C OMMONWEALTH OF M ASSACHUSETTS H EALTH P OLICY C OMMISSION Health Action 2016 Health Care Industry Mergers and Acquisitions Katherine Scarborough Mills February 5, 2016

| 2 The Massachusetts Story Ch. 224 Passed Health care cost containment Ch. 305 Passed Health care transparency and e-Health Ch. 288 Passed Small business health care relief 2006 Ch. 58 Passed Health care reform 1990s Insurance Reforms Community Rating, Guaranteed Coverage

| 3 Health Policy Commission: At a glance Who we are The Massachusetts Health Policy Commission (HPC) is an independent state agency that develops policy to reduce health care cost growth and improve the quality of patient care. Among other initiatives, the HPC is responsible for monitoring the performance of the health care system, analyzing the impact of health care market transactions on cost, quality, and access, setting the health care cost growth benchmark, and investing in community health care delivery. The HPC’s Board governs the activities of the agency. Vision Mission The HPC's mission is to advance a more transparent, accountable, and innovative health care system through its independent policy leadership and investment programs. Our goal is better health and better care at a lower cost across the Commonwealth. Our vision is a transparent, accountable health care system that ensures quality, affordable, and accessible health care for the Commonwealth’s residents.

| 4 Examples of HPC responsibilities Establish annual statewide health care cost growth benchmark and analyze and report on health care cost drivers Monitor the impact of health care provider market changes on cost, quality, and access Invest in the Commonwealth’s community hospitals to establish the foundation necessary for sustainable system transformation Promote the adoption of new delivery system models through a certification program for patient-centered medical homes and accountable care organizations Oversee the development and implementation of performance improvement plans by health care market participants

| 5 Examples of HPC responsibilities Establish annual statewide health care cost growth benchmark and analyze and report on health care cost drivers Monitor the impact of health care provider market changes on cost, quality, and access Invest in the Commonwealth’s community hospitals to establish the foundation necessary for sustainable system transformation Promote the adoption of new delivery system models through a certification program for patient-centered medical homes and accountable care organizations Oversee the development and implementation of performance improvement plans by health care market participants

| 6 Types of transactions noticed to date April 2013 to Present Type of Transaction Number of Transactions Frequency Clinical affiliation1425% Physician group merger, acquisition or network affiliation 1222% Acute hospital merger, acquisition or network affiliation 1120% Formation of a contracting entity916% Merger, acquisition or network affiliation of other provider type (e.g. post-acute) 59% Change in ownership or merger of corporately affiliated entities 35% Affiliation between a provider and a carrier12%

| 7 Overview of cost and market impact reviews (CMIRs) The HPC tracks proposed “material changes” to the structure or operations of provider organizations and conducts “cost and market impact reviews” (CMIRs) of: 1.Transactions anticipated to have a significant impact on health care costs or market functioning 2.Providers identified as having excessive cost growth relative to the statewide cost growth benchmark ▪ Comprehensive, multi-factor review of the provider(s) and their proposed transaction ▪ Following a preliminary report and opportunity for the providers to respond, the HPC issues a final report ▪ CMIRs promote transparency and accountability, encouraging market participants to address negative impacts and enhance positive outcomes of transactions ▪ Proposed changes cannot be completed until 30 days after the HPC issues its final report, which may be referred to the state Attorney General for further investigation What it is ▪ Differs from Determination of Need reviews by Department of Public Health ▪ Distinct from antitrust or other law enforcement review by state or federal agencies What it is not

| 8 Metrics for evaluating the impact of provider changes ▪ Unit prices ▪ Health status adjusted total medical expenses ▪ Provider costs and cost trends ▪ Provider size and market share within primary service areas and dispersed service areas ▪ Quality of services provided, including patient experience ▪ Availability and accessibility of services within primary service areas and dispersed service areas ▪ Impact on competing options for health care delivery, including impact on existing providers ▪ Methods used to attract patient volume and to recruit or acquire health care professionals or facilities ▪ Role in serving at-risk, underserved, and government payer populations ▪ Role in providing low margin or negative margin services ▪ Consumer concerns, such as complaints that the provider has engaged in any unfair method of competition or any unfair or deceptive act ▪ Other factors in the public interest

| 9 Example questions for evaluating impact CostsQualityAccess Changes based on the terms of the transaction Will contractual prices change as a result of the transaction? Will care shift to lower or higher priced providers? What are the identified areas for quality improvement? What changes do the parties propose to address these areas? Are any changes in services identified? How do these changes affect any shortages or oversupply of services? Projecting changes to provider and market structure Will market share or concentration increase or decrease? What is the anticipated impact on bargaining leverage? How are the parties aligning incentives? Does the proposed structure support greater clinical integration and population care management? Will the resulting organization be expected to have higher or lower government payer mix? Higher or lower mix of lower reimbursed services? Evaluation of the parties’ goals and plans Are the parties’ plans internally consistent and/or supported by historic results? Are proposed changes necessary and sufficient to improve cost, quality, and access? Are cost savings likely to be passed on to employers and consumers?

