Beaumont makes deal to acquire Ohio's Summa Health

Southfield, Mich.-based Beaumont Health has signed a letter of intent to acquire Akron, Ohio-based Summa Health, a deal that would add four hospitals and a health insurance operation to Beaumont as a wholly owned subsidiary, officials for the health systems told Crain's.

It would be the first purchase of a healthcare company outside of Southeast Michigan for Beaumont and one of only a few outside of the state by a Michigan-based healthcare company. Early last year, Grand Blanc-based McLaren Healthcare completed the acquisition of MDWise, an Indiana-based HMO.

If all regulatory and financial hurdles are met, Beaumont CEO John Fox said he hopes the merger can close this fall, or at least by the end of the year. He said he doesn't foresee any federal or state antitrust issues.

One of the prized possessions Summa has to offer Beaumont is its health insurance arm, SummaCare. For years Beaumont has considered purchasing or starting a health insurance company to compete with state and market rivals Henry Ford Health System with its Health Alliance Plan and Grand Rapids-based Spectrum Health with its Priority Health.

"Summa Health has competencies we don't have with Beaumont Health," said Fox, noting its SummaCare insurance product. "It has a (health insurance) claims shop to process claims. It is something we can use when employers" want to contract with Beaumont.

SummaCare manages care for 46,000 people, including 18,000 with self-insured employers, 23,000 in a Medicare Advantage plan and about 5,000 members in commercial products.

Under the terms of the agreement, which is considered a merger, Summa's assets would be combined with Beaumont's at the time of closing. Summa would become a wholly owned subsidiary of Beaumont. After the assets are combined, Beaumont would "write a check" to pay Summa's minority owner Cincinnati-based Mercy Health an undisclosed amount for its 30 percent interest in the four-hospital health system, which has about $1.4 billion in annual revenue, Beaumont officials told Crain's.

Summa CEO Cliff Deveny, M.D., said Summa has prenegotiated a financial settlement with Mercy, which he and Fox declined to disclose. In 2014, Mercy made the 30 percent ownership investment in Summa.

At closing, Deveny said, "Mercy's equity will be redeemed." Fox, when asked how Mercy will be paid, said the Catholic system will be paid "X dollars for their piece." Because each system's assets and cash will be co-mingled at closing, it is unclear how much each will contribute to the Mercy minority interest buyout.

"It's really more of a merger, a coming together, a pooling of assets ... a membership substitution," Fox said. "We had to pick a structure to work with. It's a common way to pull tax-exempt" entities together.

Deveny said Summa received inquiries from 32 health systems within 200 to 300 miles of Akron after its board in September announced it would look for a merger partner. Summa's board decided it needed outside help to continue a financial turnaround, boost patient services and seek growth in the highly competitive Akron market.

"We were very specific about maintaining our current system: hospitals, insurance plans, medical groups, the safety net to meet needs of community," Deveny said. "We were looking for an organization (that would keep) the local board and management team to meet the mission, and also an ability to grow."

Deveny said the board was concerned that merging could mean having to cut services to the community, including behavioral and women's health, as some hospitals have done. "We want to focus on expanding services and filling gaps in community care," he said.

But why did Summa feel a need to merge?

"We are a $1.4 billion company in Northeast Ohio with lots of competition. ... The Cleveland Clinic and University Hospitals," said Deveny. "We looked at the future and our opportunity to grow and expand our capabilities. Healthcare is going through a lot of changes with lower reimbursements, expenses not going down. We want to supercharge our growth and expand services in the community."

Hospitals competing in Akron include Cleveland Clinic Akron General and Akron Children's Hospital (affiliated with Northeast Ohio Medical University). Summa, which also operates outpatient facilities in Summit, Stark, Wayne, Portage and Medina counties, includes Akron City Hospital, St. Thomas Hospital, Barberton Hospital and Summit Rehab Hospital.

In 2017, Summa posted an operating loss of $28 million after it switched its longtime emergency medicine contract group earlier in the year. The loss of the ER group also led to the loss of accreditation for its emergency medicine residency program.

After layoffs of about 300 positions and other service changes, Summa closed 2018 with operating income of $24.3 million. Operating revenue grew a little from $1.31 billion to $1.37 billion last year.

