Mergers and Acquisitions

Why the Canceled Baylor-Memorial Merger Might Be Good For Hospital Quality and Cost

When Baylor Scott and White and Memorial Hermann announced a now-canceled merger in October, leaders on both sides of the deal spoke about how the increased scale would improve efficiency while sharing of best practices would improve the quality of care. Promises of lower prices and improved care make the merger look like a no-brainer, but numerous studies call these claims into question.

A New York Times article details research that shows how a concentrated and less competitive healthcare market results in worse care for patients, especially those whose health insurance is paid for by the government. The merger would not have had overlapping areas, but would have covered a large swath of Texas reaching North Texas, Houston, and Central Texas.

A Robert Wood Johnson study shows that “When hospitals merge in already concentrated markets, the price increase can be dramatic, often exceeding 20 percent.” The report also describes how quality decreases when the market becomes less competitive when government is the payor. If the costs are going to be the same, hospitals are forced to compete for quality. When there is less competition in a region, the pressure to have the highest quality care decreases. The study showed decreases in hospital mortality in more competitive markets.

The Baylor and Memorial systems’ coverage areas did not overlap, so the merger would not have reduced options in Houston or Dallas in the same way that other mergers within a region would have, but as Texas becomes more connected and continues to expand, the transaction might have decreased statewide competition.

The study discussed how pressures from the Affordable Care Act are causing market concentration, which might be having the opposite of the intended impact. But overall, it says that the Federal Trade Commission’s “recent successes in blocking horizontal hospital mergers should prevent further consolidation, thereby constraining price increases and likely improving the quality of care.”

Another study shows that Medicare patients who are acutely ill receive better treatment in more competitive markets. Further research shows that “moving from a zip code at the 25th percentile of cardiology market concentration to one at the 75th percentile would be associated with 5 to 7 percent increases in risk‐adjusted mortality for three of the sample populations,” while increasing costs along the way.

“These mergers have laudable goals that everyone wants, but the reality is that it is very difficult to achieve,” says Marianne Fazen, CEO of the DFW Business Group on Health. “It can be hard to integrate all of their systems into one giant organization, which may take years and years. The years of integration are fraught with all kinds of challenges and disagreements.” Fazen also notes that a larger system would be a greater negotiating force against statewide health plan administrators like Blue Cross Blue Shield.

When large systems combine, there is added pressure on doctors to refer to systems that have so much control. “Imagine the market power these groups would have, and all the doctors would be highly pressured to refer just to those systems,” Fazen says. “It would basically destroy the market. It is probably better for employers in the midsize and smaller markets, not having them merge.”

Chris Skisak, executive director of the Houston Business Coalition on Health, described to the the Houston Business Journal how the canceled Baylor-Memorial merger would benefit consumers health and bank accounts. “As we do our Houston Healthcare Cost & Benefit Trends survey, this is something we’ve seen — costs keep going up, and employees are saddled with more of the share through cost shifting,” Skisak told HBJ. “I don’t know that that ends with mergers like this.”

The merger would have created a 68-hospital network with revenue of  $14.4 billion, making it the largest network in Texas, with 73,000 employees across 30 Texas counties.

Employers will benefit from greater competition, even though the two networks’ coverage areas didn’t overlap. “Texas is the wild west of business and healthcare right now, why lock into a system that might have trouble integrating?” Fazen says, knowing that healthcare costs for employers are often their second largest expense. “Hospital systems need to be thinking that employers aren’t going to take it anymore.”


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