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    Experts puzzle over Partners-Harvard Pilgrim merger talks

    Somerville, MA - 07/13/16 - Partners HealthCare has new corporate offices in Somerville's Assembly Row. Lane Turner/Globe Staff Section: BIZ Reporter: Priyanka McCluskey Slug: 14partners
    Lane Turner/Globe Staff/file
    Partners HealthCare is looking to acquire Harvard Pilgrim, but the deal hasn’t yet gained necessary approvals.

    Even in the rapidly changing world of health care, Partners HealthCare’s potential acquisition of one of Massachusetts’ major insurers has some industry experts scratching their heads.

    The state’s largest hospital network confirmed last week that it is discussing a range of options with Harvard Pilgrim, including a possible acquisition of the Wellesley-based provider of employer and individual insurance plans.

    A merger, which would create a formidable new health care company, could result in higher costs for consumers and reduced competition, several industry experts said, ensuring tough scrutiny from state regulators who are focused on containing the growth in medical spending.

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    “My guess is that regulators would not like this,” said David E. Williams, president of the Boston consulting firm Health Business Group. “There’s no compelling logic for a merger here. There would be a lot of resistance to it.”

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    Williams said he doesn’t see a good business reason for a merger since Partners and Harvard Pilgrim, one of the largest health insurers in Massachusetts, could choose to work together more closely while remaining independent.

    Boston-based Partners, the parent company of Massachusetts General and Brigham and Women’s hospitals, and Harvard Pilgrim, which has 1.2 million members, said they’re discussing how to work together to contain costs and better serve patients, but haven’t specified how they would do that.

    Health care providers and insurers have typically been at odds — hospitals want to maximize the amount they are paid for their services, while insurers try to contain those payments — making the strategy behind a Partners-Harvard Pilgrim deal difficult to discern, said David L. Rosenbloom, professor at the Boston University School of Public Health.

    The companies may be able to cut their costs by combining some functions if they merge. But “I don’t see any savings going back to consumers from any of this,” Rosenbloom said.

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    The talks between Partners and Harvard Pilgrim — both nonprofits — are happening at a time of accelerating consolidation that has brought together some companies that even a year ago would have seemed unlikely pairs. For example, CVS Health, the big Rhode Island-based drug store chain, has agreed to buy insurer Aetna. Meanwhile, new players like Amazon threaten to disrupt the market.

    If Partners and Harvard Pilgrim pursue a merger, the deal would require several regulatory approvals. They could settle on a looser partnership, which would face a lower bar — or they could cancel the talks without reaching any deal.

    “We’re exploring a number of options that could improve the patient experience, and reduce cost and administrative burden,” Partners spokesman Rich Copp said.

    Officials from Partners and Harvard Pilgrim indicated that even if they merge, they expect to continue doing business with other major health care providers and insurers. In other words, patients won’t need a Harvard Pilgrim insurance plan to access Partners doctors and hospitals, and those with Harvard Pilgrim insurance will have the option of going to non-Partners doctors and hospitals.

    But some observers are skeptical. “When you’re owned by a health system, it gets kind of dicey to keep your independence and keep a wide network at the lowest cost,” said Nancy Kane, professor at the Harvard T.H. Chan School of Public Health.

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    Experts described the possible deal between Partners and Harvard Pilgrim as a vertical merger, or a combination of two different types of businesses in the same industry. This is different from a horizontal deal, in which a hospital acquires another hospital, for example.

    It’s harder to predict the potential negatives of a vertical merger, noted Leemore S. Dafny, a professor at Harvard Business School. Such a deal could harm competition, or it could help some consumers access more affordable coverage.

    Either way, Dafny said, “It’s very risky for Partners. Taking on an insurance business is a big, messy task.”

    Partners already owns a smaller insurance company, Neighborhood Health Plan, which struggled with heavy financial losses for several years. Neighborhood’s finances improved last year as it reduced its share of Medicaid patients.

    In other parts of the country, some health care providers have been successful at running their own insurance business, such as the California-based Kaiser Permanente system.

    But at Kaiser, the provider side of the business and the insurance side “grew up together,” noted Robert I. Field, a Drexel University professor who follows the health care market. “Partners and Harvard Pilgrim have grown up independently, so they don’t have that common cultural bond,” he said.

    While Partners is the largest hospital network in Massachusetts, executives are constantly looking to expand, including in other states and countries — particularly after they were forced in 2015 to give up on acquiring three local hospitals because of cost and antitrust concerns.

    Partners is facing a new competitive threat as two Massachusetts rivals, Beth Israel Deaconess Medical Center and Lahey Health, prepare to merge and form their own large new health system.

    The state Health Policy Commission, a watchdog agency that monitors health care costs, and Attorney General Maura Healey’s office are likely to play critical roles in the review of a possible merger of Partners and Harvard Pilgrim.

    “If there’s any state this merger gets the attention it deserves, it’s probably Massachusetts,” said Erin C. Fuse Brown, an associate professor at Georgia State University College of Law who studies the health care market.

    “It’s really critical for antitrust authorities, the state attorney general, the Health Policy Commission to really study the effects of this merger,” she said, “because once a merger happens, it’s very hard to break it up.”

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