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 But the FTC just repealed their consumer welfare standard, and so I think these statements could come back to haunt the merging parties.