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Talks on hospital merger break down

A nurse at Beth Israel Deaconess Medical Center in Boston.

Dina Rudick/Globe Staff/File 2011

A nurse at Beth Israel Deaconess Medical Center in Boston.

With the region’s hospital industry already in flux, merger talks between Beth Israel Deaconess Medical Center and two other major health care organizations have collapsed, adding more uncertainty over the future shape of the marketplace.

The potential alliance of Beth Israel, Lahey Health, and the Atrius Health consortium of doctors groups was considered a key part of a regionwide move toward consolidation into a few dominant health care systems. But the negotiations stumbled over issues such as who would lead the new organization and serve on its board of directors, according to people with knowledge of the discussions. The parties declined to comment.

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For months, it appeared that three major players were emerging on the Eastern Massachusetts health care scene: Partners HealthCare System, Steward Health Care System, and a combination of Beth Israel, Lahey, and Atrius. But the breakdown of the three-way negotiations, disclosed in e-mails to employees Friday, changes the script.

Other moves in the market are also becoming more complicated. Expansion plans by Partners’ HealthCare System have run into a roadblock, while expectations that Steward Health Care System would soon be bought by a national company are being dashed by the company’s chief executive.

“There’s a freneticism in the market,” said Ellen Lutch Bender, president of health care consulting firm Bender Strategies in Newton. “But the market hasn’t totally defined itself. The pursuit of opportunities doesn’t necessarily equate to the closure of deals.”

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The reshaping of the state’s hospital industry matters to patients because it will determine where they receive care and how much it costs.

Meanwhile, every health care leader in the region is closely following developments at Partners, Steward, and Beth Israel, even as much of the activity takes place behind closed doors in a flurry of negotiations, exploratory talks, and regulatory probes.

Partners’ long-delayed takeover of South Shore Hospital in Weymouth, which is supposed to close next month, would cement its status as the state’s largest hospital and physicians network by giving it an anchor south of Boston. Partners already owns the Massachusetts General and Brigham and Women’s teaching hospitals in Boston, along with community hospitals to the north and west.

But a final report by the state Health Policy Commission, due Wednesday, is likely to conclude the acquisition would increase costs and restrict competition. That may set the stage for a state and federal legal challenge that could drag out in courts for years. At the least, the government regulators who have been investigating Partners’ market power for more than four years could impose stringent conditions on the South Shore Hospital deal.

One of the parties investigating Partners is the office of state Attorney General Martha Coakley, now a Democratic candidate for governor. A series of reports by her office focused attention on the gap between highly paid hospitals, such as those run by Partners, and their competitors. Coakley would probably be pressed to explain why she was letting the South Shore deal go forward unless the gap is addressed.

Gary L. Gottlieb, chief executive of Partners, said executives are “in conversations” with regulators on how the South Shore Hospital deal can be completed and, more broadly, on plans to better integrate care and contain costs system-wide. Partners has struck a separate agreement to take over the Hallmark Health hospitals in Medford and Melrose.

“We believe strongly that the vision that we’ve laid down will improve care in this region,” Gottlieb said. “And we’re hopeful that with the discussions we’ve had — and continue to have — with the Health Policy Commission, with the AG, and with the Department of Justice will result in our ability to pursue that.”

Lately, Partners rival Beth Israel has been expanding aggressively. Beth Israel last month took over Jordan Hospital in Plymouth, renaming it Beth Israel Deaconess Hospital-Plymouth, and earlier this month struck a joint venture for orthopedics with Boston’s New England Baptist Hospital. It has also been negotiating to strengthen ties with Lawrence General Hospital and Anna Jaques Hospital in Newburyport.

But overshadowing those efforts were the three-way talks begun last April with Lahey Health in Burlington and Atrius Health, a Newton-based alliance of Harvard Vanguard Medical Associates and six other doctors groups. Atrius already had clinical affiliations with both Beth Israel Deaconess and Lahey, but a formal merger among the three organizations would have created a system rivaling Partners in size and reach.

In a Friday e-mail to employees, Beth Israel chief executive Kevin Tabb and Stuart Rosenberg, president of its physicians group, said the parties “decided to discontinue those discussions to focus attention on significant initiatives we are individually pursuing while leaving open the possibility of a more substantial partnership at a later date.”

Health care professionals familiar with the negotiations, speaking on the condition of anonymity because they weren’t authorized to discuss them, said the parties shared a vision of more affordable and coordinated care — and a desire to challenge Partners.