"We had a $52 million turnaround in 2018," said Deveny, who replaced Thomas Malone, M.D., in February 2017. Malone had previously been an executive at Detroit Medical Center from 2001 to 2013 and was president of Harper-Hutzel Hospital from 2008 to 2013.

Deveny said the ER labor dispute led to the departure of the faculty that taught the 21 residents.

"The (Accreditation Council for Graduate Medical Education) closed the program and we were put on institutional probation," he said. "We had addressed those issues and we got the highest level accreditation with the ACGME. We have reapplied" for the ER residency program and "have expanded obstetrics/gynecology, surgery and have a cardiology fellowship program."

Deveny said merging with Beaumont "also gives our insurance plans, Summa Care, a chance to grow in Ohio and beyond." He said he also expects Beaumont to help Summa expand its clinical service lines to compete with the Cleveland Clinic, which owns a hospital in Akron.

It is expected there will be a financial investment by Beaumont into Summa in the Akron market to expand services and health insurance membership. However, the precise amount will be hashed out during the next few months during the due diligence phase, officials said.

Fox said he expects SummaCare's Medicare Advantage and commercial products in Ohio to grow at a faster pace than in the past. He said there are internal discussions about the potential for starting insurance products in Michigan.

But Fox said Beaumont's expansion into Ohio doesn't mean slowing of its growth plans in Southeast Michigan.

Over the past year, Beaumont has announced plans to build 30 urgent care centers in a partnership with Atlanta-based WellStreet Urgent Care, a 150-bed behavioral health hospital in Dearborn with Universal Health Services, King of Prussia, Pa.-based for-profit company and three new outpatient centers in Livonia, Lenox Township and Royal Oak.

"For Beaumont this is a big position for us to be in," Fox said. "We are enthusiastic about it. A lot of people say, Ohio, something happens at that border. I've lived in Ohio. It is an adjacent market. The next phase in healthcare, we will see more regional expansion."

Fox said Beaumont became interested in Summa because it has a similar mission, vision and values, along with a strong commitment to the community.

"We (revised our) strategic plan in 2015 to look at regional expansion and look at all markets 300 miles out," Fox said. "We knew of Summa. They were on our radar screen."

The executives declined to speculate on merger savings. "It's too early. We will know more in the next 90 days. It is a unique partnership because we are farther away," Deveny said.

After laying off about 300 employees in 2017, Deveny said he doesn't expect any layoffs of employees or managers. Deveny said Summa has added about 91 positions this year.

"We do believe that restructuring debt with the new combined organization we will get savings," Fox said. "We will look at the supply chain and combine them together to get a drop in unit costs. We are confident" there will be savings.

On the governing board, Deveny said board seats will be added for Beaumont on the 16-member Summa board. "We will continue to have a fiduciary board with representatives from Beaumont. There will be reserved rights on budgets, sale of assets, acquisitions," he said.

At closing, Deveny said Mercy Health will give up its five board seats. He said Mercy's five-year investment into Summa has paid off in improved operations and efficiencies.

"They (Mercy) have gone in a different direction with their merger with (Maryland-based) Bon Secours Health System," he said.

Beaumont Health has $4.7 billion in total annual net patient revenue, eight hospitals with 3,429 beds, 145 outpatient sites, nearly 5,000 affiliated physicians and 38,000 employees. Beaumont also has 4,800 doctors, 20 percent, or 900, who are employed in Beaumont Medical Group.

"Since the formation of Beaumont Health, we have invested significantly in our Michigan employees, facilities and communities. We will continue to do so. One of our strategic goals is to become a regional healthcare leader. The planned addition of Summa Health allows us to take one step closer to achieving this key strategic priority," John Lewis, chair of Beaumont Health, said in a statement.

By adding Summa's 7,000 employees, 1,200 doctors (35 percent employed) and $1.4 billion in revenue, Beaumont is expected to grow into a $6.1 billion healthcare company with 45,000 employees, 12 hospitals and 4,729 beds with 6,000 doctors, including 1,320 who are employed.

"Beaumont makes deal to acquire Ohio health system" originally appeared in Crain's Detroit Business.