State Court Rejects Conduct Remedy in Massachusetts Hospital Merger | Practical Law

State Court Rejects Conduct Remedy in Massachusetts Hospital Merger | Practical Law

A Massachusetts trial court rejected a proposed settlement between the Massachusetts Attorney General and Partners Healthcare System, Inc. regarding Partners' proposed acquisition of three Boston-area hospitals. The court found that the proposed remedy, which contained restrictions on Partners' pricing and contracting conduct for up to ten years, was ineffective and unenforceable.

State Court Rejects Conduct Remedy in Massachusetts Hospital Merger

Practical Law Legal Update 4-598-8265 (Approx. 4 pages)

State Court Rejects Conduct Remedy in Massachusetts Hospital Merger

by Practical Law Antitrust
Law stated as of 03 Feb 2015 • USA (National/Federal)
A Massachusetts trial court rejected a proposed settlement between the Massachusetts Attorney General and Partners Healthcare System, Inc. regarding Partners' proposed acquisition of three Boston-area hospitals. The court found that the proposed remedy, which contained restrictions on Partners' pricing and contracting conduct for up to ten years, was ineffective and unenforceable.
On January 29, 2015, a Massachusetts state court rejected a settlement agreement negotiated between the Massachusetts Attorney General and Partners Healthcare System, Inc. that would have allowed Partners' acquisition of three Boston-area general-acute-care hospitals. The settlement would have implemented a variety of restrictions on Partners' pricing and contracting conduct in the markets for general-acute-care services and physician services for up to ten years. The court found that the proposed restrictions:
  • Did not adequately or reasonably address the alleged competitive harm, because the short-term price caps and other restrictions would not prevent Partners from exercising its increased market power to raise healthcare prices.
  • Were not enforceable, because the restrictions required court oversight of pricing and other complex workings of the health care market.
The Massachusetts Superior Court decision is the latest example of the preference of courts and the antitrust agencies for structural remedies, such as divestitures, over conduct remedies in merger challenges.

The Proposed Settlement Agreement

The settlement arose out of the proposed acquisitions by Partners, the largest healthcare provider in Massachusetts, of South Shore Health and Educational Corporation and Hallmark Health Corporation. The two deals would add three general-acute-care hospitals to Partners' existing nine-hospital network in Massachusetts, as well as outpatient facilities and physicians. On June 24, 2014, the Massachusetts Attorney General filed a complaint alleging that the acquisitions would harm competition under the Massachusetts Consumer Protection Act (Mass. Gen. Laws Ann. ch. 93A) and simultaneously filed the proposed consent agreement. The proposed agreement would have:
  • Implemented price caps on certain healthcare rates based on specified formulas for a period of 6.5 years.
  • Required Partners to allow insurers to purchase subsets of its provider network and services (component contracting) for a period of ten years, rather than requiring an all-or-nothing contract.
  • Prohibit doctors who are not affiliated with Partners from contracting with Partners to negotiate contracts on the physicians' behalf.
  • Placed temporary restrictions on Partners' ability to further expand its provider and physician network.

The Decision

The court found that the proposed settlement was too complicated and limited to adequately address the alleged competitive harm in the markets for general-acute-care services and physician services. Among other flaws, the court found that:
  • The Attorney General failed to justify why it chose a conduct remedy, which the federal antitrust agencies strongly disfavor, over a structural remedy.
  • The proposed price caps covered only limited services and would be very difficult to enforce.
  • Partners would be free to raise prices after the price caps expired.
  • Component contracting would not prevent price increases.
  • The court did not have adequate technical expertise or sufficient resources to oversee enforcement of the complicated pricing formulas and other terms.
The court relied extensively on public comments, including those submitted by:
  • The Massachusetts Health Policy Commission, an independent state agency that submitted a report stating that Partners already dominates the health care market in the state and that additional consolidation would increase its leverage to raise healthcare prices.
  • The American Antitrust Institute, which argued that the settlement did not restore the competition that would be lost by the acquisition.
  • The Massachusetts Association of Health Plans, representing 17 health plans, which argued that the settlement would exacerbate market disfunction and potentially cause prices to increase.
  • A group of academic economists, who noted that the proposed settlement was unlikely to be effective, particularly in light of the failure of a similar remedy implemented by the Federal Trade Commission (FTC) in a hospital merger in Evanston, Illinois in the 1990s.

Possibility of Future Challenges

The rejected settlement agreement was negotiated by outgoing Massachusetts Attorney General Martha Coakley. The new Attorney General, Maura Healy, has stated that she opposes the settlement agreement and intends to litigate against Partners over the proposed acquisitions.
Meanwhile, the Antitrust Division of the Department of Justice (DOJ), which is also investigating the proposed acquisitions, did not sign on to the Attorney General's settlement or submit any written public comments or court filings about it. At a July 2014 court hearing, the Attorney General's office read a statement from the DOJ indicating that it supported the agreement. However, given the absence of any public comment by DOJ officials, it remains possible that the agency will consider enforcement action of its own. While the FTC typically reviews hospital mergers at the federal level, the Antitrust Division of the Department of Justice (DOJ) reviewed the proposed Partners acquisitions because it was already engaged in an investigation of Partners for possible anticompetitive conduct related to its health insurance contracts.

Conduct Remedies in Hospital Mergers

The Massachusetts court opinion is the latest blow to efforts by merging hospitals to obtain conduct remedies instead of divestitures in antitrust enforcement challenges. The FTC rejected a request for a conduct remedy in its challenge to ProMedica Health System's acquisition of St. Luke's Hospital in Toledo, Ohio, and was later upheld by the Sixth Circuit (see ProMedica Health Sys., Inc. v. Federal Trade Comm'n, 749 F.3d 559 (6th Cir. July 24, 2014)). The Commission found that there were no special circumstances, such as extensive integration of the acquired hospital into the larger system, to justify a departure from divestiture as the preferred remedy. For further discussion of remedies in merger challenges, see Practice Note, Merger Remedies and Practice Note, Antitrust Enforcement of Consummated Mergers: Remedies in Consummated Mergers.