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Our Take: Texas health systems sign letter of intent to merge

Oct 08, 2018

Baylor Scott & White Health (BSW) and Memorial Hermann Health System have signed a letter of intent to merge. In a statement, the organizations said their next step is to complete a due diligence and regulatory review prior to signing a definitive agreement, which is expected to occur in 2019.

The combined system will include 70 hospitals across 30 Texas counties, with 73,000 employees and nearly $11 billion in annual net patient revenue—making it one of the 10 largest integrated delivery systems in the U.S.

“This is about two mission-driven organizations—both committed to making safe, high-quality health care more convenient and affordable—building something transformative together,” said Jim Hinton, CEO of BSW.

Hinton will be the CEO of the proposed combined system; his executive team will include Chuck Stokes, president and CEO of Memorial Hermann, and Pete McCanna, president of BSW. The health systems said a unified board would be created with equal representation from both organizations.

The new organization will have executive and support staff based in Austin, Dallas, Houston and Temple.

“Through this combined system, we have a unique opportunity to reinvent health care and make a profound difference in the lives of millions of Texans,” said Stokes.

Our TakeThis deal has been in the works for some time, evidenced by a polished website that was ready to go at launch—replete with feel-good videos—proclaiming that the two organizations are “transforming health together” for the good of all Texans.

“Texans need organizations with histories of leadership like ours to step up,” the website touts, noting candidly that “Texas ranks 44th in overall health, and Texas has the highest uninsured rate in the nation.”

Memorial Hermann facilities reside primarily in the greater Houston area, while BSW spans the area from Austin to Dallas-Ft. Worth. There’s virtually no overlap in the markets they serve, and in each highly competitive city they are the market leader.

BSW is about twice the size of Memorial Hermann, and with Hinton as the proposed new CEO, the deal feels more like an acquisition than a merger of equals. BSW also has more pieces of the integrated delivery spectrum, having several large physician groups, more lives under management in its health plan and a larger post-acute presence.

There are other differences. For instance, Medicaid represents about 15 percent of Memorial Hermann’s revenue, but only 6 percent of BSW’s revenue.

Memorial Hermann also has a stronger retail presence than BSW does.

Yet, both systems are on a strikingly similar path from volume to value. Memorial Hermann manages several hundred thousand lives in multiple ACO agreements, and its MSSP ACO has consistently been one of the top-performing ACOs in shared savings. In its first five years, Memorial Hermann’s MSSP ACO had gross shared savings of more than $260 million.

Baylor Scott & White Quality Alliance (BSWQA) took a little longer to enter the MSSP and hasn’t performed as well financially, but it manages a similar number of lives through multiple ACOs with an outstanding track record for quality.

In the Darwin Value Index—our model for measuring a system’s movement from fee-for-service to value-based care—Memorial Hermann and BSW score similarly, with a slight edge going to BSW. (See below.)

Ultimately, as the leaders of both organizations point out, BSW and Memorial Hermann have a shared faith-based history, comparable cultures and a similar purpose—all of which will increase the combined system’s chances for long-term success.

Looks like a good fit to us.


By the Numbers

The Darwin Value Index measures a health system’s progression from fee-for service to value-based care on a 10-point scale for six measures, then averages those measures to obtain an overall score. While the Index is admittedly subjective, we score each measure based on our interviews with system executives and our proprietary databases, and in relation to other integrated health systems.

In addition to the percentage of revenue derived from alternative payment models (APMs) and the percentage of physicians employed by the system, we also score the quality of vertical integration, level of technology integration, payer experience and experience with APMs.


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