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Lahey, Northeast Health set merger deal

Plan a 675-bed hospital network

By Robert Weisman
Globe Staff / July 20, 2011

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Lahey Clinic of Burlington said yesterday it has agreed to merge with Northeast Health System, forming a hospital network that would stretch from the northwestern Boston suburbs to Cape Ann and further scrambling the Massachusetts health care market.

The deal, in which no money changes hands, would create a new nonprofit umbrella organization called Lahey Health System under the leadership of Howard G. Grant, who took over as Lahey’s chief executive eight months ago. It would have 675 licensed beds, more than 1,110 doctors, and about 10,000 employees across four hospitals: Lahey, Beverly Hospital, Addison Gilbert Hospital in Gloucester, and BayRidge Hospital in Lynn.

The Lahey-Northeast alliance, spelled out in a letter of intent, will put fresh pressure on other community hospitals - and on Boston teaching hospitals such as Beth Israel Deaconess Medical Center and Tufts Medical Center - to line up more partners and strengthen their own systems in a new era of integrated health care delivery.

If such efforts succeed, it could mean better coordinated health care and lower costs for patients.

Earlier this year, Beth Israel had preliminary talks with Lahey about a potential merger, though Grant said he has primarily focused on forging an affiliation with Northeast.

“This is a big win for Lahey Clinic,’’ said Ellen Lutch Bender, president of health care consulting firm Bender Strategies in Newton. “With Lahey and Northeast linking up, I wouldn’t be surprised to see other hospitals become part of this new organization. Standalone hospitals are unlikely to be long-term survivors.’’

The financial health of the Massachusetts hospital sector has weakened as a result of the struggling economy. Sixteen hospitals, nearly a quarter of those operating in the state, lost money last year, according to a report by the state Division of Health Care Finance and Policy. Two community hospitals have filed for bankruptcy protection, while several others have aligned themselves with Steward Health Care System, a for-profit group formed last year by New York private equity firm Cerberus Capital Management.

Northeast, by contrast, is a financially stable hospital group that posted a profit of $3.7 million in 2010. Its board of trustees decided last winter to explore a merger or sale after becoming convinced its hospitals would need more resources and lower costs to succeed as state and federal governments overhaul health care delivery and payment systems.

In choosing Lahey, a nonprofit teaching hospital affiliated with Tufts Medical School, Beverly-based Northeast rejected proposals from Beth Israel and Vanguard Health Systems, a for-profit national hospital chain that owns hospitals in Framingham and Worcester. Steward, which runs eight hospitals in the state, initially made a bid, but withdrew from the competition.

“We’re very confident we made the right decision,’’ said Northeast chief executive Kenneth Hanover. “There was substantially more benefit to a Lahey affiliation than other bidders could have provided.’’

Lahey already had a longstanding clinical affiliation with Northeast’s flagship community hospital, Beverly Hospital. In addition, executives said, the two systems are geographically contiguous, and their services complementary. While Northeast provides obstetrics and pediatric care, Lahey is a leader in high-end care in areas ranging from cancer treatment to organ transplants.

Grant said he and Hanover would be open to adding more hospitals or physicians groups to their network. “We want to create value by providing the highest quality and lowest cost care as close to people’s homes as possible,’’ Grant said.

As currently envisioned, the new umbrella organization, Lahey Health System, would have a 12-member board. It would be made up of four representatives selected by Northeast, four by Lahey, three community representatives nominated by other trustees, and Grant, who also would be president and chief executive. Hanover will continue to run the Northeast hospitals while assuming some corporate roles.

The hospital systems still have to negotiate a definitive agreement, a process they said could take 90 days or more. They also need approval from the state attorney general’s office and the Federal Trade Commission.

Before the deal with Lahey was disclosed yesterday, Northeast reached a tentative contract agreement with the Massachusetts Nurses Association, which represents nearly 700 registered nurses in the system’s hospitals. Union spokesman David Schildmeier said the agreement contains strong guarantees that whatever organization emerges from the affiliation deal must honor the terms of the contract.

“As long as it assures the stability of the hospitals, we’re supportive’’ of the merger, Schildmeier said. “Our main concern is that they continue as full-service hospitals.’’

Northeast’s losing bidders had little to say about the outcome yesterday.

The unsuccessful bid of Vanguard, which lost out to Steward in other hospital competitions this year, leaves it with just two properties in the state: Saint Vincent Hospital in Worcester and MetroWest Medical Center in Framingham. “As a matter of policy, Vanguard Health Systems doesn’t comment on potential mergers or acquisitions,’’ said Dennis L. Irish, a New England spokesman for the hospital chain.

Chris Murphy, a spokesman for Steward, wouldn’t discuss the Northeast competition.

Beth Israel spokesman Jerry Berger, whose hospital in April disclosed plans to merge with Milton Hospital, also wouldn’t comment on losing out to Lahey in the Northeast bidding. Speaking of Beth Israel’s acting chief executive Eric Buehrens, Berger said, “He plans to call his counterparts at Lahey and Northeast to congratulate them.’’

Robert Weisman can be reached at weisman@globe.com.