Partners is like a shark – always on the move
Let’s examine its growth strategies going forward
Second of two parts
AS A BIG, COMPLEX SYSTEM that pursues diverse missions of clinical care, research, teaching, and community benefit, Partners HealthCare has an almost insatiable need to significantly grow its revenue base each year. The need is only fueled by their almost never-ending desire to take on one major capital project after another; that, in turn, fuels additional annual operating expense, which then requires further growth in revenue to cover it—a vicious cycle of sorts.
Beyond Partners’ pursuit of price increases for care services it already owns, the revenue growth strategy has often been to acquire new institutional assets or practices, and then use market leverage to reprice the acquired entities higher. The system usually tries to gain market share at the acquired facility or practice as well as through additional referrals to its flagship hospitals and affiliated doctors.
After pursuing a hospital growth and acquisition strategy that seemed essentially unchecked, a new reality faced the system in early 2015, when a local judge, after hearing from newly elected Attorney General Maura Healey that she opposed Partners’ proposed purchase of South Shore Hospital and Hallmark Healthcare, rejected a settlement deal negotiated by former AG Martha Coakley that would have allowed the purchases to go through.
From its operations to the north of Boston, Massachusetts General Hospital has been able to successfully grow acute care hospital ownership in New Hampshire by purchases of Wentworth Douglas Hospital in 2017 and now the planned purchase of the Exeter Health system in Dover, New Hampshire.
Brigham and Women’s Hospital has had fewer opportunities to expand, but it is currently trying to grow via a purchase of Care New England in Rhode Island. Care New England has had very significant financial challenges, and sorting through those challenges has likely slowed down the transaction. The fact that Partners is not paying anything to acquire Care New England suggests the future need for capital investments or money to cover operating deficits is where the real costs lie.
The Care New England deal appeared shaky when leaders at Brown University condemned the acquisition idea publicly—until they didn’t. Brown was reassured that they would remain the academic affiliate for the Rhode Island hospitals involved in the purchase and was also given some board seats tied to the Rhode Island hospital group in its new configuration.
Massachusetts health care regulators have decided not to launch an extensive review of the Care New England acquisition, but one would assume Rhode Island officials may want to scrub it carefully. Areas of potential concern include negative competitive impacts on Lifespan, workforce reduction plans, premium increases coming from Brigham and Women’s repricing, and general worries that “those suits from Boston” would now be determining the fate of an important chunk of the Rhode Island health care industry. At the same time, Rhode Island regulators may view the Brigham and Women’s purchase as helping to shore up what has been a financially challenged health care system.
One area that Partners has been able to grow is its physician practices and outpatient care. While antitrust law on physician ownership comes into play when ownership hits certain levels, the law and policy are still in a state of evolution. As an example, when Partners was forbidden from buying South Shore Hospital, it was still able to close a deal to purchase the physician group – Harbor Medical – affiliated with South Shore Hospital. Healey urged Partners not to acquire Harbor, but she lacked the legal power to stop the purchase.
One can even argue that the ultimate decision by the judge to reject this proposed Partners hospital purchase may have actually backfired from a public policy perspective, and helped Partners grow even stronger. Partners was able to purchase Harbor Medical and gain all of the referral benefits without having to pay the price of acquiring and needing to invest millions in IT and other capital projects at South Shore Hospital. Perversely, state intervention to stop the hospital purchase may have ended up leaving Partners richer, and done little to thwart its market dominance through additional physician group acquisitions.
In recent years, Partners has grown its urgent care business significantly and it’s still getting bigger – a worry to competitors in Massachusetts. Massachusetts General is currently adding more space and services to its MGH West facility in Waltham, and that hospital already generates more revenue from outpatient than inpatient care.
In the health plan arena, Partners has made a number of interesting moves. It purchased Neighborhood Health Plan, a historic Medicaid insurer, in 2012, and last year renamed it AllWays Health Partners. The insurance business, initially a financial drag on Partners, requiring hundreds of millions of dollars to stabilize its finances, is now pivoting toward becoming primarily a commercial insurer. It shed nearly 250,000 Medicaid lives between 2017 and 2018 and on January 1 added about 100,000 or so Partners employees and dependents as its largest book of commercial business. Partners is now reporting that AllWays is slightly profitable, and David Torchiana, the soon-to-depart CEO of Partners, spent some time exploring a merger with Harvard Pilgrim Health.
The merger idea probably attracted Torchiana’s attention for at least three reasons. First, some would argue that the economics of running a health insurance business dictate that AllWays needs much more than its current 200,000 or so commercial customers to be efficient. Some experts say closer to a million customers are needed to achieve economies of scale. A merger with Harvard Pilgrim could provide those numbers and more.
