This civil lawsuit, Hunt said, “sends a clear message that we will seek to hold healthcare providers responsible if they fail to ensure that the information they submit is truthful.”

At issue is how Sutter Health and its affiliate Palo Alto Medical Foundation diagnosed patients enrolled in Medicare Advantage, which covers about one-third of Medicare beneficiaries nationwide. The program is funded by the government but offers health plans through private insurers.

The lawsuit says Sutter, which has about 48,000 Medicare Advantage enrollees, is liable for at least “hundreds of millions of dollars” in restitution, damages and penalties.

The complaint alleges that Sutter submitted unsupported diagnoses, which overstated the medical risk of patients and led to inflated payments.

Sutter spokeswoman Liz Madison said in an emailed statement that the company takes the lawsuit seriously and intends to “vigorously defend ourselves against the allegations.”

Madison also noted that the lawsuit involves an area of unsettled law that is the subject of ongoing litigation in multiple jurisdictions. A September ruling by a federal judge in the District of Columbia has put into question how the government handles Medicare overpayments.

Sutter isn't the first to be scrutinized for its billing practices.

Earlier this year, DaVita, one of the nation's largest dialysis providers, agreed to pay $270 million to settle charges that one of its affiliates submitted improper medical codes to Medicare, allowing health plans to receive higher payments. And at least a half-dozen whistleblowers have sued health plans alleging they tampered with the billing formula to improperly boost profits.

The Sutter case stems from a sealed whistleblower complaint filed three years ago by Kathleen Ormsby, a former employee of the Palo Alto Medical Foundation. The Justice Department decided to take up the case after conducting its own investigation.

“This intervention illustrates our commitment to protecting the integrity of the Medicare Advantage program,” said U.S. Attorney Alex G. Tse for the Northern District of California. “We will continue to guard government health programs from companies that improperly maximize their bottom line at taxpayer expense.”

Sutter owns 24 hospitals and 36 surgery centers and contracts with more than 5,500 physicians across its network. The health system reported an operating revenue of $12.4 billion in 2017 and posted net income of $893 million last year.

The company's dominance in Northern California has drawn concern among patient advocates and lawmakers over the rising cost of care in the region. Critics say consolidation has given Sutter a lopsided competitive advantage, allowing it to drive up prices.

Whether the alleged “upcoding” by the Palo Alto Medical Foundation increased out-of-pocket costs for patients is unclear, because different Medicare Advantage plans have different cost-sharing and coverage options, said Tatiana Fassieux, a consultant for California Health Advocates.

In addition to lawsuits from the state and federal government, Sutter faces two other major suits — from employers and consumers — alleging anticompetitive conduct and inflated pricing. Sutter denies the charges, and in court papers it has accused Becerra of a “sweeping and unprecedented effort to intrude into private contracting.”

This story was produced by Kaiser Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation.

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