Massachusetts Court Hosts Debate On Whether Partners HealthCare Merger Settlement Will Affect The Common Health Of The Commonwealth

By Daniel Vitelli

A Massachusetts state court has extended the time for a contentious debate on a proposed antitrust settlement that the Massachusetts State Attorney General says will help hold down medical expenses, and critics say will result in greater market power for the state’s largest health care system.

Attorney General Martha Coakley is asking Suffolk Superior Court Judge Janet L. Sanders to approve a consent judgment that reflects a settlement agreement the Attorney General’s office has reached with Partners HealthCare System, Inc. The deal resolves an investigation by the Attorney General’s office into Partners’ acquisitions of South Shore Health and Educational Corp. (South Shore Hospital) and Hallmark Health Corp. (Lawrence Memorial Hospital and Melrose-Wakefield Hospital).

The court has scheduled a hearing on the proposed antitrust settlement for Sept. 29, 2014. The court has also extended the public comment period on the settlement to Sept. 15, and given the Attorney General until Sept. 25 to respond to the comments.

More than 80 comments have already been submitted during the court-ordered public comment period. Persons submitting comments have ranged from Robert Kraft, owner of the New England Patriots, to the Mayor of Weymouth, Massachusetts, to an anonymous employee of South Shore Hospital. All the rhetoric is just a prelude for an eventual judicial decision that may alter the landscape of healthcare in Massachusetts and antitrust merger review across the country.

Following an investigation, the Attorney General filed a complaint in state court to block Partners’ proposed acquisitions of South Shore and Hallmark. Partners, which already owns nine hospitals in Massachusetts, reported approximately $9 billion in annual revenue for 2012. The Attorney General’s complaint alleged that Partners’ proposed acquisitions would reduce competition among health care providers (specifically hospitals) and increase prices.

The Attorney General’s office filed the proposed settlement on the same day it filed the complaint. Rather than a “structural” settlement, in which defendants may, for example, divest certain assets in order for the deal to go through, the Attorney General negotiated a “conduct” settlement. A conduct settlement restricts the defendants’ behavior after the merger. The U.S. Department of Justice and the Federal Trade Commission, the two federal agencies jointly responsible for antitrust merger review, generally prefer structural settlements. The Massachusetts Attorney General opted for a different approach.

The proposed settlement does three main things. First, the proposed settlement would restrict how Partners can negotiate with insurers. For a period of 10 years, insurers would have the option to contract with any or all “component parts” (divisions) of Partners’ overall network. This provision is directed at counteracting the all-or-nothing leverage that large providers can wield over insurers.

Second, the proposed settlement would place limitations on Partners’ ability to grow its provider network. For a period of seven years, Partners would be prohibited from acquiring additional hospitals in Eastern Massachusetts (with some exceptions), absent review and approval by the Attorney General. Partners’ ability to increase its physician network would also be restricted for five years.

Third, for a period of six and one half years, the proposed settlement would cap the amount that Partners can increase its prices, by pegging Partners’ prices to inflation.

The proposed settlement is a creative way to try to fix a potential antitrust problem. But some commentators criticize the proposed settlement for not going far enough. A group of 21 academic economists from top schools wrote a letter urging the court to reject the proposed settlement, stating “we do not believe that the proposed restrictions on Partners’ conduct . . . will offset the consumer harm that is likely to arise from the acquisitions of South Shore and Hallmark hospitals and their physician affiliates.”

If the settlement is approved, it is likely to have a significant impact on Massachusetts’s healthcare system. If the settlement arguably achieves the Attorney General’s goal of holding down medical expenses, antitrust practitioners are likely to use the deal as the poster child for moving from resolving potentially anticompetitive mergers with structural settlements to negotiating conduct settlements.

Although the federal antitrust agencies will likely stick to their preference for structural settlements, approval of Partners’ conduct settlement may provide a roadmap for future mergers, particularly in the healthcare industry, where mergers are often reviewed by state antitrust officials. Even if federal antitrust enforcers remain skeptical of conduct settlements, state attorneys general reviewing mergers are likely to hear merging parties urge the negotiation of similar conduct settlements in lieu of the more traditional remedy of divestitures.

– Edited by Gary J. Malone