Baylor Scott and White–Memorial Hermann Merger: Can It Cut Costs?

Changes are on the way in the wake of the merger between Memorial Hermann and Baylor Scott and White, and cost savings for the consumer is one of the claims by leaders on both sides of the deal. But will the two contiguous providers eliminate redundancies and save money or use their negotiating power to drive up prices?

Baylor Scott and White is the result of a merger that may provide a look at what the future of this transaction may hold in regards to cost savings. In 2013, Baylor merged with Scott and White, creating one of the largest networks in the state, stretching from Central to North Texas. According to Baylor Scott and White, in the five years since the combination, the network saved $739.6 million in cumulative savings relative to each of the networks operating independently, exceeding their five-year goal by 28 percent.  Last year alone, the network saved $290 million through a cost savings initiative.

Baylor Scott and White’s cost savings were achieved by identifying, standardizing and implementing best practices across business and clinical areas and eliminating redundancies on the business end of the operation. The hope is for those practices to continue with the larger merger. Officials say the merger will not result in the closing of any facilities, as the two networks do not overlap geographically and have thousands of openings yet to fill.

But the data gives a mixed message about whether mergers and acquisitions save money for providers, consumers, or both. A 2017 report from the American Hospital Association says that healthcare mergers and acquisitions led to savings of 2.5 percent, or nearly $5.8 million between 2009 and 2014. The report notes that economies of scale, access to capital, and standardization of practice being some of the reasons.

A recent article from the New York Times looked at hospital mergers in 25 metropolitan areas between 2010 and 2013 (a busy time for such deals), and found that in most cases prices went up after systems merged. They cited a reduction in competition in the coverage area, but in the case of Baylor and Memorial, there is no overlap in coverage area like in many of the mergers that were analyzed.

But in a post for Harvard Health Publishing, Assistant Professor of Medicine Dr. Gregory Curfman, writes “When individual hospitals merge into larger systems, they gain a larger share of the consumer health market. That puts them in a position to ask health insurance companies to pay more for medical care and procedures. These higher prices are not borne by the insurers, but by consumers in the form of greater premiums. Thus, some economists argue, mergers drive up health care costs and place added financial pressure on consumers.”

A study from Northwestern, Harvard, and Columbia Universities said that these cross-market mergers reduced competition and resulted in higher prices or lower quality care. “Hospitals gaining system members in-state (but not in the same geographic market) experience price increases of 7-10 percent relative to control hospitals,” it read.

A Health Affairs study discussed California’s trend of increased consolidation, which “reduced health plans’ ability to leverage competitive provider markets and negotiate lower prices and other benefits for their members.” The study found that on average in 2016,  the adjusted price per admission at California’s largest health systems was $7,000 greater than at every other hospital in the state.

A Health Professionals and Allied Employees article said that the Federal Trade Commission has had to “unwind” some mergers in order to ensure competition, but FTC chairwoman Edith Ramirez, said the FTC had challenged less than 1 percent of hospital deals in 2014. Because the Baylor-Memorial merger is a horizontal move without any overlap in geography, the FTC is not likely to intervene.

But that same article discussed how new rules under the Affordable Care Act incentivized hospitals to merge. For Medicaid and Medicare reimbursement, sophisticated and expensive data collection programs are required, making it difficult for smaller hospitals or hospital systems to survive.

The Baylor Scott and White and Memorial Hermann systems are in a good place financially, which is often a key to whether the mergers will result in bending the cost curve. They are experiencing growth this year after a down year in 2017. Modern Healthcare reports that Baylor Scott and White said their operating income was $291.9 million on revenue of $9.09 billion in 2017, which was down from $494.2 million in operating income on $8.37 billion of revenue the year before. But this year, things are looking up. They reported an operating income of $494 million in the first nine months of fiscal year 2018, an increase of 44.2% from the same period in 2017.

Meanwhile, Memorial Hermann reported an operating income of $70.6 million on revenue of $5.06 billion in 2017, which was a step down from the $225 million in operating income on revenue of $4.89 billion in 2016. This year, Memorial Hermann’s operating income bumped up to to $128.7 million on revenue of $5.26 billion in their unaudited report, according to Modern Healthcare. 

Time will tell whether Baylor Scott and White and Memorial Hermann can continue the cost-saving trend begun by Baylor Scott and White in North and Central Texas.