The Risks of Hospital Mergers
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.