Could there be some sort of affiliation deal underway between Detroit-based Henry Ford Health System and Kaiser Permanente, the nation's largest not-for-profit group health plan?
Talk is circulating in healthcare circles in Southeast Michigan and nationally that the two systems are discussing a business arrangement.
Several sources told Crain's the affiliation could range from a nonasset transfer joint venture involving managed care and population health management services to a full merger with Henry Ford becoming Oakland, Calif.-based Kaiser's eighth regional market.
Based on conversations with knowledgeable officials connected with Kaiser and Henry Ford, the talks began earlier this year.
Henry Ford officials, who have acknowledged they have been seeking a partner since a proposed merger with Beaumont Health System collapsed in 2013 because of cultural differences, are mum on whether they are talking with Kaiser or other systems.
Requests for interviews with Henry Ford CEO Nancy Schlichting and President Wright Lassiter III have been unsuccessful.
Henry Ford officials issued a statement to Crain's through Brenda Craig, the system's director of media relations.
"Henry Ford is continually engaged in discussions with health systems locally and nationally regarding opportunities to partner to improve quality, efficiency and the overall experience for our patients and members," said the statement. "A major focus of our discussions is on learning, benchmarking and sharing best practices. We do not comment on specific organizations or rumors."
Kaiser spokesman Marc Brown declined an interview request.
"A Kaiser partnership with Henry Ford would not surprise me," said one of Crain's sources. "It does seem like a natural fit compared to the other options that have been previously explored."
Sources told Crain's a merger or business deal between the two systems is logical for a variety of reasons.
First, Kaiser is flush with $3.1 billion in net income generated in 2014, a 15 percent increase from 2013. Second, Kaiser's CEO, Bernard Tyson, is in expansion mode, said Jeff Goldsmith, president of Health Futures, a Charlottesville, Va.-based consulting firm.
"Kaiser is talking with everybody," Goldsmith said. "They want to enter Washington, metro Seattle, with Group Health. They want to start a medical school in Southern California. Bernie wants to be everywhere."
John Fox, CEO of eight-hospital Beaumont Health in Southfield, said he also has heard Kaiser wants to expand outside its eight markets.
"They are always looking to take their model elsewhere," said Fox, who had experience competing against Kaiser in Georgia as CEO of Emory Healthcare in Atlanta.
"It's a great model and does a lot of good things. But they have never been able to build size and scale except in California" and in Denver, the company's second-largest market, Fox said.
Some 20 years ago, under former Henry Ford CEO Gail Warden, Kaiser also entertained a potential merger with Henry Ford, said Allan Baumgarten, a Minneapolis-based consultant and publisher of the Michigan Health Market Review.
"Kaiser has talked with Henry Ford before," Baumgarten said. "But what is the business case for doing it? I am not sure I have the answer."
Joe Spallina, a consultant with Arvina Group in Ann Arbor, said a merger between the two organizations makes the most sense.
But an affiliation in which Henry Ford has a vendor arrangement with Kaiser or a program management contract to buy services or hire Kaiser executives to run departments would be easier for the board to approve, Spallina said.
"That type of affiliation would work," he said.
However, Spallina said Henry Ford has to ask the question: Could a contractual-based affiliation strategy generate enough clout in the market to successfully out-compete other systems in Southeast Michigan?
"These looser strategic relationships that allow organizations to maintain control and independence have a cost," Spallina said. "The impact is not as great as a merger that brings in expertise, branding, scale and size, and capital investments."
If Henry Ford is seeking a capital infusion to build out its planned $500 million South Campus development and to expand health care operations, Baumgarten said, one option for Henry Ford is to sell 20 percent of its Health Alliance Plan and HAP Midwest Health Plan to Kaiser.
"This could bring in capital of $300 (million) to $400 million. This has happened before with other systems that owned health plans and needed cash for growth," Baumgarten said.
But Baumgarten said if HAP Midwest loses its Medicaid contract appeal with the state for Southeast Michigan, the value of the health plan could drop by 15 percent.
Two weeks ago, HAP Midwest, which primarily built its 100,000-member plan in Wayne, Oakland and Macomb counties, was awarded the Michigan Thumb region, which has a much smaller Medicaid-eligible population, instead of Southeast Michigan.
"That could affect their plans with Kaiser," he said.
If a deal is done, Spallina said, it would cement Henry Ford's reputation as the state's strongest integrated health system.
"With the market moving away from fee for service, Kaiser has a significant level of expertise in population health and value-based competencies," Spallina said.
Acquiring a health system like Henry Ford would be a first for Kaiser, which generally builds regional markets on its own, said Goldsmith.
Kaiser's model has been to enter a market by purchasing a health plan, staff it with its own physicians or by employing local physicians. Initially, Kaiser contracts with hospitals for inpatient services.
"Their magic number is 400,000 (enrolled in their health plan)," Fox said. "Once they get to that size, they build hospitals."
Why does Kaiser like Michigan? Kaiser is interested because of its historical ties with Henry Ford and the growth potential in Michigan, several sources told Crain's.
Kaiser also could be interested in Michigan to gain another toehold in the Midwest. Last year, Kaiser sold its Ohio managed care business in Cleveland because it could not grow sufficiently, Baumgarten said.
In Southeast Michigan, Kaiser would have a ready-made regional partner with Henry Ford. HAP and HAP Midwest membership already is close to 700,000, and Henry Ford's holdings include four acute-care hospitals, a psychiatric hospital and a 1,200-physician employed medical group.
Kaiser also is especially keen on contracting with the United Auto Workers and major self-insured employers in Michigan, sources said.
Detroit-based UAW Retiree Medical Benefits Trust, which covers about 809,000 retired autoworkers, contracts with four HMOs in Michigan, including Henry Ford's HAP. Sources said the trust is looking to lower its health care costs by direct contracting with providers and fewer HMOs.
"Where is (Henry Ford) going to grow in care advantages on its own?" a source told Crain's. "Everybody is moving to population health with accountable-care organizations and value-based payments. Even though Henry Ford has a medical group and HMO, (Kaiser) can help to accelerate that movement."
