Massachusetts Court Unsettles Partners’ Hospital Merger By Nixing Consent Judgment

By Daniel Vitelli and Axel Bernabe

A Massachusetts state court on Thursday derailed the settlement of a challenge to the proposed merger of Partners Health System with rivals South Shore Health and Educational Corp. (South Shore Hospital) and Hallmark Health Corp. (Lawrence Memorial Hospital and Melrose-Wakefield Hospital) by taking the unusual step of rejecting a proposed consent judgment negotiated by the state’s top antitrust enforcer.

Suffolk Superior Court Judge Janet L. Sanders was swayed by arguments of opponents of the merger that the acquisitions would enhance Partners’ market power and enable it to increase health care costs.

The now-rejected proposed consent judgment was the product of a lengthy investigation and settlement negotiations by former Massachusetts Attorney General Martha Coakley, who filed a complaint on June 24, 2014, alleging that the proposed merger – which would enable Partners to acquire three community hospitals and add hundreds of doctors to its network – would reduce competition and increase prices.  Simultaneous with the filing of the complaint, the state Attorney General and the defendants filed a proposed “conduct” settlement (later amended) that would allow the merger to proceed on certain negotiated conditions, including how Partners could negotiate with insurers, grow its provider network, and increase prices, for certain periods of time.  Conduct settlements like this one are fairly unusual in the antitrust context; the U.S. Department of Justice (the “DOJ”) and the Federal Trade Commission (the “FTC”) generally prefer structural remedies.

The proposed deal received significant public scrutiny.  For example, 21 economists in academia argued that the consent judgment “will not fully address the substantial alleged anticompetitive effects of the acquisitions proposed.”  The economists explained that they “do not believe that the proposed restrictions on Partners’ conduct included in the consent judgment will offset the consumer harm that is likely to arise from the acquisitions of South Shore and Hallmark hospitals and their physician affiliates.”

Although the DOJ did not submit a public comment, a statement by that antitrust enforcer supporting the consent judgment was read into the record.  (Judge Sanders thought the DOJ wanted to “keep [its] options open.”)  On a related topic, FTC Commissioner Edith Ramirez recently criticized certain states’ proposed legislation, which would exempt merging health care providers from antitrust review.  Such proposals, according to Commissioner Ramirez, “betray[] a misunderstanding of the crucial role that competition plays in the health care sector,” and “undercut[] the very objectives they aim to achieve.”

A surprising voice recently joined the chorus of opponents of the Partners deal – the newly elected Massachusetts Attorney General, Maura Healey.

Last Monday, Attorney General Healey filed a notice with the court, citing her duty to “protect and advance the public interest,” raising concerns with the proposed settlement negotiated by her predecessor, and indicating a willingness to “litigate to enjoin Partners’ proposed acquisition of South Shore Hospital, and likely use additional time to further evaluate the proposed Hallmark transaction.”

Three days later, the Massachusetts Superior Court denied the motion to approve the settlement.

The court rejected the deal for two main reasons.  First, the court found that proposed acquisition was not in the public interest because it would “cement Partners’ already strong position in the health care market and give it the ability, because of this market muscle, to extract higher prices from insurers for the services its providers render.”  On this point, the court rejected the argument that the temporary price caps and other conduct remedies would address the competitive harm.  Second, the court doubted the ability to enforce the proposal:  “Certainly, there is reason to doubt that this Court has the technical competence or resources required to resolve the disputes that are certain to arise under this consent decree if it were approved.”

Judge Sanders’ evocative language highlights a concern with using temporary conduct restraints to remedy anticompetitive harms associated with mergers:  “[T]he remedies that are proposed 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.”  The court’s rejection of the deal emphasizes the benefits of structural remedies over conduct remedies, serving as a valuable reminder to state Attorneys General, judges, litigators, and legislators alike of the challenges of conduct remedies.

Moreover, Attorney General Healey’s strong statements suggest that state antitrust regulators – as well as their federal counterparts – are not afraid to roll up their sleeves and carefully scrutinize (or litigate) problematic consolidations in healthcare provider markets.

– Edited by Gary J. Malone