Second, in a world of global payment, perhaps Torchiana was advised that the wealth of care data that Harvard Pilgrim could bring to Partners would help with better managing medical expense in capitated Medicare, Medicaid, or other commercially insured contracts. A third reason could be that Torchiana believes that Harvard Pilgrim’s reach throughout New England, touching a few million lives, including in states where Partners is expanding, could under Partners ownership lead to even greater numbers of patients coming to the system’s providers.
It’s not hard to imagine many within Partners having real doubts about the company’s ability to successfully run a larger insurance function in such a way that it boosts the economics of the entire system. No wonder Torchiana had difficulty pushing this concept, and so late last year Partners announced it was backing away from the idea—at least for now
The current Partners strategy for growth is more regional than Massachusetts-based. But we may be entering a phase now where additional market and revenue growth will come via bed and service expansions at the system’s flagship hospitals.
When MGH announced its two-tower capital project a few weeks ago, it seemed to want to downplay the fact that as many as 200 additional beds will be opened. What regulators and even policy observers seem to miss is that a bed expansion is like an acquisition. In many ways it’s worse from a policy perspective when the expanding system has tremendous market power and overall demand for inpatient care is dropping—as is the case in Massachusetts.
Think about it this way. When Partners purchases a hospital, negative societal effects come about primarily from repricing existing patient care plus, perhaps, some additional redirected referral growth to Mass General or Brigham and Women’s. But if Mass General opens new beds on its high-priced campus and then fills those beds with Massachusetts commercial patients, it takes patients away from lower-priced hospitals (weakening them and possibly driving them out of business) and re-prices their care higher. It’s a double whammy for the market.
Community hospitals are not the only ones worried; Tufts Medical Center, an academic institution, should also be worried.
Of course, hospitals and systems in pursuit of expansion have answers for every legitimate fear.
Partners will likely tell us that all of the new beds at MGH from its project will be occupied by high paying patients who come from outside of the state—from other states and internationally. They will say that no new net growth will likely come from Massachusetts patients; Boston Children’s Hospital made identical, and ultimately successful, arguments during a state review of its new facility with 71 more beds.
Yes, that is what they will say. Unless they are asked to guarantee their prediction holds true (with real financial penalties if it doesn’t), they have every incentive to plow ahead and do as they please in opening up the new beds.
With Torchiana announcing his retirement, some are whispering it’s a signal of a possible break-up of Partners. I would bet against that happening.
A forced breakup seems unlikely because neither federal antitrust agencies nor Healey seem motivated legally or politically to take on such a case. That’s too bad. Healey and her predecessors have been reluctant to test the full applicability of antitrust or consumer protection laws to the market situation with Partners. As her counterparts in California and Pennsylvania have recently become more energized, maybe she will as well.
The only way a break-up of Partners could happen now would be if the two hospitals themselves concluded that they would be better off divorced from each other rather than locked in their distant and privately antagonistic marriage. I have previously advocated for the breakup of Partners for the common good. From where I sit, a divorce could come about if the Legislature or Congress passed legislation that regulated hospital pricing, making it clear the two hospitals and their doctors would essentially be capped at prices that would remain the same if they stayed together or divorced.
But again, I do not predict this will happen. Our Legislature, and particularly the House leadership, seem to have no appetite for either going down this kind of rate regulation road or thinking our state would be better off if Partners split up. Clearly, our House leaders appear to have been persuaded that our entire state’s economic growth (or at least the medical-caring-discovery-complex contribution to it) in Massachusetts is somehow tied to the continuation of Partners in its current form–market distorting behavior and all.
In theory, divorce could also be entertained if an entity, such as the new start-up company under Atul Gawande, developed a winning care concept that caught on with many businesses across the country. If Mass General and Brigham and Women’s would be eligible for large volumes of referrals if they were not legally tied to each other, that might be enough of a financial incentive to prompt a corporate divorce. But, admittedly, such a decision would not come easily or without great hesitation given the logistical challenges of breakup—their mutual dislike notwithstanding.I place myself in the camp of those who truly appreciate the many gifts that various people working across the Partners system bring us in terms of excellent medical care, teaching, and discovery efforts. But Massachusetts residents deserve those things at a more affordable price. While the existence of Partners certainly adds expense and creates market distorting negotiating leverage with commercial insurers, it is really not clear that there is value-add to the excellence side of the ledger from the system’s continuing operations. And so even though nothing on the horizon suggests an imminent breakup, whether Partners should continue to exist is a fair and important question for all of us to ask.
Paul Hattis is an associate professor at the Tufts University Medical School.