Emergency room.

Is It Time to Reverse Health System Consolidation?

By Laura Karas

Concentrated corporate power poses an obstacle to the provision of affordable health care across the state of Massachusetts.

In particular, a few large hospital systems wield monopoly power to maintain supracompetitive hospital prices. Is it time to consider breaking up large health systems?

Health care expenditures per capita in Massachusetts have been among the highest in the nation, and until recently, total health care spending growth in Massachusetts exceeded national averages. Though Massachusetts boasts the highest rate of health insurance coverage in the country, recent research demonstrates that health care remains unaffordable for a substantial proportion of Massachusetts residents. And the state’s near-3% rate of uninsurance masks variation across counties; “hot-spot” communities composed of lower-income residents, many of whom are young adults and noncitizens, experience higher rates of uninsurance.

Hospital consolidation has played a role in maintaining unaffordable health care prices, fueling health care spending growth, and compromising equitable health care provision in Massachusetts (and across the United States). What, if anything, should be done in response? I consider this question and discuss recent antitrust investigations and actions against the Commonwealth’s behemoth health care providers.

Confronting the Problem of Hospital Prices

Drug manufacturers continue to come under scrutiny for “price gouging” the American public with high pharmaceutical drug prices, whereas hospital prices have tended to attract less attention. Relative inattention to hospital spending and hospital prices is a mistake. Hospital care and physician services comprise the bulk of U.S. health care spending, and the link between provider consolidation and higher prices is well established.  Hospital prices traditionally have been enshrouded in secrecy, though the CMS final rule mandating hospital price transparency that took effect January 1, 2021, aims to change that.

Hospital expenditures grew at a faster rate in 2019 (6.2%) than did physician expenditures (4.6%) and retail prescription drugs (5.7%). And the COVID-19 pandemic is likely to boost hospital expenditures even higher in the near term and drive further provider consolidation. Outpatient volume remains depressed below pre-pandemic levels, placing pressure on outpatient providers to close or consolidate.

A 2019 Health Affairs article reported that growth in hospital prices outpaced growth in physician prices in recent years for common, high-volume services such as C-sections and knee replacements, leading the authors to suggest that that “there may be significant differences in the bargaining leverage of hospitals and physicians,” and that “policymakers should devote more of their efforts to addressing growth of hospital prices.”

Blocked Merger Attempts and Price Caps: Are They Enough?

Partners HealthCare, recently renamed Mass General Brigham in a costly and criticized rebranding effort, is the Commonwealth’s preeminent health care provider. It resulted from the merger of Massachusetts General Hospital and the Brigham and Women’s Hospital — previously considered “fierce rivals” — in 1994. Partners’ domination of the market for health care provision in Massachusetts should give ordinary citizens and regulators pause.

And indeed it has.

In 2009, the Massachusetts Attorney General’s Office (AGO) began an investigation into deals between Partners HealthCare and Blue Cross Blue Shield of Massachusetts that increased prices paid to Partners’ physicians and hospitals, an investigation apparently prompted by Boston Globe reporting. In 2010, the Department of Justice announced its investigation into Partners HealthCare for potential Sherman Act violations based on the health system’s contracting practices with health insurers like Blue Cross Blue Shield and others.

Later, in 2015, a Massachusetts Superior Court rejected a settlement between Partners HealthCare and the Massachusetts AGO to put in place conduct remedies for Partners’ proposed acquisition of South Shore Hospital, leading the two health systems to terminate their merger plans. The decision warned:

[T]he settlement, if adopted by this Court, would cement Partners’ already strong position in the health care market and give it the ability, because of this market muscle, to exact higher prices from insurers . . . . These Partners-driven increases in costs are estimated by an independent state agency, the Massachusetts Health Policy Commission (HPC), to amount to tens of millions of dollars a year. . . . The Proposed Consent Judgment . . . does not reasonably or adequately address the harm that is almost certain to occur as a consequence of the anticompetitive conduct by Partners . . . .

Concerns regarding Partners’ market position and market power remain. Yet, little has been done to address its market dominance. To be sure, the Massachusetts Health Policy Commission, the Massachusetts AGO, and federal agencies like FTC and DOJ continue to examine hospital mergers in Massachusetts. But the merger of Beth Israel Deaconess Medical Center and Lahey Health System was allowed to proceed in 2018, despite research from the Massachusetts Health Policy Commission finding that the merger will likely result in “significant price increases.”

Specifically, the final report from the Massachusetts Health Policy Commission on the proposed merger of Beth Israel Deaconess and Lahey Health noted the following:

After the transaction, [Beth Israel Lahey Health]’s market share would nearly equal that of Partners HealthCare System, market concentration would increase substantially, and [Beth Israel Lahey Health] would have significantly enhanced bargaining leverage with commercial payers[,] . . . enabl[ing] it to substantially increase commercial prices that could increase total health care spending by an estimated $128.4 million to $170.8 million annually for inpatient, outpatient, and adult primary care services. . . . These figures are likely to be conservative.

In this particular case, the Massachusetts AGO imposed a seven-year price constraint and secured commitments from the merging entities for capital investment in safety net affiliates that serve underserved communities in Massachusetts. But, temporarily slowing price growth while permitting consolidation may not be enough.

Professors Clark Havighurst and Barak Richman have called “monopoly power in the hands not only of nonprofit hospitals but also of other providers or suppliers of health services or products . . . more, not just equally, harmful to both consumers and the general welfare than monopolies of other kinds” (emphasis added). Elsewhere, Richman has called “health sector concentration combined with health insurance . . . cause for particular alarm,” and has explained that promises of charitable investment — such as that secured from Beth Israel Lahey Health — should not be viewed favorably in the antitrust analysis. Charity amounts to “a common tactic to solicit community support and judicial sympathy, even though [it] reduce[s] the efficiency of health care investments and further damage[s] the market for health care services.” Richman has encouraged courts to view assurances of research and charity as “reason[s] to oppose, not support, the mergers.”

Are Health Systems Becoming “Too Big to Fail”?

The newly rebranded Mass General Brigham seeks to become “the premier integrated healthcare system of the future.” But will the lofty and aspirational “integrated health system of the future” also be one that possesses unbridled power set to prices, ultimately driving unsustainable spending and health care inequities that deprive some residents of health care access and many more of affordable care?

Bigger doesn’t always mean better. But bigger health systems will mean higher prices.

The provider consolidation that Mass General Brigham and Beth Israel Lahey Health exemplify is reminiscent of the consolidated power of financial institutions that later required government bailout in the 2007-08 financial crisis. As former Chairman of the Federal Reserve Alan Greenspan famously stated, and as others have echoed, “if they’re too big to fail, they’re too big.”

Maybe the time has come to reverse provider consolidation in Massachusetts (and elsewhere, since, to be sure, the trend toward health system consolidation has been occurring nationwide and is predicted to continue post-pandemic). If the goal really is affordable health care, then it might be time to break up the large hospital systems and find ways to achieve integration of services and efficiencies across health systems without common corporate ownership.

Laura Karas

Dr. Laura Karas is a student at Harvard Law School and a Petrie-Flom Student Fellow for the 2020-21 academic year.

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