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From Antitrust Law Daily, January 30, 2015

Proposed consent judgment allowing acquisition of three hospitals rejected

By Greg Hammond, J.D.

A proposed final consent judgment that would allow Massachusetts’ largest health care provider system to acquire three acute care hospitals and at least 800 physicians in the greater Boston area was rejected yesterday. The Suffolk County, Massachusetts Superior Court determined that the remedies outlined in the proposed judgment are temporary and limited in scope, “like putting a band-aid on a gaping wound that will only continue to bleed (perhaps even more profusely) once the band-aid is taken off” (Commonwealth v. Partners Healthcare System, Inc., January 29, 2015, Sanders, J.).

Background. Partners Healthcare System, Inc.—Massachusetts’ largest health care provider system—entered into an agreement in December 2012 to acquire South Shore Health and Educational Corp. The two systems compete in the provision of general acute-care inpatient services sold to commercial health plans in the South Shore region of Massachusetts. Similarly, in January 2014, Partners entered into an agreement to acquire Hallmark Health Corp. and its affiliates, including two acute care hospitals and various outpatient facilities.

The Massachusetts Attorney General filed suit against the three health care providers, alleging: (1) the South Shore acquisition would eliminate significant competition in the market for general acute care inpatient hospital services sold to commercial health plans, allowing it to raise prices; (2) the Hallmark acquisition would substantially lessen competition in the health care market for acute care inpatient health services in portions of Eastern Massachusetts, resulting in higher health care costs for consumers; and (3) Partners’ practice of jointly contracting with “unowned” physician groups allows those physician groups to receive higher reimbursement rates, which reduces competition in the market for physician services and constitutes an unreasonable restraint on trade.

Proposed consent judgment. After the Massachusetts Attorney General filed suit, challenging Partners’ acquisitions and practices under the Massachusetts Consumer Protection Act and seeking to enjoin Partners’ proposed acquisitions, the parties reached an agreement—the proposed consent judgment. According to the court, there are four primary components of the proposed consent judgment: (1) a general price cap and a Total Medical Expenses price cap, that expire after 6.5 years after the date the judgment is entered; (2) component contracting, which would—for a period of ten years—permit health care insurers to negotiate with Partners to purchase certain components of service, rather than Partners’ entire network of services; (3) a prohibition on joint contracting, which would otherwise allow Partners to negotiate with insurers on behalf of unassociated doctors, allowing those physicians to be paid higher Partners rates; and (4) a limited in time restriction on physician and network growth.

Public comments. As part of the review of the proposed consent judgment, the court held an open public commentary period, receiving comments from, among others, the Health Policy Commission (HPC), an independent state agency. The HPC ultimately gave the opinion that the proposed consent judgment would not be in the public interest because it falls “far short” of addressing the harms that would occur if the acquisitions were granted permission to move forward. Specifically, it commented that rising health care costs in Massachusetts are largely attributable to higher commercial prices charged by health care providers; the majority of health care is delivered by only a few large systems, of which, Partners is the largest; and Partners hospitals and physician groups command the highest prices for services.

If the acquisitions were allowed, HPC contends that total medical spending would increase by over $38.5 million to $49 million per year; Partners would “almost certainly” have greater leverage to obtain higher prices and more favorable contract terms in negotiations with payers; and the information the parties provided does not establish a factual basis for concluding that the acquisitions would actually promote efficiency in the delivery of health care or improve patient access.

Proposed consent judgment rejected. The court rejected the proposed consent judgment, finding that the proposed remedy does not reasonably and adequately address the harm alleged in the Attorney General’s complaint and that the settlement might not be enforceable.

Specifically, the harm at issue in this case is loss of competition in the market of general acute care inpatient hospital services, which would allow Partners to raise prices, thereby increasing health care costs for consumers. The proposed consent judgment did not adequately address these harms, according to the court, because: (1) a cleaner remedy would be to require Partners to divest certain assets or to partially block the proposed acquisitions; (2) the price caps are limited in time and would do nothing to alter the size and market share Partners would have, which contribute to its current market power to command higher prices and other favorable contract terms; and (3) the Attorney General did not provide any factual basis for concluding that component contracting would be effective in keeping health care costs down.

Finally, the court noted its “serious concerns” regarding the proposed consent order’s enforceability. In this case, the proposed consent judgment provides for a ten-year period during which the court could be required to resolve disagreements among the parties concerning various complex areas of health care—a field that is already undergoing “enormous change.” The court concluded that it is “ill-equipped to keep abreast of those changes as they unfold over the next decade or to predict at this point how such changes might affect the meaning and application of the Proposed Consent Judgment going forward.” The court therefore rejected the proposed consent judgment.

Attorney general’s reaction. “In light of the court’s ruling, it is now Partners’ decision whether to proceed with the acquisition of South Shore Hospital,” newly-elected Massachusetts Attorney General Maura Healey stated. “Our office is prepared to litigate to block this transaction if Partners chooses to move forward. We remain committed to tackling the challenge of controlling health care costs while also promoting quality and access.”

On January 26, Attorney General Healey had expressed concerns over the proposed consent agreement, filing a notice with the Superior Court stating that she was prepared to fight to block the merger, if the court were to reject the consent agreement. In the notice, the Attorney General explained that she greatly respected the work the attorney general’s office did in arriving at the agreement with Partners HealthCare. She noted, however, that the court had been presented with additional information, including the input of dozens of insurers, providers, the Health Policy Commission, and many other stakeholders that have weighed in with comments, expressing concerns about the agreement’s ability to control costs over time.

The case number is SUCV2014-02033-BLS2.

Attorneys: William T. Matlack, Assistant Attorney General, for Commonwealth of Massachusetts. Brent L. Henry for Partners Healthcare System, Inc. Michael L. Blau (Foley & Lardner LLP) for South Shore Health and Educational Corp. Charles R. Whipple for Hallmark Health Corp.

Companies: Partners Healthcare System, Inc.; South Shore Health and Educational Corp.; Hallmark Health Corp.

MainStory: TopStory AcquisitionsMergers Antitrust StateUnfairTradePractices MassachusettsNews

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