Lahey, Beth Israel Deaconess in merger talk

Beth Israel Deaconess Medical CenterAssociated Press

Beth Israel Deaconess Medical Center and Lahey Health are negotiating a possible merger that would create a large health system to compete with the dominant Partners HealthCare, according to four people with knowledge of the talks.

The negotiations are still in the early stages and no deal has been reached, according to those familiar with the negotiations. They asked for anonymity because they were not authorized to speak about the talks.

If the merger is completed, it would reshape the state’s health care industry, creating a system of eight hospitals across Eastern Massachusetts that would rival the Partners network of 10 and Steward Health Care System’s nine.

This is the third time that Burlington-based Lahey and Beth Israel Deaconess of Boston have held merger talks; previous negotiations failed. Talks aimed at a three-way merger among Beth Israel Deaconess, Lahey, and the physicians network Atrius Health collapsed in February 2014 when executives couldn’t agree on who would lead the new system.

Beth Israel Deaconess and Lahey also discussed a deal in 2011.

The two health systems declined to comment directly on their latest talks, issuing general statements instead.

A Lahey spokesman said the health system “continually seeks collaborative partnerships,” and a Beth Israel Deaconess spokeswoman said it is “always open to opportunities to affiliate with providers” that promote “high quality, affordable care.”

Hospital mergers in Massachusetts are reviewed by the Health Policy Commission, a state agency, which cannot block deals but can refer them to the attorney general.

The rekindling of merger talks shows the urgency both sides feel to grow to compete with Partners, the state’s biggest and richest health system. And in today’s shifting health care industry, many executives say a larger network of hospitals, doctors, and services is needed to successfully compete.

Hospital consolidation has accelerated around the country in recent years, spurred in part by the federal Affordable Care Act.

The law encourages providers to adopt new payment systems that reward them for keeping patients healthy, rather than rewarding doctors and hospitals for every patient visit, service, and procedure.

Many industry officials and analysts say large, comprehensive networks, offering a full suite of services from preventive care to specialized surgeries, are the best way to manage patient care and costs.

The goal of a Beth Israel Deaconess and Lahey merger would be to create a formidable health system that could serve as a lower-cost alternative to Partners, according to peoplewith knowledge of the talks. Partners was formed by the 1994 merger of Massachusetts General and Brigham and Women’s hospitals.

Beth Israel Deaconess is a large academic medical center affiliated with Harvard Medical School that has built its network by acquiring hospitals in Milton, Needham, and Plymouth.

Lahey Health has also made moves to expand its network. The system includes Lahey Hospital and Medical Center in Burlington, a teaching hospital affiliated with Tufts University School of Medicine and formerly known as the Lahey Clinic, and community hospitals in Beverly, Gloucester, and Winchester. Together, Lahey and Beth Israel Deaconess employ more than 27,000 people.

A merger could help Beth Israel Deaconess and Lahey financially, said Alan Sager, professor at Boston University School of Public Health, but it may not necessarily help consumers.

“BI and Lahey are good hospitals, and in today’s chaotic world of health care, they’re scrambling, maybe through a merger, to find a way to generate higher revenue,” Sager said. “That may be good for them; it may not be good for everyone who has to pay for care.”

Both systems are run by doctors who have experience at health systems outside Massachusetts.

Dr. Howard R. Grant, 63, became chief executive of Lahey in 2010, after working at Geisinger Health System in Danville, Pa.

Dr. Kevin Tabb, 51, has been chief of Beth Israel Deaconess since 2011, coming to Boston from Stanford Health Care in California.

Lahey and Beth Israel Deaconess were among the health systems last year to launch a campaign to block Partners’ efforts to acquire three community hospitals.

They argued that Partners has already used its market power to extract high rates from insurance companies, and that a bigger Partners would only perpetuate the problem and increase health care costs.

Partners has since scrapped the planned acquisition of South Shore Hospital in Weymouth and tabled a deal to acquire Hallmark Health System, which operates hospitals in Medford and Melrose.

Boston-based Partners is known internationally for the specialized health care it offers, but it also has been cited in state reports as a high-cost health system.

Partners generated $11 billion in revenue in 2014, compared to $1.6 billion at Lahey and $2.1 billion at Beth Israel Deaconess.

Steward, with about $2 billion in revenue, is another big system in Eastern Massachusetts, but it mostly runs community hospitals that treat large numbers of patients on Medicare and Medicaid, the government insurance programs for seniors and the poor. It does not compete directly with the highly specialized services offered by big hospitals like the Brigham, Mass. General, and Beth Israel Deaconess.

Paul A. Hattis, a professor at Tufts University School of Medicine, said mergers such as the one being explored by Beth Israel Deaconess and Lahey have the potential to boost competition in a market dominated by one system — if they truly offer consumers a lower-cost, high-quality alternative.

“If you believe in the notion of competition, then you want market competitors,” said Hattis, a member of the state’s Health Policy Commission. “We haven’t really had that in our marketplace so far.”

The merger talks come after discussions about another significant deal — the alliance of Boston Medical Center and Tufts Medical Center — fell apart in May over differences in strategy and mission, signaling how difficult it can be to reach an agreement.

Massachusetts hospitals, though largely profitable, face intense pressures from government and insurers to control costs while improving the quality of care.

They also face competition from new players, such as walk-in clinics that offer convenient alternatives for patients who need basic care.

“There’s pressure on hospitals to think about maintaining their competitive position as the range of competitors grows,” said Robert S. Huckman, a professor at Harvard Business School.