A San Francisco Superior Court judge has granted preliminary approval of the $575 million settlement agreement Sutter Health reached in the antitrust case that alleges it drove up healthcare prices in Northern California through anticompetitive practices.
A hearing for final approval of the settlement has been set for July 19, according to the judge’s order issued Tuesday.
Now, class members, or certain self-funded payers in California, will be notified of the preliminary approval and may object to part or all of the settlement agreement.
This preliminary approval comes more than a year after Sutter Health first agreed to settle the case with the plaintiffs, including California Attorney General Xavier Becerra, now nominee for HHS secretary, and a grocer’s union.
To put the settlement and all its elements in motion, it must first be approved by a judge. Tuesday’s order moves the case one step closer to final approval.
That 2019 settlement came on the eve of a court case that was supposed to lay out in open court how the regional powerhouse’s practices led to higher healthcare costs.
Even though the settlement averted a trial, it was designed to force Sutter to change some of these practices. As part of the settlement, Sutter agreed to stop “all-or-nothing” contracting and instead allow insurers and other payers to contract with some, but not all, of Sutter’s facilities.
The settlement is also designed to limit what patients pay out-of-network in an effort to shield them from exorbitant, surprise medical bills.
Sutter Health has tried to delay the $575 million antitrust settlement, citing the fallout from the novel coronavirus that has squeezed providers, including Sutter.
The health system, though battered by the pandemic’s fallout, was still able to post net income of $134 million for 2020, in part thanks to investment income. However, it did report an operating loss of $321 million as expenses outpaced revenue. Sutter said it was launching a sweeping review of its finances and operations as a result.
The litigation was first initiated in 2014 when the grocer’s union, joined by other plaintiff’s, filed suit against Sutter’s practices. It ultimately drew the attention of Becerra’s office.
Four companies that agreed to pay a combined $26 billion to settle claims about their roles in the opioid crisis plan to deduct some of those costs from their taxes and recoup around $1 billion apiece.
In recent months, as details of the blockbuster settlement were still being worked out, pharmaceutical giant Johnson & Johnson and the “big three” drug distributors — McKesson, AmerisourceBergen and Cardinal Health —all updated their financial projections to include large tax benefits stemming from the expected deal, a Washington Post analysis of regulatory filings found.
In one example, Dublin, Ohio-based drug distributor Cardinal Health said earlier this month it planned to collect a $974 million cash refund because it claimed its opioid-related legal costs as a “net operating loss carryback” — a tax provision Congress included in last year’s coronavirus bailout package as a way of helping companies struggling during the pandemic.
The deductions may deepen public anger toward companies prosecutors say played key roles in a destructive public health crisis that kills tens of thousands of Americans every year. In lawsuits filed by dozens of states and local jurisdictions, public officials have argued that the companies, among other corporate defendants, flooded the country with billions of highly addictive pills and ignored signs they were being steered to people who abused them.
Under the terms of the proposed settlement— which is being finalized and will ultimately be subject to federal court approval — the four companies would pay between $5 billion and $8 billion each to reimburse communities for the costs of the health crisis. Plaintiffs who support the proposal say it will resolve a highly complex litigation process and make funds available to communities and individuals still struggling with addiction.
Others including Greg McNeil, whose son became addicted to opioids and died from an overdose, have said $26 billion is only a small fraction of the epidemic’s financial toll and argue the proposal doesn’t include what many family members of opioid victims want the most: an admission of guilt.
All four firms disavow any wrongdoing or legal responsibility. The companies have said they produced government-approved prescription pills, distributed them to registered pharmacies and took steps to try to prevent their misuse.
U.S. tax laws generally restrict companies from deducting the cost of legal settlements from their taxes, with one major exception: Damages paid to victims as restitution for the misdeeds can usually be deducted. Still, Congress has placed stricter limits on such deductions in recent years, and some tax experts say the Internal Revenue Service could challenge the companies’ attempts to deduct opioid settlement costs.
Harry Cullen, a Brooklyn-based activist who has worked to hold drug companies accountable for the epidemic, said it is “incredibly insulting” that companies would try deduct the settlement payments. “As if they are donating it to these people who they harmed in the first place.”
Erich Timmerman, a spokesman for Cardinal Health, said in a statement that the company’s tax deductions are permissible under federal law. He also pointed to a statement chief executive Mike Kaufmann made in November, when he said Cardinal takes its role in the pharmaceutical supply chain seriously and remains “committed to being part of the solution to this epidemic.”
AmerisourceBergen declined to comment on its taxes but said in a statement the company takes steps to mitigate the diversion of prescription drugs, including by refusing service to customers it sees as a risk and by making daily reports to federal drug officials.
Johnson & Johnson declined to comment on the opioid settlement and tax deductions beyond its regulatory filings.A spokeswoman for McKesson did not respond to multiple requests for comment.