| 10 Process for cost and market impact reviews Inputs ▪ Data and documents: – Parties’ production – Publicly available information – Data from payers, providers, and other market stakeholders ▪ Support from expert consultants ▪ Feedback from Commissioners ▪ Information gathered is exempted from public records law, but the HPC may engage in a balancing test and disclose information in a CMIR report Outputs ▪ Issuance of a preliminary report with factual findings ▪ Feedback from parties and other market participants ▪ Final report issued 30 or more days after preliminary report ▪ Proposed change may be completed 30 or more days after issuance of final report ▪ Potential referral to Massachusetts Attorney General’s Office

| 11 Examples of HPC market monitoring work Four Cost and Market Impact Reviews Conducted Two Court Submissions Regarding Proposed Expansion by Partners HealthCare System Two Additional Cost and Market Impact Reviews Currently Underway

| 12 Review of recent proposed acquisitions found significant cost and market impacts The HPC’s review of the data and evidence pertaining to the proposed acquisitions of two community hospitals and a large physician practice by Partners Health Care found that increases in spending were anticipated to exceed potential savings from decreased utilization through care delivery reforms and population health management: o For the three major commercial payers, the combined transactions were anticipated to increase total medical spending by more than $38.5 million to $49 million per year as a result of unit price increases and shifts in care to higher-priced Partners facilities. o The resulting consolidated system was also anticipated to have increased ability and incentives to leverage higher prices and other favorable contract terms in negotiations with payers (bargaining leverage), the costs of which were not included in the above projection. o The parties to these transactions did not provide adequate evidence of how corporate ownership was instrumental to achieving the desired care delivery reforms, and their own experience and that of other providers offered compelling alternative approaches to effectively coordinating care delivery. The HPC’s review of the data and evidence pertaining to the proposed acquisitions of two community hospitals and a large physician practice by Partners Health Care found that increases in spending were anticipated to exceed potential savings from decreased utilization through care delivery reforms and population health management: o For the three major commercial payers, the combined transactions were anticipated to increase total medical spending by more than $38.5 million to $49 million per year as a result of unit price increases and shifts in care to higher-priced Partners facilities. o The resulting consolidated system was also anticipated to have increased ability and incentives to leverage higher prices and other favorable contract terms in negotiations with payers (bargaining leverage), the costs of which were not included in the above projection. o The parties to these transactions did not provide adequate evidence of how corporate ownership was instrumental to achieving the desired care delivery reforms, and their own experience and that of other providers offered compelling alternative approaches to effectively coordinating care delivery.

| 13 Outcome of proposed acquisitions subsequent to HPC review  On June 24, 2014, Partners, South Shore Hospital (SSH) and Hallmark Health System (Hallmark) filed a proposed consent judgment in Suffolk Superior Court that would resolve the state Attorney General’s multiyear law enforcement investigation into Partners’ market conduct and recent proposed acquisitions.  The agreement would allow Partners to acquire SSH, Hallmark, and their related physicians, but included provisions designed to constrain Partners’ contracting practices, network growth, and prices for the next five to ten years.  The Health Policy Commission, economic experts, market participants and others filed extensive public comment detailing concerns with the proposed consent judgement.  On January 26, 2015, newly-elected Attorney General Healey filed a Notice of Position with the court detailing a number of concerns regarding the parties’ proposed Consent Judgment, and noted that if the Consent Judgment were rejected, she would void the agreement with the parties and move to litigate the SSH acquisition.  On January 29, Judge Sanders rejected the Consent Judgment on the basis that it was not in the public interest and would be difficult to enforce.  On February 17, the parties notified the court that Partners had dropped its bid to acquire SSH.  In March, Partners announced it was proceeding with the acquisition of Harbor Medical Associates (Harbor), the largest medical practice within the South Shore Physician Hospital Organization (SSPHO), which was not a party to the proposed Consent Judgment.  In December, 2015, Partners announced that it was abandoning its plans to acquire Hallmark.  On June 24, 2014, Partners, South Shore Hospital (SSH) and Hallmark Health System (Hallmark) filed a proposed consent judgment in Suffolk Superior Court that would resolve the state Attorney General’s multiyear law enforcement investigation into Partners’ market conduct and recent proposed acquisitions.  The agreement would allow Partners to acquire SSH, Hallmark, and their related physicians, but included provisions designed to constrain Partners’ contracting practices, network growth, and prices for the next five to ten years.  The Health Policy Commission, economic experts, market participants and others filed extensive public comment detailing concerns with the proposed consent judgement.  On January 26, 2015, newly-elected Attorney General Healey filed a Notice of Position with the court detailing a number of concerns regarding the parties’ proposed Consent Judgment, and noted that if the Consent Judgment were rejected, she would void the agreement with the parties and move to litigate the SSH acquisition.  On January 29, Judge Sanders rejected the Consent Judgment on the basis that it was not in the public interest and would be difficult to enforce.  On February 17, the parties notified the court that Partners had dropped its bid to acquire SSH.  In March, Partners announced it was proceeding with the acquisition of Harbor Medical Associates (Harbor), the largest medical practice within the South Shore Physician Hospital Organization (SSPHO), which was not a party to the proposed Consent Judgment.  In December, 2015, Partners announced that it was abandoning its plans to acquire Hallmark.

| 14 Contact Information For more information about the Health Policy Commission: Visit us: Follow us: