Two sizable Michigan health systems are becoming one, forming an integrated, $6.4 billion powerhouse with 10 hospitals and 200 care sites. But what does it really mean for the ever-changing health care industry, where such blockbuster mergers are increasingly becoming the norm?

 

Officials from Henry Ford (in Detroit) and Beaumont (in Royal Oak) health systems announced Wednesday that they've signed a letter of intent to combine operations. The deal is far from consummated, as they now must enter into negotiations and eventually gain state approval. The goal is to have a single nonprofit entity sometime in the first half of 2013. The move wasn't borne from financial desperation, with one system leaping from a sinking ship looking for a lifeboat.

Gene Michalski, CEO of Beaumont, said in a press call Wednesday that the system saw the writing on the wall about a year and a half ago — health care reform, significant changes in Medicare and Medicaid reimbursements, and the struggling economy in southeast Michigan. Beaumont sifted through the pile of potential dance partners and landed on Henry Ford, looking to add scale, better coordinate care and bolster electronic medical records.

"The population in southeast Michigan is pretty stable and static, and to continue to try and compete in every area, on every service with the specter of reduced reimbursement from Medicare and Medicaid, we just didn't see that as a sustainable option, frankly," Michalski said. "It was a riskier option to go it alone, in our view."

That view is increasingly likely to take hold nationwide, predicted Jonathan Spees, a senior vice president with the Camden Group who specializes in health care transactions. Mergers seem to be popping up more out of uncertainty and attempts to predict the future, rather than financial desperation.

"These are more strategic mergers that are in response to what's happening in the environment," he said. "A lot of it is just anticipatory. No one is exactly sure what going to evolve as the health exchanges roll out. No one can predict the future of what insurance products are going to gain in enrollment as the landscape changes. So they're creating strength in scale to better respond to however the market adapts."

"We felt we have built a lot of scale over the last decade; we've doubled our size in that 10-year period. But, believe it or not, in this economy with the pressures on health care, it's not enough," added Nancy Schlichting, the CEO of Henry Ford.

Smaller independent hospitals wanting to pursue clinical integration and care coordination could very well be next in line to pursue partnerships, said Paul Ginsburg, president of the Center for Studying Health System Change. He expects smaller hospitals in southeast Michigan to "hustle" to try and find larger partners, though Beaumont and Henry Ford won't be looking for partners for a while. Both Schlicting and Michalski admitted Wednesday that they've already gotten calls from community hospitals.

"What I'm expecting, and have seen some, is not mega mergers like this, but really these smaller hospitals perceiving that this world that's coming is really too complex for them and they need a larger partner, as opposed to two already very large systems getting together," Ginsburg said.

Henry Ford has its own health plan, the Health Alliance Plan of Michigan, with some 648,000 members, and Michalski said they look forward to using the data to help improve care. And both systems plan to be using the same electronic medical records by 2014.

The single entity will eventually have just one board of directors with an equal number of members from both sides. The systems will keep their own names for now, but eventually plan to develop a new one that incorporates both. Meanwhile, the medical staffs will remain independent, and the two CEOs said they don't expect any wholesale rounds of layoffs or facility closures. There's minimal overlap, and the systems are more complementary than competing, Michalski said.

"The pressures to become more efficient and more effective in the market are going to be an imperative," he said. "Rather than be competing with each other, we have a fabulous and unique opportunity to not duplicate services, to think about things very rationally and thoughtfully, without competing with each other."

Along with all the legal hurdles to be cleared, one of the biggest challenges of bringing the two together is likely to be figuring out whether the two cultures are compatible, said Dale Van Demark, a partner at Epstein Becker Green who specializes in hospital mergers. Ones that fail, he said, are usually because of cultural clashes and a lack of an integration process.

Nathan Kaufman, managing director of Kaufman Strategic Advisors, said Beaumont and Henry Ford will need to develop a brand where they can produce predictable quality outcomes, regardless of the physician or facility. If not, they'll struggle and "just be large and cumbersome." Many large systems have been able to do well in years past by negotiating premium managed care rates, which has masked their inefficiencies. But rate pressures from payers are putting the squeeze on big guys, too, pushing the need for improvements.

"By merging two systems in close proximity, you gain some ability to negotiate better rates with the insurance companies," Kaufman said. "And then the real challenge is can you take that extra money and invest it in your system and actually create a better brand?"