What’s likely to happen with the Partners-Eye and Ear deal

A no is in order, but a conditional approval may be likely

PARTNERS HEALTHCARE NEEDS a good dose of Vitamin N (a clear No) from either or both the Department of Public Health or the Attorney General with respect to its wanting to acquire Mass Eye and Ear Infirmary on terms that it has proposed.

The Health Policy Commission completed its initial review of the proposed merger and found that the annual estimated burden is quite large—anywhere from $21 to $61 million each year for us premium payers. About $6 million of this annual burden comes from Eye and Ear doctors fully stepping up to MGH physician rates in all of their contracts.  What makes for a wide estimate for the total range of burden has to do with the pricing of hospital services, which for an eye, ear, nose, and throat specialty hospital like Eye and Ear, is primarily outpatient care.  The range of increase that the HPC estimates is $15-$55 million of annual commercial spending for all hospital services.  The lower figure represents commercial spending growth if Partners raises Eye and Ear prices closer to what its community hospitals are paid.  The additional $40 million of annual burden on premiums results if the transaction goes forward and Eye and Ear takes on MGH rates for its hospital services.

Partners and Eye and Ear argue that this deal is necessary so that Eye and Ear can get better commercial insurance rates to make it more secure in its financial stability for the future.  Partners, in its rebuttal to the Health Policy Commission report, suggests that the annual financial burden may be closer to only $15 million a year if they ”decide” to demand less generous price increases. That’s a big if, because in their rebuttal Partners makes no guarantees. They state only that they would demand “market competitive rates” for Massachusetts Eye and Ear.  But that is more or less how they characterize the 35 to 40 percent price premium they receive now for their services at Mass General and Brigham and Women’s. What most policymakers call supra normal pricing, Partners claims is really just a fair and competitive market rate for their prestigious hospitals.

But whether the annual burden is closer to $15 million or $20 million, or over $60 million, or somewhere in-between, when premium payers and the public appear to gain nothing new from this transaction, except a repricing of hospital services under commercial insurance to a higher level for the care provided by Eye and Ear and its doctors, why would the Department of Public Health or Healey stand idly by in the face of this additional economic burden for premium payers?  Post-transaction, Partners would also gain additional bargaining power with insurers.  To their already high overall market share for practically all other inpatient and outpatient services, the Health Policy Commission estimates Partners would now control over 45 percent of outpatient otolaryngology services in their service area.

The Health Policy Commission also worries that a Partners merger with Massachusetts Eye and Ear could have implications for the future viability of tiered or limited network plans– contracting arrangements where an independent Eye and Ear has been an active participant to create more affordable health insurance options.  Partners in its rebuttal states that Massachusetts Eye and Ear will still be allowed to participate in these contracts, but, again, if the purchase goes forward on proposed terms and with no legal commitments to do otherwise, there is no guaranty that under Partners ownership the Eye and Ear would be as affordable and vigorous a participant as it has been up to now in these lower premium offerings.

If adding some additional financial security for Eye and Ear is an important policy goal, there is a better way to address that issue with far less burden on premium payers. The Senate last month passed a bill that, if enacted into law, would give substantial rate increases to Eye and Ear and a group of other community hospitals.  The Senate’s proposal would provide a revenue boost to Eye and Ear, while keeping the total amount of commercial hospital spending growth in check. If ultimately the House and the governor agree to move in this direction, that would give Eye and Ear a more secure financial future, while avoiding another Partners assault on our health care affordability.  Partners has been deadset against this very creative legislative approach  because in boosting the lower paid while keeping total commercial hospital spending in check, that would likely mean that all of Partners’ hospitals would receive very limited commercial rate increases for a few years.

While we all await the House efforts in 2018 to either support the Senate approach or find its own way to a similar end point, what should we hope for with respect to this proposed transaction?

First, I expect that when it meets in early January, the Health Policy Commission will affirm its findings and restate its worries about this transaction.  There is nothing in the Partners rebuttal or any other publicly stated commitments that should change the Health Policy Commission’s estimate of the potential burden flowing from this proposed acquisition.  I also expect the commission to refer their findings on to both the commissioner of public health and the Public Health Council, as well as Attorney General Healey’s office for consideration of governmental action.

I think the policy goal would either be to stop the transaction dead in its tracks or, alternatively, and probably more likely, write legal conditions that would sufficiently mitigate the harms that the Health Policy Commission has identified that would be in place for a minimum of 10 years should the acquisition be allowed to go forward.

