After touting a proposed settlement with Partners HealthCare (Partners) that supposedly would “fundamentally alter [Partners’] negotiating power for 10 years and control health costs across [Partners’] entire network,” Massachusetts Attorney General (AG) Martha Coakley is now playing defense trying to fend off criticism of the deal that just might send the parties back to the drawing board.  With the Massachusetts Health Policy Commission (HPC) the latest to cry foul over the deal—a number of Partners’ competitors already have lined up against the deal, including Atrius Health, Beth Israel Deaconess Medical Center, Cambridge Health Alliance, Lahey Health Systems, Tufts Medical Center, and other hospitals and physician groups—the AG’s spokesman recently noted that the AG’s “office always retained the option to seek to renegotiate portions of this agreement.”  So, what is it about the proposed deal that is generating such backlash?  First some background.

Back in 2009, the AG’s office began its investigation into Partners’ “ability to extract high prices in contract negotiations with payers” because of “its effective ability to demand ‘all or nothing’ contracting with the health insurers”—that is, “the payers are effectively required to take the entirety of the Partners network, or take none of it and have no Partners hospitals or providers within the insurer’s network of providers.”  The AG’s investigation also focused on Partners’ practice of “joint contracting with certain affiliated providers who are not owned by Partners”—that is, “health care providers who are not owned or employed by Partners but on whose behalf Partners negotiates reimbursement rates with payers.”  The AG expanded its investigation to include Partners’ proposed acquisitions of South Shore Health and Education Corporation in 2012 and Hallmark Health Corporation in 2013, each of which operates competing hospitals in portions of Massachusetts.

In the AG’s view, the proposed settlement “is the first action of its kind to directly address [the] market dysfunction” caused by “the ability of Partners to charge higher prices based on its negotiating power” and “goes well beyond” simply blocking Partners’ proposed acquisitions “by reducing the negotiating power of Partners, limiting its ability to acquire physicians, and controlling costs across its entire network.”  How you may ask?  By (1) allowing payers to split Partners into separate contracting entities for up to 10 years—that is, academic medical centers, community hospitals and physicians, South Shore Hospital, and Hallmark Health Systems; (2) preventing Partners from contracting with affiliate physician groups that are not part of its owned hospitals for 10 years; (3) capping health costs at the rate of inflation across the entire Partners network through 2020; (4) capping physician growth for five years; (5) blocking further hospital expansion in eastern Massachusetts, including Worcester County, for the next seven years; and (6) appointing an independent monitor to be chosen by the AG and paid for by Partners to ensure adherence to the terms of the settlement agreement.

What is it about the proposed deal that is generating all the fuss?  In HPC’s view, based on “review of the data and evidence,” there are several flaws:  (1) “[f]or the three major commercial payers, the combined transactions are anticipated to increase total medical spending by more than $38.5 million to $49 million per year as a result of unit price increases and shifts in care to higher-priced Partners facilities (provider mix)”; (2) the “resulting consolidated system is anticipated to have increased ability and incentives to leverage higher prices and other favorable contract terms in negotiations with payers (bargaining leverage), the costs of which are not included in the above projection”; and (3) “the parties to these transactions have not provided adequate evidence of how corporate ownership is instrumental to achieving the desired care delivery reforms, and their own experience and that of other providers offer compelling alternative approaches to effectively improving coordinated care delivery.”

According to HPC, under the proposed deal, “Partners appears to retain certain flexibility to allocate price increases across providers to maximize revenue and market position.”  HPC says that “without an individual price cap, Hallmark providers may experience unit price growth faster than the rate of general inflation,” and that “[s]uch price increases would set a permanently increased baseline upon which future price increases would be negotiated and permanently increase baseline total medical spending, and premiums, in an area of the state that has thus far not experienced the market impact of a local, high-priced Partners facility, including by impacting providers who refer their patients to Hallmark.”  “[W]ithout lasting change to the market structures and incentives that underlie the operation of bargaining leverage,” HPC says that “price caps on their own may not be effective in keeping costs down.”

HPC also thinks that the proposed deal does not fully account for the “material price impact of shifts in patient care to higher-priced Partners providers.”  “Specifically,” HPS sees the “increased spending due to shifts in patient flow to higher-priced providers is not included in the agreement’s unit price constraint, but rather would be measured as increases in total medical expenses (TME)” and, “[s]ince the agreement only monitors the TME for Partners’ commercial risk business, anticipated increases in TME as Partners grows its non-risk books of business, currently including Preferred Provider Organization (PPO) and non-risk Health Maintenance Organization (HMO)/Point of Service (POS) patients, are not monitored.”  HPC also says that the proposed “agreement also does not monitor the TME of patients associated with other provider systems who receive some of their care from Partners, [South Shore Hospital], and Hallmark facilities and specialists.”

And finally, while noting that the proposed agreement “aims to mitigate Partners’ bargaining leverage by allowing payers to negotiate for all or only certain components of the Partners network,” HPC noted that “the impact of this change will depend, among other considerations, on whether and to what extent payers vigorously pursue this option and on how the market responds.”

So, what’s up next for the AG’s proposed settlement with Partners?  The Suffolk County Superior Court overseeing the proceeding has extended a public comment period to September 15, 2014, and has given the AG until September 25 to respond to comments. A hearing on whether to approve the deal is now set for September 29.

Drawing on the experience of members of our healthcare team in complementary areas of health law, including transactions, tax, labor and employment, and healthcare regulation, our team of antitrust lawyers has the depth and experience to handle the most significant antitrust healthcare matters, including transactions and investigations.  If you have any questions regarding this matter, or would like to learn more about our healthcare antitrust capabilities, please contact Jonathan L. Lewis, or 202.861.1557.

Editor’s Note:  This blog post is a joint submission with BakerHostetler’s Health Law Update blog.