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

Sutter Health's Market Power Is Questioned

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Illustrations by Matt Owens

Basic economic theory suggests that competition should narrow big price gaps for the same service. In the U.S., which spends more on health care than any other nation, Sutter and other large local providers show why the theory fails in a system where insurers or third parties foot most of the bills. As it grew, Sutter pursued a strategy to raise prices and make itself "indispensable" to insurance plans, internal company documents produced in a 1999 California state antitrust suit show. Sutter has 24 hospitals, 17 outpatient surgery clinics, and a 3,500-doctor network, making it the largest provider in an 11-county region that is home to 10 million people.

Sutter boasts 35 percent of the revenue and 36 percent of beds in the region, according to a state database. The tallies of 2008 data exclude Kaiser Permanente, whose hospitals are only available to plan members. "They are able to dictate terms," says Jeff Emerson, head of managed care for Aetna, the nation's third-largest health insurer. "Sutter says to all of its payers, to the best of our knowledge, 'These are the terms by which you will deal with Sutter. Take it or leave it.' "

Some business groups agree. "Instead of leveraging its system to be more cost-effective, we've seen Sutter leveraging its system for monopoly pricing," Peter V. Lee told Bloomberg in May, while he worked at Pacific Business Group on Health, a coalition that includes Chevron (CVX), Walt Disney (DIS), General Electric (DIS), and Wells Fargo (WFC). Lee in June became director of health-care delivery system reform for the federal Health & Human Services Dept.

Sutter charges more than many rivals for a wide range of services, from colonoscopies to births (table), according to prices posted on an Aetna website in May, before they were removed. After the removal, the site responded to inquiries about Sutter prices with the message: "Facility does not permit Aetna to disclose fees." Sutter spokesman Gleeson says the company doesn't allow its prices to be disclosed because the data are often misleading and don't reflect the variables of each patient's case.

Cost never occurred to Logsdon, the Sacramento doctor who wrecked his knee skiing. He says he was "shocked" to discover later that the MRI cost nearly twice as much at Sutter Davis as it would have at Radiological Associates, where he is chairman of the oncology division. He says he went to Sutter Davis for convenience. "I guess I'm a textbook case of why policymakers say they need to make patients feel the cost of these things."

The bottom line: The big hospital chain controls a third of health-care resources in parts of Northern California. Insurers worry that lets it control prices

Waldman is a reporter for Bloomberg News.

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