The question today: How did we get these mammoth hospitals? And what does the suit against Sutter tell us about where we might be headed next? Welcome to Tradeoffs.

Jaime King
This is a huge case. Sutter is a huge entity in Northern California in terms of health care, and it’s really been a model for a lot of other systems around the country.

Dan Gorenstein
Jaime King is the associate dean and a professor at UC Hastings College of the law.

Jaime King
So if the attorney general in California was able to win that would sort of send shock waves through the system around not only signaling to other large health care systems that they need to change their practices, but also inspire other attorney general around the country to start bringing similar cases.

Dan Gorenstein
You say practices. What are the practices that got them into trouble? What’s Sutter actually being sued here for?

Jaime King
Basically the claim is that the way that Sutter is engaging in these contracts and the kinds of terms they’re putting in the contract, are harming competition, and that they’re allowing them to drive up prices. One of them is all or nothing contracting. And this is where Sutter’s size really plays into this. Sutter has 24 hospitals in Northern California, and some of them are in areas where there is no other hospital and so insurers have to have those hospitals in their networks. And so what Sutter has done is say, “You want that hospital? You have to take all 24 at the price that we set.”

Dan Gorenstein
And so what did this all or nothing contract language and some of those other alleged practices mean for consumers?

Jaime King
There was a great study that demonstrated that people in Northern California were paying somewhere between 30 and 50 percent higher health care prices than people in Southern California. Everybody knows Northern California is expensive. But we don’t tend to think of it as being more expensive than, you know, Los Angeles, Beverly Hills, the OC. When they looked at what was driving those costs, there’s a lot more competition in Southern California than there is in Northern California.

Dan Gorenstein
The employers, workers, and insurers of Northern California didn’t need a study to know that. They feel the effects of this monopoly like market every day. Delivering a baby 75 miles south of San Francisco costs nearly $23,000 on average. In San Diego, it’s about $11,000. 

And this isn’t just a problem in California. Research from the Health Care Costs Institute shows three out of four cities across the country have highly concentrated hospital markets. The question is how did we get to this point?

Bob Town
Through mergers and acquisitions. That’s the strategy to get big. It’s that simple.

Dan Gorenstein
University of Texas health economist Bob Town joins us with a little hospital consolidation history lesson. So Bob, in the 1990s, we’re seeing a huge wave of mergers, right. And one of the hospitals leading the way is Sutter. In 1999, it’s moving forward with another big purchase: Summit Medical Center, right in their backyard. But even back then, lots of people were worried these deals would lead to higher prices. So how did Sutter and Summit sell the marriage to the skeptics?

Bob Town
Summit and Sutter claiming that this merger will lead to efficiencies. They’re going to be a better hospital system, patients will benefit because the quality of care will be better, and costs will go down. So this will be a win-win for everyone. That’s how they’re pitching it.

Dan Gorenstein
And how are the state and federal regulators looking at this proposed merger? Are they worried about it?

Bob Town
They’re very worried.

News tape
Critics are calling it bottom line medicine.

Bob Town
Both the attorney general for California is looking at this and the FTC is looking at this transaction at the time.

News tape
Attorney General Bill Lockyer filed suit to block the merger, saying it would hurt consumers.

Bob Town
The source of their concern is that these are hospitals that are located only a couple of miles apart.

Dan Gorenstein
So here’s the state AG deciding to go after this. And this merger looks like mergers federal regulators, the Federal Trade Commission and the Department of Justice, are also pursuing in the ’90s. They look like slam dunks but the AG loses that Sutter-Summit case, and the FTC and DOJ go 0 for 7 in other suits around the country. Bob, you were an economist at the DOJ, back then. What was going on?

Bob Town
The legal reasoning varied by each case. But the underlying sentiment, at least in my view, is that hospitals are looking out for the community’s well-being…

Archive news program
Around the clock and around the calendar, hospitals are at your service…

Bob Town
That they are not going to increase prices. Many of these institutions are run by religious organizations. And you have the CEO of the hospital system who’s a nun on the stand, arguing that, you know, they’re not going to raise prices. It’s pretty compelling.

