Baylor Scott & White Health

Can the Baylor-Memorial hospital merger lower the costs of health care for Texans?

by Mitchell Schnurman, Business columnist | October 7, 2018

What do you get from putting together the top hospital systems in Dallas and Houston?

Maybe a company that can compete with Amazon and Warren Buffett. Or even better, a company that can collaborate with them.

This week, Baylor Scott & White Health in Dallas and Memorial Hermann Health System in Houston agreed to a merger that would combine two faith-based, not-for-profit organizations that control about a quarter of the hospital business in their respective hometowns.

They still must work out details, including a definitive agreement and regulatory review, with the aim of closing the deal next summer.

Together, the companies generate almost $15 billion in annual revenue and have over $19 billion in assets. They have 68 hospitals, nearly 14,000 affiliated physicians, 73,000 employees and two insurance plans. They have nearly 10 million patient encounters a year.

That’s big by any standard, but the question is whether that size will pay off in more affordable service.

“The No. 1 issue in health care is costs,” said Jim Hinton, CEO of Baylor Scott & White and the executive who will lead the merged companies. “Everyone in the industry is trying to figure out an approach to lower costs.”

So are others on the outside, distressed by rising medical expenses. Early this year, Amazon, Buffett’s Berkshire Hathaway and JPMorgan Chase unveiled plans for an independent health care company for their 1 million-plus employees.

In June, they named the renowned Harvard professor and surgeon Dr. Atul Gawande as CEO. This month, the venture hired a chief operating officer. Other corporate leaders are monitoring developments closely.

So is the Amazon effort a threat to Baylor-Memorial or a potential collaborator?

“Both,” Hinton said during an interview in his Dallas office. “If we don’t understand the frustration among businesses and don’t do anything about it, this is a big threat. But if we begin to disrupt ourselves, maybe we can become a partner in some way with the disruptors.”

In many industries, mergers offer significant savings because managers can eliminate redundant jobs, facilities and overhead. But in health care, consolidation usually doesn’t translate into lower costs for consumers, many studies have found.

In the 1990s, California was a leader in controlling health care costs. But several factors led to big spikes in spending, including the consolidation of hospitals into large systems.

By 2016, the average adjusted price per admission in the large hospital systems was $7,000 higher than at all other California hospitals, according to a report by three researchers in this month’s Health Affairs magazine.

The California attorney general cited several anti-competitive behaviors by one of the state’s largest systems, including “all or none contracting.” That provision requires insurance plans to include all the system’s facilities or none.

“Policy makers across the country can and should learn from California,” the study said. “The wave of hospital consolidation happened earlier in California, but other states are catching up.”

Hinton said that savings from hospital mergers can be overshadowed by other expenses, such as pricey blockbuster drugs. The biggest potential benefit comes from identifying and transferring best practices, such as ways to reduce intensive-care stays or make surgeries more efficient.

Baylor Scott & White, created by the merger of the Baylor and Scott & White systems five years ago, has exceeded its projected cost savings even while integrating the two systems, he said. In the past five years, the company saved almost $740 million from various improvements. A new cost-savings initiative saved an additional $290 million last year, according to the company.

Moody’s Investors Service, in a report last year, lauded Baylor for “demonstrating [an] ability to execute large integration initiatives.”

Revenue, operating income, cash and total assets have more than doubled since before the merger. Licensed beds and patient days are up sharply. The number of employees has swelled from about 20,000 pre-merger to over 47,000 today.

All this growth and the company’s operating margin for the first nine months of fiscal 2018 was 6.9 percent — the same as the year before the merger.

“They’ve demonstrated superior financial acumen,” said Britt Berrett, a professor at the Naveen Jindal School of Management at the University of Texas at Dallas.

Berrett is a former health care executive, having served as president of Texas Health Presbyterian Hospital Dallas. When the Baylor-Scott & White deal was announced, he expected “a train wreck — a collision of two very different cultures,” he said.

But the integration went well and the company can point to rising employee engagement.

“They’ve proven they know how to lead change,” Berrett said.

When the deal with Memorial was announced, top executives and trustees emphasized that the two systems had similar mission statements and commitments to the public. They don’t pay dividends to shareholders, one trustee said, so they can invest more money in their communities.

“This is front and center,” Hinton said about their shared values.

Texas is among the least-healthy states in the nation, ranking 44th, according to the Commonwealth Fund. Texas ranked even lower in the share of adults who went without care because of the costs.

That’s bad for residents as well as employers like Amazon. Hinton believes Amazon and Buffett will focus on improving general health and access to primary care. Hospitals won’t be the primary target — unless they don’t improve.

“We have to take dollars out of the system, because health care costs could ultimately bring businesses to their knees,” Hinton said.

This article was originally published by The Dallas Morning News and FWD>DFW had no influence on the content created.

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