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Massachusetts Hospitals Seek to Get Larger to Shrink Costs

Article · May 3, 2017

In what could be a harbinger for other large markets around the country, several metro Boston hospitals are proposing a merger that will give them critical mass to compete against the dominant player. But will patient costs rise, in what is already the nation’s highest-cost health care market?

In January, 672-bed Beth Israel Deaconess Medical Center, which is one of Boston’s biggest hospitals, a teaching facility for Harvard Medical School, and the flagship for a four-hospital system, announced plans to merge with Lahey Health. Located in Burlington, Massachusetts, Lahey serves Boston’s northern suburbs and a sliver of southern New Hampshire with five acute care hospitals and a total of 841 beds.

The combined system — which would include Beth Israel Deaconess hospitals in southern and southeastern Massachusetts — contains 1,814 beds, some 29,000 employees, and an annual revenue of $4.5 billion. That count excludes Beth Israel Deaconess’ business affiliates, among them large medical groups Atrius Health and Cambridge Health Alliance, as well as Signature Healthcare and Lawrence General Hospital, with 253 and 189 beds, respectively.

Assuming the merger is completed, Beth Israel Deaconess CEO Kevin Tabb, MD, would head the new system. Howard Grant, MD, Lahey’s CEO, would retire. The 53-year-old Tabb, a California native and internal medicine specialist who underwent his undergraduate and medical education and training in Israel, had served as the Chief Medical Officer for Stanford Hospital and Clinics before taking over at Beth Israel in 2011.

Soon after, Tabb approached Grant to discuss a potential combination. After three false starts over 5 years, a letter of intent to merge was signed in January.

Almost immediately, that letter was subjected to revisions and addenda.

Little more than two months into a process expected to take a year or more to complete, New England Baptist Hospital in Boston — a 118-bed facility focused on orthopedics — was invited to join the merger as well. And 225-bed Mount Auburn Hospital in Cambridge said it was also mulling entering the transaction.

New England Baptist has close ties with Beth Israel Deaconess, having announced a strategic partnership in 2014 and a joint venture among physician groups in 2016. But its New England Baptist’s CEO, Trish Hannon, says the institution wasn’t approached by the two other systems until late February.

“For Baptist particularly, it provides us with an opportunity to perhaps further develop our [primary care physicians network] and collaborate effectively across the new system to deliver a much higher value for musculoskeletal care,” she tells NEJM Catalyst.

Counteracting the Partners Effect

James F. Burgess, PhD, a health care economist with Boston University, believes that Lahey and Beth Israel in particular would be able to assist one another in navigating value-based and bundled payments.

“Massachusetts has been a hotbed in developing ACOs,” he says, adding that Lahey’s huge multi-specialty medical practices would help Beth Israel Deaconess better control its own ACO ventures.

But that is only part of the story. Although the three providers have been caring for New England’s patients mostly on their own for the better part of the last century, the impetus for them to become partners goes beyond better-managed ACOs. It goes to Partners itself.

That would be Partners HealthCare, perhaps the single most economically dominant regional hospital system in the United States.

Even with New England Baptist in on the deal, the new 10-hospital system (in a state with little more than 10,000 square miles of area) would still play catch-up. Partners also has 10 hospitals statewide in its network, with an 11th in New Hampshire. But Partners’ $12 billion in annual revenue still dwarfs the combined $5 billion from Beth Israel Deaconess–Lahey–New England Baptist.

That’s partly because Partners owns both Massachusetts General Hospital and Brigham and Women’s Hospital — the two largest acute care facilities in Boston, respectively. Partners also owns Newton-Wellesley Hospital, the largest in Boston’s western suburbs, and North Shore Medical Center, the largest hospital north of Boston.

Hannon suggests that Partners’ power has distorted health care delivery in the Bay State to a significant extent: “The market in eastern Massachusetts does not function particularly well with a very large health system, and a series of much smaller systems.”

Hank Osowski, a Managing Director with Strategic Health Group in Burbank, California, notes that an alpha hospital system can change how health care business is conducted in a particular geographic region.

“Health plans have to do business with big players,” he says. “Their presence is so dominant, it’s tough to compete even though there should be significant opportunities to compete.”

