Sutter vs. the people

Attorney Richard Grossman represents a group of 1,500 health plans in a class-action suit against Sacramento-based Sutter Health, alleging that the industry giant has been illegally overcharging patients for more than a decade. The case is being closely watched by policymakers across the country as hospital consolidation increases and prices continue to rise. Last November, it was discovered that Sutter destroyed 10 years of records after the lawsuit was filed. SN&R publisher Jeff vonKaenel visited Grossman in his San Francisco office for an interview.

What is significant about this lawsuit?

This case is extraordinarily important, because it’s a documented fact that the cost of hospital health care in Northern California exceeds the cost for the same health care in Southern California by 30 to 40 percent. When I learned that that was the case and examined what was likely to be behind it, I determined that there is no explanation for that kind of price disparity other than anti-competitive behavior that restrains price competition here and allows hospital providers to increase their prices without discipline. The discipline that we all accept and rely upon to keep prices low and quality high. And that’s competition in our marketplace.

Without that competition, there is no reason for competitors to keep their prices at the lowest possible rates and no reason for them to increase their quality. With competition, they have tremendous incentive to do what our economic system requires, which is provide the best quality at the lowest possible price and, if you fail to do so, you do so at your peril.

Who are you representing in this case?

As of last August, I represent all self-funded health plans—employers that pay for the health care of their employees directly without purchasing insurance to cover those costs. That’s how half of the individuals in Northern California—for that matter, across the country—obtain their health care coverage.

What are you alleging in the lawsuit that Sutter did to allow their health care costs to go up 30 to 40 percent?

Sutter’s anti-competitive conduct is extremely treacherous. What they did was they entered into anti-competitive and illegal contracts with all of the major health insurance companies that provide health care coverage in Northern California. And those contracts require the following: One, that if you utilize one Sutter Health provider, one of their hospitals or one of their medical practices across the state, you must utilize all of them in your network. And if you fail to do that, you will pay a huge pricing penalty.

So, for larger employers with many locations, they have to include Sutter in their entire network. Is that correct?

Sutter is so large that they have providers, either hospitals or medical practices, in locations where they are the dominant provider. And it is not commercially feasible to put together a provider network that does not include Sutter—either their medical practice or their hospital in that location. In other locations, there are many alternatives, and you could choose to go to a higher-quality or lower-cost hospital or medical practice. But Sutter says no, you cannot exclude our higher-cost or lower-quality provider in that area and encourage your members to go to a competitor that may be lower-cost and higher-quality.

And does the lawsuit also allege that Sutter bought different hospitals to set up the situation, so they became the only provider in an area?

That is the history of Sutter. We have not alleged that Sutter’s acquisition of hospitals or medical practices is by itself illegal. One could possibly make that case, but that is not part of our case. What we’re saying is that they used the leverage they obtained by acquiring must-have hospitals in certain locations or must-have medical practices in other locations to force inclusion of all of their hospitals and all of their medical practices.

In other words, they’re saying to the health insurers and to all of the health plans, you may not exclude our higher-priced or lower-quality providers in locations where there are better alternatives. That is what we refer to as “all-or-nothing.”

Secondly, they have provisions that make it difficult or impossible to have a tiered system. So a health plan might decide, all right, we’re happy to include Sutter’s facilities in our network, but we would like to provide financial incentives to our members to choose a higher-quality or a lower-cost hospital. And Sutter prevents that from occurring through their contracts with the health insurance companies.

And thirdly, Sutter makes its pricing secret. They refuse to allow health plans to know in advance what the prices are for the services they provide.

Is that a practice somewhat unique to Sutter?

There are other health providers that keep their pricing secret. But certainly in this context, it’s anti-competitive.

What is the possible justification for a nonprofit health care system not to be transparent with their prices?

There’s no justification. And Sutter is a nonprofit in name only.

They are a nonprofit in their tax status.

That is absolutely correct. The truth is that unlike the rest of us, Sutter obtains enormous amounts of government services without paying taxes. In other words, other taxpayers must subsidize the cost of all of the services that Sutter’s 24 hospitals and multiple medical practices obtain from our state and local governments. At the same time, while they claim to be a nonprofit, their revenues far, far exceed their costs, so that they have surpluses—what would be called profits in any other context—in the hundreds of millions of dollars.

