Lifespan, Care New England merger raises antitrust concerns, M&A experts say

The revitalized merger between Lifespan and Care New England Health System will likely raise antitrust concerns, and executives will have to prove their combined market share across Rhode Island won’t significantly harm competition and that service reduction or closure is otherwise imminent, hospital merger and acquisition experts said.

State and federal regulators will be weighing the viability of the Rhode Island health systems as independent entities and the likelihood of facilities closing with the potential anticompetitive impacts of combining some the state’s largest providers. If the deal to merge the seven hospitals and affiliated operations as well as partner with Brown University’s medical school is approved, regulators—who are generally more skeptical of in-market hospital consolidation—will likely impose conditions to ensure competitive balance, experts said.

The revenue loss from COVID-19 is going to be an important factor, but it won’t be enough to validate a merger that otherwise wouldn’t be approved for anticompetitive reasons, said Colin Luke, a partner at Waller Lansden Dortch & Davis.

“These are competitors that have significant market share, but the last thing anyone wants to see is closures and leaving markets without access,” said Luke, who expects the deal to be approved with conditions potentially involving caps on annual price increases or divestitures. “You have to look at the underlying financial strength outside of COVID—is it going to be good for the community and is access going to be protected in a post-COVID world?”

Combining Lifespan and Care New England would consolidate more than half of the state’s acute-care hospitals and both of its inpatient psychiatric hospitals, said Robert Hackey, a professor of health policy and management at Providence College.

“I think this will raise a red flag with the (Federal Trade Commission), as the merged entity not only includes most hospital beds in the state, but also consolidates all of the state’s teaching hospitals,” he wrote in an email to Modern Healthcare, noting that most empirical studies of hospital mergers suggest that mergers contribute to higher overall prices.

In the East Providence area, Lifespan and CNE hospitals account for the top three facilities by market share, according to HMP Metrics. A similar dynamic exists in the Warwick market.

COVID alone won’t justify a merger, Hackey said. To yield efficiencies, clinicians and administrators will need to foster a new culture of collaboration, along with merging different electronic health record systems, he said.

“The real challenge here is merging two different organizational cultures with institutions that are long-time rivals,” Hackey said. “In the absence of consolidating services—akin to a ‘centers of excellence’ model—it will be difficult to realize significant cost savings as the hospitals offer duplicative services in close proximity.”

Care New England and Lifespan have been trying to merge for several years, although talks never materialized into formal integration.

Boston-based Partners HealthCare, which has since rebranded to Mass General Brigham, bowed out of its planned merger with CNE last June after Rhode Island’s governor signaled her strong desire that the Providence health system retain local control. Partners’ decision came in response to Gov. Gina Raimondo’s request that CNE, Lifespan and Brown University resume their own merger talks, which have been on and off over the years. Brown is affiliated with both Lifespan and CNE.

“By working together, Lifespan, Care New England, and Brown University can create a fully integrated academic healthcare system for the people of Rhode Island,” Dr. Timothy Babineau, Lifespan president and CEO, said in prepared remarks.

Lifespan said in a statement that it will “engage with applicable state and federal agencies in connection with customary regulatory reviews applicable to the proposed affiliation.” The state attorney general said it had not received an application from the organizations yet.

“The Attorney General will carefully review any proposed merger between Lifespan and Care New England when an application comes before us, pursuant to this Office’s authority under the Hospital Conversions Act, Health Care Advocate statute, and Rhode Island’s antitrust general laws. As always, when reviewing hospital and healthcare transactions, our ultimate objective is to ensure access to safe and affordable healthcare for the citizens of Rhode Island and to preserve and protect charitable assets,” the attorney general’s office said in a statement.

The market service area boundaries will be key in the antitrust review, particularly since patients often travel between states in New England, Luke said.

Both systems have taken a financial hit as a result of COVID-19, although Lifespan stands on stronger footing.

For the nine months ended June 30, Lifespan reported a $12.3 million operating income on revenue of $1.57 billion, up from an operating loss of $19 million on revenue of $1.51 billion compared to the same prior period. Discharges were down 10.5% over that span, while inpatient surgeries decreased 9%, emergency department visits fell 11.6% and ambulatory surgeries dropped 9.4%, Lifespan noted in its earnings report, adding that it received nearly $95 million of grant funding under the CARES Act.

“The problem is COVID destroyed the most profitable business for hospitals,” said Luke, adding though that is likely only a short-term impact.

Some business groups, regulators and lawmakers have petitioned against healthcare providers using CARES funding to fuel predatory consolidation. The concern is that the grant funding may unintentionally help large, well-resourced companies buy up smaller ones that were weakened by the crisis.

Meanwhile, the FTC said that it had seen an uptick in the use of the “failing firm” defense before COVID-19 hit and had not found the arguments “particularly persuasive.”

“This deal could effectively create a monopoly in Rhode Island,” said Michael DiNardi, a health and labor economist at the University of Rhode Island. “Proponents of these mergers often say they will reduce costs through economies of scale and improve quality of care, but most evidence shows mergers lead to increased prices for consumers.”

For the quarter ended June 30, Lifespan reported a $36.4 million operating income on revenue of $528.5 million, up from $4.2 million of operating income on revenue of $520.9 million for the quarter the year prior.

Lifespan recorded a $23 million operating loss in 2019, up from $30.9 million of operating income in 2018.

Care New England reported a $24.2 million operating loss through the quarter ended March 31 compared to a $5.1 million operating loss through the first half of fiscal year 2019. Its Women and Infants and Kent hospitals recorded operating losses over that span.

In 2019, Care New England reported a $3.8 million operating income compared to a $28.4 million operating loss in 2018.

Ratings agencies had downgraded the outlook for both organizations’ outstanding bonds from stable to negative, with S&P Global Ratings noting CNE’s “long history of weak financial performance and a balance sheet we consider vulnerable,” with the pandemic “exacerbating an already tenuous financial situation.”

“It is a very strange time because some hospitals and health systems have lost a lot of volume and are having trouble getting it back,” said Nancy Kane, a management professor in Harvard T.H. Chan School of Public Health’s health policy and management department. “There is sudden burst of effort to create telehealth capabilities, which could automatically draw down visits and could result in a permanent reduction for demand of inpatient beds.”

If the organizations prove that they cannot survive as separate entities, that will be hard for state and federal regulators to ignore, Kane said.


Tags: covid-19, pandemic

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