Thursday, September 11, 2014

Experts file in Court: The proposed AG-PHS settlement is flawed

Following my earlier post about comments from an FTC official, please see a bit more on the proposed agreement between the Massachusetts Attorney General and Partners Healthcare System--in the form of a filing with the Court from the American Antitrust Institute.  AAI is an independent and non-profit national research, education and advocacy organization devoted to advancing the role of competition in the economy, protecting consumers, and sustaining the vitality of the antitrust laws.  The filing also includes an expert report from Professor John Kwoka of Northeastern University outlining the deficiencies in the settlement and explaining why it should be rejected.

This is powerful stuff and again suggests that both the Democratic and Republican candidates for Attorney General should ask the current AG to withdraw her proposal from the Court and leave future action on this issue to her successor--someone who will assemble an approach that fully addresses the documented anticompetitive practices of this player in the Massachusetts healthcare market.

The introduction:

AAI has an interest in this matter not only because it will affect consumers in a large and important health care market, but because Massachusetts’ national leadership in health care innovation and regulation, as well in as antitrust enforcement, could make the settlement an unfortunate precedent for resolution of anticompetitive hospital mergers by other states. As we shall explain, the proposed remedy is not in the public interest because it will likely fail to restore competition lost as a result of the acquisitions by Partners Health Care Systems, Inc. (“Partners”) of South Shore Health and Educational Corporation (“South Shore”) and Hallmark Health Corporation (“Hallmark”), and it will embroil the Attorney General’s Office and the court in extensive regulatory oversight for which they are ill suited. Therefore, it should be rejected.

(We address the Proposed Final Judgment filed on June 24, 2014. While the Attorney General and Partners are apparently renegotiating the Hallmark aspects of the deal in light of the recent objections by the Massachusetts Health Policy Commission (“HPC”), and this could resolve some of our concerns about the details of the settlement, our fundamental concerns about the effectiveness of using a regulatory decree to resolve anticompetitive horizontal mergers undoubtedly will remain.)

The major points (with my emphasis):

If litigated the Mass AG would have prevailed in court and the merger would have been enjoined.

--Conduct remedies are clearly inferior to blocking an anticompetitive merger or other structural relief, and are typically unsuccessful.  Antitrust enforcers and courts lack the expertise and institutional capability to adequately regulate firms with market power, and to counteract the firms’ natural incentives to exploit it.  Accordingly, the federal enforcement agencies and courts have consistently rejected these types of conduct remedies in hospital and other mergers between direct competitors.  And where remedies like these have been used in the past they have failed.

The proposed settlement is generally flawed for several reasons:
--The settlement is time limited and does nothing to alter Partners’ increase in market power resulting from the mergers.  Accordingly, prices can be expected to rise once the price caps are removed, as has been the case in the few other instances where caps have been tried.
--The settlement is highly complex and technical, with numerous ambiguities that will likely require extensive and continuing court involvement to resolve.  The proposed independent monitor will be helpful, but administering the regulatory decree will still require significant judicial resources.
--Conduct remedies are particularly problematic where, as here, the product is highly complex, the market is undergoing significant changes, and enforcement depends on parties in long-term business relationships with the enjoined firm (here, payers) willing to complain when violations occur.

The major elements of the proposed remedy are inadequate to protect consumers from the loss of competition.  Where they have been used in the past they have failed.  Besides the fact that they are time limited, the price caps are flawed because:
--The price caps are limited in scope, with the total medical expenditure (TME) cap covering only 11% of Partners’ commercial business.  Moreover, the caps do not cover quasi-private plans such as Medicaid Managed Care and Medicare Advantage.
 --The proposed price regulation would be difficult to administer—even by a regulatory agency, much less a court—and fails to take into account important considerations, such as how to deal with changes in the scope and types of services.
--The price caps may be ineffective insofar as prices, absent the mergers, would increase by less than the general inflation or medical inflation in the index used in the settlement.
--The price caps do nothing to address the potential diminution in quality competition, and perversely provide incentives to reduce quality.
--If the price caps are exceeded in any year, ultimate health care or insurance consumers may not benefit from the refund mechanism.
--To the extent it is relevant, the price caps do nothing about Partners’ existing supra-competitive pricing and rate advantage over other providers

Besides being time limited, the component contracting provision is flawed because:
--Component contracting will do little or nothing to alter Partners’ ability and incentives to increase prices post-merger.
--The settlement does not provide sufficient protection from actions Partners could take to make component contracting unattractive to payers, such as offering pricing differentials for bundled and non-bundled components and engaging in subtle forms of retaliation against payers that seek to take advantage of the unbundling option.
--There are reasons to be skeptical that payers and consumers will find it attractive to utilize component contracting and when utilized Partners’ physicians can still seek to steer consumers to out of network Partners’ providers.
--Component contracting works at cross purposes with the purported efficiency justification of the mergers, namely the deep integration of South Shore and Hallmark into the Partners’ network.

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