As hospitals merge, is bigger really better?
Memorial Hermann patients might not benefit, experts say
If all goes as planned, the merger of Memorial Hermann Health System of Houston and Baylor Scott & White Health in Dallas would create a $14 billion health care behemoth, with increased muscle to negotiate better deals and the flexibility to innovate in challenging times.
The hospitals’ leaders insist bigger is better, and patients will be the winners, benefiting from easier access to medical services, greater efficiency and lower costs after merger closes next year. The nation’s health economists are less certain.
“I know of no academic papers to show mergers reduce cost for patients,” said Vivian Ho, a health economist at Rice University’s Baker Institute of Public Policy. “The immediate motivation is profit.”
The combination of Memorial Hermann and Baylor Scott & White would form the biggest nonprofit health care system in Texas and one of the biggest in the nation, merging two organizations that operate in different markets. Regulators and researchers have typically focused on mergers within the same mar-
kets and found that increased pricing power leads to higher health care costs. But now a growing body of evidence suggests that even mergers across different markets produce similar results.
A study to be published next year in the Rand Journal of Economics, for example, found that mergers in the same state but different local markets increased medical prices by as much as 9 percent. The study examined nearly 500 mergers between 2002 and 2012.
“It is pretty significant,” Leemore Dafny, a co-author the the study, said of the price increases. Dafny, a professor at Harvard University Business School, grew up in Houston and is following the Memorial Hermann-Baylor Scott & White deal.
A separate and older analysis from the Robert Wood Johnson Foundation found that “when hospitals merge in already concentrated markets, the price increase can be dramatic, often exceeding 20 percent.”
The CEOs of Memorial Hermann and Baylor Scott & White, Chuck Stokes and Jim Hinton, respectively, say they are confident their deal will be different, potentially becoming a model for others. Hinton said lowering patient costs was a “driver of the proposed combination.” Stokes said the merger would accelerate efforts to “to make health care more convenient and affordable for all.”
“The reason for us to come together,” Stokes said, “is not to merge our balance sheets, but to better serve our communities.”
Mergers and prices
So what pushes up costs after a merger?
Sometimes, economists say, it’s as simple as a lack of competition when a large hospital gobbles up another in the same market and leaves fewer choices for patients. But in mergers across geographic areas, it is trickier, often coming down to the insurance reimbursement dance.
Analysts say the increased heft of merged hospital systems gives them more leverage when negotiating rates with insurers, which may become willing to pay more for fear of losing large, multi-city health systems from their networks. “Hospitals know they can ask for higher prices if they form statewide networks that insurers can’t ignore, because they include so many providers that their patients want,” said Ho.
Ultimately, it is patients who feel it, either directly through higher out-of-pocket costs or indirectly as insurers raise premiums to make up lost revenue, several analysts said. An economic study last year, also published in the Rand Journal of Economics, found that after a hospital is acquired by a large health care system, the reimbursements paid by insurers rise as much as 17 percent.
While the study does not precisely match the Memorial Hermann and Baylor Scott & White deal, the fundamentals are largely the same and the findings relevant to Texas, said Matthew Lewis, co-author and associate professor of economics at Clemson University. “Patients and insurance companies generally pay more for care following these types of mergers,” Lewis said.
Stokes said that gaining an advantage in insurance negotiations was “just not part of our thought process.”
Memorial Hermann officials pointed to a 2017 report commissioned by the American Hospital Association, the industry trade group, that concluded the opposite of other research, finding that hospital mergers lower costs. That study also disputed findings in academic journals that insurers pay more to hospital systems after a merger. And even if they do, said Melinda Hatton, general counsel for the hospital association, it would only be to bring reimbursements in line with the cost of care.
Dr. Dan McCoy, president of Blue Cross and Blue Shield of Texas, the state’s largest insurer, declined to comment on the Memorial Hermann-Baylor Scott & White deal. He added, though, he is troubled by what health economists have reported about mergers elsewhere.
“The last thing we need to do is accelerate the growth of costs,” he said.