With its dominant market position, Partners is often paid much more for care than other hospitals in Massachusetts. The Boston Globe referred to it as the “Partners effect” in an investigative series that was published in 2008. One example: Brigham & Women’s Hospital was paid by insurers 44% more to perform an angioplasty than MetroWest Medical Center in Framingham, Massachusetts. Massachusetts General was at the time paid about 15% more to take care of heart failure patients than Beth Israel Deaconess, despite the fact Beth Israel had better outcomes.

If Partners is able to command such payments from insurers, it means smaller hospitals and systems have less negotiating clout, giving them impetus to band together — among the reasons why Beth Israel Deaconess and Lahey have never quite given up on their merger hopes.

“As the economics change dramatically and risk is absorbed by providers, you have to scale up to compete and have more value,” Hannon says.

Meanwhile, the “Partners effect” has not changed in the intervening years. A 2016 report by a state agency, the Center for Health Information and Analysis, concluded that Partners was the only health care system in the state with each of its hospitals paid more than the statewide average in 2014. Indeed, Partners’ then eight hospitals raked in a third of all commercial insurance payments to Massachusetts hospitals. The Massachusetts Hospital Association’s membership includes 143 acute care facilities statewide.

Partners had become so dominant in Massachusetts that it began to get in its own way when attempting recent transactions. The system agreed to price controls in order to acquire South Shore Hospital in South Weymouth and Hallmark Health System in 2014. But that deal, reached with former Attorney General Martha Coakley, was scuttled by a state court judge the following year and roundly criticized by Coakley’s successor, Maura Healey. Partners dropped those deals, but snapped up the 70-physician Harbor Medical Associates despite Healey airing concerns about potential price hikes. Partners said it would put in price controls similar to those it proposed for its two failed hospital transactions.

Earlier this year, Partners announced another acquisition, saying it came to terms to acquire 41-bed specialty hospital Massachusetts Eye and Ear.

Consolidation and Costs

Kathleen Carey, Professor of Health Law, Policy, and Management at the Boston University School of Public Health, says a deal along the lines of Beth Israel Deaconess–Lahey–New England Baptist would allow its participants to “position themselves better in this market because of how dominant Partners is. They can perhaps consolidate services, lower costs, and improve efficiency.”

The system CEOs have indeed been painting their merger as a value proposition for Massachusetts. In an interview in late March with the Boston Globe, Grant and Tabb suggested that for every 1% of market share their combined entities are able to wrestle from Partners, medical spending in Massachusetts would be reduced by $18 million.

“We think it’s exactly what the marketplace is demanding,” Grant told the newspaper. Neither CEO elaborated on the mechanics of that specific formula.

It’s a common refrain among potential partners that merging is a way to cut costs. But economic studies say otherwise.

Carey is skeptical. “The argument is that this new merger is competitive and puts downward market pressure on Partners and it’s good for everybody,” she says. Yet “if you look at history, at the overwhelming amount of literature, it’s quite clear that hospital consolidation leads to higher prices.”

Osowski mostly concurs. “Do they have the chops to pull it off; can they drive down costs to where business starts to shift over to them? That is the question,” he says. But Osowski adds he’s never seen a merger that has led to an overall decline in health care prices.

As a result, Carey believes the new combined health system will have a high bar to surmount with regulators, at least on the state level. “There is a very, very strong burden on these hospitals to make a case to put downward pressure on prices in Massachusetts, and that is going to be a hard sell,” he says.

New England Baptist’s Hannon demurs on whether such a merger would lead to a rise in prices in what is already one of the most expensive health care markets in the country. She notes that her hospital’s prices are among the lowest for orthopedic care in the state.

Meanwhile, it is likely regulators will take a long and deliberative look at the deal. The existing joint venture between New England Baptist and Beth Israel Deaconess suggests their pace. It was announced in the first half of 2014 but wasn’t approved until late last year.

Burgess, the Boston University economist, does not believe that the Trump administration would have any objections to the deal, noting that it would still be a much smaller player than Partners.

But he points out the crux of the issue for Beth Israel Deaconess, Lahey Health, and New England Baptist: “There really is no point for them to merge unless to charge higher prices. That is, unless they are willing to work together and change their practices.”

 

Disclaimer: Namita S. Mohta, MD, Clinical Editor for NEJM Catalyst, is faculty at the Center for Healthcare Delivery Sciences and a practicing internist at Brigham and Women’s Hospital. Thomas H. Lee, MD, MSc, NEJM Catalyst’s Leadership Board Founder, practices primary care at Brigham and Women’s Hospital. Neither were involved in the writing of this article.

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