Beth Israel-Lahey merger could raise healthcare spending

(Updated July 19)

Massachusetts healthcare spending would increase by up to $251 million per year if regulators approve the planned merger between Beth Israel Deaconess Medical Center, Lahey Health and several other hospital systems to create the second-largest healthcare network in the state, according to a preliminary report from the Massachusetts Health Policy Commission.

The deal involves Beth Israel in Boston and Lahey in Burlington, as well as Boston's New England Baptist Hospital, Mount Auburn Hospital in Cambridge and Anna Jaques Hospital in Newburyport.

The combination would put the new system behind Partners HealthCare and its nearly $14 billion in total revenue in 2017. The combined entity would have a network of 10 hospitals, the largest in the state. It would also have three affiliate hospitals in Cambridge Health Alliance, Lawrence General Hospital and Metrowest Medical Center and more than 4,000 physicians.

The Beth Israel-Lahey merger would increase its bargaining leverage with commercial payers and potentially allow it to boost prices around 5% to 10%, increasing spending by an estimated $138.3 million to $191.3 million annually for inpatient, outpatient and adult primary care services. Specialty physician services spending could increase by an additional $29.8 million to $59.7 million. These conservative price hike estimates modeled after insurers' willingness to pay higher prices would still result in lower prices than Partners, the commission found.

Notably, although this is one of the most complicated mergers in the country because so many parties are involved, both Beth Israel and Lahey have maintained low to moderate prices relative to the Massachusetts market as they've grown. They haven't excessively raised prices after past mergers and acquisitions, researchers found.

"There is a competition between delivering a vision of new care, which I hope will be offered, and the simple opportunity to take advantage of price leverage here," Commissioner Dr. Donald Berwick said during a discussion of the preliminary report. "Everyone wishes they had Partners' prices. This is a chance for this entity to go for Partners' prices and that is not going to help anyone at all."

The elephant in the room is what would Partners do if the deal is approved or it falls through, Berwick added.

The merger would not materially change the combined entity's payer mix, which already caters to a higher-income bracket. The health systems have a lower inpatient Medicaid, minority and lower-income payer mix compared to their peers, the report said.

The hospitals now have 30 days to address the commission's concerns before the final report is published.

The discussion illustrates the power struggle between Partners HealthCare, the largest health system in the state, and other providers in Massachusetts trying to capture more market share. On one hand, the Beth Israel and Lahey combination could lower Partners' prices if it broadens the payer network that Partners is in. A more competitive network could ultimately lower spending.

But even if Beth Israel and Lahey are able to save money by shifting care from high-cost providers, expanding its patient base, better coordinating patient data and sharing best practices, and combining purchasing and administrative services, among other purported efficiencies, that would not offset the projected higher prices it could garner from more market share, the commission said.

This conversation is taking place throughout the country as providers grow.

"I am at a loss for what are the things that could happen together that couldn't happen separately," said David Cutler, the commission's market oversight and transparency committee chair and a Harvard professor.

Massachusetts employers and consumers are eager to change the healthcare delivery dynamics in the state, which is known for overusing its academic medical centers. Medicare beneficiaries in Massachusetts visited a hospital outpatient setting for routine office visits at more than twice the national rate, resulting in roughly double the cost when compared to the U.S., according to the commission.

The Make Healthcare Affordable Coalition, which includes 60 community leaders across Eastern Massachusetts, opposed the merger.

"This report confirms our worst fears, that the merger will leave communities of color behind in order to generate bigger profits," said Hanoi Reyes, spokeswoman for the coalition.

The Massachusetts' attorney general also warned that the deal could raise healthcare costs and impede access.

The Department of Public Health will review the deal, taking the commission's findings into consideration. The Public Health Council said it could change its approval pending the commission's report when the council approved the merger in April.

Correction: An earlier version of this story misattributed remarks to another member of the commission. This error has been corrected.