Keeping pace
These arranged marriages have exploded in recent years as size and scale are viewed in the health care industry as a way to keep pace with a rapidly changing landscape. Hospitals feel pressure to find new ways to deliver care as the government and insurers tie payment to health outcomes rather than number of visits. At the same time, new players, such as Amazon and CVS, are barging into the market, upsetting traditional ways of doing thing.
“If we don’t want to be disrupted,” Hinton said in statement, “we must disrupt ourselves.”
Last year, hospitals completed a record 115 mergers, according to Kaufman Hall, a health care management consulting firm. Mergers between large organizations are driving the trend, economists said.
The Memorial Hermann and Baylor Scott & White merger will need the approval of the Texas Attorney General and Federal Trade Commission, but analysts said such cross-market mergers tend to get little scrutiny from federal and state regulators. Deborah Cannon, the chair of Memorial Hermann Health System board of directors, said at a news conference last month that she did not anticipate antitrust objections because the two systems are not in the same market.
But health economists say these deals deserve the same thorough review that in-market mergers receive.
“All of the reasons you would worry about these kinds of mergers are very real,” said Barack Richman, a professor of law and business administration at Duke University. “Any efficiencies they purport to gain are very speculative.”
Falling in love
Theirs was a casual friendship for years. Then, about eight months ago, things heated up.
Last year, during Hurricane Harvey, Baylor Scott & White reached out to Memorial Hermann to offer to send nurses and other clinicians to Houston to help.
“After that, we began to talk,” said Stokes, “I can’t really remember who made the first call.”
In the following months, the two hospital systems explored and negotiated a merger agreement, which they announced Oct. 1. The deal, expected to close next summer, would create a health care network of 68 hospitals in 30 counties, covering wide swaths of North, Central and Southeast Texas. Each hospital system would keep its name.
Hinton would become the CEO of the parent organization, which has yet to get a name, while Stokes would continue to lead Memorial Hermann. A new CEO of Baylor, Scott & White has not been named.
Financial rating services report both health systems are financially stable going into the merger. Still, Memorial Hermann has seen both its operating income and margins decline significantly since 2016. Similar financial breakdowns were not available for Baylor Scott & White from the rating services.
While an analysis by S&P Global of Memorial Hermann details a much sharper decrease, the health system’s own figures confirm a sizable drop in income and margins. Operating income plunged nearly 70 percent from $225 million in fiscal 2016 to $71 million in 2017. Margins fell from 4.6 percent to 1.4 percent, Memorial Hermann said.
Income and operating margins rebounded in fiscal 2018 to $128 million and 2.4 percent, the health system reported, but still remained below 2016 levels.
Stokes acknowledged his health system suffered in 2017, blaming it on the oil bust and painful industry recovery that followed.
“Everyone in this market trended down,” he said. “We’re back to where we should be.”
The merger announcement did not come as a complete surprise to many in the industry.
Texas leads the nation in the number of uninsured, and Houston leads the state. The amount of indigent care at Memorial Hermann, along with a high percentage of Medicare and Medicaid patients with lower reimbursements rates, create steep challenges for the system, said Travis Singleton, executive vice president of Merritt Hawkins, a leading physician staffing and consulting firm.
Competition is also fierce, not only from other nonprofit hospitals but also from HCA, one of the nation’s largest for-profit health care networks, Singleton said. ‘White knight’
“It wasn’t a stretch to say that Memorial Hermann had to do something,” he said. “It is not an insult. I think it’s being responsible. On paper, you couldn’t get a better white knight than Baylor Scott & White.”
Stokes denied that financial concerns were behind the decision to join with Baylor Scott & White.
All hospitals, analysts say, face challenges as the focus of their business changes from putting patients in beds to providing them with easier access to services, through outpatient treatment and the use of technology, such as telemedicine or personal monitoring devices. Stokes and Hinton said the merger will help make that possible.
“There is a sense by some that we’ve got to get bigger to survive,” said Kevin Holloran, a nonprofit hospital and health system analyst for Fitch Ratings. (Fitch is owned by Hearst Corp., the parent company of the Houston Chronicle.)
But whether bigger actually turns out to be better remains to be seen, Holloran said, adding, “I think it’s right to question this one.”