Financial details outlined in final affiliation agreement between Henry Ford Health, MSU

The 30-year academic affiliation agreement between Henry Ford Health System and Michigan State University calls for both entities to contribute millions of dollars toward the new health sciences center and joint operating company.

Under the agreement signed Monday, Henry Ford would pay in annually about $11.25 million and Michigan State approximately $3.75 million, totaling $15 million annually for the first 10 years, to fund the health sciences center, according to the 75-page final master affiliation agreement.

The HSHS-MSU agreement, reached after more than a year of talks, will allow the two partners to conduct joint research and clinical care, collaborate more on health student education and develop a long-term plan to build a research institute and a regional health campus in Detroit.

Executives said the affiliation, which builds on Henry Ford and MSU's long-term medical education and research partnership, will also focus on the goals of improving access, affordability and outcomes for Michigan's underserved populations.

Detroit-based Henry Ford Health, a six-hospital integrated health system with a 1,900-physician medical group and a 650,000-member health plan, also will pay MSU directly annual administrative support payments that amount to $3.25 million for the first five years and increasing steadily every five years to $5.05 million years 26-30. The first payment is due 30 days from the date of the agreement on Feb. 18.

Overall, Henry Ford's contribution to the deal could be at least $14.5 million annually. But the agreement also includes an underdetermined "clinical performance improvement incentive" payment Henry Ford would make to the new company.

The annual incentive payment would be 18 percent of the system's clinical operating margin above its budgeted goal to the new venture. In 2019, Henry Ford earned $138.8 million in operating income, a 2.2 percent margin. The clinical margin is slightly different than the traditional operating margin.

For example, if the Henry Ford 2023 margin goal is 2.5 percent and the actual margin reached that year is 3 percent ($112 million), then HFHS would earmark 18 percent of the 0.5 percent excess margin ($22 million) for the health sciences center, which could amount to $4 million. The payment wouldn't be triggered if the operating margin is under 2.4 percent or if the system doesn't hit is projected margin.

Of the $15 million contributed by both partners, $2 million of that will be used for the first-year operating budget of the new joint 501(c)3 nonprofit company, which initially will be called the Henry Ford Health System Michigan State University Health Sciences Center.

After the first year, the $15 million contributions will be divided up with $12 million going for research and $3 million for education. Each partner also will contribute an unspecified amount toward ongoing additional operating costs of the company, the agreement said.

The agreement calls for Dr. Steven Kalkanis to be the CEO of the new health sciences center and company. Kalkanis is Henry Ford's chief academic officer and president and CEO of the Henry Ford Medical Group.

Dr. Norman Beauchamp Jr. would serve as the initial chair of the company and health sciences center and serve for at least the first two years. Beauchamp is MSU's executive vice president for health sciences.

"By virtue of this partnership, we see substantial improvements in cancer outcomes, patient satisfaction and other quality measures of real value to patients," Beauchamp said.

The health sciences company's 12-member governing board would include six members from each partner. There would be six board committees, including finance and administration, diversity equity inclusion, research, education, cancer and clinical.

In an interview with Crain's on Wednesday, Beauchamp discussed the financial details and timetables for the various projects.

On the annual administrative support payments Henry Ford will make to MSU, which start out at $3.25 million, Beauchamp said the money will help fund MSU science and education across the board.

"Ultimately, the goal of these funds isn't just to help scientists" at MSU do their jobs, he said. "Some of (the funding) will also be catalytic money to bring strength from across MSU to this effort to improve" education quality.

"We have to sustain the educational model because we train students in partnerships with health systems across the state," he said. "We believe (these partnerships with health systems) can help us be successful to do that."

Beauchamp said the administrative support payments are common across the nation when hospitals partner with universities.

"When you look at other institutions across the country that come together there's often a fund that comes as a part of a co-branding" the two partners, Beauchamp said. "We looked at what some of those were across the country (and) we wanted to make sure that it is obviously sustainable and something Ford had built into their business model, and that it was commensurate with what we saw when other leading organizations came together."

On the clinical performance improvement incentive payments based on Henry Ford's operating margins, Beauchamp said the partners want to create incentives to improve quality that can be reinvested in the joint company for the community.

"We haven't figured out exactly the right number to do that, but the other financial terms (administrative support payments and annual contributions to health sciences center) are the ones set in stone," he said.

On the annual $15 million toward the health sciences center, Beauchamp said the amount was set based on numerous factors.

"Part of it was trying to figure out what actually would allow us to meet our goal of establishing an NCI-designated (cancer center in five to seven years)," Beauchamp said.

"Some of it was to what would be required to really fuel our goal of growing research and recruiting individuals to those efforts. And some of it frankly was looking at what was financially sustainable," he said.

Beauchamp said future research needs to focus on addressing health disparities. "We feel the struggles are far too great" to do less, he said.

A timetable key events and goals was laid out in the 75-page document.

• Transfer of federally funded research to the joint health sciences center, 12 months to two years.
• Boost research with goal of achieving $200 million annual portfolio of federally sponsored research by 2025-2027.
• Additional MSU student education slots at Henry Ford, July 2022 to July 2023. Slots include 40-50 allopathic (M.D.) students, 40-50 osteopathic (D.O.) students, 6-8 M.D.-Ph.D/D.O.-PhD students and 80-100 nursing students.
• Complete study by 2025 for new regional MSU campus for third- and fourth-year allopathic students. Goal is for admitting first class by 2027.
• Complete 200,000-square-foot joint research institute building, five to seven years. Building would be funded through a public-private partnership or philanthropy