US hospitals have seen a substantial increase in the number of mergers in the last few years. In 2009, there were 52 hospital mergers. In 2011, there was twice that number. According to the Irving Levin Associates Health Care Services Acquisition Report, many observers believe that the increased prevalence of consolidations experienced in 2010 and 2011 represents a material increase in overall transaction activity, correlated in part to hospital preparation for reform provisions of the ACA. Massachusetts, my home state, has seen more than its share of such consolidations. In an effort to shed some light on the reasons for these mergers and their benefits and drawbacks, I turned to Mr. Paul Levy. Mr. Levy is the former president and CEO of Beth Israel Deaconess Medical Center in Boston. Having taken the job in 2002, he is credited with turning around the finances of the struggling organization. He has extensive experience in the business of health care, and has written several books on leadership and negotiation. He blogs about health care policy at Not Running A Hospital.

Mr. Levy has been an outspoken opponent of a merger recently completed by Partners Healthcare, the largest health care conglomerate in Massachusetts. I asked him about this, and how his concerns echo the larger national trends.

Shirie Leng: There have been many hospital mergers and consolidations in the US in the last few years. What in general is the economic impetus for this?

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Paul Levy: I think there are three factors at play, to different extents in different places. One, the best way to do this is that people are consciously and really, really do want to give more integrated care to people, cradle-to-grave kind of care, regardless of where they live in a geographic area. That’s the clinical reason. And some people believe, as yet unsupported by evidence, that by owning the whole spectrum of care, you can do a better job of it.

SL: That would be Gary Gottlieb’s [president and CEO of Partners Healthcare] position.

PL: That’s right. And the other two, one is that as doctors and hospitals go more and more to risk contracts, taking on the actuarial risk of patients, they want a bigger risk pool. And the third reason, and the one that’s really in play here [in Massachusetts], is that they can be big enough to lord it over the insurance companies and demand higher rates. The smaller hospitals are afraid of being left out of one of these networks. Many of the smaller hospitals have their own financial difficulties with raising capital and the like. They view affiliation with a big medical center as their saving grace. I think the unanswered question, because people are so hell-bent on doing this, is couldn’t you achieve at least the first two [factors at play in the merger landscape] by strategic partnerships and clinical relationships between the hospital and physician groups?

SL: I know Partners is involved in an antitrust investigation that just finished. There have been similar investigations in other states. Are the issues there similar?

PL:  I think they’re similar. I don’t know all the details. But the Federal Trade Commission, which is usually the agency that would do this kind of work, feels hobbled. They’re not sure they have the authority. It hasn’t been an emphasis. I remember a speech by the head of the FTC basically saying that if people expected them to be the watchdog on this, they shouldn’t. So that means no one’s watching it. Also, what’s being done can be viewed as being consistent with the ACA, which is promoting accountable care organizations and risk sharing and so on.

SL: One could argue that Partners just has a really great business plan.

PL: Oh, they do! It’s something to be admired. The question is whether it’s in the public interest. You can’t blame them for what they’re doing. It’s the natural tendency of a corporation to want to reduce competition. The problem is there are no current safeguards.

SL: So what about the Department of Justice?

PL: They’re busy doing other things. Like in the Massachusetts case, I know the DOJ was looking into it. But I imagine they deferred to Martha [Coakley, the Massachusetts Attorney General], saying “you take care of it.”

SL: The ACA didn’t set up any federal oversight of this?

PL: Not that I know of. So that’s the public policy issue facing America, which is that theoretically there could be some advantages from this consolidation in terms of more integrated patient care, but if the end result is monopoly or near monopoly positions by these big companies, the rates won’t go down. In fact, they’ll go up.

SL: Your concern over the Partners merger is really a cost issue.

PL: Yes.

SL: Partners has higher payment rates than other hospital groups, and higher revenues as well.

PL: Remarkably higher. As you said, it’s a great business plan. 

SL: Do the limitations Martha Coakley put on price raising and expansion allay your fears? [The Massachusetts attorney general approved the merger in May of this year, capping health costs at the rate of inflation across the entire Partners network through 2020; capping its physician growth for 5 years; and blocking further hospital expansion in eastern Massachusetts, including Worcester County, for the next 7 years.]

PL: No. Just the opposite. The limitations she put on pricing locks in their current pricing advantage forever. So the rule is they can’t go up more than inflation, right? Nobody is going to go up more than inflation. If they start with a price basis that’s 15%, 20%, 40% higher…

SL: Other hospitals in Massachusetts have done some merging. Why are those partnerships different from what Partners is doing? Or are they?

PL: BID, I assume, is likewise trying to build a bigger network, for all the reasons we talked about. The question is: can they ever be a counterweight to Partners? 

SL: If you had two major medical centers [of similar size], would that make a difference [in competition]?

PL: I think you’d need three or four. When you have two competitors, you usually don’t have real price competition. There’s a term that economists use called contestability. Contestability usually requires three or four competitors to have real price controls.