The parent company of Tufts Medical Center plans to expand its hospital network with the addition of Hallmark Health System, a merger that will help both sides compete in a market dominated by bigger institutions.
Hallmark’s board voted Thursday to exclusively negotiate a combination with Wellforce, the parent company of Tufts and Lowell General Hospital. Hallmark would be the first health system to join Wellforce since Tufts and Lowell General came together to create the company in 2014.
Hallmark, which owns Melrose-Wakefield Hospital in Melrose and Lawrence Memorial Hospital in Medford, had spent three years planning a tie-up with Partners HealthCare, the state’s largest health care system. But the acquisition fell apart in December, in the face of opposition from the attorney general, state health officials, and a judge, who felt Partners’ further expansion would raise health spending and increase Partners’ market power.
Alan Macdonald, Hallmark’s chief executive, said joining forces with Wellforce will allow Hallmark to upgrade its facilities and expand medical services, which would help retain patients. If the deal goes through, Hallmark will be an equal partner in Wellforce, along with Tufts and Lowell General.
“This is an opportunity for us to be an influential part of a larger organization,” Macdonald said.
Normand E. Deschene, chief executive of Wellforce and Lowell General Hospital, said the merger will broaden the reach of Wellforce, which competes with larger organizations such as Partners, Beth Israel Deaconess Medical Center, and Lahey Health. Details of the transaction will be hammered out in the coming months, and will be reviewed by regulators.
“The profile of Hallmark fit in very nicely geographically, size-wise, in their commitment to communities, and in the level of services they provide,” Deschene said. “We felt Hallmark was a natural fit.”
Hallmark, with 368 hospital beds, pulls patients from an important area just north of Boston, but it has struggled, losing $9.1 million on operations in the fiscal year ended Sept. 30, 2015. It is on track to lose money again this year.
Many community hospitals have struggled to compete against bigger Boston-based medical centers that have stronger brand appeal and often receive higher payments for providing similar services.
Hallmark’s leaders had seen a deal with Partners as a way to inject needed cash into their system and hold on to local patients who were driving into Boston for much of their medical care. But after that deal fell apart, Hallmark issued a request for proposals and drew interest from more than a half-dozen suitors, including Beth Israel Deaconess, Lahey, Steward Health Care System, and three national hospital chains.
By choosing Wellforce, Hallmark is opting for a different strategy than it considered with Partners. Wellforce doesn’t have the deep pockets or market clout of Partners, but its management structure will allow Hallmark more control over its destiny.
Tufts, Lowell General, and Hallmark will operate independently, but they will share some functions through Wellforce, such as purchasing supplies together. They also plan jointly to borrow money to invest back into their hospitals.
Tufts, which has itself struggled in the past to compete against bigger teaching hospitals, could gain referrals through the deal. Hallmark has long been affiliated with the Partners-owned Massachusetts General Hospital, and its doctors are currently affiliated with Partners’ physician network, but they could choose to change their affiliation to the Tufts network and refer more patients to Tufts.
“[We hope] that the doctors of Hallmark will see the value of working with Tufts Medical Center,” said Dr. Michael Wagner, chief executive of Tufts, based in Boston’s Chinatown neighborhood.
Hallmark and Wellforce must submit their plans to the Health Policy Commission, a state agency that monitors how hospital mergers affect medical spending. Massachusetts has among the highest health care costs in the country, and the commission has warned that hospital consolidation in some cases threatens to push health spending even higher.
But Wellforce and Hallmark executives said they expect their transaction to help contain spending, because their hospitals are already lower-cost than their competitors.
“Both of these systems were undersized to be able to compete effectively, so it’s a good matchup from that standpoint,” said David E. Williams, president of the Boston-based consultancy Health Business Group. “It’s unlikely that there will be any serious regulatory opposition to this. If anything, I think the regulators will look favorably on this. I think it will help create more competition with Partners than if these companies just stayed on their own.”