Archival news program
That’s our business here at the hospital, to be ready to take care of you whenever you get here. That’s our job.

Bob Town
And so there was a sense that these institutions are part of the community, and we’re going to support them and they’re not going to do us harm.

Dan Gorenstein
It’s also the decade insurers started putting in lots of incentives to nudge consumers to seek out the lowest cost doctors and hospitals, which hospitals claimed had them bleeding money. They argued they needed to merge to level the playing field. So Bob, let’s pick up the story. All these controversial hospital tie-ups go through. And then the Federal Trade Commission, decides to do a little look back something they call a merger price retrospective.

Bob Town
Yeah, so they went back and looked at what happened to hospital prices in these cases and other mergers that happened that they might not have challenged but thought about challenging in the past. And the results of those cases were that many of these hospital mergers led to significantly higher prices. So all these kind of arguments that the hospitals had been making, that they’re not going to raise prices, there’s plenty of competition, they’re only looking out for the community, that clearly wasn’t the case.

Dan Gorenstein
So lawyers and economists at the Department of Justice and FTC feel vindicated by this analysis, and then they go back to court. This time they argue that the judge should break up a previous merger in Evanston, Illinois, a deal that had led to huge price hikes.

News tape
An administrative law judge expects to hear closing arguments today in an antitrust case involving the merger of two North Shore hospitals.

Bob Town
So this is the first time that the courts agreed that prices rose because of a hospital merger. Now, it was clear evidence that hospitals do in fact use their market power to lead to price increases. And that was a sea shift.

Dan Gorenstein
A sea shift that led to the FTC flipping that losing streak. Since the Evanston case in 2005, federal regulators have halted virtually every merger they’ve challenged.

So bottom line if a couple of hospitals in my area, I live in Philadelphia, say they want to merge, how should I be thinking about this?

Bob Town
You should be very concerned. It doesn’t mean that the merger will be bad, but you should be very concerned because competition may go down in a significant way, which could lead to price increases, which will lead to higher premiums, which will lead to either lower wages or higher premiums.

Dan Gorenstein
Bob, what’s the most optimistic thing we can say about this legacy of these mergers?

Bob Town
Probably the most optimistic thing we can say is that they probably didn’t harm the quality of care that we receive, at least didn’t harm it a lot. In individual cases, the quality of care may have gone up, but if you had to take a guess of what the impact was, it’s probably slightly negative. But that’s probably the most positive thing you can say is that it really didn’t harm too much the quality of care.

Dan Gorenstein
And yet, we continue to see about 100 hospital deals a year on average. Sutter did not respond for comment by deadline, but the American Hospital Association maintains these mergers serve patients and the community.

Rick Pollack
Mergers aren’t about market power. They’re really all about efficiencies.

Dan Gorenstein
The AHA just last month got on the phone with reporters to discuss discussing their latest report, which paints a much brighter picture about mergers. AHA President Rick Pollack highlighted that these deals bring cutting edge technology, ensure that docs are up to date with best practices, and invest more money to provide better care in the community. And all that, he argued, means better health and fewer deaths.

Rick Pollack
Patients benefit from mergers because mergers actually decrease costs. Mergers enable more widespread use of best practices, which leads to statistically significant reductions in rates of readmission and mortality.

Dan Gorenstein
Hospitals are convinced these mergers are good. But when we here at Tradeoffs, look at the evidence, it’s pretty one-sided. The research overwhelmingly disputes hospitals’ claims and shows that when it comes to prices, mergers lead to increases not decreases. As for the other claim, that the deals improve care, there’s little to show for that too.

And that’s the backdrop for the case the California Attorney General Xavier Becerra brought against Sutter last year.

Xavier Becerra
We intend to protect competition in the health care market here in California and to protect patients.

Dan Gorenstein
The case isn’t about Sutter merging with other hospitals. The AG is accusing Sutter of abusing its market power, using its dominance to dictate contract terms with insurers and employers that are anti-competitive, ultimately illegal.

Xavier Becerra
The consequences of these practices for Northern California families are and have been real.

