5 takeaways from the Beth Israel-Lahey merger review

Cost increases and lack of concern at Health Policy Commission are surprises

THE MASSACHUSETTS HEALTH POLICY COMMISSION’S preliminary review of the proposed BI-Lahey et al merger and the comments of the commissioners on that review surprised me a bit. Here are my five takes on those surprises:

1. The commission staff and the agency’s economic consultant, with their “willingness-to-pay” analysis, say that if the merger goes forward in its current form commercial health care spending for inpatient, outpatient, and primary care services may increase by as much as $190 million a year for premium payers because of the new combined system’s ability to raise prices. If you add additional projected spending for specialty care services flowing from price increases that commission staff expect would also result, the burden increases to as much as $250 million a year. The new pricing burden could be offset partly by savings from care redirection that the merger parties have championed as a societal benefit of the merger, but the commission staff estimates those savings are no more than about $13 million a year. That means the net burden to premium payers could be $230 million per year, about the same as what I estimate Partners already extracts each year from the commercial insurance pool to subsidize unfunded research.

That is an astounding projected figure, four to five times bigger than any other spending burden ever projected by the commission in its history. And, as noted in the report, it is a conservative estimate. I was further surprised when not a single commissioner in their questioning or commentary was willing to make specific reference to these pricing burden estimates when they spoke.

When Partners proposed acquiring South Shore Hospital plus a related physician group and the Hallmark Health System, the Health Policy Commission staff projected a roughly $50 million-a-year new annual burden for Massachusetts premium payers. That level of annual spending growth plus the added negotiating power for Partners as it grew even larger led me (I was a member of the commission at the time) and some of the other commissioners to criticize the Partners’ proposal as “not in the public’s interest.”

The commission’s board subsequently voted unanimously to refer its  findings to the attorney general. Stuart Altman, the commission’s chairman, also expressed our concern about a $50 million annual spending increase to Superior Court Judge Janet Sanders who, when reviewing the proposed settlement agreement that Partners had subsequently cut with then-Attorney General Martha Coakley to allow the proposed deal to go forward, pointed to the commission’s report and findings as a basis to reject the agreement.

Dr. Kevin Tabb, who I believe to be an honest, thoughtful, and socially minded CEO of Beth Israel, told the commissioners after the findings were revealed that it is his hope to come back over the next 30 days with some additional ideas on how to “make sure that the interests of patients in this state are addressed” as the parties continue to move forward with the proposed merger idea.

That is a tall order to accomplish. It’s almost unimaginable to see how this spending burden can be mitigated without firm and enforceable conditions to restrain most of the projected price increases.

2. The so-called willingness-to-pay analysis is the output of an economic forecasting model that has been used for a number of years by the Federal Trade Commission and Justice Department to estimate pricing impacts from proposed hospital mergers. With great confidence, regulators have come to rely on this tool when presenting their antitrust economic arguments as a basis for legally opposing a proposed hospital merger in court.

What surprised me was that, except for Altman, every commissioner seemed to distance themselves from this analytic approach. Not a single commissioner in their questioning or commentary made specific reference to the projected spending burden figures that the model generated. A few went out of their way to say how complex the analysis was, and how the projections are taking place while the transaction is still being formulated to suggest that perhaps the tool was being applied prematurely. A few commissioners also seemed to say that they find the analysis and resultant findings almost too negative to be true. (I have some sympathy here—with our market dysfunction, and with government missing in action in terms of doing anything about that dysfunction–creating Beth Israel Lahey Health (the proposed name of the merged entity) seems at times to understandably represent a hope for finding a viable way to possibly take on Partners’ dominance in our marketplace.)

Harvard economist David Cutler, not an antitrust economist but perhaps the one commissioner most knowledgeable about the analytic approach, appeared to want to avoid speaking directly about the price projection issue. Instead, he preferred to talk more about the size of the potential savings that the parties can accomplish with their care redirection aims—with an apparent hope that the current projection underestimates the savings. While he did not run away from the staff’s projection of as much as $200 million of additional spending flowing from price increases, he did suggest this analysis was much less certain when it does not involve the dominant actor in the market—namely Partners Healthcare. The net effect for the listener was to wonder if he didn’t want to fully embrace the analysis the agency and its consultant were using.

Marylou Sudders, the state secretary of health and human services and a social worker by training, was the commissioner most critical of the analysis. She seemed to suggest that the projected spending increases might be reined in by Beth Israel Lahey Health’s needing to adhere to the state’s 3.1 percent cost growth benchmark or various regulatory actions. The problem with her reasoning is that the cost growth benchmark may not work to check undue price increases.

For example, assume that Beth Israel and Lahey would average a 1.5 percent increase in per capita total medical expense (TME) spending over a five-year period if they remain independent. But if they join together, with the added leverage leading to additional price increases, the new system’s TME could grow by 3.1 percent a year. The merged system wouldn’t exceed the state’s growth benchmark, but the rise in spending together would be much greater than if they were operating on their own – about $200 million a year greater by year five.

