Achieving the improvements in cost and quality expected by the two mission-minded nonprofits will be no easy task. The detailed work that begins now will determine whether they succeed or fail.
The planned merger between Baylor Scott & White Health and Memorial Hermann Health System announced this week is unlikely to face a challenge by state or federal antitrust regulators. But that doesn't mean the Texas nonprofits are guaranteed to succeed in their stated objectives.
There's enough geographic separation between the two major markets in which these two organizations currently operate, Dallas and Houston, to sidestep concerns that the combination could harm competition, as executives involved in the deal and outside consultants alike told HealthLeaders. That view was endorsed Tuesday in a bulletin by S&P Global Ratings.
"The two systems have no market overlap, which we believe limits the chance of regulatory intervention in the merger process," the bulletin stated.
But the two mission-minded organizations have set much loftier goals, including cost and quality improvements that have proven notoriously difficult for mergers and acquisitions among other healthcare providers.
Baylor Scott & White CEO Jim Hinton, who will lead the post-merger organization, said Monday that the objectives include demonstrating change leadership for the industry and improving the convenience and affordability of high-quality healthcare for Texans. Memorial Hermann President and CEO Chuck Stokes similarly said goals include making healthcare more consumer-centric, better managing population health, and bending "the unsustainable healthcare cost curve in the state." The S&P bulletin, too, cited potential "operational and clinical efficiencies" among the merger's likely benefits.
History has shown, however, that the cost savings brought by mergers and acquisitions often fall short of what was promised. And some industry watchers worry the added negotiating power that comes with scale could ultimately make U.S. healthcare more expensive.
Lawrence J. Zielinski, MBA, executive in residence for healthcare administration at the University at Buffalo School of Management, likened the proposed merger between the Texas nonprofits to a pending merger between Philadelphia-area nonprofits Jefferson Health and Einstein Healthcare Network and also to the Cigna–Express Scripts deal.
"Will these new oligopolies really integrate care, improve quality, and reduce cost?" Zielinski wrote on LinkedIn. "History of these mega-mergers indicates the opposite—size creates more market leverage."
Inputs Determine Outputs
Rod Hochman, MD, president and CEO of Providence St. Joseph Health, based in Renton, Washington, told HealthLeaders earlier this year that it's difficult to generalize about whether a given deal will ultimately save patients money or improve the quality of their care. The conclusions reached by research papers on the topic depend on how the data is formatted and which organizations are included, he said.
"There are examples of those who have done it well and those who haven't," Hochman said. "Like all things in healthcare, whether the mergers work as their architects describe their benefits is dependent on whom you talk to."
The key to success is settling on a specific game plan to turn scale into cost savings and efficiency gains, he said.
That analysis aligns with the conclusions of a report produced last year by the Deloitte Center for Health Solutions in collaboration with the Healthcare Financial Management Association (HFMA), which analyzed post-M&A performance of more than 750 hospital mergers or acquisitions between 2008 and 2014. The report found that acquired hospitals typically experienced a slump in operating margins, revenue, and expenses for two years after a transaction. But there was significant variation.
"With proper integration planning and execution, some hospitals did experience higher operating margins following acquisition," the report states. "Among a sample of transactions with better outcomes, executives reported spending more time on integration planning and execution than those from transactions that did not meet cost and quality goals."
Strong Starting Point
It's worth noting that Baylor Scott & White and Memorial Hermann are coming into their planned merger from positions of relative strength. The former had an operating margin of 5.1% during the first nine months of fiscal year 2017 that grew to 6.9% during the first nine months of fiscal year 2018. The latter remains profitable.
This financial position could render them better prepared to take full advantage of the opportunities this merger offers. Those opportunities could include more ambulatory surgical center and micro hospital projects, especially since the organizations already work with the same joint venture partners in these areas, as Transwestern National Director Eric Johnson told Bisnow Houston's Tierra Smith.
What's more, the nonprofit health systems have support from at least some community stakeholders.
Elena M. Marks, JD, MPH, president and CEO of the Houston-based nonprofit Episcopal Health Foundation, which works on health and wellness initiatives across 57 counties in Texas, said she has had positive experiences working with Baylor Scott & White and Memorial Hermann separately, so she looks forward to the potential community benefits of their collaborative efforts as well.
"My hope is that it's more than just a revenue ploy and that the enhanced clout will actually give them the incentive and the cushion to do more work in a value-based framework, where the value is health outcomes, not just medical procedures," Marks told HealthLeaders. "So it could go either way, I guess is what I'm saying."
Marks said she hopes the merger will be the starting point for systemwide population health projects that move farther upstream to solve nonclinical problems, such as transportation or nutritional concerns, for the communities being served by these already-large nonprofits.
"I think there are opportunities for it to be wildly successful in terms of cost and quality for the community," she said, "and we'll just have to wait and see."
—Steven Porter is an associate content manager and online news editor for HealthLeaders, a Simplify Compliance brand.
Executives from both nonprofits want to cut costs and improve quality. As past M&A activity has shown, that's a tall order.
The organizations are beginning from a place of relative strength, but the detail work that has just begun could determine whether they succeed.