But as discussions extended into the fall, they said, doubts grew over how an alliance would benefit the individual parties, and some of the people involved came to believe fellow negotiators had violated an agreed-to “cone of silence” by talking outside of their meetings.

Then there was the thorny matter of who would run the combined organization. Tabb and Lahey chief executive Howard R. Grant of Lahey are ambitious newcomers to the Massachusetts market and neither would willingly cede the top job, according to people who know both men. Complicating matters, Atrius has been without a chief executive since last September when Gene Lindsey stepped aside, and some Atrius officials didn’t want to agree to an alliance with Lahey and Beth Israel Deaconess until the position was filled.

Before the talks collapsed, Tabb said Beth Israel Deaconess was likely to continue expanding through acquisitions and affiliations with other organizations.

“We are in the midst of a sea change resulting in a smaller number of systems and a smaller number of independent hospitals,” he said. “We are much further along than we thought or even dreamed we could be 24 months ago. But we are not finished.”

Grant said his system has been busy upgrading the recently acquired Beverly Hospital and Addison Gilbert Hospital in Gloucester, keeping local patients at those facilities while attracting more patients to its flagship Lahey Clinic in Burlington. Lahey is also awaiting regulatory approval of its agrement to acquire Winchester Hospital.

“There will continue to be consolidation,” Grant said. “It’s unclear what teams everyone ends up on.”

Many in the industry have anticipated a new team, or a new owner, at for-profit Steward Health Care, the Boston company operating 10 community hospitals that include St. Elizabeth’s and Carney in Boston, a rehab site, and a doctors network. Nearly three and a half years after it was formed by buyout firm Cerberus Capital Management to take over the Caritas Christi hospitals, Steward has failed to make good on its plan to expand outside Massachusetts.

Despite widespread speculation that Cerberus would put the hospitals on the market in the first half of this year, Steward chief executive Ralph de la Torre said there are no such plans.

“We are not for sale in the foreseeable future,” said de la Torre, who maintained Steward’s out-of-state expansion was slowed by uncertainty surrounding the US health care overhaul but should resume soon. “If I had to handicap it right now, there’s a much higher chance Steward will grow substantially than be sold. If you’re going to be a bear, be a grizzly.”

De la Torre said Steward is a high-quality, lower-cost system that has forced academic medical centers in Boston to build up their own community hospital networks. As patients, employers, and health insurers grow increasingly sensitive to costs, he said, Boston teaching hospitals will find it harder to fill their beds for routine care.

Questions also loom for Tufts Medical Center and Boston Medical Center, teaching hospitals that have mostly stayed on the sidelines as other facilities consolidated.

Tufts opened primary care centers in Quincy and Framingham, launched a health insurance plan with Vanguard Health System, and retains one of the state’s premier physicians groups. But it also lost out to Steward and Beth Israel on bids for community hospitals.

Tufts vice chairwoman Ellen Zane said that while the system is open to an affiliation, many past mergers have failed, including Tufts’s alliance with the Lifespan system in Providence and Lahey’s short-lived marriage with Dartmouth-Hitchcock Medical Center in Lebanon, N.H.

“Aggregating bricks and mortar isn’t the future of health care,” she said.

Boston Medical treats a large number of low-income and older patients insured by Medicaid and Medicare. In recent years it has improved its finances and clinical services, solidified ties with a network of neighborhood health centers, and begun an initiative to consolidate its two South End campuses. Still, the hospital looks likely to remain dependent on state and federal support.

Kate Walsh, Boston Medical’s chief executive, said the hospital may have to seek new ways to expand as other health care systems tighten their referral networks.

“I like to think we have all the pieces we need to be successful,” Walsh said. “But scale’s an important challenge for all of us.”

Patients, meanwhile, are coming face to face with the changing health care market in a number of ways, all of which are aimed at saving money and coordinating care.

New team-based models feature social workers, nutritionists, and other caregivers who work with primary care doctors; new insurance plans limit which doctors and hospitals people can go to, or force them to pay more for out-of-network care. At the same time, hospitals are becoming stingy about making outside referrals in an effort to keep patients within their own systems.

And while the pace of consolidation will eventually slow, such moves to improve efficiency and cut costs will gain momentum for years to come, said Marc Bard, principal at MB2 Consulting in Newton.

“These systems that claim to be integrated haven’t even scratched the surface,” Bard said. “It’s going to take a generation.”

Robert Weisman can be reached at robert.weisman@globe.com. Follow him on Twitter @GlobeRobW.
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