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Analysis

Why Texas Hospitals' Urge to Merge Takes Precedence

By Bruce Japsen  
   October 05, 2018

Health system M&As may be necessary as insurers with greater access to capital are expanding low-cost outpatient centers into Texas to capture patients.

The proposed merger of two giant Texas health systems illustrates the escalating pressure health insurance companies are bringing to bear on hospitals threatened by narrowing provider networks and a flood of new competition from health plan­–owned outpatient providers.

Dallas-based Baylor Scott & White Health and Houston-based Memorial Hermann Health System this week said they've signed a letter of intent to create a 68-hospital system that draws tens of thousands of patients from Oklahoma to the Gulf of Mexico.

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

And even as big as they are, the deal may be necessary as even larger companies with greater access to capital are expanding low-cost outpatient centers into Texas to capture patients, as fee-for-service medicine gives way to value-based models that emphasize population health outside of the inpatient hospital.

"These two health systems are concerned about increasing market concentration amongst insurers, as well as vertical integration between providers and between insurers and providers," said Vivian Ho, an economics professor and the director of the Center for Health and Biosciences at Rice University's Baker Institute for Public Policy in Houston. "They are aiming to preserve their negotiating power in the midst of a rapidly consolidating landscape."

To be sure, in general, hospitals that decide to merge say they need to consolidate to gain influence against insurance companies like Humana, which is buying providers in Texas; and UnitedHealth Group, which owns Optum, and is gobbling up doctors and clinics and expanding its MedExpress brand urgent care centers across the country. Meanwhile, drugstore and retail clinic operator CVS Health is buying Aetna, and plans to develop more healthcare services beyond the 1,100 MinuteClinics that the pharmacy chain already owns.

Related: Why Health Systems Should Worry About Walgreens and CVS

All three of these health insurance companies are part of an escalating trend by health plans to form narrow network health plans designed to guide patients first to their own low-cost outpatient care centers before they would go to hospitals or other providers owned by Baylor or Memorial Hermann.

With Baylor and Memorial Hermann touting their established brand, Humana has gone so far as to rebrand all of the medical care provider operations it owns in Texas and Florida under the Conviva model, hoping to attract patients to both its clinics and its insurance offerings like Medicare Advantage plans for seniors.

"We are moving to an integrated model and are building a platform that will consolidate these brands in South Florida and Texas under a one payer-agnostic physician brand called Conviva," Humana CEO Bruce Broussard told analysts on the company's fourth-quarter earnings call in February of this year.

"Our strategy is for Conviva to provide local depth and drive both healthcare service and Medicare Advantage growth opportunities with greater member access and engagement in health over the long term," Broussard said. "We believe this new, simplified structure will help us to continue to build trust throughout Florida and Texas markets, improving operations while continuing to make strategic investments in the business."

To compete against the effort of insurers to package insurance and the provision of medical care, the two Texas health systems hope to make the combined system a "national model for integrated, consumer-centric, cost-effective care." The merger of Baylor Scott & White with Memorial Hermann will cast a wide net with more than 1,100 medical care delivery sites; nearly 14,000 employed, independent and academic physicians; and two health plans the systems own. The two systems say they "record nearly 10 million patient encounters annually."

"Together, we believe we will be able to accelerate our commitments to make care more consumer-centric; grow our capabilities to manage the health of populations; and bend the unsustainable healthcare cost curve in the state," Memorial Hermann President and CEO Chuck Stokes said.

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

Analysts say any healthcare providers that hope to compete will need "size, scale, presence, and concentration," says Kevin Holloran, Fitch Ratings senior director and leader of the firm's not-for-profit hospital and healthcare group. "There is always the hoped-for economies of scale, and there is also typically an underlying need to have more touch-points should population health really take off," Holloran said.

It also sets up a battle in Texas that is perhaps a more difficult market to compete in than other areas of the country because health insurance companies and medical care providers are fighting to divvy up a smaller percentage of paying patients.

Texas has the highest rate of uninsured Americans in the country with more than 17% of the state residents who were without coverage in 2017, according to the latest U.S. Census Bureau report on the uninsured, which was released last month. 

Texas is the latest of the remaining 17 states that have yet to expand Medicaid under the Affordable Care Act. Of the 28 million Americans without coverage last year, 4.8 million of them were in Texas, the 2017 census figures show.

"Texas hospitals are facing a tougher financial situation than elsewhere, because the state did not elect a Medicaid expansion under the Affordable Care Act," Rice University's Ho said. "The absence of those funds, combined with the highest rate of uninsured patients in the nation, may have pushed Baylor and Memorial Hermann to consider this merger."

 

Bruce Japsen is a contributing editor for HealthLeaders.


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