What happens with those surpluses?

Well, Sutter uses them to acquire more facilities for their conglomerate. Sutter uses them to pay multimillion-dollar salaries to dozens of their executives. Sutter uses them to subsidize, as alleged by the attorney general, their effort to roll out an HMO to compete with Kaiser. According to the attorney general’s complaint, Sutter is losing money in that effort and is subsidizing those losses with the overcharges that it charges the rest of us.

The California Nurses Association estimates that Sutter’s nonprofit status enables them to have a $500 million tax savings while providing only a couple hundred million dollars in charity work.

I can’t confirm that. One thing I do know is that various studies have determined that Sutter’s contributions to charitable care on a per capita basis are less than the for-profit hospitals that it competes with.

And they’re counting the reduced amount that they receive for Medi-Cal patients as a charitable donation.

Right.

In terms of possible damages—how long a period are you looking at, and what’s the dollar amount?

Sutter has, since it has instituted these anti-competitive policies and contracts, been able to raise its prices, and that has led to a substantial overcharge. The amount we currently estimate, since 2004, is just north of $700 million in overcharges. If we can demonstrate at trial that these overcharges are attributable to Sutter’s anti-competitive policies, we can recover that $700 million. In addition, because our state Legislature has for over 100 years valued the principles of our competitive and free market economy, the antitrust laws provide that any overcharge that Sutter has imposed is automatically multiplied times three. As a consequence of that, if we are successful, we will recover possibly over $2 billion.

The trial is set for June. We had a case management conference with [San Francisco Superior Court Judge Curtis E.A. Karnow] earlier this week, and he said that that trial date is set in stone. There will be no delays. We’re going forward with it.

So the $700 million—two years from now, or whenever it is settled, will the amount of the settlement be increasing, or is it set in stone?

Sutter continues to overcharge, and the $700 million that we estimated is only based upon the data that we were able to obtain through subpoena from the insurance companies, as of last year. We’re continuing to get more data for more recent time periods from the insurance companies. And you’re correct, we will a get a recovery for the overcharged as since close to the trial date as we possibly can.

The Attorney General announced last week that he is filing a similar kind of lawsuit, and the suits being tried together. So talk a little bit about that.

The Attorney General has the ability to conduct an investigation where they can subpoena documents and interview witnesses before they even filed a complaint. And in this case, the Attorney General was exceedingly careful in conducting a thorough investigation over a period of six years to confirm that the allegations in our complaint are accurate. They concluded that they were, and that the attorney general needed to join in the fight against this anti-competitive behavior. They filed a lawsuit several weeks ago, and they have asked that the court to combine their case with ours for purposes of trial and trial preparation. The court is presently considering that request. Judge Karnow indicated that there would be an expedited a consideration of that request so that a decision could be made quickly.

Do you think that’s going to happen?

I think it should happen. The attorney general’s complaint is a mirror of the complaint that we filed four years ago, so it doesn’t make sense for the court to have to try those allegations in two separate trials.

Is Sutter Health fighting the joining of the cases?

Sutter has indicated that they will oppose it. I don’t know what their precise position will be.

If the cases are heard simultaneously, will there be a ruling on your case and then a separate ruling on the AG’s case?

It’s being tried to the same jury, so it is likely that there would be a single verdict. The jury would decide, number one, whether the overcharges should be refunded, how much those overcharges were and what, and that Sutter is liable for violating the antitrust laws. If that occurs, the judge will then be asked after the jury trial to also provide injunctive relief that would require Sutter to stop engaging in this anti-competitive behavior.

Would that mean the all-or-nothing practices …

So they would be forbidden from requiring in their contracts with insurers from engaging in these all-or-nothing contracting practices; they would be forbidden from banning financial incentives to encourage consumers to go to better quality and lower cost hospitals. They would be forbidden from hiding their pricing so that consumers are unable to compare those prices with other hospitals. That’s the idea. The attorney general and the plaintiffs in the class action have a variety of very specific proposals that they would ask the court to impose to make sure that Sutter cannot engage in those practices again.

