The prospect of another huge healthcare merger—this time involving two of Texas' more prestigious hospital systems—is the surest signal yet that even the industry's strongest players are having a difficult time navigating the rapidly shifting healthcare landscape.
Baylor Scott & White Health, a dominant system in the Dallas market, and Memorial Hermann, which holds a similar position in Houston, hope to complete their combination by the middle of next year. The merger will create a 68-hospital system with over 1,100 care sites, 14,000 employed or affiliated physicians and more than $14 billion in revenue.
While the Federal Trade Commission will raise some concerns, the linkup is likely to win approval. There is little overlap between the two systems. Regulators didn't object to a similar horizontal merger between Advocate Health Care in Illinois and Aurora Health Care in Wisconsin, which was consummated earlier this year.
Top officials from both systems listed the usual suspects when asked what they hoped to accomplish by merging: reduced overhead; lower supply costs; and greater cooperation on best practices aimed at streamlining the care-delivery process and improving quality. But there are deeper issues, only some of which are driven by local circumstances. Let's turn to those first.
Texas, which failed to expand Medicaid, has the highest uninsured rate in the nation—about 17%. Over the past two years, the number of people buying individual plans on the exchanges has fallen by 9%, one of the sharper drops in the country after the individual mandate was lifted. That's hurt the bottom lines of both systems. Spending growth far outstripped revenue growth from fiscal 2015 to 2017, and margins at both systems plunged, according to company filings.
In the short run, income from endowments has bolstered both systems. But revenue from a frothy stock market cannot be counted on to provide the capital needed to restructure their businesses to meet tomorrow's challenges.
What are those? First and foremost, healthcare's ongoing shift from inpatient to less costly outpatient settings is speeding up, driven by technological change, consumer preference and payer demands. Lawsuits may delay the inevitable, but the CMS will eventually win its battle to equalize payments for similar services in different settings and commercial payers will quickly follow.
Meanwhile, new entrants are moving rapidly to snatch away key parts of hospital system revenue. On the insurer side, UnitedHealth continues to build its national physician network, now approaching 50,000 strong. The Aetna-CVS Health merger will create a nationwide network of retail medical clinics that will inevitably pose a direct challenge to health systems' heavy investment in building up their own primary-care physician networks.
Then there's Amazon, Apple and Google, each of which has the intellectual and financial capital to build vastly superior platforms for delivering the scheduling flexibility, comparative pricing and quality information that today's consumers want. As their growing healthcare divisions learn the industry's intricacies, they will have the potential to overwhelm the nascent investments by major healthcare systems in that space. The battle over who owns the healthcare experience is only beginning.
BS&W and Memorial Hermann, like major systems across the country, are investing heavily to build the capacity to survive in this brave new world. But like incumbent players in every industry facing disruption—they are fighting with one hand tied behind their backs. For healthcare providers it's the hand that must feed their existing investment in buildings and personnel, and the internal culture and fee-for-service reimbursement system that sustains them.
Merging the financial resources of two solvent systems may buy some time in this environment. But it doesn't solve the core problems.