Bay Area companies say Sutter Health is strong-arming them into a contract that would help the medical system secure its power over prices and potentially raise the cost of medical care for their employees in the future.

Dozens of companies received a letter in recent months, via their insurance administrators, asking them to waive their rights to sue Sutter. If they don’t, the letter says, the companies’ employees who get care at Sutter will no longer have access to discounted in-network prices.

“In both choices, Castlight and our employees lose,” says Jennifer Chaloemtiarana, general counsel for Castlight Health, a tech company in San Francisco that received one of these letters this spring. She thought it was strange.

Castlight is self-insured, meaning it hires an insurance company —  in their case, it’s Anthem Blue Cross — to manage the administrative details of its health coverage. But when an employee gets sick, Castlight, not Anthem, pays the bill. Anthem basically functions like a middleman, including negotiating discounted prices with providers like Sutter.

“We don’t have a direct relationship with Sutter Health,” Chaloemtiarana said. “So the letter was unusual in that regard because it asked us to make certain legal agreements with Sutter.”

The letter is from Anthem, but it says if Castlight has any disputes with Sutter, Castlight has to agree to arbitrate with Sutter Health. It can’t sue. And if it doesn’t sign, Castlight’s employees will lose their in-network medical rates. As a lawyer, this makes Chaloemtiarana uncomfortable.

“Arbitration provisions are pretty common among companies, but it usually occurs when you can sit down at a table and have a discussion and negotiation,” she says. “This has just been handed to us as a one-sided, unilateral provision.”

As an employer that pays its employees’ medical claims, Castlight doesn’t like the idea that it will never be able to challenge Sutter over its prices in open court. To Chaloemtiarana, waiving that right would only help strengthen the power of Sutter’s “already dominant” provider network.

Sutter is the largest medical system in Northern California, with roughly 30 percent market share of hospitals, surgical centers and doctors’ groups, according to a data analysis by Christopher Whaley, a research economist at UC Berkeley. For comparison, Whaley says, the largest medical system in the Los Angeles area has 5 percent market share.

Economists have long argued that Sutter uses this power to charge more for its services. Sutter’s hospital prices are about 25 percent higher than other hospitals around the state, according to a recent study from the University of Southern California.

“Having a very strong, dominant provider system will reduce choice for our employees,” Chaloemtiarana says. “We want them, over the long term, to have choices in high-quality, low-cost providers.”

Not signing the letter, she says, allows her company to “maintain our flexibility in fighting against what we consider to be difficult, anti-consumer provisions in provider networks.”

Sutter rejects these claims and the research findings.

“Recent academic studies have been one-sided and misrepresent the competitive environment of Northern California,” said Bill Gleeson, vice president of communications for Sutter, adding that the studies “unjustly inflate the so-called market share of Sutter. There’s competition all around.”

Castlight and the other self-insured companies believe they’re receiving this letter because of a lawsuit Sutter is facing from UFCW & Employers Benefit Trust (UEBT), which funds health coverage for 60,000 members of a grocery workers’ union. UEBT is alleging that Sutter uses unfair business practices to maintain its power over prices.

“They’ve put a stranglehold on the competitive process in the Northern California health care market,” said Richard Grossman, UEBT’s attorney. “And therefore they’re free to raise prices without limit, and they have.”

Sutter rejects these claims, too, and argued that the health trust should have to arbitrate its disputes behind closed doors. The company said that the arbitration agreement Sutter has with Blue Shield, the trust’s insurance administrator, also applies to the trust. But the judge in the case disagreed and so did an appeals court.

“My client had never agreed to arbitration, had never seen a contract that included an arbitration clause. And so we opposed that,” said Grossman. “The judge agreed with us and said, ‘Sutter you cannot force them into arbitration.’”

Grossman says that’s why Sutter now wants other self-insured companies like Castlight to actively sign the arbitration agreement and give up any future right to sue over prices or claim anti-competitive practices in open court. Again, if they don’t, their employees will have to pay higher out-of-network rates at Sutter hospitals and doctors’ offices.

“They want to force any disputes into confidential arbitration so their misdeeds cannot be exposed in a public courtroom, as is our constitutional right,” Grossman says.

To Sutter, the goal of the letter is transparency.

“We’ve taken a very proactive, very transparent approach, to making sure that the health plans provide these important clients of theirs with all the key terms of their agreements, and that includes rates,” says Gleeson.

Pressed to comment on the decision Sutter is asking self-insured companies to make — to give up their right to sue or give up their lower prices for medical care — Gleeson said companies “can’t accept deep discounts and make up their own rules.”

Castlight’s Jennifer Chaloemtiarana says there’s nothing transparent about one company forcing another company to sign a contract it hasn’t negotiated.