Cardinal Health’s use of the “carryback” tax break draws attention to what some see as a shortcoming of the $2 trillion U.S. coronavirus bailout known as the Cares Act. In their haste to funnel cash benefits to businesses facing economic peril, lawmakers made billions of dollars in tax breaks broadly available to any company, regardless of whether it suffered during the pandemic.
Cardinal, a company with a $15 billion market capitalization and $4 billion in available cash, surpassed Wall Street expectations for its most recent earnings period. Last week, CEO Kaufmann told investors a rebound in medical treatments and procedures had revived demand for Cardinal’s health devices and drugs. He said the company was boosting its investment in sophisticated supply-chain technology.
On the same day, Cardinal said it was filing for a tax break using the Cares Act provision and expected a nearly $1 billion cash refund from the IRS within the next 12 months. The company plans to pay $6.6 billion in the settlement.
Francine J. Lipman, a tax professor at the University of Nevada at Las Vegas, said Cardinal Health appears to be “getting a bit of a windfall from laws that Congress intended to help companies that are suffering due to a pandemic.”
The “carryback” tax break permits any company that lost money in 2018, 2019 or 2020 to apply those losses to previous, more profitable years. Some form of this provision has been permitted by the U.S. tax code for over a century to help businesses that face ups and downs to even out their taxes.
The Cares Act raised the limit on the amount of losses companies can use to offset taxes and permitted them to apply those losses to earlier periods. Because the corporate tax rate was higher before 2018, companies with recent losses can increase tax refunds they received before that year by up to 67 percent.
Cardinal estimated in August it expected to deduct $488 million from the expected opioid legal settlement. But in its Feb. 5 filing, the company said the amount probably would be higher in part because the Cares Act permitted it to carry back losses related to the opioid litigation to previous years when the tax rate was higher.
UNLV’s Lipman said Cardinal’s decision to apply for a tax refund before any legal settlement has been finalized could face scrutiny from the IRS. Deductions must be made against business expenses that are shown to have “economic effect,” she said, which may preclude deductions against future, unpaid legal settlements.
Timmerman, Cardinal’s spokesman, said the company has already recorded a loss related to the opioid litigation because Cardinal insures itself through a wholly-owned insurance subsidiary. The opioid litigation caused a loss to the insurance company’s reserve, and that is the loss that Cardinal is deducting, he said.
“Tax and accounting rules applicable to insurance companies, including self-insurance companies, require recognition of loss when an insurance reserve is set, thus establishing economic effect, even if the underlying settlement is not final,” Timmerman said.
The three other companies involved in the $26 billion settlement have estimated the tax benefits of the deal but have not filed for tax refunds. They all said the tax benefits could be lower if courts or regulators determined some or all of the payments are not tax-deductible.
McKesson, which expects to pay $8.1 billion in the settlement, said in a Feb. 2 filing that the actual cost of the deal would be $6.7 billion after taxes, implying a $1.4 billion tax benefit. The company also said $497 million in tax benefits were “uncertain” because of the “uncertainty in connection with the deductibility of opioid related litigation and claims.”
AmerisourceBergen, which anticipates a $6.6 billion settlement payment, said in November it expects a $1.1 billion tax benefit. The company said an additional $371.5 million tax benefit was possible but “uncertain.”
“A settlement has not been reached, and, therefore, we applied significant judgment in estimating the ultimate amount of the opioid litigation settlement that would be deductible,” the company said.
Matthew Gardner, a senior fellow at the nonprofit Institute on Taxation and Economic Policy, said these disclaimers suggest the companies are making conservative estimates. “That’s one way of saying they are likely going to claim even bigger tax benefits in their tax returns than they are showing on their financial statements,” he said.
Whether the payments will be deductible may hinge on specific word choices in the final terms of the settlement. Though recent changes to the tax code have attempted to close loopholes that permit companies to deduct taxes when they have committed wrongdoing, many companies now push to make sure their settlements include a “restitution” payment for victims — the “magic word” that often qualifies them for deductions, Gardner said.
In previous opioid-related settlements local governments reached with McKesson, Purdue Pharma and Teva Pharmaceuticals, the companies admitted no fault and agreed to restitution payments that appeared to qualify them for tax deductions, USA Today reported in 2019.
Johnson & Johnsonhas said it expects it could deduct as much as 21.4 percent of its $5 billion share of the settlement, which would mean a roughly $1.1 billion tax benefit. However, the company said last summer that the deductible amount may be lower if a regulation proposed by the IRS last year came into effect.
The rule, which did take effect Jan. 20, requires companies to meet a long list of specific criteria to qualify government settlements for tax deductions.