Dan Gorenstein
Sutter is a leader in the hospital industry, which is why so many of us in health care have watched this case, popcorn in hand. In a moment, how this lawsuit may mark a turning point in the evolution of mega hospitals. You’re listening to Tradeoffs.

Theme music

Dan Gorenstein
Now that we understand how we got to this point with hospital mergers and Sutter in particular, let’s bring back Jaime King from UC Hastings. Jaime, we talked about how everyone’s watching this case. And both sides, Sutter and the California Attorney General’s Office, seemed pretty confident in their cases. And then all of a sudden, they settle. Let’s start with Sutter. Why would Sutter want to settle? Is this just about saving money?

Jaime King
So I think what was at stake for Sutter, I mean, certainly money was on the line. There was $2.7 billion being requested by the plaintiffs. But more than the money, the case was going to bring out into the public, potentially, a lot of their contracting practices, and a lot of their pricing practices, and health care provider organizations have worked very hard to keep those private and kind of hidden under the radar. And so the idea that this would expose and bring to light some of those practices, I think, would be very detrimental to them.

Dan Gorenstein
And what about the attorney general? If he thought he had such a good case, and we know that there’s growing frustration over the price of health care, why would he settle this instead of, you know, going after this source of potentially a very big problem in California?

Jaime King
Well, so here’s where I can only speculate right? Because the details of the settlement have not been made public. But what I would say is that the AG might settle if they got what they wanted. So one of the things, the attorney general was not asking for any damages, they were not asking for any money. They just wanted Sutter to stop engaging in these contracting practices and to basically not enforce any of the terms in those contracts. So if Sutter agreed to that, then the AG gets what they want and they don’t have to spend, you know, the next two to three months trying a very rigorous case.

Dan Gorenstein
As you said, we won’t know the details of the settlement until early next year. But how much do you think the actual agreement will matter? What’s at stake?

Jaime King
I think a lot turns on what’s in that settlement. I think that if it appears that Sutter generally won, I think we will absolutely see a continuation of these types of practices. They may become even more hidden. I think if it appears that the AG won, I think it will inspire other attorney generals to continue to bring those those cases, and it will inspire health systems to stop putting those into their contracts.

Dan Gorenstein
This is the second major settlement agreed to by a big consolidated health system in the last year. Atrium Health in North Carolina was also sued over similar practices that settled last November. Do you think this is sort of a foreshadowing for what’s to come?

Jaime King
So turns out there’s a lot of different options for state policymakers that want to try and make a difference in these markets, and litigation is one very important and effective tool. But there’s also regulation, legislation, and I think states are going to have to push on all fronts.

Dan Gorenstein
Now I know Maryland is trying to set a cap on how much hospitals can increase prices every year, but it hasn’t had a huge impact. And outside of that, there’s not much that lawmakers have done. Do you actually think we’re going to start seeing states regulate hospital prices?

Jaime King
In reality, do I think that states are going to pass price caps on providers? I think we’re inching in that direction. I don’t know if we’ll ever get there. We may see Medicare for All, we may see a massive federal public option that comes in, but we’re definitely seeing states start to set prices in certain areas, whether it’s through surprise billing laws or it’s for their state employee benefit plan that is paying providers a percentage of Medicare, and that seems to be a direction that a lot of states have interest in. But I definitely think that if we are not able to control costs, we will start to see states pushing on that.

Theme music

Dan Gorenstein
Even if states do start legislating and regulating hospital prices, which is a long shot, economist Bob Town is not optimistic it would make that big of a difference in the end.

Bob Town
I think it’s at the margins. I think broadly, the train has left the station and it’s going to be very, very difficult for us to lower hospital costs.

Dan Gorenstein
Everyone is concerned about high health care costs getting even higher, and hospitals are a big part of the equation. They receive one out of every three dollars spent on care, and hospital prices have risen rapidly over the past decade. As we’ve heard today, 30 years of mergers and market consolidation have given us giant hospitals with little improved care and higher prices. Not all deals have led to price hikes, but a lot of them have, leaving regulators and patients holding the bag.

I’m Dan Goldstein, and this is Tradeoffs.