In a high-stakes fight over healthcare costs, insurance giant Blue Shield of California contends that a major hospital chain is trying to hide some of its business practices from public scrutiny.
The dispute has prevented Blue Shield and Sutter Health, which runs 23 hospitals in Northern California, from reaching a new contract that could affect numerous employers and consumers. Their previous agreement expired Dec. 31.
Blue Shield said state regulators were notified and it's informing about 280,000 health plan members that they might lose network coverage with Sutter doctors and hospitals.
Health plans and hospital systems frequently bicker over rates and a temporary impasse can be part of the negotiations. But Sutter has already drawn attention for its high prices and market power.
California Atty. Gen. Kamala D. Harris has been investigating the conduct of Sutter and other big hospital chains and whether their market clout has harmed consumers. Last year, a union trust representing more than 60,000 grocery workers and dependents sued Sutter in state court, accusing it of imposing anticompetitive terms and "illegally inflated prices."
Blue Shield has taken a similar stance against Sutter, saying its prices are up to 30% higher than other hospitals. The San Francisco insurer said Sutter is insisting on mandatory arbitration for all disputes. Such a policy would block the health plan and employers from suing Sutter for anticompetitive practices in open court, Blue Shield said.
"Sutter has a long history of driving up the cost of healthcare," said Blue Shield spokesman Steve Shivinsky. "Now they are seeking new contract terms that would insulate them from any potential litigation."
Sutter said arbitration is commonly used to resolve disputes and Blue Shield's demands would diminish patient care. The Sacramento-based health system also said state data show that its charges per hospital discharge are at or below its peers.
"Blue Shield is demanding significant rate rollbacks as well as several changes to language that has been in our contracts for years," Sutter spokesman Bill Gleeson said. "Rate rollbacks of the magnitude that Blue Shield demands would have a negative impact on the level of healthcare services we offer."
This latest tussle comes amid growing concern nationwide about the toll from industry consolidation. Prodded by the federal health law, hospitals have been merging and buying up more physician practices, surgery centers and clinics.
Industry officials tout the efficiencies that can be gained and the ability to better integrate the fragmented care patients receive from multiple providers.
But some health policy experts and employers say care coordination can be achieved without consolidation and such tie-ups merely serve to reduce competition.
James Robinson, a UC Berkeley professor of health economics, published a study in October showing hospital ownership of physician groups in California led to 10% to 20% higher costs overall for patient care.
"Consolidation can create better coordination and efficiencies in healthcare," Robinson said. "However, it can also create opportunities for higher prices."
In April, the United Food and Commercial Workers and its Employers Benefit Trust sued Sutter in San Francisco Superior Court.
The suit said Sutter's hospital prices in San Francisco have exceeded those of competitors by as much as 56%. It also said an overnight hospital stay at Sutter hospitals in San Francisco or Sacramento cost at least 38% more than a comparable stay in the more competitive Los Angeles market.
"Sutter's illegal conduct has resulted in inflated prices that far exceed the prices its hospitals could charge in a free, competitive market," the union trust said in its complaint.
Sutter said the allegations in the complaint are inaccurate and "we fully expect to win the lawsuit on the merits."
On the state inquiry, Sutter said "we have provided information about our contracting practices in response to the attorney general's request."
In the first nine months of 2014, Sutter reported operating revenue of $7.24 billion and net income of $228 million.
The network lapse won't affect patients immediately. Blue Shield and Sutter said they have agreed to a six-month transition period for people with preferred-provider organization, or PPO, plans. HMO members assigned to a Sutter primary-care doctor would be reassigned to a new medical group effective April 1, according to Blue Shield.