First, Metro Health announced on Oct. 16 that it planned to explore potential partnerships with other health systems, a move that could ultimately lead to a merger or acquisition of the Wyoming-based health system.
A day later, Trinity Health, the Novi, Mich.-based parent company of Saint Mary’s Health Care in Grand Rapids and Muskegon’s Mercy Health Partners, announced it had begun due diligence on a transaction with Newtown Square, Pa.-based Catholic Health East to create a $13 billion health-care goliath with 82 hospitals in 21 states.
While the timing of the two announcements was coincidental, the strategies behind Trinity’s mega-merger and Metro Health’s might-be merger are anything but. Both health systems are girding for a future where tightening Medicare/Medicaid reimbursement, payment reform and the soaring costs of technology are making it necessary to gain economies of scale.
And both are looking for ways to grow and step out from the increasingly large shadow of market leader Spectrum Health.
“It’s going to raise the competitive stakes in Grand Rapids,” said Mike LaPenna of The LaPenna Group Inc., which provides strategic and financial consulting to health care clients. “Everybody is going to find a changed landscape here in 24 months.”
For Trinity Health, the deal with Catholic Health East — which the parties referred to as a “consolidation” in the announcement — could result in additional investment or some expansion of services in the system’s West Michigan hospitals, according to Lody Zwarensteyn, president of the Grand Rapids-based Alliance for Health.
“They are going to invest and re-invest in this market,” he said. “They will be a very formidable competitor — not that they aren’t now.”
Not everyone agrees.
“Don’t expect an influx of new buildings or capabilities” as a result of the Trinity-Catholic Health consolidation, says a source familiar with the health business in West Michigan. He expects the combined companies will first focus on finding inefficiencies and squeezing out redundant costs rather than invest in bricks and mortar.
“The word consolidation…doesn’t typically mean an open checkbook,” he says.
Some local executives, including Mercy Health’s CEO, say that Trinity might look to partner with Metro Health. Trinity proposed merging a decade ago, but Metro quickly nixed the idea.
“Absolutely,” Mercy Health CEO Roger Spoelman told MiBiz when asked if Trinity still wants to acquire Metro. He praised Metro as an innovative health system that took a large risk in developing and relocating to a 208-bed, $165 million suburban hospital campus five years ago that has led to increased patient volumes and market share. Connecting Metro to Trinity would help both better compete in West Michigan, he said.
“I just believe it could be a very good partnership,” Spoelman said. “The Grand Rapids community — in particular the business community — has consistently said, ‘We value choice in our health care options.’ It would be very good for both of us.”
Spoelman isn’t alone in his view of Metro Health’s value as a potential partner. In fact, health care consultant LaPenna views any potential Metro Health partnership as “the biggest and most interesting thing in Grand Rapids in a long time.”
When Metro begins the search, it’s likely to find plenty of potential suitors coming forward, LaPenna said. The Metro Health system offers potential partners a modern suburban facility that’s well-positioned geographically and has no immediate need for capital investments. It also brings to the table a network of 13 outpatient and primary care health centers across Kent and Ottawa counties to drive referrals, he said.
Throw in a growing market with a solid economy and Metro Health “has a lot to offer,” LaPenna said. He considers the Grand Rapids area the best market for health care in the Midwest.
“There are very few hospitals that are ready-made for a partner like Metro,” LaPenna said. “If you’re not in Grand Rapids, it offers access to the most important market in Michigan right now. Grand Rapids is an opportunity for somebody that would be looking for expanding in Michigan or be looking for expanding into Michigan from another area.”
He also raises the possibility that a for-profit care provider could see Metro as a way to enter the Grand Rapids market. LaPenna notes two recent examples of for-profit activity in the state: Nashville, Tenn.-based Vanguard Health Systems’ 2010 acquisition of Detroit Medical Center and Duke Lifepoint’s recent $483 million deal for Marquette General Hospital.
Alliance for Health’s Zwarensteyn also sees a Metro Health move as changing the competitive balance in West Michigan.
“It could mean the entry of a new and different kind of competitor,” Zwarensteyn said. “It could mean the ability of the community to have more choices. It depends on the creativity of the people running things.”