The most bizarre thing I think of in this case is the destruction of records. Give me some background on that.

A year after we filed the lawsuit, at a time when Sutter was under a request for production of documents that was served upon them, Sutter’s in-house lawyer, Daniela Almeida, and Sutter’s vice president in charge of managed care, Melissa Brendt, according to sworn testimony, destroyed 10 years worth of records during that critical period during which Sutter implemented these anti-competitive restraints.

And you already had requested those records, correct?

We’d already requested them. So they’re very clear rules in court. Once a lawsuit is filed, you are immediately without even a request. You are immediately required to preserve all documents and all evidence on top of that. We had already requested the documents that were destroyed under the rules that allow us to obtain those documents under what would be the equivalent of a subpoena.

It’s illegal for anyone to destroy documents that are evidence in a pending civil litigation matter. It’s also, under the state bar rules, unethical for an attorney to be involved in this.

I don’t practice law, but this seems really unusual, that a non-profit health care system with advice from their counsel destroyed records.

It is extraordinarily unusual for a non-profit health care system with with counsel to destroyed records. I mean, it’s a cover up. There’s no other word that can be utilized to describe what happened here. They attempted—unsuccessfully, because we have other evidence of their conduct—but they attempted, through the destruction of over 190 boxes of archived records, to cover up their behavior. Those boxes were in storage and were slated for destruction in 2035. They purposely moved up the destruction date by 20 years. We alerted the court to this illegal cover-up attempt. Judge Karnow expressed his extreme concern about that, and now there will be consequences for Sutter

And the consequences are…

Well, there are two things. I mean, what we would like, if it was possible, would be to somehow restore the evidence that was destroyed in the cover-up. The second best alternative is for the court to force Sutter to restore its email backup tapes in the hope that some of the emails might have included some of the documents that were destroyed. The judge has ordered Sutter to restore their email backup tapes, at some expense, for a portion of the period. The judge also is considering instructing the jury at trial that they can draw whatever inferences they feel are appropriate from the fact that Sutter deliberately destroyed 10 years worth of evidence. In this case, the judge has not made a decision on whether he’ll do that. He’ll decide that just before trial. But he’s indicated he will consider instructing the jury to do that.

So what happens to those people? Do they get fired or disbarred?

I am unaware of any consequences to them individually. If there were some internal consequence. I don’t know about it.

This just seems so outrageous. If I get a bill from Sutter and I get mad and break a window, I’d have to go to jail. They destroy all these records, and the judge may decide to instruct the jury … ?

That’s the current state of affairs. Correct. Judge Karnow is being very careful and is doing his best to provide a remedy. But by definition, any remedy he could provide is unsatisfactory because there’s nothing he can do to make the destroyed documents be restored. They’re gone. Jeff, this is a company that deliberately exploits the sick and the elderly, pregnant women and young children by overcharging the sick and the elderly for the health care services that they provide. One has to wonder why anyone would interest their health care to this company. One has to wonder what self-respecting doctor would want to work or be affiliated with a corrupt, unethical company like Sutter Health.

If the jury says, “Nice try Rick, but we’re with Sutter on this one,” then you’re out all your expenses on this. Correct?

We will be compensated for work only if we are successful. And our compensation will be determined by the court, not by anyone else. Most lawyers, particularly lawyers that work for large corporations, get paid every month. Others prefer to be paid only if they provide a benefit for their clients. And that’s how I choose to practice law.

So you’re obviously a betting man. When do you think, if you’re going to predict, when this will be finally done?

I’ve had cases like this that have gone on for 14 years. In those cases, the efforts of the defendant to delay the outcome only harm them. In the end, they ended up paying more than they would have if they had sought to resolve it earlier.

If they think that this would go on this much longer, and if the damages go up proportionally, that would be a pretty big number.

Sutter is only harming itself by prolonging the outcome of this. They would do far better if they acknowledged that they need to change their practices and attempted to establish some credibility with the public that they have ripped off for the last 15 years. There are people—doctors and nurses that work at Sutter hospitals every day—that are trying their best to provide health care to their patients. And that’s a good thing. But they work for a treacherous conglomerate that seeks to profit from anti-competitive behavior at the expense of the sick and the elderly.