Release of details on failed Beaumont merger does little to quell critics

Critics of Beaumont Health CEO John Fox and his cost-cutting decisions that they say have driven away more than 50 top doctors haven't changed their minds about wanting the board of directors to fire him after the release of the letter of intent to merge with multi-state player Advocate Aurora Health.

If anything, the release seems to have sown more distrust among staffers and donors who have dug in their heels in open rebellion.

Over the past several months, even after Beaumont and Advocate terminated their merger plans in early October to create a 34-hospital, $17 billion system, the desire of doctors, nurses, donors and community leaders to remove Fox and his top lieutenants has only intensified.

Fox told Crain's last week that he has no plans to resign. Sources close to the Beaumont board of directors, who asked to remain anonymous for fear of retaliation, say that at least 10 of 16 members continue to support Fox, who also has said he believes the opposition against him represents a minority opinion.

But doctors, donors and community leaders point to several key provisions of the LOI, along with statements and decisions by Fox the past several years, that have sown more distrust and created what they say are irreconcilable differences.

Here are some key provisions in the LOI that have solidified critics' beliefs that the merger proposal was a bad idea and that Fox must be replaced:

What the LOI said: The 12-page document described a "strategic affiliation" and "partnership" when it fact the deal was a full merger in which Advocate Aurora would assume Beaumont's $5 billion system in exchange for a promised $1.12 billion over three years.

Critics' reaction: The $1.12 billion investment over three years in Beaumont appears to be a misleading amount, critics say. It included $780 million, or $260 million per year, of Beaumont's own cash generation, and only $345 million of funding from Advocate Aurora.

Beaumont response: "As part of the partnership discussions, the plans were never regarding Advocate and Aurora providing funds to Beaumont, nor Beaumont sending funds to Advocate Aurora. The partnership was going to generate pooled synergies and savings for Advocate and Aurora and Beaumont to provide the best patient care as stated within the organizations' mission and vision."

LOI: The new Advocate-Aurora-Beaumont (called Newco in the document) board would have complete corporate control over Beaumont operations. Beaumont would have limited reserved powers to "review and recommend" capital and operating budgets for seven years. Five legacy Beaumont directors also would have been appointed to the planned 16-member board. The 16th member would have been the CEO of Newco, which was designated as current Advocate Aurora CEO Jim Skogsbergh.

Critics' reaction: Local control ultimately could have been lost over time as legacy Beaumont directors in Newco were only guaranteed terms during the first six years. After the initial period, the Newco board would have been self-perpetuating (appointed under Newco governance rules).

Critics also expressed concern that Beaumont, as a top U.S. News and World Report hospital, could be diminished and weakened as a system by corporate decisions made in Chicago. They also said cost-cutting decisions and asset sales of health care properties, including nursing homes, home health agency and an ambulance company, that were made over the past three years were done to facilitate the sale and make Beaumont look better to buyers.

Beaumont response: "Beaumont had a seven-year commitment to retain a strong regional board. In addition, we would have had equal representation on the parent board. Each legacy organization (Beaumont, Advocate and Aurora) would have selected five representatives for our respective states to the parent board. CEO voting or non-voting was not yet specified one way or another."

LOI: While the document contained no golden parachutes for Beaumont's top management, the LOI allowed the existing contracts of Fox and other top lieutenants to remain intact after the merger.

Critics' reaction: The amount of money Fox and other executives could walk away with after the merger could be in the tens of millions of dollars based on "change of control" compensation packages typically contained in management contracts, critics said. These provisions often are worth three times an executive's annual salary.

Fox response: During several interviews with Crain's, Fox has denied he has any such provisions in his current management contract, which is a two-year contract believed to run through 2022. Fox said that when he does leaves Beaumont he is not entitled to receive any lingering payments. "When my contract ends, it ends," he said.

"Most CEOs and executive leaders have severance provisions if they are terminated," Fox said. "For the past 30 years, at the various places I have worked, I have had a severance clause in my contract if I was ever terminated. I have never received any money under any severance or separation agreement.

"If the partnership with Advocate and Aurora had proceeded and closed as estimated at the end of 2020, and I had been negatively affected and left the organization under any permitted contract term, I would not have received three times my annual compensation."

Despite the Letter of Intent revelations, doctors and donors tell Crain's they believe Fox still needs to be replaced, along with COO Carolyn Wilson and Chief Medical Officer Dr. David Wood Jr.

Besides the proposed sale of Beaumont, doctors and donors are also upset with the 16-member Beaumont board of directors, and specifically Chairman John Lewis. They can't understand why at least 10 members continue to support Fox and especially why Lewis has brushed aside as unimportant multiple no confidence surveys and even threats by major donors to withhold funds until Fox is replaced.

But several sources, who asked to remain anonymous, say that Lewis has told them not to bother to send him emails criticizing Fox because he won't read any more of them. Lewis allegedly said: "He has done everything the board hired him to do. Increase profits and quality."

It is true that Beaumont's quality has risen over the past five years Fox has been CEO, as illustrated by U.S. News and World Report designating 19 Beaumont departments as top performing. In the early 2010s, Beaumont had about 13 top performing departments.

However, doctors tell Crain's they believe Beaumont's quality is slipping based on cost-cutting moves and the number of top doctors who have defected the past two years.

In a statement from Beaumont, Lewis denied making any statements disparaging doctors or refusing to pass along emails he received about Fox. Fellow board directors Stephen Howard and Julie Fream also joined in the response.

