The many risks of hospital mergers

The New York TimesJuly 7, 2014 

The following editorial appeared in the New York Times:

In retrospect, it looks as if Massachusetts made a serious mistake in 1994 when it let its two most prestigious (and costly) hospitals – Massachusetts General Hospital and Brigham and Women’s Hospital, both affiliated with Harvard – merge into a single system known as Partners HealthCare. Investigations by the state attorney general’s office have documented that the merger gave the hospitals enormous market leverage to drive up health care costs in the Boston area by demanding high reimbursements from insurers that were unrelated to the quality or complexity of care delivered.

Now, belatedly, Attorney General Martha Coakley is trying to rein in the hospitals with a negotiated agreement that would at least slow the increases in Partners’ prices and limit the number of physician practices it can gobble up, albeit only temporarily.

The experience in Massachusetts offers a cautionary tale to other states about the risks of big hospital mergers and the limits of antitrust law as a tool to break up a powerful market-dominating system once it is entrenched.

One purpose of the 1994 merger, as the president of Mass General acknowledged in 2010, was to take away the ability of insurance companies to demand lower prices from one hospital with the threat that they could just send patients to the other. After the merger, insurers had to take both of them or neither.

The bargaining power of the merged institutions was starkly displayed in 2000 when the Tufts Health Plan refused to pay Partners what it considered unjustifiably high prices. Partners promptly announced it would no longer accept Tufts insurance and created an uproar among members of the Tufts plan who wanted to retain access to the two prestigious hospitals. Faced with defections that could destroy its viability, Tufts quickly caved in.

The current case in Massachusetts arose when Partners sought to acquire a hospital and an affiliated physician group southeast of the city. A special agency created by the Legislature to monitor health care costs, known as the Health Policy Commission, concluded that the acquisition of South Shore Hospital and related doctors would be likely to drive up total medical spending in the region by $23 million to $26 million a year and possibly much more. It referred the matter to the state attorney general, who has no power to restrict prices but can file an antitrust suit to block a merger and can use that threat to win broader concessions.

On June 24, after months of negotiations, a final agreement between Partners and Coakley was filed in a Massachusetts court. The judge has set a public comment period that will end this month. The deal would let Partners acquire two more community hospitals in addition to South Shore, in exchange for temporary restrictions on raising its prices and on further expansion.

This could be a dubious bargain. Such short-term restrictions have been abandoned as a tactic by the Federal Trade Commission because, an agency official said last month, they are “an inferior substitute” for allowing market competition among separately owned providers to determine prices and quality. Large-scale mergers almost always lead to higher prices, reputable research shows. However, the Department of Justice, which has been investigating Partners alongside the state, reportedly supports the settlement.

At the end of 10 years, Partners would be free to raise its costs at will and would be larger than it is now. The deal was apparently struck because state investigators concluded that blocking the latest acquisition on antitrust grounds would not reduce the prices or market power of Partners. And they saw no legal or practical way to undo the original merger.

The lesson for other states confronting the wave of hospital mergers is to look much more carefully at possible consequences than Massachusetts did 20 years ago. Mergers are hard to undo after the fact.

The New York Times

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