The proposed merger between Spectrum Health and Beaumont Health could add fuel to the years-long trend of consolidation in the health care industry.
The deal, which was announced Thursday and could close as soon as this fall, would create the largest in-state health system in Michigan with 22 hospitals, 305 outpatient care centers and about $13 billion in operating revenue. The combined company would have more than 7,500 employed, affiliated and independent physicians, more than 64,000 employees, and about $13 billion in operating revenue.
Much of the industry consolidation that has occurred over the years involved small community hospitals joining larger health systems. In fact, Grand Rapids-based Spectrum Health grew to 14 hospitals across West Michigan through acquisitions in markets such as Ludington, Greenville, Fremont, Zeeland, Hastings and St. Joseph.
However, the latest proposal involves joining two major health systems in geographically different markets to create a health care powerhouse in Michigan. That’s a difference that Michigan Health & Hospital Association CEO Brian Peters considers “emblematic of what we have long thought would be the next logical evolution” in health care consolidation.
“We’ve talked for a while now about the fact that the number of small, independent hospitals is continuing to dwindle as many of them have joined larger, multi-hospital systems. What we’ve said is really the next shoe to drop is the mega-merger — these large multi-hospital systems joining with other similar organizations. In this particular instance, you see a perfect example of that,” Peters said.
Spectrum and Southfield-based Beaumont last week signed a letter of intent to “explore creating a new health system.” They aim to complete due diligence, integration planning and regulatory reviews in hopes of closing the merger by this fall.
Since Spectrum and Beaumont each operate in distinct markets without any overlap, Spectrum Health President and CEO Tina Freese Decker expects the deal to clear the required regulatory reviews.
“We believe that this combined organization will really benefit patients and members in the state of Michigan,” said Freese Decker, calling the merger “a fantastic opportunity to transform health care in Michigan.”
“Spectrum Health and Beaumont share similar purposes, missions, visions and values. We have a long track record of providing exceptional clinical care for our communities, as well as a strong focus on academic research,” Freese Decker told MiBiz last week. “So, together we are uniquely positioned to deliver greater value and exceptional care that is accessible, (and) it is equitable and affordable, while maintaining our unwavering commitment to our local communities in Michigan.”
Freese Decker would run the new health system, which would take on the temporary name of “BHSH System” and have dual headquarters in Grand Rapids and Southfield.
Created through the 1997 merger of the former Butterworth Hospital in Grand Rapids and Blodgett Memorial Medical Center in East Grand Rapids, Spectrum Health consists of 14 hospitals, a large group medical practice, and a network of outpatient care centers across the region.
Beaumont Health has eight hospitals in the Detroit area, plus 155 outpatient sites, nearly 5,000 physicians and 33,000 employees. The health system also partners on a medical school with Oakland University.
The combined health system would have equitable corporate governance. Spectrum and Beaumont each would appoint seven seats to a 16-member board. The board would also include the CEO and a final appointment after the new health system is created.
Local boards would remain in place. In West Michigan, that would include oversight boards for BHSH Spectrum Health West Michigan, BHSH Spectrum Health Lakeland, and Priority Health.
Strength in scale
Part of what drives consolidation between large system mergers today is the same element that makes a small hospital merge into a larger partner: a need to generate economies of scale and efficiencies, Peters said.
Peters believes the Spectrum-Beaumont plan “is very likely to spur a conversation” at other health systems about resource adequacy and staying competitive in the new landscape.
The COVID-19 pandemic and the resulting financial stress on many health systems may drive the trend even harder, he said.
“It doesn’t matter how large you are, even the larger health systems have some vulnerability in terms of financial status and the operational viability when hit with a crisis like the COVID-19 pandemic,” Peters said. “And there is strength in scale.”
Mike LaPenna, a health care consultant and the principal of Grand Rapids-based LaPenna Group Inc., also believes that the proposed deal could prompt other large players in Michigan to pursue a merger.
Many health systems are already involved in some form of consolidation talks, LaPenna said.
“This is going to cause something to happen,” he said. “This will signal that there is going to be a big and important statewide system — at least in Detroit and Grand Rapids — that will be competing for linkages to Kalamazoo, Lansing, and all points in the northern tier of the mitten. Other discussions will accelerate to achieve scale and prevent being marginalized over the next couple of years by the largest of the health systems.
“So, if my board was in pre-pre-merger talks with another system or hospital, now might be the time to speed it all up.”
