Antitrust settlement leads Sutter Health’s $613 million operating loss

Sutter Health’s recently announced $575 million antitrust lawsuit settlement has landed in the health system’s latest financial filing, creating a sizable operating loss.

Sacramento-based Sutter reported a $613 million operating loss in the third quarter of 2019, which ended Sept. 30, compared with a $49 million operating gain in the prior-year period. Even though the not-for-profit health system won’t pay plaintiffs in the UFCW & Employers Benefit Trust case until at least mid-2020, the health system is accounting for it now, which is typical in such cases.

The system’s operating expenses increased 22.8% in the third quarter of 2019 year-over-year to $3.9 billion, while operating revenue grew just 1.7% in that time to $3.2 billion. Most of the expense increase was in the “other” category, which jumped from $176 million in the 2018 period to $716 million in the recently-ended period, which the system wrote was primarily due to settlement expense. In the nine months ended Sept. 30, “other” expenses exceeded $1.1 billion, compared with just $568 million in the 2018 period.

Sutter spokeswoman Amy Thoma Tan wrote in an email that the UFCW & Employers Benefit Trust case required thousands of hours of work from highly specialized attorneys. She said Sutter was also served with a number of lawsuits that were found to be without merit.

“Unfortunately, frequent litigation has become the new normal for healthcare organizations like ours, and we must defend ourselves against frivolous lawsuits,” she said. “We would prefer to spend this money on investments that benefit our patients and communities.”

Sutter had been accused in the lawsuit of “all or nothing” contracting practices with health insurers that restricted them from providing low-cost health plan options to California residents. The health system was also accused of setting excessively high out-of-network prices and restricting transparency around cost information, among other things. The settlement agreement includes no admission of wrongdoing on Sutter’s part.

The $575 million settlement amount and terms have not yet been approved by a judge. A hearing on a motion for preliminary approval is scheduled for Feb. 25, 2020. Sutter wrote in the financial filing it doesn’t expect final approval on the settlement until June 2020, which is when the health system would pay out the settlement.

Olga Beck, a senior director with Fitch Ratings, said Sutter’s full-year 2019 results, when they’re released, should contain the full effect of the litigation settlement. She said she doesn’t expect any lingering costs to appear in Sutter’s 2020 finances.

Sutter had delayed the release of its third quarter financials until terms of its preliminary settlement in the UFCW & Employers Benefit Trust case were made public. The stipulations were unveiled Dec. 20. In addition to paying plaintiffs $575 million, Sutter will have to operate under a court-appointed monitor for 10 years with the possibility of a one-time renewal for another three years and cap its hospital charge increases for the next five years, among others.

Sutter generated $9.9 billion in operating revenue in the nine months ended Sept. 30, up 4.4% from $9.5 billion in the prior-year period. Within that, patient service revenue increased 3.6% and premium revenue jumped 9.7%, which Sutter wrote was due to increased membership.

Expenses jumped nearly 12% in that time, from $9.3 billion in the 2018 period to $10.4 billion in the 2019 period.

Although not Sutter’s largest expense category, “other” saw far and away the biggest increase during that time, jumping 101% to $1.1 billion. Meanwhile, supply expenses grew 9% to $1.2 billion, which the health system said was primarily in pharmaceuticals. Salary and benefit expenses grew 4.7% to $4.6 billion and purchased services grew 5.8% to $2.6 billion.

Thoma Tan wrote that another contributing factor to the operating loss was lower income from California’s hospital provider fee program in 2019 compared with 2018.

Factoring in investment income, Sutter’s loss in the nine months ended Sept. 30 shrunk to $162 million, compared with a $261 million gain in the prior-year period.

Excluding investment income, Sutter’s earnings before interest, taxes, depreciation and amortization declined from $738 million to $124 million in the nine months ended Sept. 30 year-over-year.

On the volumes front, Sutter’s admissions grew 0.7% in the third quarter of 2019 year-over-year to about 142,000, even as the number of beds in service declined more than 9%. Emergency department visits were mostly flat in that time, and patient days increased 1.6%. Outpatient revenue as a percent of total revenue has grown from 38.4% in 2016 to 40.9% in the third quarter of 2019.

Sutter operates 24 hospitals and had about 55,000 employees as of Sept. 30, 2019, roughly 35,000 of them full-time.

The announcement of the settlement amount removes a large unknown from Sutter’s operations, Beck said.

“Even though it’s a big number, it’s still a big system,” she said. “At least we have that uncertainty removed.”