Two of Michigan’s largest hospital systems announced plans to merge, the latest reordering of a competitive health-care market still reeling from the impact of auto-industry layoffs.
The proposed combination of Beaumont Health System, based in Royal Oak, and Detroit-based Henry Ford Health System, would create an organization with $6.4 billion in annual revenue, 10 city and suburban hospitals, and 100 other patient-care sites.
Both sides now have a 120-day window for exclusive negotiations to complete the merger agreement by the first half of 2013. Any deal would likely have to be reviewed by the Federal Trade Commission, as well as the state’s attorney general, before it becomes final.
Top officials of the two nonprofit health-care systems said in interviews Wednesday that they don’t anticipate closures of their facilities or widespread layoffs, arguing that the joint organization will be able to grow, possibly beyond the state’s borders. Greater efficiencies, officials argue, will come from reducing duplicative services and curtailing new capital projects that were drawn up as the two systems sought to grab market share from one another.
Gene Michalski, president and CEO of Beaumont, said the broad shift from inpatient care to outpatient care continues to unnerve the industry. “The need for a strong partnership has never been greater,” Mr. Michalski said. “We didn’t have to partner. We chose to partner.”
Michigan had once been a robust growth market for health care. But the state’s tradition of well-funded, union-negotiated benefits began to erode in recent years as hundreds of thousands of Michigan auto-industry workers and some salaried retirees lost their employer-provided health coverage.
Patients are now foregoing treatments or relying more heavily on state support, hospital officials say. Both factors are straining providers, who have seen market growth flatten, competitive pressure heat up and the cost of unpaid bills and unfunded charity care rise.
The new federal health legislation championed by President Barack Obama is set to expand coverage, but health-care providers fear what other provisions of the law—such as reduced reimbursements for providers under Medicare—will mean for their bottom line.
In recent years, hospitals in the region have sought refuge in bankruptcy, potential tie-ups with former competitors, and takeovers by large national chains.
Two years ago, the nonprofit Detroit Medical Center, billed as the region’s largest health-care provider, agreed to be bought by a for-profit company, Vanguard Health Systems of Tennessee, for $365 million in cash plus $850 million in capital improvements.
Henry Ford opened a new hospital in West Bloomfield in 2009, seeking to expand its reach beyond the city and into Detroit’s well-heeled northern suburbs, where patients are more likely to have private health insurance. Beaumont has also expanded over the years and recently opened a medical school with Oakland University.
The region’s hospitals have been expanding even though, according to the Michigan Department of Community Health, the three counties of Metro Detroit have roughly 2,000 more hospital beds than their population requires.
“They’ve got all this investment in these hospital buildings, and they’re not able to fill them up,” said Allan Baumgarten, a Minneapolis-based health-care consultant who studies the Michigan market.
With three hospitals and more than 14,000 full-time employees in three counties, Beaumont had $2.1 billion in revenue in 2011. The Henry Ford system includes seven hospitals with more than 100,000 patients admitted last year. Henry Ford has 24,000 full-time employees, a physician group with 1,200 members and an insurance provider, the 648,000-member Health Alliance Plan of Michigan. It took in revenue of $4.22 billion last year.
But Henry Ford has struggled recently, posting a decline in net income to $23.2 million in 2011, from $61.9 million in 2010. The decline was largely due to lower investment income as well as the closure of its hospital in Warren, Mich. Standard & Poor’s Ratings Services in October revised the health system’s outlook to negative from stable.
This article originally appeared in the November 1, 2012 edition of the Wall Street Journal.