Counting on regulators to fix any problems also seems risky. We have yet to see the Health Policy Commission require any physician group to adopt a performance improvement plan even though some have breached the benchmark in total per capita TME growth. And even if a plan is imposed and violated, the most Beth Israel Lahey Health could be fined would be $500,000. The Department of Public Health, with its determination of need oversight, has failed to do its job over and over again, including failing to mitigate Health Policy Commission projected harms tied to the 2016 Children’s Hospital billion-dollar capital expansion project, the purchase of Mass Eye and Ear by Partners earlier this year, and again with this proposed merger– when it failed to adopt a draft condition that would have more directly checked price increases post-transaction.

Sadly, the Department of Public Health means well. They just really don’t have the expertise to handle these transactions in the right way.

In sum, I would much rather rely on the commission’s projections to guide public policy decisions—which here are likely to be made by Attorney General Maura Healey, than the false security that Secretary Sudders seemed willing to offer up as an alternative.

3. My third major surprise was the meager projected savings — $13 million – from the merger.


I certainly wanted to believe that this transaction as currently constituted could bring substantial savings from all of the planned care redirection goals—especially the one goal tied to moving market share away from Partners Healthcare to the new Beth Israel-Lahey system. Sadly, even though the Health Policy Commission projects that the new system will gain some market share from Partners (more from that system than any other), the net savings are small (between $2 million and $3.3 million) because of both the projected price increases Beth Israel-Lahey can demand as well as the fact that market share is also taken from lower-priced providers.

It was also disheartening to read that Beth Israel Lahey Healthy can’t realistically grow its primary care base (even with an approximate $32 per member per month advantage over their competition) to mitigate the spending from projected price increases. The Health Policy Commission estimates Beth Israel-Lahey would need to recruit between 350,000 to 500,000 new primary care patients with commercial insurance to net out the increased spending burden from their higher pricing projections.

Over the next few weeks, I imagine the merging parties will be hard at work to credibly craft an argument to show that the Health Policy Commission has greatly underestimated the savings that can occur in the marketplace from this transaction. But as I read the preliminary report that won’t be easy.

4. I was also a bit surprised how the idea of this new system being able to offer a limited network that could attract patients away from Partners seemed to capture very little support as a viable spending reduction mechanism. The preliminary report affirms what we already know about the present–the merging parties have not shown any real success in coming together to be part of limited network arrangements which, while cutting Partners out of being an in-network offering, can then attract substantial numbers of patients to such an insurance offering.

But apparently, the insurers that the Health Policy Commission staff talked to seemed to have little confidence the transaction on its own would help with rebranding to the extent that Beth Israel Lahey Health would become a sufficient must-have network so as to change this reality from the present situation. Perhaps, as the report suggests, only with even deeper discounts in premiums from significant provider price cuts to Beth Israel Lahey Health, (rather than price increases) could the limited network product gain real market share. But to date the parties have not committed to that approach. It would be nice in the next few weeks to learn more specifics from the parties—or really even better from the insurers about the viability of a Beth Israel Lahey Health-anchored limited network and its ability to attract market share from Partners.

5. The last surprise ties into the Medicaid market share issue for the new system. The merging institutions care primarily for higher proportions of wealthier, white patients, and overall attract fewer numbers of Medicaid patients as compared to their competitors. So it is not surprising that when you just put them all together, you do not magically create anything that will serve as a magnet for either persons of color or for Medicaid enrollees.

Yes, if the new system decided to put more resources into behavioral health services—especially into services or facilities that attract either people with addiction disorders or those who are seriously and persistently mentally ill—that could lead to growth in Medicaid market share. But given the poorer reimbursement and the often unstated reality by providers that caring for these populations does not usually create the sort of environment that is deemed attractive for recruiting more commercial patients to a provider, I would not bet that behavioral health service expansion is in the plans for Beth Israel Lahey Health for the foreseeable future.

The one surprise to me was just how unattractive these providers at baseline seem to be to Medicaid enrollees. For every institutional provider that is part of this transaction, at baseline in their primary service areas their market share for Medicaid is less than the share of the service area ove all. That’s true for every provider. This is not true for the contracting affiliates (Metro West, Lawrence General, and Cambridge Health Alliance) who were not invited to the merger party.

While there can be a number of explanations, I think at some level it means that the majority of primary care practices associated with these hospitals are in some way not accessible or unattractive to Medicaid patients. It also may be that Medicaid patients go elsewhere when they need emergency services—either because of geographic location or perhaps perceptions of provider cultural competency–and this translates to less Medicaid admissions. New England Baptist, primarily an orthopedic hospital and one of the parties to the transaction, is the poster child for serving all but Medicaid patients–with less than 1 percent of its payer mix coming from this group.

One thought I have after seeing this data is that, no matter what happens with this transaction, this issue presents an opportunity for improvement. At least the parties to this transaction should take a real hard look at how they can do more to attract their fair share of Medicaid enrollees. And if the transaction does go forward—with the likelihood of the flow of additional resources no matter what conditions are imposed on the merger—it seems to me that making investments in services, facilities, or care practices that will attract Medicaid patients as well as more patients of color would be a socially worthwhile investment.

Meet the Author

Paul A. Hattis

Associate professor, Tufts University Medical School

Paul A. Hattis is an associate professor at Tufts University Medical School and a former member of the Health Policy Commission.