As for stopping it outright, the far easier path would be for DPH’s Public Health Council to simply deny approval for the determination of need request for this transaction.  Taking such a step would be a fresh start for this group, which now has newly revised regulations in place that took effect earlier this year.   Historically, the Public Health Council has never in its history stopped any transaction from going forward because of concerns about spending growth. Perhaps this can be the time and transaction where the council finds its footing and operationalize its regulatory requirement that a proposed merger “meaningfully contribute to the Commonwealth’s goals for cost containment” in order to meet determination of need requirements.

It would likely be more challenging for Healey to halt the transaction, as her office would need to go into court and successfully sue either under antitrust or consumer protection legal principles (or both) to stop the merger. Market share impacts to trigger an antitrust case are likely not significant enough here to win under traditional antitrust analysis, unless a court was willing to define the relevant product market to be limited to outpatient ear, nose, and throat services. Nevertheless, a few recent federal antitrust cases have tended to focus more on whether a transaction may add to a provider’s market power such that it can thwart health insurers’ abilities to provide competitively priced insurance products at reasonable prices, rather than only a market share analysis.  And while that could be the case here with the potential impact on insurers and their ability to offer tiered or limited network products, it would likely still be a difficult legal road for Healey.

In addition, while I have always thought that the consumer protection laws should be tested in court, to date none of our state attorneys general have been willing to go down this road.  I assume that they are of the opinion that using consumer protection arguments in such a health care transactional context would not likely lead to a successful prosecutorial outcome.  But since the facts here could lead to premium payers facing an annual spending increase of over $60 million a year, perhaps that could be enough “burden” to embolden Healey to go forward with a consumer protection case to stop the transaction.  After all, that is a figure that is actually greater than the total spending increase predicted from Partners proposed acquisition of South Shore Hospital and Hallmark—two transactions that were stopped when a state judge gave out her dose of Vitamin N in rejecting the consent decree between Partners and then-Attorney General Martha Coakley after reading the Health Policy Commission cost and market impact projections.

If neither the Department of Public Health or the Healey decide that the best public policy choice is to try to stop Partner’s acquisition of Eye and Ear outright, either agency could also try to place conditions on the approval of this merger, which if crafted in a tough and competent manner could possibly mitigate most or all of the predicted harms for as long as those conditions are in place.  I would predict this is actually the most likely scenario for giving Partners its dose of Vitamin N.

If I am correct about the legal positon of Healey, then the Department of Public Health would most likely be in the best position to use its governmental authority to require conditions for its grant of a determination of need for the proposed transaction. The Health Policy Commission’s report and its identified worries suggest the creation of a set of pricing and contracting constraints could form the basis for a set of long-lasting (perhaps at least 10 years) conditions that could be attached to the Department of Public Health approval of the determination of need application now before it.

While there is clearly a good government opportunity here, the Department of Public Health will need to step up its game.  Conditions that were tied to last year’s approval of a Boston Children’s Hospital capital project were, in my estimate, both off the mark in their scope as well as insufficient to mitigate the potential harms that the Health Policy Commission found when it studied the potential impact of Children’s billion-dollar capital project, which included adding about 70 beds.  Hopefully, the Department of Public Health can do better this time; and it would certainly be wise for them to take note of the Health Policy Commission’s report, which reveals an apparent Partners’ estimate that there can ultimately be about $20 million of operating expense savings for Eye and Ear as a result of this merger.  If that is true, that sort of annual savings should, even in the absence of any price increases, help assure Eye and Ear of a stable financial operating position.  Using that efficiency savings and stopping any unwarranted market-power related price increases should be important requirements and create some hope for turning this bad transaction into one that has greater promise of being in the public’s interest.

Finally, I think there is even more at stake here than just this transaction and what happens to it.

Arguably, what happens now with this proposed acquisition sets the tone for how the Beth Israel-Lahey et al merger—which the Health Policy Commission recently voted to study – will be viewed and possibly responded to by our governmental agencies.  Greenlighting the Partners acquisition of Massachusetts Eye and Ear at this moment, in the face of the Health Policy Commission findings, and failure to either halt it outright, or place significant and highly protective conditions to stop additional pressure for premium growth, will arguably set the parameters for how any other major market transaction will be assessed, or how any projected harms flowing from a transaction will be dealt with by the governmental machinery.

Meet the Author

Paul A. Hattis

Associate professor, Tufts University Medical School
Seems to me that a strong dose of Vitamin N is called for here.

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