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Analysis

Baylor Scott & White's Memorial Hermann Merger Isn't a Ploy for 'Domination'

By Steven Porter  
   October 01, 2018

While some see a possible 'behemoth to rival HCA,' the prospective CEO of the combined nonprofit organization downplays the competitive edge and says he plans to play nice with payers.

Two of the largest nonprofit health systems in Texas announced Monday that they have signed a letter of intent to merge their operations into a single entity as soon as next year.

The planned combination of Dallas-based Baylor Scott & White Health with Houston-based Memorial Hermann Health System would form a 68-hospital system, making it the largest in Texas and among the largest nationwide, with annual revenue in excess of $14 billion.

Although each of the nonprofit systems dominates its metro market, the Nashville-based for-profit hospital chain HCA Healthcare has been gaining ground on Memorial Herman, buying a total of six Houston-area hospitals since last year. The nonprofits' proposed tie-up shouldn't be seen, however, as an effort to keep HCA or any other hospital chain at bay, said Baylor Scott & White CEO Jim Hinton, who will be CEO of the proposed combined entity.

"I can't recall a single time that using this opportunity as a means to target a competitor has ever come up. I think this has strictly been about how can we deepen the quality of service to our existing communities and bring some new capabilities to play," Hinton told HealthLeaders. "The word 'domination' isn't in the vocabulary."

Memorial Hermann CEO Chuck Stokes, who will retain his title post-merger, similarly said the proposed arrangement is about doing what's best for patients.

"This is about two really forward-thinking organizations coming together to try to make sure we improve accessibility, affordability, and services to the people that we serve. … That's what we're going to stay focused on, and that's what our governance is expecting us to do," Stokes told HealthLeaders.

Related: Lofty Goals Limit Success Scenarios for Baylor Scott & White, Memorial Hermann

Even so, some outside observers described the merger in terms of a competitive strategy that could benefit the organizations by establishing their regional dominance with a combined network in two major markets.

"This will allow one organization to impact healthcare for a large proportion of patients in metropolitan areas that have a combined population of more than 16 million people," said Tyler Dinwiddie, a senior analyst with Decision Resources Group who covers Texas markets. "The merger will also create a state-based healthcare behemoth to rival HCA—which continues to operate hospitals in each of Texas' five largest markets."

Playing Nice With Payers
 

The desire to gain a stronger hand in contract negotiations is commonly cited as a factor driving many hospital mergers and acquisitions. In the case of Baylor Scott & White's planned union with Memorial Hermann, the combined network power could translate to more leverage with major insurers, and that could have a lasting impact on the integrated delivery network's relationship with payers down the road, Dinwiddie said.

"I also think that with insurance reimbursements declining, and with the continued movement toward risk-based value-based care arrangements, economies of scale and integration are increasingly more important," Dinwiddie added. "The two organizations will have an opportunity to combine certain capabilities and assist each other by disseminating care protocols or expertise across the network."

Related: Memorial Hermann CEO Chuck Stokes Never Wanted to Be CEO

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Hinton brushed aside any suggestion that this merger was motivated by a desire to out-negotiate payers. He preferred instead to describe insurers as partners in the shared task of creating a value-based care delivery system.

"I think we're actually natural allies," Hinton said.

Review Could Be Easy
 

Despite its size and potential impact, the merger seems unlikely to trigger antitrust regulatory action by the Texas Attorney General's Office or Federal Trade Commission, according to the organizations' leaders and industry watchers alike.

"We're not in overlapping markets. There is no overlap. We're in contiguous markets," said Deborah Cannon, chair of the Memorial Hermann board of directors. "Typically, when FTC gets concerned, it's when there's a lot of overlap."

Dinwiddie and his colleague Sarah E. Wilson, principal analyst of market access insights at Decision Resources Group, agreed. They likened the newly announced merger plans to others recently executed, such as Dignity Health's merger with Catholic Health Initiatives or the combination of Advocate Health Care and Aurora Health Care.

Nevertheless, Cannon and Stokes acknowledged that they cannot predict what steps the authorities may take.

EMR And Other Hurdles
 

Although the two mission-minded nonprofits may speak the same language in terms of their objectives, their electronic medical record (EMR) systems will require some translation.

Baylor Scott & White uses Epic systems, while Memorial Hermann's EMRs come from Cerner. That could make data-sharing—a critical component of any value-based initiative—difficult for the combined entity. But the hurdle is surmountable, Hinton said.

"We don't think it's a huge obstacle, and we'll make a decision about moving to a single EMR down the road, if and when that becomes a priority," he said.

Related: The Dangers of Unequal Access to Post-M&A Resources Among Providers

Related: How Much Can M&A Cut Costs? Lower Your Expectations

Related: Nonprofit Hospitals Must Address Administrative Bloat, Physician-Researcher Says

In announcing their letter of intent, the two organizations said they will station executive and support staff in four cities: Dallas, Houston, Austin, and Temple. But there's no word yet on which would be named headquarters for the 68-hospital system with nearly 14,000 physicians, and two health plans.

Now begins the due diligence process. The goal is to finalize the merger by the beginning of the new fiscal year on July 1 next year, as The Dallas Morning News reported.

"We're a long way away from the finish line, and maybe some of these issues will rise up and be more significant," Hinton told HealthLeaders. "But today [the focus is] really a strong commitment to complete those steps, to improve healthcare for Texans."

Editor's note: This story has been updated throughout with additional information.

Steven Porter is editor at HealthLeaders.

Photo credit: (at top) Baylor Scott & White Health CEO Jim Hinton (courtesy photo)


KEY TAKEAWAYS

Some outside observers described the merger as a means to regional dominance with feet firmly planted in two major markets: Dallas and Houston.

Despite its size and potential impact, the merger seems unlikely to trigger state or federal antitrust regulatory action.

The due diligence process has just begun, but the organizations aim to have a final agreement in place by July 1, 2019.


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