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Boston’s hospital market keeps regulators busy with merger scrutiny

The third-party monitor found that Beth Israel Lahey complied with all applicable stipulations in its first year as a combined system, according to its January report. “The initial reports seem to indicate they are in compliance with the terms they committed to,” said Alexis Gilman, an antitrust lawyer at Crowell & Moring. “But one of the concerns the FTC has with these settlements is what happens after these terms expire and you are left with a merged system that is in the position to extract higher rates.”

Beth Israel Lahey outlined a range of financial efficiencies afforded by the merger, according to its 2019 annual report. Although, it adjusted its annual target range of savings to $59.8 million to $86.4 million by year five of operations, down from the originally projected $88 million to $169 million, noting that it is too soon to estimate the realized savings thus far as it is just starting to roll out clinical integration initiatives.

The system’s second annual report has been delayed until May due to COVID-19, but Beth Israel Lahey did not say whether it would ask for any other flexibility. A spokesperson said Beth Israel Lahey continues “to adhere to the conditions set in the Assurance of Discontinuance and (is) working collaboratively with the attorney general’s office, which recognized the need for a delay of the reporting deadline given the extraordinary disruptions in patient care and hospital operations caused by the pandemic.”

The biggest savings are expected to come from supply chain synergies. But economists have found that supply chain savings stemming from consolidation often fall short of initial targets.

“The Beth Israel Lahey settlement agreement with the attorney general is costly and ties the system’s hands for several years,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “There is a big risk to give up flexibility to deal with changing conditions, whether the changes are a pandemic that closes your positive cash flow service lines or are regulatory or payment changes.”

Like many U.S. markets, Boston is losing independent hospitals. Of the roughly 40 acute-care hospitals in the Boston-Cambridge-Newton, Mass., and New Hampshire service area, nearly half were not affiliated with a system in 2014. That share dropped to 25.6{f771d91d784324d4be731abc64bffe0d1fd8f26504ceb311bcfd8e5b001778f4} as of 2019, according to Modern Healthcare’s analysis of Medicare cost reports.

Nationally there were about 100 hospital transactions in each of the past five years, many involving smaller community hospitals, Gilman said. “They are really struggling financially as care moves from inpatient to outpatient, as government reimbursement rates get pushed down, as small community hospitals negotiate with large insurers and as pressure mounts to keep up with new technology, value-based care and population health,” he said. “So they are looking to partner with larger hospitals to find efficiencies—layer on COVID and the associated decline in elective procedures and ER visits, (and) they are looking to partner just to keep the doors open.”

The Massachusetts Health Policy Commission outlined the degree by which the state relies on academic medical centers. More lower-acuity care has been referred to lower-cost settings recently, per the commission’s suggestion, albeit slowly. Beth Israel Lahey said that it has launched a virtual transfer center, unified management of neonatal programs and streamlined referrals across its Continuing Care network, among other initiatives that will continue to direct appropriate care to the lowest-cost settings. Meanwhile, there was no material elimination of clinical services, according to the report.

Consolidation has saved some hospitals and led to the closure of others, Gordon said. “The hospitals that have closed often were beloved to the local population but financially unsustainable for many years,” he said. “The fact that the hospitals were not financially viable doesn’t quell protests or political intervention.”


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