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Consolidation Case Study: Baylor Health and Texas Health Resources

 |  By Jim Molpus  
   September 03, 2014

Leaders from Baylor Scott & White Health developed a merger partnership built on cultural fit, clinical alignment, and market growth.

This article first appeared in the July/August 2014 issue of HealthLeaders magazine.

In 2011, Baylor Health Care System was hemmed in. For an organization that already had 30 hospitals, 180 physician clinics, and $4 billion in total operating revenue, having its growth limited was not an acceptable state of affairs. A merger with another Dallas market giant, Texas Health Resources, had run off track with regulatory hurdles a decade ago, and any similar mergers with local players would likely meet the same result.

Baylor faced a thornier problem: scale. Many health systems across the country have looked to mergers, acquisitions, and other partnerships to grow scale so they can manage a population of patients, whether under contracted agreements with commercial payers or by creating their own payer organization. With scale, or so the thought goes, comes efficiency that can provide higher-quality care at a lower cost. Even as large as Baylor was, it still lacked the clinical and operational scale it needed to meet that bar.

"We were growing. The [Dallas area] metroplex was growing, but so was everybody else," says Baylor Scott & White Health CEO Joel Allison, who at the time was CEO of Baylor Health Care System. "At the same time, we knew that if we really wanted to become a statewide presence that we needed another partner to move forward. We looked at how to improve the footprint to get to population health management. Our ultimate vision was to be able to manage the total care of the population."

A two-hour drive away in Temple, Texas, Scott & White Healthcare had 12 hospitals and a national reputation for clinical excellence. Its multi-specialty group practice model was well-positioned for healthcare reform. But it was also on an island in Central Texas, says Bob Pryor, MD, who was serving as Scott & White's CEO at that time. He is now president, chief operating officer, and chief medical officer of Baylor Scott & White Health.

"As a $2.5 billion organization, we could not grow anymore, because we'd grown organically in the region all we could," Pryor says. "We could not acquire anybody. We couldn't build anymore. We didn't have enough population to really make population health work. We knew that if we really wanted to lower costs and improve quality, we had to figure out how we could work together in a way that was uninhibited. We needed to be able to push forward care plans and compare costs across a large geography, and then contract over that large geography for population health."

The timing was on Scott & White's side.

"We didn't really have to make that leap three years ago," Pryor says, "but we knew if we were going to take that next leap, there was only one partner in all the state of Texas that we would have partnered with. That was Baylor. There wasn't a No. 2 choice."

There were several factors that made a proposed merger between Baylor and Scott & White a logical fit. One was that the two health systems were not in the same market, and together would form a larger regional player that would not face as many antitrust concerns as two systems in the same market would.

"It would be really challenging to go into some of these markets without a partner," Allison says. "For us, there was no better partner than Scott & White. It was just so logical. As Bob and I were talking about it, it just made so much sense that we made good partners because we had almost identical mission, vision, and values."

No merger is a perfect fit between two organizations, and this one was no different. Baylor had been built for rapid physician growth, with a large number of independent physicians aligned to the health system and a growing employed physician group with HealthTexas Provider Network. (Texas law restricts the direct employment of physicians and the corporate practice of medicine, but the so-called 501(a) model, named for a section of state law, provides for a physician-governed group practice to essentially function as a hospital-employed group, thereby avoiding the state's ban on the corporate practice of medicine model.) Scott & White was a highly integrated multispecialty group with an emphasis on physician leadership.

Beyond the physician model structures, there were other significant differences: The two health systems had different electronic health record system vendors. The nursing practice models were different. And both brands had such a long local history that each unique brand identity would have to be maintained.

What kills many mergers before they finish, however, is culture. Allison and Pryor say they felt the cultures of their two organizations were a great fit, but with so much at stake, their respective boards asked them to hire a consultant just to make certain. As part of the due diligence, McKinsey & Company conducted a cultural audit that found the two systems are "much more alike than they are different," Allison says.

"It gave us a comfort level that we're moving in the right direction," Allison says. "There have been a lot of past relationships among our teams, so when we sat down to do the mission, vision, and values for the new organization, it took us about five minutes. Basically we just blended the two because they were so much alike. We maybe changed one or two words here or there, but otherwise it was right on."

Beyond the culture question was a leadership one: Who would helm the combined health system? The merger was announced in December 2012 and finalized 10 months later. One fiduciary board was created, with advisory boards in the two local markets. Allison retained his title as CEO of the combined system, while Pryor was named president, COO, and CMO of the newly branded Baylor Scott & White Health. Combining the operating and clinical sides of the system under Pryor was intentional.

"It's not like I wanted another title," Pryor says. "For the first 24 months, I thought it was important that both the clinical enterprise and the operational enterprise report to me. I have cross-membership of both the clinical and operational committees. I think that sends a strong message that we're still a clinical-operational dyad that moves forward."

The merger is now in what Allison describes as the "budgeting and strategy phase" but is quickly moving ahead on four strategies:

  • Continue with overall system integration
  • Develop the clinically integrated network built around the the Baylor Scott & White Quality Alliance (since renamed the Quality Alliance)
  • Develop systems for population health management
  • Continue to seek strategic growth

Allison and Pryor say the integration has gone smoothly so far, but there is no timeline for completion.
"The timeline of the integration is basically as soon as possible, and it's realistically another year to a year-and-a-half out," Allison says. "This time next year we'll probably still have about six months of work to do to get everything fully to what we would consider integration, but it's a journey."

Reprint HLR0814-11

This article appears in the July/August 2014 issue of HealthLeaders magazine.


Jim Molpus is the director of the HealthLeaders Exchange.

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