Beth Israel-Lahey merger causing some jitters

Beth Israel-Lahey merger causing some jitters

Can this ‘second system’ be a true competitor to Partners?

USUALLY SUMMERTIME is not chock full of key health care developments and related news stories.  Yes, there is always the strategic late August regulatory filings from our hospitals, where annual CEO salaries are published—with hospitals hoping that most people are away on vacation and not reading newspapers.

But, clearly, this summer is different.  The circus in Washington over whether or not our Republican-controlled federal government will pass legislation to repeal and replace the Affordable Care Act; the recent nurses’ strike and lockout at Tufts Medical Center, and the current budget battle in our own state over how best to deal with the costs of our state Medicaid program are all making health care issues top stories.

One story, which has gotten more limited press attention, and likely will not become more prominent in the news until the spring of 2018, was the official notice and filing last week with the state’s Health Policy Commission of the on-again off-again proposed merger involving Beth Israel Deaconess-led Caregroup (its three community hospitals plus Mt Auburn and New England Baptist Hospitals); Lahey Health System and its related hospitals and physician groups; Anna Jacques Hospital; and two related physician-hospital contracting organizations. (Hereafter, I’ll call the merging parties BI-Lahey et al.)

While unwise changes to the Affordable Care Act pose the most significant risk to our collective well-being in terms of what we need from a functioning health care system, this proposed merger to create a second major health system in eastern Massachusetts presents some potential long-term concerns for those of us who worry about the health care system and individual affordability.

As proposed, this merger is by far the most significant potential market transaction to come forward since the creation of Partners HealthCare in 1994.  A few years ago, rumors were swirling that Atrius was to be a part of this proposal—but now they are not.  Other than Lahey Health, all of the other parties to the transaction have had contracting or affiliated relationships with each other for a number of years. Noteworthy, two other hospital systems that also have long-standing contracting relationships with Beth Israel — Cambridge Health Alliance and Lawrence General, both with very significant proportions of Medicaid patients – are not part of this proposal.

We have learned over time that when health care executives talk about the need to do some sort of health care consolidation, it is usually a good thing to hold on to your wallet or pocketbook.  Though the operational details of the proposal are not completely clear, it appears that two new corporate entities are planned for creation to hold assets and engage in contracting for the related hospital and physician groups to deliver care and accept payment. The Health Policy Commission, which will undoubtedly vote to study this proposed transaction in great detail, will likely focus its six-month review on commercial health care spending impacts resulting from any changes in provider pricing and/or changes in market share.  It is important to note that while the policy commission will be making projections based on current contract terms and provider market shares, it will also employ econometric analyses to make future market projections.  In many ways, it is those projections that carry the weight of whether or not a merger proposal is good or bad for consumers and our marketplace.

I sense that, like me, many health policy watchers reacted positively to the proposal when it first emerged a few years ago.  Quite simply, if there is a desire for a health care system big enough to take on Partners, then viable market competitors are needed.  BI-Lahey et al says its goal is to create a true competitor to Partners which, if successful, could take business away from our largest, most prestigious, overpriced system and lead to millions of dollars of savings in annual commercial health care spending.

This is the rosy picture for this “second system” proposal.

But as I have thought more about the merger idea, I have started to worry that, instead of BI-Lahey et al taking business away from Partners, it could quite possibly raise total health care spending by taking net market share away from everyone else but Partners. This is a key issue that the Health Policy Commission must look at.

Today I write not only to encourage the Health Policy Commission to take a more expansive look at the issues surrounding this merger than it has ever done before, but to strongly encourage the agency to consider charting new territory.  Specifically, to the extent that the agency uncovers issues of concern tied to access, cost, or quality, the agency should be prepared to identify some ways to mitigate whatever harms they detect.

Clearly, it will be a “facts and circumstances” test as to whether this proposed second system is ultimately a good or a bad policy idea from a health care cost perspective. The Health Policy Commission was clued into this in October 2015 at its annual cost growth hearings, when Lenore Daffny, an economist with expertise in health care antitrust issues, was asked to opine about a hypothetical merger where the merging entities do not include the dominant provider in a market, but rather a group of providers arguing that they are coming together to better compete against the dominant system.   She said that whether this is a good or bad thing for employers and consumers is very much a case by case examination.

She also said that even if this new competitor system takes market share and revenues away from the higher-priced market leader, we somehow need to assure that the savings are passed on to employers and consumers and not just banked by health plans or ultimately given over to the newly formed second system as it raises its rates from having increased leverage in its negotiations with insurers.

To date, private market-led efforts to provide consumers and businesses more price transparency, offer tiered network products, or create alternative payment arrangements built around capitation have not evidenced any success to meaningfully reduce Partners’ commercial price advantage or the system’s risk-adjusted total medical expenditures, according to the Health Policy Commission’s most recent cost trends report.

We seem to consistently avoid definitive governmental solutions to the market dysfunction that we face with Partners as well as with the even more overpriced Boston Children’s Hospital. Therefore, it should not shock our sensibilities that BI-Lahey et al has decided to offer its own version of a merger as their way to correct market failure.  It’s sort of a fight a fire with fire approach.

