Beaumont Health Clears Key Hurdles in Latest Merger Try

A year after proposed merger talks with Henry Ford Health System collapsed, Beaumont Health System agrees to combine operations with two other Detroit-area providers.

It was little more than a year ago — May 2013— that Detroit's Beaumont Health System and Henry Ford Health System abruptly announced that they had called off talks to form an integrated system.

Senior leaders at both health systems declined to comment on what scotched the $6.4 billion marriage that just seven months prior Henry Ford CEO Nancy Schlichting had described as "the absolute ideal partner for us."

Some observers said the sticking points centered around the disparate populations the two systems serve, and their diametrically opposite physician compensation models. Henry Ford uses salaries and capitated systems and Beaumont relies mostly on independent physicians and fee-for-service.

Others noted cultural hurdles between the two systems that could not be overcome.

Flash forward to June 2014, and the announcement that Beaumont, Botsford Health Care and Oakwood Healthcare had agreed "to combine their operations" into a $3.8 billion healthcare organization that will be called Beaumont Health, with Beaumont President/CEO Gene Michalski serving as its CEO.

Marianne Udow-Phillips, director of the University of Michigan's Center for Healthcare Research & Transformation, says this deal "has a better chance than Henry Ford because the cultures are much more similar and now they have gotten much further down the road. They have the support of their physicians and that is the key."

Why did the Henry Ford talks collapse?

"Henry Ford is a salaried physician model and has a very longstanding closed network practice that built a very successful health maintenance organization and has that sort of mindset. Beaumont is an independent practice model and the physicians are paid predominantly fee for service," Udow-Phillips says.

"Those two fundamental issues were very important in what made it very difficult for them to come together in a merger."

"In addition to that you have a geographic issue where Henry Ford, even though they have a location in Oakland County, it has been very strongly anchored in Detroit, and you have Beaumont very strongly anchored in a wealthy suburb of Detroit," she says.

So why will this effort "to combine their operations" (the three systems have avoided the "M" word) work with Botsford and Oakwood?

"These hospitals have a more similar profile. All of the physicians are predominantly fee for service and independent practice. There are some employed physicians but not the majority," Udow-Phillips says.

"And they're in the suburbs of Detroit: Dearborn for Oakwood; Farmington Hills for Botsford; and Oakland County for Beaumont. So they form a ring around Detroit. They have a little bit more similar profile in terms of the type of patient populations they are serving."

Another Culture Clash Unlikely
Allan Baumgarten, a veteran observer of the shifting hospital landscape across the Midwest, agrees that a culture clash is unlikely now that key stumbling blocks have been removed.

"There were other disagreements about who would lead the combined organization and would the combined organization maintain two academic medical centers (Beaumont started a medical school with a local university a few years ago)," Baumgarten said in an email exchange.

"Clearly these parties have agreed that the Beaumont brand is more valuable than Oakwood or Botsford."

As for changing the care delivery landscape, Baumgarten provided this analysis:

"Based on revenues in 2012, the combined system will have 30% of the hospital market in the three-county Detroit area (Wayne, Oakland and Macomb). That makes them the largest system it what is a relatively unconsolidated market.

Next largest is Henry Ford at 22.8% (Henry Ford just got a credit downgrade over concerns about operating income). I don't think that 30% market share is enough to attract opposition from the (Federal Trade Commission/Department of Justice), although a 40% Beaumont-Ford combination would have gotten closer scrutiny."

Udow-Phillips says the deal will likely face more than a passing glance from the FTC.

"Every merger these days is getting a lot of scrutiny," she says. "In this case there is quite a bit of competition in the marketplace in this region and so I am predicting it will go through with regulatory approval but we can't be 100% sure."

Better Negotiating Ability
Baumgarten says the launch of Beaumont Health comes as hospitals in the Detroit have seen inpatient days drop steadily since 2007. "Even the surge in enrollment in the Medicaid expansion and individual plans is unlikely to change that trend line. That's one reason why I think that the assurances offered of achieving savings with no layoffs may not be very reassuring," he says.

"Further, Medicare and other payers are pressing hospitals to reduce readmissions, linking payments more closely to performance and cost savings. These hospitals are hoping that investments in health IT and care management systems spread over a larger organization and more patients will have a better return."

Udow-Phillips says the deal will give the new Beaumont Health "significant leverage and it increases their negotiating ability with the health plans in the region."

"It probably doesn't change too much from a clinical care perspective," she says. "One would hope that they are better on integration and coordination of care for patients who see physicians in these systems. But I don't think it will change too much of the profile of who is delivering what and where in the region."

Udow-Phillips says the chances are good that Beaumont Health will become a reality by the end of the year, but she warns that "they aren't across the finish line yet."

"We are going to have to wait and see how things play out," she says. "They seem to have settled the CEO issue, at least initially. We have to see what the roles are for the boards and the other leaders of these organizations over time. There is much yet to come on this one, but for right now they seem to be on a pretty good path to success of bringing this together."