Memorial Hermann to merge with Baylor Scott & White creating largest health system in Texas

Memorial Hermann Health System and Baylor Scott & White Health have signed a letter of intent to merge to create the largest health system in Texas Monday Oct. 1, 2018 in Houston. The CEO of Baylor Scott and White said the two entities will continue to use their old brand names in their respective service areas. less Memorial Hermann Health System and Baylor Scott & White Health have signed a letter of intent to merge to create the largest health system in Texas Monday Oct. 1, 2018 in Houston. The CEO of Baylor Scott ... more Photo: Michael Ciaglo, Staff Photographer Photo: Michael Ciaglo, Staff Photographer Image 1 of / 30 Caption Close Memorial Hermann to merge with Baylor Scott & White creating largest health system in Texas 1 / 30 Back to Gallery

Two of the biggest hospital chains in Texas announced plans Monday for a merger that would create a mega-system, stretching from Dallas to Austin to Houston, treating patients in more than 30 counties and employing more than 73,000 people across the state.

Memorial Hermann Health System, Houston's biggest nonprofit hospital chain, and Baylor Scott & White Health, the largest in Dallas, have signed a letter of intent to begin negotiations, with the goal of having a definitive agreement in place by next spring.

The proposed merger is the latest in a growing national trend, experts say. Hospital systems have been consolidating rapidly in recent years, in part because of reforms in the health care market aimed at steering more patients to outpatient treatment and avoiding the need for costly in-hospital care.

"This is an opportunity for two progressive, like-minded organizations, who do similar service, to come together and provide a better model of health care," said Chuck Stokes, Memorial Hermann's president and CEO. "Through this combined system, we can reinvent health care to be more consumer-centric and technology-focused."

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At a press conference announcing the merger Monday, executives from both institutions noted that the financial strain on hospitals has been even greater in Texas, where nearly a fifth of the population lacks health insurance. Jim Hinton, the CEO of Baylor Scott & White, said the merger would create efficiencies in the health care delivery system, leading to better care while containing costs.

"We are in a competitive business and people do have choices," Hinton said. "Where we are going to compete is on value, what you get versus what you pay for."

Hinton said the proposed new system will have a new name to be determined before the merger closes — "a corporate name that sits in the background" — but both Memorial Hermann and Baylor Scott & White will continue to use their existing brand names in their respective service areas.

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The new system will be led by Baylor Scott & White officers, at least initially. Hinton will become the new CEO, and Ross McKnight, the chair of Baylor Scott & White Holdings board of trustees, will serve as the new system board chair. A vice chair, to be selected by the Memorial Hermann Health System board of directors, will be named prior to the merger's closing and become chair at the end of McKnight's two-year term.

The goal of the merger is to put the health care systems on sound financial footing for years to come, Hinton said.

"The cost of health care is the No. 1 issue in America, whether it's in Washington, D.C., or in Austin, Texas, or in the benefits office of an employer here in Houston," Hinton said. "So, taking cost out of the system will be an important part of this journey as we come together."

Officials said most of the cost savings would come from the sharing of expertise, collaborations on technology and increased buying power and efficiency.

It's not clear whether a merger would also lead to job cuts. The CEOs noted that the two systems combined have nearly 5,000 current job openings. Memorial Hermann, Houston's largest employer, laid off 460 employees in 2017, with leaders at the time citing the "uncertain health care environment."

Many health care economists disagree with the notion that hospital mergers lead to better, more efficient care for patients. Vivian Ho, a health economics professor at Rice's Baker Institute of Public Policy, said she worries the proposed merger could have the opposite effect. She pointed to research showing increases in health care costs following major hospital consolidations.

"There's nothing that says they have to pass on their savings to the patient," Ho said. "It could lead to higher profits, it could lead to lower prices, but you really need to have other hospitals competing in a market for that to bring prices down, and the problem is that all this consolidation means there's not as much competition."

Barak Richman, a professor of law and business administration at Duke University, said hospital mergers almost always fail to deliver on their promises of delivering better, more affordable health care. Richman said consolidation gives hospitals increased bargaining power with insurance companies, and that in turn can lead to more expensive health plans.

"One thing that does happen, is that prices go up," Richman said. "That seems to be the one predictable consequence of these types of mergers. That is for sure true when the merging hospitals operate in common markets, but it also seems to be true of hospitals that operate in different geographic locations."

Deborah Cannon, the chair of Memorial Hermann Health System board of directors, said the merger talks began several months ago. Cannon said the two systems had partnered in the past, including during Hurricane Harvey, when Baylor Scott & White sent nurses to Houston.

"As we looked at all of the changes that are coming in health care, and understood that there's got to be some radical difference in the way we deliver health going forward to make it more accessible and affordable, we decided, maybe instead of being partners, we needed to be together," Cannon said.

The letter of intent was signed Friday and announced Monday at news briefings in Houston and Dallas. The deal would need the approval of the Texas Attorney General and has been submitted to the Federal Trade Commission for review of anti-trust issues.

Baylor Scott & White is itself the product of the merger between Baylor Health Care System and Scott & White Healthcare five years ago. It has 49 hospitals in central and northern Texas.

Memorial Hermann, created in 1997 when Hermann Hospital merged with Memorial Healthcare System, has 19 hospitals in and around Houston.

Bob Harvey, the president and CEO of the Greater Houston Partnership, said he was pleased by this "merger of equals" and its potential to ensure local patients have access to affordable care.

"As final details of the merger are developed over the coming months," Harvey said in a statement, "we would expect representatives of the Memorial Hermann board and executive team to remain mindful of the specific needs of the greater Houston community and to ensure Houston – like the rest of the state – benefits from this combination."

Hinton said the new system will spread leaders around the state and will not make a big deal out of designating a corporate headquarters. If a corporate headquarters ultimately is based in central or north Texas, the merger would leave Houston Methodist as the last hospital system headquartered in the city and the Texas Medical Center.

"We'll have major operations in Austin, Dallas, Houston and Temple," said Cannon, the Memorial Hermann board chairwoman. "We'll have executives and support staff in all of those locations."

Hinton said Stokes, Memorial Hermann's current CEO, and Pete McCanna, president of Baylor Scott & White Health, will join Hinton in the CEO's office. He said the system will "recognize Stokes' expertise on a lot of things, certainly Houston," and give McCanna and Stokes "a big voice in shaping the overall direction of the new company."

Stokes said he does not see anything changing from what Memorial Hermann patients are used to.

"Care should be more become convenient, more affordable, a better delivery model," said Stokes. "But patients shouldn't be worried about any other changes."

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