Partners and Care New England add Lifespan to merger talks

Providence, R.I.-based Lifespan has joined its neighboring system Care New England in proposed merger talks with Boston's Partners HealthCare.

Tuesday's announcement adds a new wrinkle to the potential three-way deal as Partners, the largest healthcare provider in Massachusetts, looks to expand its reach into Rhode Island. The news came about a month after Brown University and California-based hospital company Prospect Medical Holdings intervened by pitching an unsolicited proposal to acquire Care New England if the talks with Partners fall through.

Care New England and Partners approached Lifespan—the owner of three hospitals including the state's largest, Rhode Island Hospital—to combine the resources of the "like-minded" organizations to create a "national model that fully leverages the integration and coordination of care," the organizations said in a joint statement that offered minimal detail. Together, they said, the combined entity could meet market challenges and mandates to improve outcomes and lower costs.

Brown and Prospect had previously argued Rhode Island would suffer if the Partners and Care New England deal went through. Specialty care would shift to Massachusetts, reducing access for Rhode Island consumers and increasing the cost of care. Rhode Island would also have less control of local healthcare operations and the state would suffer from fewer federal grants and stunted job growth.

Brown University President Christina Paxson said in a statement that the university has advocated for this kind of in-state dialogue for years to create an integrated academic medical center. But "a business relationship between Partners and Lifespan that further consolidates market power could have additional adverse effects on Rhode Islanders." Notably, Lifespan's Emma Pendleton Bradley Hospital is a teaching affiliate of Brown's Warren Alpert Medical School.

Many systems, including the merger between Downers Grove, Ill.-based Advocate Health Care and Milwaukee, Wis.-based Aurora Health Care that the Federal Trade Commission recently approved, aim to form regional hubs, picking up where national players have struggled to manage costs.

More systems are seeking scale to standardize care and reduce variation, form regional clusters and boost technological investment to implement virtual care, said Gurpreet Singh, health services sector leader at consultancy PricewaterhouseCoopers.

"Health systems are expanding and creating some scale that can allow for the cost of care to come down, which is consistent with what we are seeing in the U.S.," he said.

Potentially, these deals can improve patient access, bolster community engagement and reduce costs as providers look to offset rising expenses, dwindling reimbursement levels, declining volumes and ballooning bad debt, Singh said. Partners absorbed a $382 million shortfall in Medicare and Medicaid reimbursement that didn't cover the full cost of care in the first quarter of 2018, an increase of $29 million over the comparable 2017 quarter.

"Many providers tend to be in a revenue and expense battle and tend to be upside down to some degree in terms of expense growth," he said. "Part of the motivation (behind these deals) is maintaining quality operations and part of it is achieving the right level of profitability."

While healthcare economists have long argued that consolidation among competing hospitals raises healthcare prices, there is less evidence on the impact of non-horizontal mergers, or when healthcare organizations in different geographies or service categories combine. This gives regulators less ammunition to challenge these types of mergers and acquisitions, experts said.

Mergers between hospitals in different states don't have significant impacts on prices, one study conducted by Northwestern University, Harvard University and Columbia University found.

Still, the study's co-author, antitrust expert and professor at Harvard Business School, Leemore Dafny, said in a recent congressional hearing that consolidation, on average, has systematically increased prices and has "not yielded benefits to consumers."

Dr. Stuart Altman, chair of the Massachusetts Health Policy Commission, came to a similar conclusion. Bigger healthcare providers often lead to higher spending, but the correlation is murkier when they reach across state lines, he said.

"The power (Partners) has in Massachusetts doesn't translate to the power it would have in a neighboring state given the different delivery system and insurance companies in the Rhode Island market," Altman said. "But obviously Rhode Island has to look at how much concentrated power this entity would have." The commission will also be taking a look at how this merger would impact consumers and the healthcare system in Massachusetts, he added.

The tenuous talks between Partners and Care New England had hinged upon Care New England's ability to improve its financial standing. It's unclear how Lifespan would fit into the mix.

On Jan. 1, Care New England closed its troubled hospital, Memorial Hospital, which resulted in the organization's $33.7 million net loss from operations on revenue of $278.2 million in the first quarter of 2018. That loss widened from a $13.9 million net loss from operations on revenue of $274.5 million in the first quarter of 2017.

While the hospital closure dragged its earnings, Care New England reported a net income from operations of about $200,000 excluding Memorial.

Partners reported operating income of $114.8 million on revenue of $3.4 billion in the first quarter of 2018, up from an operating loss of $17.4 million on revenue of $3.2 billion. Its earnings were bolstered by its acquisition of Wentworth-Douglass Health System in Dover, N.H.

Lifespan's income from operations dipped to $2.5 million on revenue of $479.7 million for the quarter ended Dec. 31, down from a $3.4 million income on revenue of $445.3 million in the comparable quarter prior. The system saw its operating expenses increase by 8% to $35.3 million, driven primarily by rising labor costs.