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| Vol. 21, No. 6 |
| Apri 1, 1999 |
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About the Merger, Administrative and Clinical Services, and Large Hospital Systems
TMCN: It's been over a year now since the merger of Memorial and Hermann. In retrospect, how did it go? DW: The merger formally occurred on Nov. 4, 1997, so it's been about a year and a half. We at Memorial had been involved in a couple of acquisitions - Memorial City and its three facilities, and The Woodlands and then Pasadena. So we had a pattern that we had already used to integrate systems. Of course Hermann was much larger, and it had its own culture. We had six months of serious negotiations We moved through the process pretty quickly, and that's essential, I think, in these types of mergers because if you move too slowly then you will just create more problems. Early on we had agreement among the members of both boards that it was a good thing to do. The philosophies and the values of the two organizations were very compatible. That was of critical importance. To answer your question, it went very well, more smoothly than you would think. TMCN: In the negotiations to merge, did you have key issues identified? DW: Yes, absolutely. First of all was the issue of governance. Our board of directors had 11 members and Hermann's had 11 members, so we felt the new board would have 11 also, with a 50-50 split or representation. Hermann had just one board, but Memorial had a few boards, including our foundation board. So all the board members who wanted to serve did so, and those not on the system board would be on one of the subsidiary boards. Then we decided who was to be the chairman of the board and the CEO for the system. A big issue was bringing together the management staffs, looking at the strengths and weaknesses of the senior positions. Fortunately, we had many structural things already in place because we had multiple hospitals. Again, we resolved the larger issues - governance and management - early on, so the smaller issues such as where the corporate offices would be, what the name of the organization was to be and defining other personnel matters, came into place pretty easily. After the formal merger, it took us about five months to merge the services - finance, human resources, information systems, planning and the others - to bring the organizations together. TMCN: So you had a system of community hospitals with the addition of a large academic hospital. DW: Yes, and of course each had a somewhat different emphasis, a different mission. There have been very good relations with [The University of Texas-Houston] UT Medical School. We consider UT a part of our family. As a system, we try to centralize many of the hospitals' functions, such as admissions, laundry; it's the same with merging the management services. The savings are there in administration and support, and we're on target to save $20 million this year. There are not a lot of savings on the clinical side. And there we want to de-centralize the services. With Hermann, our system now has three hospitals where heart surgery is performed: Hermann, Memorial Southwest and Memorial City. Some might say that's overlapping, duplicating services. Actually Memorial Southwest and Memorial City do more heart surgery than Hermann does, but Hermann is where the medical school is; that's where the teaching takes place and where the residents work. So, certainly we have to have a heart program in the Medical Center. But a lot of people still like going to a community hospital, ever for heart surgery. We are de-centralizing in another way: We're seeing many of the UT doctors wanting to reach out into the community, especially in obstetrics, pediatrics, cancer care, and cardiovascular care. We hope to enlarge pediatric care in the community and also to increase referrals to Hermann Children's Hospital. I think it's very important to know your communities, and be able to provide appropriate services. For example, the hospital in The Woodlands: that population is young, there's a large OB service, and the average length of stay is under three days. The Pasadena community, on the other hand, has a population that is 80 percent Medicare/ Medicaid, an older and more diverse population. So these two hospitals are quite different clinically. We've never wanted to force clinical services into an area. TMCN: Eventually, are we going to see several large systems? DW: Yes, I think so - for a number of reasons. The capital resources and needs of a hospital can be overwhelming. It can take a lot of resources to be able to replace MRIs and CAT scans, those sorts of things. It's difficult to negotiate good managed care contracts if you're small. Here's an example: Memorial City Hospital - which is pretty sizeable at 500 beds - saw their occupancy continue to drop because they simply didn't have the clout to negotiate contracts. After we acquired them and brought them into our system where all of our hospitals are negotiated into a contract, their occupancy rate went up 54 percent almost overnight. We insist that all of our hospitals are in a contract. Some of the care plans might say to us, "Surely you wouldn't expect us to include Such-and-Such a hospital in this contract." And we'll say, "Just test us." Another very positive thing about a large integrated system is that you can provide a full scope of services, and you can make quick referrals to those highly specialized services. Our presence in the Texas Medical Center gives us an advantage in recruiting health care professionals, and the educational institutions in the Medical Center are a great source of employees. Also, there can be a transfer of the research into the community hospitals, so that's a real benefit for our patients. I think, too, that the efficiency and productivity of community hospitals can be very instructive to larger teaching facilities. TMCN: Now, you're over in the Golden Triangle. DW: Yes. Baptist has a 200-bed hospital in Beaumont and a 125-bed hospital in Orange. They came to us and said, "We think it's time to be part of a larger system." They did this for the reasons I've just talked about - the benefits of a larger system. They needed some capital support, and they wanted to upgrade their facilities. And we'd been thinking that we needed to be east of Pasadena. There's a lot of industry in the Beaumont area, and I think the private patients coming from there to Hermann can offset some of the faculty expense. So we're really excited about being over in East Texas - where, by the way, we will have a little friendly competition with the Sisters of Charity, whom we have as partners in an existing care plan. TMCN: What's next? DW: We don't necessarily want to be the biggest system, just the best. I'm told by several independent auditors that we have the most efficient system, so we want to continue with that coupled with the highest quality patient care. We have affiliation agreements with 16 hospitals in south Texas, and we have managed care contracts with Polly Ryon, Tomball and Angleton - all are independent hospitals. We want to build a hospital in the FM 1960-Highway 290 area, with about 75 beds and a large clinic service. There's a young, growing population there. And we want to expand The Woodlands hospital with some things the doctors need for their practices and with another 75 beds. So we have our hands full. TMCN: Just to go back to my earlier question about several large systems. DW: That's certainly the trend, and you can see it in any number of cities - notably Dallas and Austin, and with the Christus system (a merge of the Sisters of Mercy and the Sisters of Charity hospitals). There will continue to be consolidation here. I believe that there will be three or four systems in the not-too-distant future. The surviving systems will have a market share of about 30 percent, 25 percent if there are four systems. There will be a handful of independent hospitals, less than 10. The surviving large systems will be highly efficient. The patient care will be the best we've ever seen. - ROGER WIDMEYER
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