In the face of all of this, what should the Health Policy Commission do as it takes on its review?

Having been an agency commissioner who went through the commission’s review of Partners’ proposed acquisition of South Shore, Harbor Health, and Hallmark a few years ago, I would suggest building on that very excellent work in four ways.

  1. The Health Policy Commission’s review will project any future spending impacts by taking current provider prices for these entities and make some projections based on planned changes in contracted prices flowing from the transaction. To calculate total spending, the commission will then need to make some assumptions on future market share. The Health Policy Commission will model what the BI-Lahey et al folks claim—that they will gain market share at the expense of Partners, leading to savings for care to the commercially insured.  But the commission also needs to look at other scenarios where the new entity takes varying levels of care away from the rest of the lower-cost providers in the market.  It goes without saying that the commercial spending analysis should include both hospital and physician services and model what happens based not only on fee-for-service pricing, but from capitated arrangements as well.
  1. Under some of the scenarios where net market share is taken from the rest of the lower-priced (non-Partners) providers, it would be useful for the Health Policy Commission to employ some modeling projections as to what happens to those entities in terms of viability and overall patient revenue flow. Without getting overly wonkish, typical antitrust analysis looks at what happens to overall market competition but does not necessarily look at impacts on individual competitors. However, it would be a mistake in this analysis to neglect some sort of review of the impact of this proposed deal on other providers in terms of access-to-care concerns for all patients, implications for medical education as well as other considerations at stake if some provider systems are destabilized. Noteworthy is the fact that the providers coming together to form this second large system at baseline do a relatively low amount of Medicaid business.  If at the margin they take away commercial business from some of the systems that take care of high proportions of Medicaid patients, and in so doing cause those providers to become financially unstable, that would be a very bad thing for the Commonwealth.
  1. The Health Policy Commission needs to explore what sort of efficiencies may result from the proposal that can lower costs and premiums. BI-Lahey et al should be challenged to demonstrate tangible efficiencies such as centers of excellence or identify other structural changes in their proposed second system that can reduce redundancies or take expenses out of the system.  It is the creation of these efficiencies that give hope to the notion that the merged system can thrive at a lower level of revenue flows as it attempts to compete with Partners.   A fat system, one that needs commercial prices at or near Partners’ levels to maintain stable operations, is not in society’s interest.
  1. There needs to be an analysis of what our health insurers’ views are of this proposed transaction—both their ability to negotiate prices as well as their ability to create competitively priced tiered or limited network products in our market after the closing of such a proposed transaction. Remember, the rosy picture of this merger is to create consumer offerings which can take business away from the overpriced Partners providers, and in so doing possibly prompt Partners to lower its prices.  But we need to hear insurer views about any undue negotiating leverage that can be created here and/or their views on the ability of other competitors to create sufficiently sized networks with an adequate breadth of providers.  I would even go as far to say—the insurers ought to come to a Health Policy Commission board meeting and give testimony on this topic under oath so that the public can hear their hopes and worries about this proposed merger.  For that matter, it would be wise for the Commission to hold public hearings and allow any concerned party to offer their comments and perspectives about this potentially market altering transaction.

When all is said and done, and the data and sensitivity analyses are completed—what should the Health Policy Commission do then?

If the review says that there is little risk of harm to consumers and businesses—or even potential net benefit—the Health Policy Commission should say so and get out of the way of BI-Lahey et al.

But if the data and analysis that comes forward shows that consumers are at significant risk for being worse off as a result of this merger, the commission should say so and refer the findings to Attorney General Maura Healey who can mount a court challenge to stop the merger from going forward.

There is another option as well. With revised regulations that took effect earlier this year, the commissioner of the Department of Public Health working under the Public Health Council is empowered to rescind any determination of need approval needed for the merger to move forward.

It is also quite possible that this transaction may not have a clear-cut outcome. It’s possible there could be some positive potential outcomes for the market as well as some worrisome possibilities. Given this possibility, the Health Policy Commission needs to stake out some new territory. The commission needs to use its competence to suggest some sort of pricing or other behavioral guarantees that need to be promised by BI-Lahey et al. to prevent this transaction from becoming harmful.   These could be guarantees that either Healey or the Department of Public Health could incorporate as written conditions that Bi-Lahey et al would agree to meet as part of its post-transaction performance.   And if the conditions are not satisfied, the system could face the loss of some annually escrowed monies, or perhaps even threatened with the need to unwind all or parts of the transaction.

Perhaps my greatest concern goes well beyond the specifics of the merger.  My fear is that if the merger is approved, it may likely position BI-Lahey et al as the largest health system in eastern Massachusetts in terms of total hospital discharges and primary care visits.  The merger may invite Partners to argue that it has a right to expand again, given that it is no longer the largest system by these measures.

Meet the Author

Paul A. Hattis

Associate professor, Tufts University Medical School
Wouldn’t that be just dandy?

Dr. Paul A. Hattis is an associate professor of public health and community medicine at Tufts University Medical School.