HHI hacking argument in Massachusetts

The New England Journal of Medicine has a great piece on the arguments of the Partners Effect in the Eastern Massachusetts healthcare and hospital market. It is framed as an explainer as to why Lahey Clinic and Beth-Isreal-Deaconess would want to merge as a matter of public interest instead of internal gains seeking:

The system CEOs have indeed been painting their merger as a value proposition for Massachusetts. In an interview in late March with the Boston Globe, Grant and Tabb suggested that for every 1% of market share their combined entities are able to wrestle from Partners, medical spending in Massachusetts would be reduced by $18 million.

This argument is effectively an HHI minimization argument. It goes like this. Partners’ is a very powerful entity with both excellent branding (Mass General Hospital and Brigham and Womens are the flagships) and significant market power. This market power in community hospitals leads to a very profitable feeder pattern into the flagship hospitals. This allows for the collection of significant economic rents through much higher prices. Insurers don’t believe they can say no to Partners so they pay the very high prices. A competing 500 pound gorilla won’t displace the current 800 pound gorilla but it can give some ability to insurers to say no again. Therefore the merger is good.

There are a couple of problems with the countervailing gorilla theory of competition. First the FTC will not approve mergers solely on the need to create new negotiating leverage in an already distorted market. Secondly, it assumes that the new entity will only take market share from Partners. If it only takes market share from Partners, the argument makes mechanical sense. If it takes market share from other competitors, the market concentration mechanically gets worse. The chart below shows two hypothetical scenarios:

If the newly merged entity has local market power and can impose increase frictional costs on patients who need the tertiary care in the new entity but receive care outside of the new entity and Partners, patients will flow into the new entity to minimize the hassle costs. If that is the case, and in my mind it is a plausible case as my parents are a good use example of this story, market share will shift from non-Partners, non-new entity hospitals to the new entity.