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$6.4B Henry Ford, Beaumont Merger Failed on Cultural Hurdles

By John Commins  
   May 23, 2013

A merger between two Michigan healthcare providers has been called off because of stark cultural differences between them, observers say. Those differences include the patient populations they each serve and the organizations' physician compensation models.

Detroit's Henry Ford Health System and Beaumont Health System announced this week that they would let expire a deadline for merger talks that would have created a $6.4 billion integrated system. In the end, observers say, it came down to a clash of cultures that could not be overcome by the advantages gained from a merger of equals.

Seven months after telling a room full of journalists that Beaumont was "the absolute ideal partner for us" Henry Ford CEO Nancy Schlichting sent a note to employees saying the deal was off. "This decision was made because it became apparent that two very different perspectives had emerged for the new organization between Henry Ford and Beaumont," Schlichting wrote.

At Beaumont, CEO and President Gene Michalski said in prepared remarks that "we have benefitted greatly from our merger discussions and have great respect for our colleagues at Henry Ford. However, we found through our discussions that we are not aligned on how to achieve our vision for a model health system due to differences in our structures and business models."

Beyond those public statements, neither side was talking, which left the field free for speculation.

Signs that the deal was faltering surfaced last week when physician leaders at Beaumont reportedly asked the system's board to reconsider the merger.  

Marianne Udow-Phillips, director of the University of Michigan's Center for Healthcare Research & Transformation, says she was not surprised that the talks fell apart.

"I was more surprised in the first place when they said they wanted to do it," Udow-Phillips says. "The cultures are so different between these two organizations. Mergers and acquisitions are hard to do generally and in this particular case when you layer on top of it two organizations that have fundamentally different backgrounds and structures, that makes it even harder. I was surprised it was on track for as long as it was."

For starters, Udow-Phillips notes, the two health centers served different patient populations and used different physician compensation models.

"Henry Ford Health System is a very integrated academic health center where the physicians are predominantly salaried. The main campus is in the inner city of Detroit. They serve a population that is predominantly Medicaid and uninsured," Udow-Phillips said.

"In contrast Beaumont Health System," she said, "while it has some staff physicians, the leadership is predominantly led by independent physicians and private practice physicians. Their traditional home is in the wealthy suburbs. Their Medicaid population is very small."

"The physician cultures are quite different. Henry Ford has been an owner of the Health Alliance plan and is very familiar with capitated systems and salaries and structures for physicians and Beaumont is a much more fee-for-service oriented environment.

Allan Baumgarten, an independent health policy analyst and author of the Michigan Health Market Review, acknowledged the vast operational and cultural differences between the two systems, but said he was still surprised that the merger talks flopped.

"I thought these were two organizations that had concluded that they needed to combine forces to be more competitive in what has become a more dynamic and competitive regional market and I thought they had enunciated goals of improving quality and achieving efficiencies and reductions in costs that they thought they could achieve together better than separately," he said.

"Having said that, merging two organizations of that size and with different cultures and structures is obviously very difficult and at a certain point there were enough sticking points that they said they were better off walking away from the table than going any further."

Udow-Phillips believes that the merger talks were initiated last year more as a response to the Patient Protection and Affordable Care Act and other cost-containment and market share pressures brought forward by healthcare reform. Baumgarten says Vanguard Health System Inc.'s $1.2 billion acquisition of Detroit Medical Center in 2010 "stirred things up and was a major driver of Henry Ford and Beaumont to look for a marriage partner literally."

"Since Vanguard acquired the Detroit Medical Center, they have been pumping nearly $1 billion in capital into improving the buildings and the practices and challenging Beaumont on its own turf," he says. "Vanguard has now completed a major clinical center about two miles from the main Beaumont hospital at Royal Oak. Vanguard clearly has a strategy of trying to pick up more patients with better insurance than the inner city patients they have been seeing mostly up to now. They've been doing that by building new facilities and trying to acquire certain specific practices and had some success with that."

Neither Beaumont nor Henry Ford gave any suggestion in their brief statements to the media that they would pursue mergers or other alliances with other providers.

"We haven't seen the first quarter numbers yet, but for the end of the year the Beaumont finances improved significantly so there wasn't the same kind of financial pressure on them as there was when they first started the discussions I am not sure their path is going to be toward a merger," Udow-Phillips says.

"Henry Ford has already in their history done some mergers with other organizations. I am not sure which ones now they would approach. Henry Ford because their patient base is much more heavily based with public programs, they would benefit financially by finding a partner that would balance that out a little bit but I don't know how realistic that is going to be at this stage."

Baumgarten says Beaumont has already rejected advances from Vanguard "and I don't think that is likely to change."

"There are other possibilities," he says. "The University of Michigan Health System at Ann Arbor is about 50 miles from Beaumont and that is a very prestigious academic medical center which has been trying to extend its reach into different parts of the state through some acquisitions but mostly through different kinds of partnerships."

Baumgarten says some sort of alliance between Beaumont and Oakwood Healthcare System might also garner consideration. "Oakwood serves the west side of the Metro area where Beaumont is on the northeast side. There are geographically compatible," he said.

"Or maybe we'll see a partner relationship where Mayo Clinic or Cleveland Clinic is sharing certain lines of expertise of medical management or other administrative expertise with if not Beaumont than one of the other systems in the area."

Baumgarten says Henry Ford's improving balance sheet means the system could keep merger plans on the back burner for a while.

"Henry Ford has remade itself in the last couple of years with some success. Their profitability is much improved over where it was five years ago. It is mostly because of two things: one was the opening of the new West Bloomfield Hospital, which is a prosperous suburb of Detroit; and second was they closed what had been a money-losing (Henry Ford Macomb Hospital-Warren). Their medical group is in good shape. They have their own Health Alliance plan, which about 18 months ago acquired a Medicaid HMO in Detroit, which is strengthening their position. Henry Ford is thinking they're in pretty good shape."

If there is a lesson to be learned from the failure of the merger, Udow-Phillips says that key players in both systems have to be on board. "It is more than just two leaders wanted to come together, and I know the boards wanted to come together. But you saw in the physicians at Beaumont last week came out publicly in opposition to the merger so for any hospital the cautionary tale is to make sure that your physicians are aligned."

"The other message I would take from this is Beaumont and Henry Ford are two very strong institutions with a lot of history and strength in their markets. What you see more in mergers with hospitals is a very weak hospital merging with a strong hospital."

Baumgarten says the breakdown "is just a reminder of how difficult it is to engineer a merger of this scope."

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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