"The board closely monitors goals, objectives, and metrics to ensure the organization continues to perform in accordance with established strategies (quality, safety, etc.), holding all leadership accountable," the Beaumont board statement said.

"Our board regularly receives communication from physicians, nurses, staff members and community members. We welcome their input and feedback and have readily responded to anyone who contacts the Board. All comments received are shared with the entire board of directors."

Because the merger talks started in 2019 and the preliminary agreement reached in February, critics said it is clear that Beaumont and Advocate Aurora spent countless hours and millions of dollars on the merger talks, which include unspecified payments to law firms and consultants.

Critics said the merger talks continued into the spring and summer, all while doctors and nurses risked their lives to battle the COVID-19 pandemic. Instead of giving support to employees, including CRNAs and anesthesiologists, Beaumont continued to work to cut costs and sell the health system, critics said.

Another ongoing problem, say multiple doctors, nurses and donors, is that the anesthesia/surgery coverage problems and staffing are worsening in the southern Beaumont hospitals where Beaumont has contracted with Irving, Texas-based NorthStar Anesthesia to replace longtime provider Anesthesia Associates of Ann Arbor.

"Beaumont Trenton has been declining rapidly since September 2019," said a leading Beaumont surgeon, who asked to remain anonymous. "Some of these issues have to do with the new anesthesia group (Northstar).

"There is no reason that a level 2 trauma center with some of the best statistics historically in the state can't perform simple (appendix) procedures in a timely fashion. There are a very limited number of surgeries that can be performed. No surgeon has block time. The surgery center is still 90 percent closed. Only certain procedures on certain days can be done in the surgery center. It is people sitting around for 12 hours to do three hours worth of surgery most of the time. Turnover times in the OR are commonly two to three hours, where it should only take 30 minutes."

Fox has told Crain's that Beaumont has been investing in several of its southern hospitals to improve services since the early days of the COVID-19 pandemic hit the health system hard. NorthStar Anesthesia officials have said they believe they are performing well and are continuing to recruit staff to fulfill its contract requirements.

Beaumont plans to use NorthStar to service its three legacy Beaumont hospitals in Royal Oak, Troy and Grosse Pointe, starting Jan. 1.

Another point raised by critics is the belief that Beaumont and Advocate Aurora were very close to signing a definitive agreement by late summer when doctors, nurses and donors started to object. Critics believe that this final agreement, which hasn't been released, could contain further details they fear could have further weakened local control and shed light on financial benefits to Fox and top executives.

On a definitive agreement, the Beaumont board statement said: "No definitive agreement with Advocate and Aurora was ever finalized or approved by the board."

Mark Shaevsky, a former Beaumont board vice chair and director for 17 years, said the LOI and Fox misstated the deal as a strategic affiliation when it was a complete takeover by Advocate Aurora.

"Fox was not being honest in the press release that came out and in his his description" of the deal, said Shaevsky, an attorney who heads up Mark Shaevsky & Associates, LLC - Management Advisors in Farmington Hills. "They referred to this transaction as a partnership. The takeover would have been completed after four years."

Shaevsky asked how Beaumont's board of directors could sign off on the sale of a $5 billion system for $1.12 billion in capital improvements that really only amounted to $345 million if Beaumont's own annual capital improvement budget of $260 million per year were excluded?

"This merger was a giveaway," said Shaevsky, who came out against the merger in September, added he hopes nothing of its kind ever surfaces again.

Dr. Kenneth Shaheen, chair of Beaumont Royal Oak's plastic surgery department and a frequent critic of Fox and management, said the LOI has not changed his opinion of the problems at Beaumont.

"The issue is, given the change of control of Beaumont hospitals to Advocate Aurora, Beaumont is getting nothing in return," said Shaheen, who also was one of the authors of the physician and nurse surveys.

"All Beaumont is getting is five seats on the (16-member) board and those will disappear in several years. We are being promised $375 million a year for three years if conditions are met. But Beaumont only is getting an extra $115 million per year from Advocate Aurora while giving up $2 billion in cash (and investments). It was not a fair trade."

In a statement, Beaumont also said: "The new combined entity would have created financial benefits that would enable all three founding organizations to share in and would have ultimately enabled Beaumont to offer more investment within Michigan. Most importantly, the goal was to enhance patient care."

Dr. Robert Safian, a top Beaumont cardiologist who has penned three letters asking the board to replace Fox because of poor management decisions, said nothing has changed after the release of the LOI. He said he suspects there was more to the proposed merger that wasn't written in the LOI.

"Nothing has changed regarding corporate leadership and the need for change," Safian said in an email to Crain's.

Shaevsky said Fox told the community that Beaumont would be protected by having reserved powers and one-third of the board overseeing the deal. "Those reserved powers were weaker than what John was suggesting," he said.

For example, Shaevsky said the LOI states that Newco can elect the entire board after four years. Beaumont's foundation also could remain separate for only four years, he said.

"This (means Advocate Aurora) basically takes over in two stages. First, the merger. And second, the complete board after four years," he said. "The foundation would only remain as a separate foundation for four years."

Based on the timetable of when the LOI was developed, the COVID-19 pandemic started and ongoing negotiations until the merger plan was terminated in early October, Shaevsky said hundreds of thousands of dollars and possibly millions were spent on the merger proposal.

"Countless management hours were spent negotiating this deal and possibly millions of dollars while doctors, nurses and other health care workers were risking their lives to take care of patients," Shaevsky said. "Instead of giving support to these people, increasing morale, management and the board were trying to sell the hospital out from under them. That is not leadership."