Texas Hospital Giants Baylor Scott & White and Memorial Hermann in Merger Talks

https://www.wsj.com/articles/texas-...d-memorial-hermann-in-merger-talks-1538410793https://www.wsj.com/articles/texas-...d-memorial-hermann-in-merger-talks-1538410793


Two Texas hospital giants said they are in merger talks that would combine dominant hospital systems in two of the nation’s largest metropolitan markets, one of the latest signs of the consolidation reshaping the health-care industry.

Baylor Scott & White Health, a nonprofit based in Dallas, and Memorial Hermann Health System, based in Houston and also a nonprofit, announced a letter of intent to create a 68-hospital system spanning from the Gulf of Mexico to the Oklahoma border.


The combination would be among the largest U.S. systems, by number of hospitals, with annual revenue of more than $14 billion.

With that size comes potential for greater efficiency and savings that can be invested to catch up with market demand for less costly and more convenient care, the hospital systems’ executives said in a joint interview.

Jim Hinton, chief executive officer of Baylor Scott & White Health, which is in merger talks with Memorial Hermann Health System. Mr. Hinton would be CEO of the combined system. PHOTO:BAYLOR SCOTT & WHITE HEALTH
“The means is to create economies” of scale, said Baylor Scott & White Chief Executive Jim Hinton. “The end, the more important end, is to improve care and invest in digital and ambulatory and other modes of care.”

Mr. Hinton would be named CEO following the merger, which could close as soon as July.

Around the country, the rise of regional hospital powerhouses is accelerating as hospitals respond to pricing pressure, and technology moves more medical care outside their walls.

Bon Secours Health System Inc., based in Marriottsville, Md., merged last month with Mercy Health, based in Cincinnati, to form a seven-state health system with nearly four dozen hospitals. That followed the April combination of Chicago-based Advocate Health Care and Milwaukee-based Aurora Health Care, which created a 27-hospital giant.


“Scale done right is vital,” said Bon Secours Mercy Health CEO John Starcher, Jr. in an interview last month. “It’s not secret to anybody…how far behind the consolidation curve” the hospital sector is compared with others, such as airlines, he said.

That is changing as hospitals come under continued pressure to curb costs and companies across health care strike deals that aim to steer patients away from hospitals. That is the case with the roughly $70 billion acquisition of AetnaInc. by CVS Health Corp. and UnitedHealth Group Inc.’s continued buy-up of physician practices.

Meantime, hospitals are snapping up one another and physician groups to protect their market position. That could hinder efforts to lower spending where hospitals gain leverage in talks with insurers and employers.

Hospitals with market power can negotiate terms with insurers that stifle competition on price and quality.

Limited competition has enabled hospitals to often operate inefficiently. Hospitals budget and set procedure prices using cost approximations that can sometimes be wrong or mask waste. As hospitals rely on raising prices—rather than tight control of costs—to maintain margins, they drive spending higher.


The newly formed Texas hospital giant would likely speak with insurers early about “how we can be their best partner,” Mr. Hinton said.

“We all understand the problem of price and cost is one of the highest concerns in health care,” said Chuck Stokes, president and CEO of Memorial Hermann.

Memorial Hermann’s hospitals dominated the Houston-area market in recent years, treating one in four residents hospitalized in 2017, it said in investor filings. Houston is a competitive, fast-growing market where hospital rivals are racing to consolidate.

But in the past year, Memorial Hermann’s closest competitor has gobbled up a handful of nearby hospitals, challenging Memorial’s No. 1 market position. HCA Healthcare Inc., the nation’s largest hospital system, acquired four Houston-area hospitals from Tenet Healthcare Corp. , and a fifth from Community Health Systems Inc. HCA continued its expansion there with a deal last month to acquire North Cypress Medical Center from a real-estate investment trust.

HCA’s expansion wasn’t a factor in the possible merger with Baylor Scott & White, Mr. Stokes said.

 

Middle managers always find....uh....a way.