With Beth Israel-Lahey merger, state charts new course on health care

Beth Israel and Lahey Health officials have said they plan to build an alternative to Partners HealthCare.David L Ryan/Globe Staff/file

The decision by Attorney General Maura Healey to allow the merger of Beth Israel Deaconess Medical Center and Lahey Health marks the start of a great experiment in Massachusetts health care.

The hypothesis behind the approval: Allowing the formation of a new large health system — with price caps and other constraints — will keep medical costs in check, ensure access for vulnerable populations, and provide a healthy dose of new competition to market leader Partners HealthCare.

The settlement is the first of its kind in Massachusetts, and some experts believe it could serve as a model for mergers in other states. But antitrust specialists also warn that the more than 50-page agreement could be hard to enforce because it seeks to control hospital executives’ behavior, an inherently difficult task.

And it could take years to fully understand how the creation of the new health system, Beth Israel Lahey Health, is affecting the market.

“Partners has been the 800-pound gorilla in the market,” said Robert Field, a health law expert at Drexel University in Philadelphia. “What’s the best way to take on an 800-pound gorilla? It’s another 800-pound gorilla. That’s what this merger seems to be creating.

“On the other hand,” Field said, “it’s moving the market to a duopoly.”

Boston-based Beth Israel Deaconess Medical Center and Lahey Health of Burlington had been planning a merger on and off for years before finally receiving Healey’s approval, and the backing of the Federal Trade Commission, last Thursday.

The merger includes thousands of doctors and more than a dozen hospitals, which will have combined revenue of more than $5 billion, making it one of the largest health care deals in state history.

The settlement with Healey’s office includes price caps on the new health system’s services for seven years. Initially, prices would not be allowed to grow more than 3 percent a year, though the limit could change over time. If the hospitals fail to comply, the attorney general could seek significant financial penalties.

In the lingo of antitrust law, the conditions included in the settlement are known as conduct remedies. Antitrust experts tend to dislike these remedies because they’re time-limited and tricky to enforce.

“Markets are dynamic, and things change, and it’s hard to anticipate everything that might happen,” said Richard Brunell, general counsel at the American Antitrust Institute, a Washington-based group that promotes competition. “It’s hard to write down an agreement that deals with all future contingencies.”

The fact that state and federal regulators backed the transaction at all indicates that they accept the argument Beth Israel and Lahey officials are making: that Massachusetts needs a strong No. 2 health system to counterbalance Partners, the parent company of Massachusetts General, Brigham and Women’s, and other hospitals.

“Whenever you have any of these so-called conduct remedies, they are temporary, so you really have to believe that the transaction makes sense,” said Leemore S. Dafny, a professor at Harvard Business School.

Conditions like the ones Healey placed on the Beth Israel-Lahey merger are rare, particularly at the federal level.

The Federal Trade Commission noted in its statement last week that it “does not typically pursue behavioral remedies, such as price caps, in merger cases.”

“We recognize, however, that this settlement seeks to satisfy two goals of critical importance to the Massachusetts AG: first, to preserve access to health care for underserved populations in Massachusetts; and second, to limit price increases for Massachusetts health care consumers,” the commission said. The commission voted 5-0 to close its investigation and not challenge the Beth Israel-Lahey deal.

Most deals reviewed by the Federal Trade Commission and the Department of Justice are allowed to proceed after a preliminary review, but some transactions (including the Beth Israel-Lahey deal) are subject to fuller investigations. When federal authorities believe a merger would reduce competition, they can bring an enforcement action to block the deal.

Hospital leaders often argue that they need to merge into larger systems in order to manage their costs and take care of more patients. Hospital mergers have been increasing over the past several years, and 2017 was a record-breaking year for hospital deals, according to the Chicago-based consulting firm Kaufman, Hall & Associates.

It’s difficult to predict the degree to which other states will study Healey’s deal with Beth Israel and Lahey and use it as a model for negotiating other transactions, because every merger — and every health care market — is different.

Massachusetts is often considered a national model for health policy, and it stands out for its many state agencies that monitor the health care market. In addition to the attorney general’s office, there is the Center for Health Information and Analysis, a clearinghouse for health care data, and the Health Policy Commission, which issues reports on mergers and other issues that affect health costs.

Those agencies are the product of a 2012 state law that also set a target for controlling the rate of growth in statewide health spending. The state benchmark, which seeks to contain the increase in health spending to 3.1 percent a year, applies to overall spending, while the attorney general’s conditions on Beth Israel Lahey Health specifically target hospital prices.

Several experts said a deal as complex as the one announced by Healey last week might not work in other states that lack such a strong oversight structure.

“There are more opportunities to put conditions on deals in Massachusetts than there are elsewhere,” said David L. Rosenbloom, professor at Boston University School of Public Health. “I don’t think [other states] have got the tools.”

Beth Israel and Lahey officials have said they plan to build a large, high-quality, and less expensive alternative to Partners. Their new health system will include New England Baptist, Mount Auburn, and Anna Jaques hospitals.

Officials in the attorney general’s office weighed their options — including the possibility of suing to stop the merger — before negotiating a deal to try to keep the merging hospitals in check.

So will the Massachusetts experiment work?

“What the attorney general’s office is hoping is this merger is pro-competitive, not anti-competitive. That it could lead to some benefits. That maybe now Partners faces a more formidable rival,” said Martin Gaynor, an economist at Carnegie Mellon University.

“Precious little in the way of efficiencies has flowed from hospital mergers in the past 30 years,” Gaynor added. “It would be great if this one was different.”