Companies & Industries August 26, 2010, 5:00PM EST

Sutter Health's Market Power Is Questioned

Insurers say the Northern California hospital chain uses its market clout to raise prices

By Peter Waldman

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After Dr. Mark Logsdon tore a ligament in his knee skiing at Lake Tahoe in March, he returned home to Sacramento and had an MRI scan at Sutter Davis Hospital. Sutter's price for the knee scan was $1,271, payable by Logsdon and his insurer. The same MRI at a local office owned by Radiological Associates of Sacramento would have cost $696, or 45 percent less.

Logsdon didn't know something his insurer does: Sutter Health, the nonprofit that owns Sutter Davis, charges 40 percent to 70 percent more than its rivals for a typical procedure, and it requires insurers to keep its rates secret. Sutter, with 2009 revenues of $8.8 billion, can charge these prices because it has acquired more than a third of the medical-care market in the region from San Francisco to Sacramento. The company has taken over more than 20 hospitals in the past 30 years, according to executives at Aetna (AET), Health Net (HNT), and Blue Shield of California who asked not to be named because their agreements with Sutter ban such disclosures. The executives say operating so many of an area's most popular hospitals, doctor groups, and testing facilities gives Sutter the ability to stare down insurers and employers.

The pricing power of local hospital systems has received little attention in the national health-care debate, says Stanford University economist Alain Enthoven. In 2009, as consumer prices fell for the first time in 54 years, the U.S. health bill rose 5.7 percent, to $2.47 trillion, a record 17.3 percent of the economy. "Provider consolidation is driving up health-care costs," Enthoven says.

Sutter Chief Executive Officer Patrick Fry says his company conducts itself properly in a competitive envi ronment. "I don't see Sutter Health as having market power, given the choices that employers can make," he says. "The market has a lot of room to make a lot of decisions."

Federal investigators in five states—Connecticut, Massachusetts, Ohio, Pennsylvania, and New Hampshire—are probing proposed hospital takeovers and consolidating medical practices for evidence of antitrust violations. "The enforcement pendulum has now swung back to where it should be," says Matthew J. Reilly, assistant director of the Federal Trade Commission's competition bureau.

Sutter spokesman William Gleeson says Sutter knows of no antitrust investigation of the company. While it may have higher "unit" prices than its competitors, it is not the most costly for patients over the long run because its integration of hospitals and doctor groups allows it to provide more efficient care, says CEO Fry.

The U.S. has 5,800 hospitals, divided about evenly between nonprofits and for-profits. Nearly 3,000 changed owners from 1994 through 2009, says research firm Irving Levin Associates. Most were rolled into regional chains like Sutter.

The new health-reform law aims to achieve $500 billion in savings over the next decade to help pay for extending coverage to 32 million uninsured Americans. Yet it doesn't address the problem of market concentration—and may make it worse, says Dr. Robert Berenson, a physician and analyst at the Urban Institute. The clout of hospital and physician groups in California is a "cautionary tale for national health reform," he adds, because incentives in the reform law to improve treatment by promoting doctor-hospital alliances could strengthen providers' bargaining leverage.

Higher prices for medical services stemming from hospital mergers that took place from 1997 to 2006 add $12 billion to annual health costs, according to a study last year by Cory Capps, a former Justice Dept. economist. Capps, now a private consultant, says that because of the ability of powerful hospitals to encourage the use of additional medical procedures and the merging of doctors' groups, he might have underestimated the impact by $6 billion to $10 billion annually.