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.
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