A Partners take on BI-Lahey merger

There could be some interesting side-effects

I HAVE MIXED FEELINGS about the merger of Beth Israel Deaconess and Lahey Health, but now that it has received the conditioned approval of Attorney General Maura Healey I want it to succeed in putting competitive pressure on Partners HealthCare. Officials at Partners say they welcome the competition. That may be so, but I wonder how the formation of the BI-Lahey system will impact Partners’ thinking and behavior going forward.

Here’s my take:

PRICES – Attorney General Healey negotiated seven years of price constraints with the new system that are tied to the state’s cost growth benchmark. Partners should give a slight sigh of relief over this condition because the price cap on BI-Lahey is likely to reduce some of the pressure on Partners to reduce its commercial revenue flow.

Although the Health Policy Commission predicted the creation of BI-Lahey would lead to price increases in the range of 6 to 9 percent above the allowed annual increments, the deal with Healey now limits increases to no more than 3 percent through 2022 assuming the state’s overall benchmark doesn’t budge. Starting in 2023, BI-Lahey will have a 3 percent price cap for three additional years unless the benchmark rises above its current 3.1 percent level.

Why do the price caps on BI-Lahey help Partners? If BI-Lahey were to obtain even greater price increases, exceeding the statewide cap on pricing, that would put more pressure on the highest-paid group of hospitals (Partners, Children’s, and Dana Farber) to rein in their prices to help overall spending come in at or under the benchmark.  So the more that BI-Lahey prices are restrained, this in theory makes room for Partners to get more of its desired price increases.

ALLWAYS – In the attorney general’s agreement with BI-Lahey, AllWays Health Partners, the wholly owned insurance subsidiary of Partners (formerly Neighborhood Health Plan), is not eligible to claim that price increases cannot exceed the 3 percent cap in its negotiations with BI-Lahey.   At first blush, this provision seems like a slight setback for Partners. But it could add some strategic clarity for AllWays as it transitions from primarily a Medicaid insurer to a commercial insurer. AllWays may want to ultimately steer away from dealings with BI-Lahey and position itself as a limited network plan attracting businesses and individuals to its Partners-only network, or a network that contains Partners plus some other lower-cost providers but not BI-Lahey.

BLAME GAME – Both the Health Policy Commission and the attorney general expressed concern that the new BI-Lahey could draw customers away from non-Partners hospitals instead of Partners hospitals.  If this happens, and some community hospitals go under, BI-Lahey may end up taking the blame and Partners could end up gaining market share.

BI-Lahey’s creation may also have untoward effects on the academic medical center market. For a number of years now, Tufts Medical Center has been struggling to find a path of long term sustainability. It lacks the brand name or commercial rates of many of its competitors and it also lacks the government backstopping that is available to Boston Medical Center.  The Tufts pediatric business (Floating Hospital) is likely to lose patients to Children’s when that hospital’s additional beds come on-line in a few years and adult referrals could be siphoned by BI-Lahey. Partners, with its top-ranked academic medical centers, could benefit from a declining Tufts and again the blame could fall to others—including the state, which allowed both Children’s expansion and the BI-Lahey merger to go forward.

MORE EXPANSION – It’s possible the creation of BI-Lahey could open the door to additional Partners hospital expansion in Massachusetts—something that was thought to have been checked by a judge’s decision and Healey’s opposition in early 2015. Partners could claim that with a viable competitor now in the marketplace (the two systems would be roughly the same size in terms of utilization, while Partners has double the revenue of BI-Lahey), there is no longer a reason to reject its additional expansion. Indeed, analytics used by antitrust experts would probably point to less of an antitrust problem after the BI-Lahey merger than before.

Nevertheless, the approval process itself for the BI-Lahey merger may be enough to dissuade Partners from trying to expand. As part of the BI-Lahey process, the attorney general imposed prices constraints on all of the hospitals in the merged entity. It would be logical to assume that Partners would face a similar requirement if it tried to expand, and the advantages gained from expansion may not be enough to offset the price constraint requirement applied to the entire system.

NO LEGISLATION – Last summer, no state health care bill went forward primarily because of a disagreement between the House and the Senate about how to give a financial boost to community hospitals receiving lower insurance reimbursements. The Senate took what I thought was the responsible position by arguing the best way to pay for the financial boost was to impose some revenue constraints on the flush hospitals. The House supported raising the money through one-time assessments, with the financial burden falling primarily on our state’s health insurers.

At the cost trends hearing of the Health Policy Commission in October, House Speaker Robert DeLeo noted there will be some legislative effort next year to boost the revenues of community hospitals. With the BI-Lahey merger moving ahead, however, that push may stall as lawmakers take a “wait and see” attitude to see what impact it will have.

I can imagine DeLeo saying to his colleagues in the House or to the Senate leadership something along the lines of this: “Look, the state just approved the creation of BI-Lahey.  Its creation is predicated on the notion that as a ‘second system’ it will be able to take business away from Partners and, in so doing, help reduce some of the cost growth pressure and lead to a better functioning market.  While we need to boost those at the bottom through some mechanism, we ought to give BI-Lahey a chance to develop for a few years and see what happens with market competition and pricing before we go in and do a more radical effort to intervene in the market through some form of rate regulation legislation which would place some constraints on providers paid at the top.”

Meet the Author

Paul A. Hattis

Associate professor, Tufts University Medical School
At the end of the day, perhaps the most significant impact of allowing BI-Lahey to go forward is what its effect may be on Partners thinking and behavior over the next few years, and our state government’s ability and willingness to deal with the consequences of it.

Paul Hattis is a public health professor at Tufts University Medical School and a former member of the Health Policy Commission.