After much speculation, Beaumont Health System, Royal Oak, Mich., and Henry Ford Health System, Detroit, signed a letter of intent to merge, creating a new not-for-profit system with eight hospitals in Southeast Michigan.
Terms for the agreement call for the new system to have a single board made up equally of representatives from both systems and for the organizations' foundations to be combined under a single, to-be-determined name, officials told reporters during a news conference Oct. 31. Both existing systems, though, would keep their own names, and their respective medical staffs and physician groups would remain separate.
The organizations have not identified a lead administrator or the number of members who would sit on the board of the new system, Beaumont President and CEO Gene Michalski said. Michalski and Henry Ford President and CEO Nancy Schlichting will help make those decisions in the coming months.
Beaumont and Henry Ford have agreed to negotiate exclusively over a 120-day period. They expect to complete a definitive agreement for creating the new system during the first half of 2013.
“If it needs to be extended, it will be extended,” Michalski said.
Beaumont approached Henry Ford about 20 months ago. Michalski said a move was needed so the system could continue to offer patients the same services it does today: “Frankly, it was a riskier option to go it alone,” he said.
Expanding the new system's footprint beyond Michigan is an option in the future, Schlichting added. However, she and Michalski acknowledged both organizations needed to do work before they consider further growth.
Schlichting said Henry Ford and Beaumont leaders felt compelled to act as they watched other systems consolidating, noting in particular the October announcement that Livonia, Mich.-based Trinity Health and Catholic Health East, based in Newtown Square, Pa., intend to merge to form one of the largest not-for-profit systems in the U.S.
“Both systems recognize that the way healthcare is provided today—where it is offered, how it is paid for, how it is measured—is changing dramatically,” said Steve Howard, chairman of Beaumont's board of directors, in a news release. “Reimbursement for care is declining, the care itself is shifting to more convenient outpatient settings and more emphasis is being placed on keeping people healthy, not just treating them when they are sick.”
The merged system would create few redundancies, the systems said; however, the two sides said they will analyze any overlaps. Schlichting said consolidation would not result in any hospital closures in the foreseeable future. Henry Ford in March closed Henry Ford Macomb Hospital-Warren (Mich.), after the facility suffered an operating loss of more than $70 million over the past five years. While she didn't rule out future layoffs, Schlichting noted that most of the employees at the shuttered hospital were transferred to other jobs at other Henry Ford facilities.
“We have gone through the process to learn how to protect our people, and this is something that we are very committed to,” she said.
Schlichting and Michalski said their organizations both have strong balance sheets and that the merger would provide a chance to improve their financial strength. Beaumont earned $2 billion in net patient-service revenue in fiscal 2011. That's up 2%, or a $4.2 million increase, from fiscal 2010. Henry Ford earned $2.2 billion in net patient-service revenue in fiscal 2011, up 2.7%, or a $5.7 million increase, from fiscal 2010.
The numbers represent a comeback for Beaumont, which trimmed the equivalent of 788 full-time positions in 2008 and 2009. Michalski said that those layoffs came in the “deepest, darkest days” of the recession.
In October, Standard & Poor's lowered Henry Ford's outlook to negative in light of “significantly softer financial performance in 2012” and limited financial flexibility caused by recent strategic spending. The ratings service affirmed the system's investment-grade A-rating, noting a “sound business position” and solid standing on cash and debt measures.
Schlichting said the nearby Detroit auto industry taught her that “there's no such thing as a match made in heaven,” but similarities in culture and strategic goals make Henry Ford and Beaumont good partners.
That includes having the same electronic health-record system. Beaumont already has an Epic Systems Corp. system, and Henry Ford is rolling out an Epic system scheduled to be complete in 2014.