Rob Casalou, president and CEO in Michigan for Trinity Health, similarly told MiBiz that the merger could spur “more serious discussions” at other health systems in the state about consolidating.
“It will cause other discussions to start in the state,” Casalou said. “For us right now, I don’t think there’s a direct impact. We just want to maintain our already good relationship with the new combined system.”
Trinity Health is the parent corporation for Mercy Health Saint Mary’s in Grand Rapids and Mercy Health Muskegon.
The potential market price effects of the Spectrum-Beaumont plan, or any health care merger, remains a key question. Analyses over the years have reached varied conclusions on the effect mergers have on costs and pricing. Some studies have shown that greater concentration within a market drives up prices, though the American Hospital Association has conducted analyses disputing that notion.
Still, the new health system would have considerable clout in negotiating contracts for reimbursement payments from health insurers. Michigan’s largest health insurer, Blue Cross Blue Shield of Michigan, said it intends to look at the merger for any potential fallout.
“These are two organizations where Blue Cross has deep partnerships and with whom we have worked over many generations on behalf of our members and customers. This proposed arrangement is very complex with potentially significant implications,” Andy Hetzel, Blue Cross Blue Shield of Michigan’s vice president for corporate communications, wrote in an email to MiBiz. “We will be assessing the impact it may have on our members and the health care market in Michigan.”
Because Spectrum and Beaumont now operate in separate markets, LaPenna doesn’t necessarily expect costs to swing a certain way.
“Let ‘em merge. It’s not going to cost anybody anything, I don’t think,” LaPenna said.
Asked about the negotiating and pricing posture the new health system would have, Freese Decker emphasized that the focus for Spectrum and Beaumont “is delivering great value to our community.”
“We’re trying to be affordable,” she said. “Our focus is affordability (and) greater value for our communities that we are serving. We want to transform health care. We want to reduce the total cost of care.”
Opportunity for Priority
One of the potential beneficiaries of the merger is the Spectrum-owned Priority Health.
The connection to Beaumont would give Priority Health a foundation to make further inroads in the Detroit-area health insurance market that’s largely controlled by Blue Cross Blue Shield, LaPenna said. That can create greater competition between Priority Health and Blue Cross Blue Shield.
“My impression is this is a great thing for Priority Health,” he said. “Beaumont is now a platform for Priority on the east side of the state.”
Quite often when seeking quotes for clients in Southeast Michigan, Bob Hughes, principal of Advantage Benefits Group Inc. in Grand Rapids, sees how Priority Health still experiences a lack of familiarity in the market. Hughes believes the merger of the two health systems can accelerate Priority Health’s growth in Southeast Michigan.
“The perception when you bring up Priority, even when they have better rates, is, ‘Who are they? Who’s in the network?’ Their network’s gotten a lot better over the years and it’s really a viable option, but even with that there’s buyer reluctance because people aren’t familiar with it like the Blues,” Hughes said. “Now that they would have Beaumont under their wing, that’s going to add to the credibility factor.”
An annual report by the American Medical Association indicates that Blue Cross Blue Shield holds more than a two-thirds market share in the Detroit area.
Spectrum Health owns a 93.9 percent stake in Priority Health, Michigan’s second-largest health plan with 1 million members statewide that generates a majority of the parent health system’s revenue and earnings.
Spectrum Health in 2020 recorded operating income of $295.5 million on nearly $8.3 billion in patient revenues. That includes $188.9 million in operating income earned by Priority Health in 2020, plus a $24.8 million operating loss at Spectrum Health Lakeland in St. Joseph that operates as a separate division from the health system’s other hospitals.
For the first quarter of 2021, Spectrum Health recorded $88.4 million in operating income on $2.21 billion in revenue. The quarterly results included $59.1 million in operating income at Priority Health on $1.421 billion in revenue.
A deal with Spectrum comes after Beaumont and Advocate Aurora Health, a nonprofit 28-hospital system based in Downers Grove, Ill., ended merger discussions last fall that had been met with opposition from Beaumont doctors.
Beaumont has since added more system physician representatives to its board, going from three to six, “and they really helped us understand the perspective of physicians and what would be important to them in structuring a deal of this type,” said Julie Fream, Beaumont’s board chair. At least three physician representatives would be included on the board at the new health system.
Beaumont physicians are “excited, and with their excitement, we think we really have the right thing for both organizations to move forward,” said Fream, who would chair the board of the new health system.