Hospital giants’ merger is nixed
Dallas, Houston systems end deal, give no reasons
Two Texas health care giants, Memorial Hermann Health System and Baylor Scott & White Health, abruptly called off their proposed $14 billion merger Tuesday with officials offering no reasons for the move.
The cross-state deal that captured national attention would have created the largest nonprofit health system in Texas and one of the largest in the United States. It was also the latest in an exploding trend of multibillion-dollar health care megamergers where bigger is seen as better.
Both Houston’s Memorial Hermann and Dallasbased Baylor Scott & White officials issued identical press releases on Tuesday that said they have chosen to seek their health care visions separately rather than together. They were otherwise tight-lipped throughout the day, offering few clues on why the deal fell apart.
“After months of thoughtful exploration, we have decided to discontinue talks of a merger between our two systems,” said the statements. “Ultimately, we have concluded that as strong, successful organizations, we are capable of achieving our visions for the future without merging at this time.”
Chuck Stokes, Memorial Hermann CEO, wrote in an email to employees: “Our goal was never about getting bigger. Our goal is to create a model for integrated, consumer-centric, costeffective care, and I am confident in Memorial
Hermann’s ability to accelerate and achieve this effort.
“We appreciate the time, thought and care that was invested in this process by so many from both organizations, and extend our deepest thanks to all those involved for their many months of hard work, above and beyond their regular day-to-day responsibilities,” Stokes’ email said.
As word spread, those who had been watching the cross-state merger unfold expressed a mixture of surprise — and relief.
“I was worried about hospital prices rising. I was worried about patients, and I was worried about health insurance premiums in Houston,” said Vivian Ho, a health economist at the Baker Institute for Public Policy. She has been skeptical from the beginning that, by joining the health systems, communities would benefit through increased access and efficiency and, ultimately, lower costs.
‘Good for Houston’
The prevailing economic research, Ho said, shows the exact opposite with prices rising after a merger even if the hospitals are not in the same market.
Still, she assumed the Texas deal would go through.
“It’s good for Houston,” echoed Chris Skisak, executive director of the Houston Business Coalition on Health, who was glad to see the deal fall through as he remains unsure that simply being big always translates into improved quality and lower costs.
On Oct. 1, the two health care systems announced plans to join into a single umbrella organization operating 68 hospitals across 30 counties in Texas. At the time, officials were full of optimism that the move would create a path to the future of health care in the state.
There were no outward signs of trouble as the year ended, with officials maintaining that the deal could close as early as the summer of 2019.
Such a large merger needs approval from both the state attorney general’s office and the Federal Trade Commission to rule out antitrust issues.
But at the announcement last fall, Deborah Cannon, chairwoman of the Memorial Hermann Health System board of directors, expressed confidence the deal would pass muster because the two systems are not in the same market.
Regulatory hurdles do not appear to have been behind the merger collapse. The FTC on Tuesday said in an email it could not confirm whether the merger had been filed for review. The Texas attorney general’s office similarly did not comment about the deal.
The merger came apart recently as the two systems were nearing the end of the due diligence stage, a spokeswoman for Memorial Hermann said in an email without offeringfurther specifics.
Financially strong
While large hospital system mergers continue to rule the day, not all deals go through. Last year, a proposed North Carolina cross-state merger between Charlotte-based Atrium, formerly known as Carolinas HealthCare System, and UNC Health care fell apart over a dispute about control.
Barack Richman, professor of law and business administration at Duke University, said Tuesday that hospitals are dependent not only on support but also full-throated enthusiasm from state policymakers. A tepidness can sometimes be enough to cause second thoughts on a deal’s wisdom, he said.
The Texas merger was officially on for just four months, but hospital officials have said the two systems were in talks about eight months before that. Jim Hinton, CEO of Baylor Scott & White, was to have become head of the unnamed joint operation, and Stokes would continue to lead Memorial Hermann.
Both health systems were considered financially strong going into the merger, although Baylor Scott & White was seen to have a slight edge and was also larger.
Although Memorial Hermann experienced a sharp decrease in income and margins in 2017, the hospital said its financial picture has stabilized.
Martin Arrick, managing director at S&P Global Ratings for its non-for-profit health care group, said joining separate corporate cultures can be tricky, especially when the scale grows.
“Is Texas really ready for a statewide system?” he asked. “The answer is perhaps not.”