State lawsuit against Sutter Health lands between bond pricing and closing

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California Attorney General Xavier Becerra sued hospital operator Sutter Health for anti-competitive behavior two days after it priced $1.29 billion of bonds.

Becerra argues in the lawsuit filed Thursday that the hospital system has engaged in anti-competitive practices that have driven up hospital prices in Northern California. He said the lawsuit stems from a six-year investigation by his office into Sutter’s practices.

Morgan Stanley priced $683 million in taxable refunding bonds and $619 million in tax-exempt revenue bonds for the hospital on March 27, just two days before the attorney general filed the lawsuit.

The bonds have dropped between 10 and 15 basis points since Becerra filed the lawsuit, according to a credit analyst, who asked to not be named.

The California Health Facilities Finance Authority is conduit issuer for the new tax-exempt debt and the taxables are being sold directly by Sutter Health. The bonds are rated A-plus by Fitch Ratings, Aa3 by Moody's Investors Service and AA-minus by S&P Global Ratings. Outlooks are all stable. Fitch had downgraded Sutter Health one notch ahead of the deal.

A supplement with information about Becerra’s lawsuit was added to the offering documents for both bond sales early Monday morning.

Investors were questioning Tuesday whether the broker-dealer might re-price or yank the deal, according to the credit analyst.

Morgan Stanley did not respond to inquiries as to whether the broker-dealer would move ahead with the April 4 closing.

“Sutter Health is throwing its weight around in the healthcare market, engaging in illegal, anticompetitive pricing that hurts California families,” Becerra said in a statement. “These tactics are risking Californians’ lives by driving up the cost of healthcare for everyone. Big business should not be able to throttle competition at the expense of patients."

The attorney general is seeking injunctive relief and disgorgement of any overcharges, but no amounts were included in the lawsuit.

“Sutter Health believes its contracting practices are in compliance with all applicable laws and regulations and intends to vigorously defend the lawsuit,” according to the supplement, signed by Svend Ryge, the hospital’s treasurer.

The hospital chain is in the “early stages of analyzing and responding to the lawsuit and is unable at this time to make a determination regarding the financial impact, if any, on Sutter Health and its affiliates,” Ryge wrote in the supplement.

“There can be no assurance that the final resolution of these matters will not have a material adverse effect on Sutter Health’s consolidated financial position or results of operations and, therefore, could have a material adverse effect on the Obligated Group, taken as a whole," Ryge wrote.

Sutter, which runs 24 hospitals in northern California, had total revenues of more than $12 billion in 2017.

Karen Garner, a hospital spokeswoman, said publicly available data from California's Office of Statewide Health Planning and Development “show that on average, total charges for an inpatient stay in a Sutter hospital are lower than what other Northern CA hospitals charge."

Sutter has held average rate increases to health plans to the low single digits since 2012 even as expenses for labor, facilities and technology increased by 37%, Garner said.

She added that healthy competition exists in Northern California because there are 15 major hospital systems and 142 hospitals. Those hospital systems include Kaiser Permanente, Dignity Health, Adventist Health, Tenet Healthcare, and the University of California.

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Lawsuits Healthcare industry Primary bond market Revenue bonds Sutter Health California Health Facilities Financing Authority California