In 2019, The Post analyzed a database maintained by the Drug Enforcement Administration that tracks the path of every pain pill sold in the United States. The database shows that America’s largest drug companies distributed 76 billion oxycodone and hydrocodone pain pills across the country between 2006 and 2012 as the nation’s deadliest drug epidemic spun out of control.
McKesson, Cardinal Health and AmerisourceBergen distributed 44 percent of the nation’s oxycodone and hydrocodone pills — the two most abused prescription opioid drugs — during that time.
An investigation by The Post last year found that near the peak of U.S. opioid production, a Johnson & Johnson subsidiary was manufacturing enough oxycodone and hydrocodone to capture half or more of the U.S. market. The company also lobbied for years to help persuade regulators to loosen a narcotics import rule, allowing Johnson & Johnson’s U.S. subsidiary to produce rising amounts of opioids out of potent poppies harvested by its Tasmanian subsidiary, The Post found.
Attorneys for Johnson & Johnson have said its opioid-producing subsidiaries did not cause the United States’ addiction crisis, that the companies were heavily regulated, and that such companies play only a “peripheral role in the multibillion-dollar market for prescription opioids.”
A company that owned and operated more than 30 urgent care centers has agreed to pay $12.5 million to resolve overbilling allegations, the Department of Justice announced Sept. 3.
UCXtra Umbrella, which did business in Arizona as Urgent Care Extra, previously admitted to engaging in healthcare fraud and monetary transactions derived from unlawful activity. The company admitted that it had billing procedures in place that caused its providers to overstate the complexity of the medical services provided to patients. This resulted in falsely inflated reimbursement rates from health insurance companies, according to the Justice Department.
The company also admitted that staff were encouraged to order tests and procedures that may not have been medically necessary to justify higher billing codes and reimbursement.
Health insurance companies overpaid the company by an estimated $12.5 million due to the fraud scheme, according to the Justice Department.
Sutter Health had a staggering loss of $857 million in the first half of the year as the Northern California health was bruised by the pandemic. That’s almost a $1.4 billion drop in income compared to the first half of last year, a plummet Sutter management largely blamed on investment and operational losses in its latest financial filing posted Thursday.
The virus shuttered operations for a period of time, driving Sutter’s revenue down 8% to $6.1 billion during the first half of the year. Expenses climbed nearly 2%, contributing to an operating loss of $557 million.
Still, the nonprofit noted it did experience a significant rebound in its investments in the second quarter after weathering the devastating effects of the first quarter.
Sutter joins other major nonprofit health systems in posting net losses for the first half of the year despite receiving hundreds of millions in federal grants to help offset headwinds brought on by the pandemic.
Recently, both Renton, Washington-based Providence and Arizona-based Banner Health posted losses for the first half of the year — $538 million and $267 million, respectively. Dampened revenue and downturns in investments contributed to their losses.
The federal government has funneled billions of dollars to providers across the country in an attempt to help them weather the downturn in patient volumes. Sutter noted in its filing that it’s received $400 million in federal relief funds so far, though that wasn’t enough to push the health system back into the black. Sutter operates 29 hospitals and enjoys a large presence in Northern California.
Sutter reported fewer admissions and emergency room visits in the second quarter compared to the prior-year period, down about 10% and 19%, respectively.
The pandemic was quick to wreak havoc on Sutter’s finances during the first quarter, in which the system reported an operating loss of $236 million and a net loss of almost $1.1 billion.
The coronavirus is also serving as a drag on its ratings. In April, two of the three big ratings agencies downgraded Sutter Health’s rating.
In part, Moody’s attributed the downgrade to Sutter’s weaker profitability profile. In its rationale, Moody’s said, “Following a second year of weaker results, margins in 2020 are likely to remain under pressure due to COVID-19 related disruptions, ongoing performance challenges at some of Sutter’s facilities, and continued reimbursement pressure.”
Also weighing on Moody’s rating is the $575 million settlement expected to be paid this year to resolve antitrust issues. Last year, the health system averted a trial over antitrust concerns after agreeing to a settlement with California regulators. Sutter agreed it would end any contracts that require all of its facilities to be in-network or none of them and cap out-of-network charges, among other stipulations.
A San Francisco Superior Court judge on Thursday denied Sutter Health’s request to delay preliminary approval of a $575 million antitrust settlement with California amid the uncertainty and financial upheaval of the COVID-19 pandemic.
The approval process and settlement agreement are flexible enough to continue as scheduled and the needs of the plaintiffs — a union that operates a trust for employee healthcare benefits and California Attorney General Xavier Becerra — to see the health system’s behavior change are pressing, Judge Anne-Christine Massullo wrote in her order.
In a statement Thursday, Becerra applauded the court’s decision. “Sutter’s practices harmed California’s healthcare market by charging higher prices unrelated to quality or cost of care,” he said. “They did that long before the COVID-19 pandemic. There is no period of time that medical providers, like Sutter, should be able to carry out such destructive market practices.”