“Having been put in this position without any activity or triggering event of our own feels very unfair,” she says.

So Castlight has made the difficult decision not to sign the letter — even though it’s going to have negative consequences for its employees who go to Sutter for care.

“They can stay with that provider and face substantially increased prices. Or, if they feel that they cannot handle that financial burden, they’ll have to find another provider,” she says. “In many cases, that’s going to mean traveling further, or moving to another provider network entirely.”

Castlight itself is in the business of trying to make health care more transparent — it makes a software platform where employees get information about their health benefits, service costs and quality, so they can make better decisions about their care. Chaloemtiarana says, out of principle, and for the long-term mission of improving health care, it has to “stand up against” Sutter.

Sutter’s Gleeson says if companies don’t sign the letter, Sutter will ask health insurers to find another way to convince companies to agree to the arbitration terms.

Arbitrate or Else: Sutter Health Drives a Hard Bargain 16 August,2016April Dembosky
  • Patrick Pine

    Nice article. This is nearly identical to what is happening in North Carolina with Cardinal Health Systems except the US Dept of Justice and the North Carolina AG are suing Cardinal. See article below. Would like to see a similar case brought here in California.

    DOJ Sues Carolinas HealthCare Over Steering Restrictions
    HealthLeaders Media News, June 9, 2016

    Federal and state officials claim that the healthcare system used its market power to leverage steering restrictions in its contracts with major insurers, resulting in higher costs for consumers.

    Federal and state officials in North Carolina on Thursday filed a civil suit against Charlotte, NC-based Carolinas HealthCare System, alleging that the state’s largest healthcare system used its market power to dictate “steering restrictions” in contracts with commercial health insurance companies that ultimately led to higher costs for consumers.
    In a complaint filed in U.S. District Court in Charlotte, the U.S. Justice Department Antitrust Division and North Carolina regulators allege that CHS used the 50% market share of its nine acute care inpatient hospitals in the Charlotte area “to require steering restrictions in its contracts with every major insurer. ”
    “These provisions,” the complaint continues, “have prevented insurers from, among other things, introducing health plans that encourage patients to use medical providers that offer lower-priced, higher-quality services.”
    “Americans should be able to choose a healthcare provider that gives them and their families the most cost-effective and appropriate treatment,” Principal Deputy Assistant Attorney General Renata B. Hesse, head of the Justice Department’s Antitrust Division, said in prepared remarks.
    “This lawsuit will stop a dominant hospital from using its market power to undermine its smaller competitors’ efforts to attract patients by competing on the price and quality of their services.”

    CHS Responds
    In a statement released to the media Thursday, CHS said it will contest the allegations, which the health system characterized as “a dispute over certain language” in contracts with insurance companies.
    “Our arrangements with insurers are similar to those in place between insurers and healthcare systems across the country. We have neither violated any law nor deviated from accepted healthcare industry practices for contracting and negotiation,” CHS said.
    “In fact, we have been applauded by the United States government for the quality care and cost reduction programs we’ve implemented, programs it hopes to model in other parts of the country.”
    “Carolinas HealthCare System is strongly committed to providing accurate and useful information to consumers and patients as it relates to cost, quality and overall value of the care they receive. We remain dedicated to making healthcare more affordable, while ensuring that we fulfill our mission. We provide financial assistance to patients in need, as well as medical education and research in the communities we serve. These and other mission-based service totaled over $1.65 billion or 19% of total operating expenses in 2015,” CHS said.
    In March, 2015, a contract between CHS and UnitedHealth expired, effectively rendering all Carolinas HealthCare facilities and physicians “out of network” for United Healthcare customers. They agreed to a new contract the following month.
    CHS is the largest healthcare system in North Carolina and one of the largest not-for-profit healthcare systems in the United States. The health system operates 39 hospitals in North Carolina and South Carolina and reported net operating revenues of $8.7 billion in 2014.


April Dembosky

April Dembosky is the health reporter for The California Report and KQED News. She covers health policy and public health, and has reported extensively on the economics of health care, the roll-out of the Affordable Care Act in California, mental health and end-of-life issues.

Her work is regularly rebroadcast on NPR and has been recognized with awards from the Society for Professional Journalists (for sports reporting), and the Association of Health Care Journalists (for a story about pediatric hospice). Her hour-long radio documentary about home funerals won the Best New Artist award from the Third Coast International Audio Festival in 2009.

April occasionally moonlights on the arts beat, covering music and dance. Her story about the first symphony orchestra at Burning Man won the award for Best Use of Sound from the Public Radio News Directors Inc.

Before joining KQED in 2013, April covered technology and Silicon Valley for The Financial Times, and freelanced for Marketplace and The New York Times. She is a graduate of the University of California at Berkeley Graduate School of Journalism and Smith College.

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