Baylor Scott & White, Memorial Hermann sign letter of intent to merge

Dallas-based Baylor Scott & White Health and Houston-based Memorial Hermann Health System have signed a letter of intent to merge, the organizations announced Monday.

The combined not-for-profit entity would have 68 hospitals, two health plans and around $14.4 billion in revenue. Its footprint would include more than 1,100 care delivery sites, about 73,000 employees and nearly 14,000 employed, independent and academic physicians.

"As the whole field is in the midst of a transformation related to a combination of cost issues and technology disruption, our boards got together and talked about how to come together in a more structural way rather than just sharing best practices," said Jim Hinton, CEO of Baylor Scott & White.

Together, Baylor Scott & White and Memorial Hermann could expand their academic arms related to research and medical training and accelerate the implementation of new technology, said Chuck Stokes, president and CEO of Memorial Hermann.

"There is a lot of synergy and opportunity to do things in a different way," Stokes said. "When we are independent of each other, it is harder to do that."

While executives argue that scale will drive down costs and improve care, economists and policy experts contend more market share often leads to higher prices and consolidation does not necessarily produce better outcomes.

Hinton would be the CEO of the combined system. His office of the CEO would include Stokes and Baylor Scott & White President Pete McCanna.

The board would be equally split between Baylor Scott & White and Memorial Hermann. Ross McKnight, the current chair of Baylor Scott & White's board, would also chair the combined system's board. A vice chair, selected by the Memorial Hermann board before the deal closes, would replace McKnight after his two-year term. The merged company would have executive and support staff based in Austin, Dallas, Houston and Temple.

The combined entity would operate under a new name, although Baylor Scott & White and Memorial Hermann facilities would maintain their brands in their respective markets. The organizations expect to reach a definitive agreement in early 2019 and finalize the merger by midyear. The deal needs approval from the Federal Trade Commission and state attorney general.

Baylor Scott & White reported $291.9 million in operating income on revenue of $9.09 billion in 2017, down from $494.2 million in operating income on $8.37 billion of revenue in 2016. The health system's operating income of $494 million in the first nine months of fiscal 2018 was up 44.2% from the same period in 2017.

Memorial Hermann reported $70.6 million in operating income on revenue of $5.06 billion in 2017, down from $225 million in operating income on revenue of $4.89 billion the year prior. But in 2018, Memorial Hermann's unaudited operating income improved to $128.7 million on revenue of $5.26 billion.

Texas is one of the fastest-growing markets in the country, although a declining oil and gas market has dampened the area's economy.

About 17% of Texas' population is uninsured, translating to 4.8 million people, which is one of the largest shares in the country, Stokes said.

Memorial Hermann has reached capacity in some of its facilities, he said. It has also flattened the management structure over the last 18 months, which will serve it well going forward, Stokes said.

"We are the safety net organization for the Houston market, just like Baylor, Scott & White is for Dallas," he said. "We have to figure out how we can continue to strengthen our communities so we can be true to our mission."