Federal and state regulators will sue to block Lifespan and Care New England Health System’s proposed merger, which officials said Thursday would increase prices, reduce quality and stifle wages.

The two largest providers in the Rhode Island would control at least 70% of the inpatient general acute care and inpatient behavioral health markets, the Rhode Island Attorney General’s Office and Federal Trade Commission said. The two regulators will file a complaint in federal court seeking a temporary restraining order and preliminary injunction to stop the deal, which the Providence-based not-for-profit systems initially proposed in September 2020.

“If this extraordinary and unprecedented level of control and consolidation were allowed to go forward, nearly all Rhode Islanders would see their healthcare costs go up for healthcare that is lower in quality and harder to access, and Rhode Island’s healthcare workers would be harmed,” Rhode Island Attorney General Peter Neronha wrote in a 150-page report.

While some merger and acquisition experts claim that the state boundaries are too narrow when measuring competition, the combined health system would still have dominant market shares after looping in the surrounding Massachusetts towns, according to the FTC’s analysis. The merged system would still control at least 60% of the inpatient market and 50% of the inpatient behavioral health market.

Commissioner Rebecca Kelly Slaughter and Chair Lina Khan focused on the labor market impact.

“Just as consumers are worse off when mergers diminish competition for goods and services based on price, quality and innovation, workers suffer when mergers diminish competition for their labor and employers are insulated from improved competition driving wages, benefits, working conditions and other terms of employment,” they wrote in a concurring statement. “We take seriously concerns about competition in labor markets and will be vigilant in probing the effects mergers may have on competition for workers’ labor.”

Executives from Lifespan, Care New England and Brown University—which would be an affiliate of the new system—said in statements that they were disappointed with the decision.

“We thought it was the right thing to do, but now we will need to move on to a new path forward,” CNE CEO Dr. James Fanale said. “There is always a path forward, and we will explore all options to find the best possible—and acceptable to regulatory bodies—solution for access to affordable, quality, healthcare.”

Care New England and Lifespan have partnered for decades but haven’t been able to formalize merger talks.

Boston-based 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. Brown is affiliated with both Lifespan and CNE.

It’s unlikely that Lifespan and Care New England will be able to salvage their proposal, M&A experts said.

“Given the way the AG came down with this decision, I don’t think an appeal to overturn this is likely to succeed,” said Robert Hackey, a professor of health policy and management at Providence College. “The arguments that the AG is raising about market power is consistent with the FTC’s historical approach—we’re talking about (concentration levels) that are off the charts compared to other mergers.”

Each of the hospital mergers the FTC challenged since 2004 involved smaller concentrations of market power than the Lifespan-CNE deal, according to the AG’s report.

Even if CNE’s Kent Hospital, which directly competes with Lifespan’s Rhode Island and Miriam hospitals, was divested, there would be significant competitive impacts on the behavioral health, outpatient, primary care and labor markets, regulators claimed. The health system CEOs have been reluctant to control costs, promote quality improvements and ensure sufficient oversight, they said.

Lifespan and CNE could ask for a judicial review of the decision to block the merger, but it doesn’t seem promising, said Beth Vessel, a partner at Waller Lansden Dortch & Davis who focuses on antitrust issues.

“I would bet they wind up abandoning it,” she said.

Rhode Island labor unions had signed off on the merger merger, but “the meaningful concessions and protections” they were able to negotiate were “not enough to cure the risks and harms of this proposed transaction,” the attorney general wrote.

“If you look at Lina Kahn’s statementsthe FTC is laying down the gauntlet here in the fact that the federal government needs to play a more active role in promoting competition and protecting against anticompetitive transactions,” Hackey said.

Lifespan and CNE were an odd pairing, Hackey said, noting that there likely wouldn’t be many efficiencies associated with integrating the psychiatric hospital and women and infant tertiary care facility with community hospitals. Lifespan and CNE didn’t go into enough detail about how they would save money, the Rhode Island Attorney General’s Office said.

Care New England will likely look to merge with another entity or pursue a more informal venture, experts said.

“Instead of transferring ownership, they could pursue a clinically integrated network, which would allow them to coordinate clinical services and jointly negotiate with payers, as long as they take on substantial financial risk,” said Joe Lupica, chairman of Newpoint Healthcare Advisors. ” I don’t know if a merger is necessary.”

Lifespan reported an $89.1 million operating income on revenue of $2.6 billion in 2021, up from $55.1 million of operating income on $2.3 billion of revenue in 2020. It received $266.9 million in COVID-19 relief grants as of Sept. 30.

Lifespan recorded a 3.4% operating margin in 2021, which was its “best operating margin in more than a decade,” a spokesperson said, noting the boost from relief funding.

CNE has been operating on thin or negative margins for years, which in part has driven its search for a merger partner. It reported a $16.2 million operating income on $1.3 billion of operating revenue in 2021, up from a $28.1 million operating loss on $1.1 billion of operating revenue in 2020. CNE was buoyed by the $142.2 million of COVID-19 relief grants it had received as of the end of last year.

Lifespan and CNE submitted its revised application to the Rhode Island Department of Health and Attorney General in November, which started their official review process. The FTC’s review also started in November, after the parties submitted their updated request for information. Neronha had until March 16 to approve or deny the merger.

While this transaction would’ve likely been challenged under most circumstances, regulators are investigating deals they might not have in the past, Vessel said.

“For deals where there is significant market share concentration, hospitals will be trying to anticipate questions ahead of time and prepare their efficiency arguments,” she said.