In
retrospect, it looks as if Massachusetts made a serious mistake in 1994
when it let its two most prestigious (and costly) hospitals —
Massachusetts General Hospital and Brigham and Women’s Hospital, both
affiliated with Harvard — merge into a single system known as Partners
HealthCare. Investigations by the state attorney general’s office have
documented that the merger gave the hospitals enormous market leverage
to drive up health care costs in the Boston area by demanding high
reimbursements from insurers that were unrelated to the quality or
complexity of care delivered.
Now,
belatedly, Attorney General Martha Coakley is trying to rein in the
hospitals with a negotiated agreement that would at least slow the
increases in Partners’ prices and limit the number of physician
practices it can gobble up, albeit only temporarily.
The
experience in Massachusetts offers a cautionary tale to other states
about the risks of big hospital mergers and the limits of antitrust law
as a tool to break up a powerful market-dominating system once it is
entrenched.
One
purpose of the 1994 merger, as the president of Mass General
acknowledged in 2010, was to take away the ability of insurance
companies to demand lower prices from one hospital with the threat that
they could just send patients to the other. After the merger, insurers
had to take both of them or neither.
The
bargaining power of the merged institutions was starkly displayed in
2000 when the Tufts Health Plan refused to pay Partners what it
considered unjustifiably high prices. Partners promptly announced it
would no longer accept Tufts insurance and created an uproar among
members of the Tufts plan who wanted to retain access to the two
prestigious hospitals. Faced with defections that could destroy its
viability, Tufts quickly caved in.
The
current case in Massachusetts arose when Partners sought to acquire a
hospital and an affiliated physician group southeast of the city.
Partners is already the largest provider system in Massachusetts, with
about 6,000 doctors and some 2,800 licensed beds in its academic medical
centers and community hospitals. A special agency created by the
Legislature to monitor health care costs, known as the Health Policy
Commission, concluded that the acquisition of South Shore Hospital and
related doctors would be likely to drive up total medical spending in
the region by $23 million to $26 million a year and possibly much more.
It referred the matter to the state attorney general, who has no power
to restrict prices but can file an antitrust suit to block a merger and
can use that threat to win broader concessions.
On June 24, after months of negotiations, a final agreement
between Partners and Attorney General Coakley was filed in a
Massachusetts court. The judge has set a public comment period that will
end later this month.
The
deal negotiated by Ms. Coakley would let Partners acquire two more
community hospitals in addition to South Shore, in exchange for
temporary restrictions on raising its prices and on further expansion.
There would be limits, for example, on the number of community
physicians it could add to its networks over the next five years and
cost increases would be held to the rate of general inflation, which is
typically less than medical inflation, for 10 years.
This
could be a dubious bargain. Such short-term restrictions have been
abandoned as a tactic by the Federal Trade Commission because, an agency
official said last month, they are “an inferior substitute” for letting
market competition among separately owned providers determine prices
and quality. Large-scale mergers almost always lead to higher prices,
reputable research shows. However, the Department of Justice, which has
been investigating Partners alongside the state, reportedly supports the
settlement.
At
the end of 10 years, Partners would be free to raise its costs at will
and would be larger than it is now. The agreement lets insurers bargain
separately with Partners’ community hospitals but does nothing to split
Mass General and Brigham so that insurers could play one off against the
other. Several health care providers that are rivals of Partners have
complained that the agreement may further impair their ability to
compete with Partners.
The
deal was apparently struck because state investigators concluded that
simply blocking the latest acquisition on antitrust grounds would not
reduce the prices or market power of Partners. And they saw no legal or
practical way to undo the original merger.
•
As
this case moves forward, it will be important to find an appropriate
balance between two concerns that tug in opposite directions. The
Affordable Care Act has incentives that encourage hospitals and doctors
to integrate their operations and collaborate to control costs and
improve care, and Partners has been a leader in doing that. At the same
time, such collaborations must not be allowed to accrue such market
power that they stifle competition and drive up prices, as seems to have
happened in Massachusetts in past years.
One
possible approach to controlling costs is to split Mass General and
Brigham into separate bargaining units for insurance purposes. That way
patients would retain access to a top-flight hospital and probably pay
lower premiums if their insurers bargained hard with the separate
hospitals.
Partners
would be loath to separate its flagship hospitals voluntarily, but the
State Legislature, with the help of the many public agencies that
oversee the state’s health care system, could conduct an inquiry into
whether the 1994 merger has benefited the public or if it would be
better off if the union could be undone in some way.
The
lesson for other states confronting the wave of hospital mergers is to
look much more carefully at possible consequences than Massachusetts did
20 years ago. Mergers are hard to undo after the fact.
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