Taking a step already made by many other hospitals across the country, Lawrence & Memorial Hospital and The Westerly Hospital announced Wednesday that they have begun talks toward a possible merger or affiliation.

The talks between the boards and administrations of both hospitals began about two months ago, and has progressed to a "non-binding letter of intent" to continue exploring some type of alliance, L&M said in a news release. Both hospitals issued news releases Wednesday announcing the development. The two hospitals engaged in similar discussions in the mid-1990s, "but this is a much different environment now than it was then," said Mike O'Farrell, spokesman for L&M.

"Today's an important day, because we're ready to let people know we're talking," he said. He cautioned, however, that thorough research and analysis lie ahead before any decisions are made.

L&M initiated the discussions, he said.

Bruce Cummings, L&M president and chief executive officer, said the increasing challenges of the changing health care field mean that hospitals must consider new ways of doing business.

"In these challenging times, and given the enormous changes being thrust upon hospitals, it's increasingly common for hospitals to explore opportunities to lower costs and enhance patient care through new organizational models and new inter-organizational relationships," he said. "We have an obligation to our patients, our employees and our communities to explore opportunities that have the potential to enhance ourselves clinically, operationally and financially."

L&M is the larger and more financially sound of the two hospitals, with 280 beds and a consistent record of positive operating margins. The Westerly Hospital has 125 beds and has ended several of the last few years with deficits, and earlier this year laid off 26 employees and made other cost-cutting moves.

Nick Stahl, spokesman for The Westerly Hospital, said the hospital has had talks over the last few years about merging or affiliating with hospitals other than L&M, but that the New London and Westerly organizations "had some commonality with each other that lends itself to working more closely together."

Both are nonprofit community hospitals. There is some overlap in the patient communities the two hospitals serve, mainly in the North Stonington and Stonington-Pawcatuck areas. The Westerly Hospital this year opened an urgent care center in North Stonington that also houses a physical therapy and athletic training center and other medical offices affiliated with it.

"The future is going to require us to be participating in some of the payment methods that will require us to be hooked up to a larger system," Stahl said.

It will take at least four months to complete the research and analysis and determine whether a merger is in the best interests of both hospitals, Stahl said.

Patty Charat, spokeswoman for the Connecticut Hospital Association, listed several recent mergers or affiliations between hospitals in the state. Most recently, Waterbury Hospital and St. Mary's Hospital merged; the Hospital of Saint Raphael recently joined with Yale-New Haven Hospital, which has also folded Bridgeport and Greenwich hospitals into its network. The most recent merger in Rhode Island was between Roger Williams Medical Center and St. Joseph Hospital.

"You're seeing this all over the country," Charat said. "It's the economy and the economy of health care."

Some of the mergers are involving for-profit health care companies taking over nonprofit hospitals. Such was the case with the Caritas network of Catholic nonprofit hospitals in the Boston area, which are now part of the Steward Health Care System, a for-profit company that includes several other Massachusetts hospitals.

Charat said the federal health care reform act and pending changes in Medicare reimbursement rules are among the forces motivating hospitals toward mergers and affiliations. "It encourages facilities and providers to work together," she said of the health care act.

Any merger or affiliation between L&M and Westerly must be approved by hospital regulators in both states. In addition, the Federal Trade Commission must be convinced that no anti-trust regulations would be violated by a merger.

"If you have a local area where there are only two or three competitors, it could be a potential red flag to us," said Jeff Perry, deputy assistant director of the Bureau of Competition at the FTC. Health insurers would also be consulted, he said, for their view on whether a merger would "negatively affect their leverage over rates."

Dr. Henry Amdur, president of the medical staff at L&M, said any decision must put the needs of patients first. "The patients in our mutual communities need to be held in the forefront," he said. Whatever decision is made, he said, must ensure that "patients will be better served by this affiliation than they are currently."

His peer at The Westerly Hospital, Dr. George Bourganos, said the medical staff at Westerly is generally supportive of the talks.

"We'd like to work for a hospital that is viable and strong," he said. "And we're happy that this would maintain nonprofit status, for the good of the communities."

One concern early on was that L&M, as the larger hospital, would in effect swallow up Westerly, but that has been assuaged, he said. "No hospital wants to take over the other," he said. "We're looking at a symbiosis versus a leader and a follower."

j.benson@theday.com