Lessons from a Failed Merger

The two largest hospital systems in Rhode Island, Lifespan and Care New England, wanted to merge. I wrote previously that:

Basic economics tells us that if a company with 50% market share buys a company with 25% market share in the same industry, they have strong market power and are likely to use this monopoly position to raise prices…. I think the Federal Trade Commission will almost certainly challenge the merger, and that they will likely succeed in doing so

It turns out I was right about the FTC challenge, but wrong that it would be necessary. The same day that the FTC challenged the merger, Rhode Island Attorney General Neronha blocked it. The law in Rhode Island is such that he doesn’t need to convince a judge like the FTC would; the merger was done unless the parties tried to appeal. But today they gave up and officially terminated the merger.

I was surprised by the AG’s move because the merging parties have so much political clout in the state, and many politicians like Senator (and former RI AG) Whitehouse had expressed support for the merger. I expected that even if state leaders didn’t like the merger, they would approve it with the expectation that the FTC would step in and be the bad guy for them. So AG Neronha blocking the merger was a pleasant surprise.

I also said previously that the FTC might challenge the merger for creating a monopsony (predominant employer of health care workers) as well as a monopoly (predominant provider of hospital services). This turned out to be one vote short of true. The FTC voted 4-0 to challenge the merger, but released two concurring statements explaining why. The two Democratic commissioners wanted to challenge the merger on both monopoly and monopsony grounds, while the two Republican commissioners thought it would only be a monopoly. This didn’t matter for this case, since they all thought it would be a monopoly, and since the AG blocked it. It was also odd that the Democratic FTC commissioners were more worried about labor than the actual unions involved. But it may be a sign of more monopsony challenges to come, particularly once the vacant spot gets filled and a 3rd Democrat is breaking the ties.

This was the first big political / economic issue I’ve got involved in since moving to Rhode Island, and I have to admit I was worried about making enemies. But despite speaking against the merger at the same forum as its most powerful proponents, speaking to several journalists, and at the AG’s public forum, I didn’t hear a single angry response; if anything I made friends.

One final surprise in all this is that the two hospitals systems are reported to have spent $28 million pursuing the merger. Apparently money can’t buy everything. But what a lot to spend on something that so many of us thought was clearly destined to fail.

Hospital Merger Update

The panel on the proposed merger of Rhode Islands two largest hospital systems I mentioned last week happened yesterday, I’ll post some reactions here, there was a lot I didn’t get to say since my section only had 45 minutes split across 4 panelists and Senator Whitehouse naturally got more of the time.

The Lifespan and Care New England CEOs trying to merge their systems opened with what to me seemed like their weakest argument, a general appeal to togetherness. They said that if the Patriots offense and defense had to be kept as separate teams, they wouldn’t be very good. To me the right metaphor is that if you merged all the NFL teams into one super team, they wouldn’t try very hard.

To their credit though, overall the hospital CEOs and President Paxson of Brown University were surprisingly honest about the risks, basically acknowledging that hospital mergers are often just a way to gain market power at everyone else’s expense, but arguing that for various reasons this one is different. They seem to realize that if you define the relevant market area as the state of Rhode Island (as e.g. the Dartmouth Atlas does in their “Hospital Referral Regions”) then the merged entity would have a nearly 80% market share and be challenged by the FTC as an obvious monopoly. So they argue that the relevant market should include Boston and much of Connecticut. They argue that it won’t just be an excuse to raise prices because they are non-profits and the state has rate regulations.

They identified two potential true efficiencies, integrating the electronic medical records of the two systems and being able to easily conduct research across both systems (both systems have many employees who are faculty at Brown Med School, including my wife). In a reasonable world these efficiencies could be gained without merging, though I suspect HIPAA prevents this, meaning one of its many perverse unintended consequences would be incentivizing mergers.

Their biggest admission against interest was that “the primary benefit [of the merger] comes from scale” and that “scale matters for purchasing supplies and staffing”. To me this implies “don’t worry, we won’t use our monopoly power against consumers, we’ll just use it against suppliers and staff”. But the FTC just repealed their consumer welfare standard, and so I think these statements could come back to haunt the merging parties.

Lifespan / CNE Merger Economics

The largest hospital system in Rhode Island, Lifespan, is trying to merge with the second-largest hospital system in Rhode Island, Care New England. Next Wednesday I’ll be on a panel discussing the proposed merger, following a panel with the Presidents of the three institutions involved (Lifespan, CNE, and Brown University). I’ll summarize my thoughts here.

Basic economics tells us that if a company with 50% market share buys a company with 25% market share in the same industry, they have strong market power and are likely to use this monopoly position to raise prices.

The real world is often more complicated, especially when it comes to health care, but in this case I think basic economics holds up well. A wealth of empirical evidence, including studies of previous hospital mergers, suggest that reduced hospital competition leads to higher prices without bringing commensurate benefits in quality or efficiency.

I think the Federal Trade Commission will almost certainly challenge the merger, and that they will likely succeed in doing so. The FTC merger guidelines more or less demand it, and current FTC leadership if anything seems to want to be more aggressive than required on antitrust. To me the biggest question is whether they will try to stop the merger entirely, or whether they would allow it to proceed subject to conditions (e.g. spin off one or two hospitals to remain independent)- I’ll be watching with interest and letting you know how it goes.