For Metro Health, capital rather than creativity was an impetus to seek a strategic partner. Part of the health system’s rationale for seeking a potential partner is ensuring it will have “enough capital to do what we think we should,” Metro Health President and CEO Mike Faas said.
Metro has had to pass on opportunities such as acquiring physician practices, opening new primary care or outpatient locations and forming joint ventures for new services because the health system did not have the capital, he said.
Metro undertakes the search as its finances remain sound and it can look for a potential partner from a position of strength, Faas said.
Since moving to the new campus in 2007, Metro has averaged total annual net income of $7.8 million, Faas said. Operating income, which is based only on revenues from the care provided to patients and excludes investments and other sources of revenue, averaged $5 million annually over the five-year period, he said.
Metro generated total revenue of $279.1 million and net income of $8.6 million in the 2011 fiscal year, the most recent period for which financial data filed with the IRS are available.
The health system also continues to pay off the $169.0 million in bonds sold in 2005 to finance the new hospital campus. At the end of FY 2011, Metro’s bond liability was $161.4 million, down from $163.2 million at the start of the year.
Covenants on the bonds require Metro to maintain assets that are 1.75 times debt. Since the relocation, assets have averaged 2.2 times debt, Faas said.
“We’re approached often enough where they’re asking Metro to do certain things and we’re not capable of doing them,” Faas said.
The ideal partner will be “like-minded” and “willing to push the envelope a little bit and position us just to do a lot of the things that at this point we are either not big enough or don’t have enough wealth to do on our own,” Faas said.
Any partner would have to allow for “quite a bit of autonomy and independence” and support collaboration with other care providers in the market, be better prepared for health care reform, provide access to capital and “really help us offset our competitors’ aggressiveness,” Faas said.
He stresses that Metro Health is “not for sale,” but adds the search could very well end in a joint venture, taking on an equity investor or entering into a merger with another health system.
Metro wants to talk to Borgess Health, which once discussed a merger with Metro 10 years ago, and Flint-based McLaren Health is also a possibility, he said. Metro and McLaren have talked in the past about doing business together, Faas said.
“We are very interested in and want to know more about the McLaren system,” Faas said. “We want to have a conversation with them and at least follow through on that avenue.”
McLaren consists of 10 hospitals that serve patients in 54 counties of eastern Michigan, owns a health plan and shares Metro’s osteopathic roots. Both health systems support Michigan State University’s College of Osteopathic Medicine.
Metro Health is also partners with the University of Michigan Health System in the Pennant Health Alliance, a coalition formed two years ago for the joint purchasing of medical supplies and equipment, shared administrative services and the sharing of clinical best practices. Faas serves as chief executive of Pennant Health.
The other partner in the alliance is a familiar name: Trinity Health.
Faas told MiBiz that Metro wants to talk to both Trinity and UM Health System about the potential for a stronger partnership with either one or both, perhaps under the Pennant banner. While Metro could remain independent and work more through Pennant Health, Faas sees a good possibility that some form of new partnership will emerge.
“I don’t think it’s impossible that we’ll come through this and say, ‘We like just what we are and we’re going to stay the way we are and work through Pennant,’” Faas said. “I think it’s much more likely that we’ll end up with a strategically aligned partner that (involves) either some kind of massive joint venture capital-wise, and/or even owns a percentage or all of Metro Health.”
Health care strategist LaPenna said Trinity Health would make a logical partner for Metro Health because it would generate economies of scale and improve Trinity’s position in the Grand Rapids area. He called a possible Metro-Trinity link a “very interesting and powerful strategic initiative.”
Saint Mary’s, Mercy Health and Metro Health all have strong primary care networks in their markets. Combining them would make for a formidable market competitor, LaPenna said.
“If you ever put together the Metro stuff and the Trinity stuff, you’d have a robust primary-care network,” LaPenna said.
Whatever the final transaction, Metro Health is “not going to leave any stone unturned,” Faas said. “I don’t think anything is out of the question in terms of that word ‘partner.’”
“If we really care about the greater community, and we really are going to attempt to provide choice in the market, then we need to stay ahead of where health care reform is ultimately going to take all of us and be on the leading edge, rather than lag behind and react to something.”
Brian Edwards contributed to this report