Saying they would rather remain free competitors than shackled collaborators, Rhode Island's two largest hospital systems have abandoned their 2-year-old plan to merge.
Five-hospital Lifespan Corp. and three-hospital Care New England Health System, which together control 57% of Rhode Island's acute-care hospital beds, last week withdrew the merger application they filed with state Attorney General Sheldon Whitehouse.
The two Providence-based, not-for-profit systems, which have spent more than $5 million putting the deal together and clearing legal hurdles, blamed Whitehouse's pursuit of "broad and undefined" regulatory power over the merged network as the reason they walked away from the deal.
"To submit to additional authority beyond the well-established body of antitrust law would have made it difficult to manage our organizations and (would) jeopardize our ability to compete locally and regionally," George Vecchione, chief executive officer of Lifespan, and John Hynes, CEO of Care New England, said in a written statement.
In exchange for allowing the systems to merge, Whitehouse had proposed an oversight system in which a justice of the state's Superior Court would serve as a final authority. The justice would rule in the event of an impasse between the hospitals and Whitehouse should the attorney general suspect the merged system of abusing its market power.
Attorney general spokesman Jim Martin said Whitehouse and representatives from the systems found that identifying all the potential abuses, so that rules on their post-merger behavior could be established in advance, was impossible because of the wide range of possible scenarios.
Rhode Island's Hospital Conversions Act, which governs the sale and merger of for-profit and not-for-profit hospitals, is considered to be one of the most rigorous in the country. The law, passed in 1997, requires the attorney general to review any hospital transaction in which 20% of charitable assets change ownership.
Martin said through the conversion law the attorney general is able to oversee charitable assets and ensure that Rhode Island consumers are getting the best healthcare possible.
Although the Federal Trade Commission cleared the merger of any antitrust problems in February, the systems were still in the midst of completing their merger application for the attorney general when they abandoned their quest to merge.
"I believe it to be a wise decision for the parties to pursue the advantages of the merger through mechanisms that are a less blunt instrument than a full corporate merger," said Whitehouse in a written statement.
Lifespan and Care New England said they would seek ways to collaborate as separate organizations, but they were not specific on whether they would create a shared hospital-services corporation.
"We are committed to talk over the next year about what options there are," said Lifespan spokeswoman Linda Shelton.
Lifespan and Care New England claimed that they could achieve $67 million in savings during five years as a result of the merger by consolidating nonclinical programs and avoiding competing with each other on clinical programs.
Care New England spokeswoman May Kernan said, "The merger benefits as originally envisioned could not be achieved" under the regulatory control proposed by Whitehouse.
Both systems reported losses in their last fiscal year.
Lifespan lost $6.7 million on $1.1 billion of total revenue, and Care New England lost $6 million on $342 million of total revenue.
Lifespan includes flagship 677-bed Rhode Island Hospital in Providence and 314-bed New England Medical Center in Boston. Care New England includes 326-bed Kent County Memorial Hospital in Warwick, R.I., and 197-bed Women and Infants Hospital of Rhode Island in Providence.
The two systems announced their plans to merge into a single organization, which would retain the name Lifespan, in October 1998. In March 1999 they submitted merger applications to both the FTC and to the Rhode Island attorney general.
The attorney general required that the application be cleared by the FTC before it would rule on it. Martin said the attorney general's review of the application was occurring concurrently with the FTC's review.
Shelton said the systems spent a combined $5.1 million in pursuing the merger, with most of that money going for legal fees necessary to gain FTC approval.
Nearly 18 months after submitting their application to the attorney general, the systems were continuing to meet with and supply documents to the office. The attorney general held four public hearings in locations across the state in mid-1999. A consumer group, formed in May, actively contested the merger because of concerns that it would limit hospital competition and result in higher prices.
The Coalition for Responsible Healthcare, which includes the 180-member Rhode Island Manufacturers Association and the state's only two remaining health insurers--Blue Cross and Blue Shield of Rhode Island and United HealthCare of New England--conducted a letter-writing campaign to the attorney general to block the proposed union.
"We are glad that the hospitals came to their senses and realized that this wasn't the best thing for Rhode Island," said Nicholas DeRosa, executive director of the Rhode Island Manufacturers Association.
Physicians also opposed the merger. Steven DeToy, the Rhode Island Medical Society's director of government and public affairs, said his members were "overwhelmingly negative" about the merger.
DeToy said his members questioned whether the merged system could achieve proposed cost efficiencies since neither Lifespan nor Care New England had been able to do so within their existing networks.