UCSF Stanford Health Care's decision late last month to dissolve its 2-year-old merger sent aftershocks far beyond the earthquake-prone San Francisco Bay area.
Temblors were felt as far as Texas, where Texas Health Resources in Irving and Baylor Health Care System in Dallas called off their long-planned mergerlike partnership just days after the Baylor board voted to continue merger talks.
The deal to form what would have been an 18-hospital system accounting for 40% of the nongovernment acute-care beds in Dallas-Fort Worth was first announced in January.
The systems had been in talks for at least a year before that.
When the systems announced the partnership, they said it would save the community $1 billion over five years.
Doug Hawthorne, chief executive officer of 13-hospital THR, said the boards of the two systems thought the integration process would have diverted too much time and attention from operations in an unforgiving operating environment.
The boards thought that if the systems remained separate, they would have more flexibility to deal with financial challenges that emerged after the organizations began merger talks, Hawthorne said. Those challenges included lower payments from Medicare and managed care, he said.
Despite the decision not to merge, the systems expect to pursue some collaboration that will yield savings of about $330 million over five years, he said.
"This is not a goodbye, see you later kind of decision," Hawthorne said.
"This has all been on an amicable basis," added Boone Powell Jr., Baylor president and CEO. "We will do some projects together in the future."
Peter Dysert, M.D., who, as chairman of the physician advisory committee, represented Baylor physicians in negotiations with the Baylor board, said the boards had been concerned with the failures of hospital mergers in other parts of the country.
"Clearly watching the California thing unwind . . . caused both the boards to catch their breath and go back and re-evaluate," he said.
Both sides were concerned that a merger would distract them from core businesses, he said.
"(In a merger), the first year or two years, you spend so much time and energy internally focused when the real things are happening outside the systems," Dysert added.
But Jack McCallum, M.D., a physician representative for THR doctors, called the decision "very disappointing. I think we've missed a real opportunity to improve healthcare in this area."
Also complicating the deal was greater-than-expected antitrust interest from the state attorney general's office.
A spokesman for the attorney general said the termination came as a surprise. Lawyers representing both systems were scheduled to with the attorney general on Nov. 2, he said.
Sources said that in exchange for antitrust clearance, the attorney general was considering a price freeze and restrictions on negotiations with managed-care plans, which would have made the alliance less attractive to the systems.
The spokesman declined to specify the conditions the attorney general had considered imposing. But he said the breakup will safeguard the public's interest.
"We will have a competitive marketplace by virtue of the fact that the merger did not go through," he said.
Another complication was THR's continued failure to sell its Harris Methodist Health Plan, a 314,000-member HMO that posted a loss of $29 million on revenues of $332 million in the first half of 1999. Baylor had made the sale of the HMO a condition of the merger.
Three days after the systems shelved their affiliation plan, THR announced an agreement to sell the HMO to PacifiCare of Texas for an undisclosed sum. Spokesmen at Baylor and THR said the terms of the sale did not affect the decision to terminate merger talks.
PacifiCare's acquisition of the plan, which more than doubles its current 200,000 membership, is expected to close in 90 days.