Business & Tech

Partners HealthCare, Harvard Pilgrim discussing possible merger

Partners HealthCare (above) and Harvard Pilgrim Health Care have been talking for several months.
Lane Turner/Globe Staff
Partners HealthCare (above) and Harvard Pilgrim Health Care have been talking for several months.

Hospital giant Partners HealthCare, looking to fortify its position in the rapidly changing health care market, is in potential merger negotiations with Harvard Pilgrim Health Care, one of the state’s largest medical insurers.

Executives from Partners, Massachusetts’ largest network of doctors and hospitals, and Harvard Pilgrim have been talking for several months, officials from both companies confirmed Friday in response to inquiries from the Globe. They are discussing a range of options, including an acquisition of Harvard Pilgrim by Partners.

Merger negotiations can take months or even years, and there is no guarantee the organizations will reach an agreement.

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Any deal is likely to face scrutiny in a state where policy makers and consumer groups are focused on controlling medical costs. Governor Charlie Baker — who once ran Harvard Pilgrim — said Friday that state officials would carefully vet any deal between the two companies.

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“It’s going to be incumbent on them to make the case for why this is a good idea,” he told reporters. “The big thing is, what does this mean with respect to costs? Why would this be good for the health care system overall, and for patients and customers? And what’s the rationale?”

The talks are taking place at a time of heightened deal-making in health care across the country, as hospitals, physician groups, insurers, and other companies pursue new strategies to manage costs and patient care. In Massachusetts, Beth Israel Deaconess Medical Center and Lahey Health are planning a big hospital merger to more aggressively compete with Partners.

Boston-based Partners is the parent company of Massachusetts General, Brigham and Women’s, and several other hospitals. Its expansion plans have been scrutinized in the past because the company is the most dominant health care provider in Massachusetts, and among the most expensive. Partners acquired specialty hospital Massachusetts Eye and Ear this year, and it’s negotiating a takeover of Care New England Health System in Rhode Island.

“Partners HealthCare is constantly exploring new partnerships and relationships with other providers and insurers with the goal of improving the delivery of health care to patients both locally and around the world,” Partners spokesman Rich Copp said. “Harvard Pilgrim is certainly among those organizations.”

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Harvard Pilgrim, headquartered in Wellesley, sells insurance to employers and consumers, and has about 1.2 million members. Officials said they’re talking to Partners about a number of ideas, ranging from new contract arrangements to “operational and financial integration.”

“We’re looking at what we could do differently that brings value to our marketplace,” Harvard Pilgrim’s chief executive, Eric H. Schultz, said in an interview.

Schultz said the discussions grew from regular contract negotiations between the two companies. (Insurers and providers routinely negotiate how much the insurer will pay the provider for medical services.)

The goal, Schultz said, is to provide a more seamless experience for patients navigating the health care system, and to better manage care for patients with chronic conditions by sharing data and other resources between Partners and Harvard Pilgrim.

Harvard Pilgrim posted an operating loss of $28.3 million last year on revenue of $3 billion. That compared with an operating loss of $91.3 million and revenue of $3.1 billion in 2016.

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Schultz said the insurer’s financial losses did not trigger the merger discussions. “Harvard Pilgrim is strong,” he said.

The US health care industry is in a time of rapid deal-making, with companies trying to cut costs by owning more pieces of the health care pie. CVS Health and the insurer Aetna have been working on a deal, for example, while heavyweights Amazon, Berkshire Hathaway, and JPMorgan Chase said they’re teaming up to create a new health care venture.

In recent years, the lines between health care providers and health insurers have blurred.

Health care payments have been moving from a fee-for-service system to one in which doctors and hospitals are rewarded for keeping costs down while scoring well on quality metrics. As this shift continues, providers are taking on more of the financial risk of caring for patients, while some insurers are doing more to provide care.

“As in many other industries, this is not a static time in health care,” said Ellen Lutch Bender, a Newton health care consultant. “The market is appropriately exploring new strategies to grow and combine resources to meet patient needs with quality and efficiency.”

Among the uncertainties around the combination of Partners and Harvard Pilgrim is what would happen to Partners’ existing insurance business, Neighborhood Health Plan.

Partners acquired Neighborhood in 2012. But instead of boosting Partners’ bottom line, Neighborhood — which traditionally focused on low-income individuals on Medicaid — contributed to historic financial losses at Partners.

Last year Partners had an operating gain of $53 million and total revenue of $13.4 billion.

Neighborhood shed many of its low-income members and worked aggressively to sell insurance to employers. But with about 142,000 members, it remains a small player compared with the state’s big three insurers: Blue Cross Blue Shield of Massachusetts, Harvard Pilgrim, and Tufts Health Plan.

Partners, since its founding in 1994, has grown to include a dozen hospitals and thousands of doctors. The nonprofit health system had planned to acquire South Shore Hospital in Weymouth and Hallmark Health System of Medford, but in 2014, the Health Policy Commission warned that those deals would increase health spending by as much as $49 million a year. Attorney General Maura Healey threatened a legal challenge, and Partners eventually abandoned both of those deals.

A Healey spokeswoman said Friday that the attorney general’s office would review any proposed transaction between Partners and Harvard Pilgrim as more information becomes available — including whether the merger may violate antitrust laws and how it would affect consumers.

Partners and Harvard Pilgrim have not filed plans with regulators because they are still in negotiations.

A spokesman for the Health Policy Commission, a watchdog agency that studies big mergers, said, “We look forward to learning more as negotiations progress.”

A deal is also likely to need approvals from other state agencies. Officials at the Department of Public Heath and the Division of Insurance said Friday that they couldn’t comment on the approval process without knowing more details about the planned transaction.

Kristina Minnick, a Bentley University finance professor who studies corporate mergers, said a deal between Partners and Harvard Pilgrim would decrease competition and is not likely to gain approval unless the companies explain how consumers would benefit.

“Unless they are able to show that consumers are better off, and they would be able to offer better plans at better prices, I really don’t see the deal would be allowed to go through,” she predicted.

Priyanka Dayal McCluskey can be reached at priyanka.mccluskey@globe.com. Follow her on Twitter @priyanka_dayal.