Sutter, like health systems throughout the country, has taken a significant hit to its bottom line as the pandemic forced lucrative elective procedures to be put off for weeks earlier this year. The company posted a net loss of more than $1 billion in the first quarter of this year.
It said the financial losses from the COVID-19 crisis could force it to close or divest hospitals. In its June argument to delay the settlement approval, Sutter said the agreement’s cap or chargemaster prices could be too low “to cover the unprecedented and unforeseeable increases in expenditures to respond to COVID-19 particularly given declining revenue.”
But the judge did not agree, saying the court is “not persuaded that the proposed injunction will interfere with Sutter’s ability, or the broader healthcare system’s ability, to provide patient care during the COVID-19 pandemic.”
Massullo continued: “To the extent that a provision of the proposed injunction poses a threat to patient care or the public interest during the COVID-19 pandemic, or as a result of some other presently unforeseen circumstance, any party may seek a modification of the offending provision if and when such a modification becomes appropriate.”
The preliminary approval hearing is now set for Aug. 12 and Aug. 13, according to multiple news reports.
Sutter avoided a jury trial late last year by agreeing to the settlement, which in addition to the $575 million payout includes stipulations like ceasing contracts that require all of its facilities be in an insurer’s network or none of them. The system, however, did not admit guilt as part of the agreement.
A California federal judge again refused to approve a deal requiring Dignity Health to pay as much as $747 million to settle a class-action lawsuit accusing the San Francisco-based health system of underfunding its pension plan, according toLaw360.
The lawsuit, filed by former Dignity Health workers, alleges the health system used a religious Employee Income Retirement Security Act exemption to underfund its pension plan by $1.8 billion. In October, a federal judge in the Northern District of California refused to sign off on a proposed settlement because it contained a “kicker” clause. The clause would allow Dignity to keep the difference between the amount of attorneys’ fees awarded by the court and the more than $6 million in fees authorized by the settlement.
“Although the fact is not explicitly stated in the settlement, if the court awards less than $6.15 million in fees, defendants keep the amount of the difference and those funds are not distributed to the class,” Judge Jon S. Tigar said, according to Bloomberg Law. “The Court concludes that this arrangement, which potentially denies the class money that defendants were willing to pay in settlement — with no apparent countervailing benefit to the class — renders the settlement unreasonable.”
Both sides agreed to eliminate the kicker clause and resolved other issues the court outlined when it denied preliminary approval and class certification in October. In November, the workers filed a renewed unopposed motion, which the court denied June 12.
To certify a class for the purpose of settlement, the court must find that the plaintiffs named in the lawsuit and their lawyer were negotiating on behalf of the entire class. In Dignity’s case, there’s a “fundamental conflict of interest between the vesting subgroup and the rest of the class that must be addressed by subclass certification,” Mr. Tigar wrote in the order denying the motion. “Because the court cannot certify the class, it cannot grant preliminary approval of the settlement.”
Mr. Tigar wrote that he made the finding reluctantly because of the extensive litigation that has already occurred and the age of the case. However, he said Rule 23 of the Federal Rules of Civil Procedure requires it.
Sutter Health, a 24-hospital system based in Sacramento, Calif., has agreed to pay $575 million to settle an antitrust case brought by employers and California Attorney General Xavier Becerra.
The settlement resolves allegations that Sutter Health violated California’s antitrust laws by using its market power to overcharge patients and employer-funded health plans. The class members alleged Sutter Health’s inflated prices led to $756 million in overcharges, according to Bloomberg Law.
Under the terms of the settlement, Sutter will pay $575 million to employers, unions and others covered under the class action. The health system will also be required to make several other changes, including limiting what it charges patients for out-of-network services, halting measurers that deny patients access to lower-cost health plans, and improving access to pricing, quality and cost information, according to a Dec. 20 release from Mr. Becerra.
To ensure Sutter is complying with the terms of the settlement, the health system will be required to cooperate with a court-approved compliance monitor for at least 10 years.
Mr. Becerra said the settlement, which he called “a game changer for restoring competition,” is a warning to other organizations.
“This first-in-the-nation comprehensive settlement should send a clear message to the markets: if you’re looking to consolidate for any reason other than efficiency that delivers better quality for a lower price, think again. The California Department of Justice is prepared to protect consumers and competition, especially when it comes to healthcare,” he said.
A Sutter spokesperson told The New York Times that the settlement did not acknowledge wrongdoing. “We were able to resolve this matter in a way that enables Sutter Health to maintain our integrated network and ability to provide patients with access to affordable, high-quality care,” said Flo Di Benedetto, Sutter’s senior vice president and general counsel, in a statement to The Times.
The settlement must be approved by the court. A hearing on the settlement is scheduled for Feb. 25, 2020.