Henry Ford, Beaumont health systems to announce merger talks in blockbuster deal

In a blockbuster deal to combine two of Michigan’s largest hospital groups, Henry Ford Health System and Beaumont Health System are expected to announce Wednesday that they have signed letters of intent to pursue a merger.

A press conference is to be held at 11 a.m. at William Beaumont Hospital in Royal Oak, with CEOs of both groups present, several sources told the Free Press.

News of the deal, which is contingent on further discussions and due diligence, began to circulate among industry and civic leaders Tuesday afternoon, following a meeting where Beaumont trustees approved it, according to sources who requested anonymity because the discussions were confidential. Henry Ford’s board met last Friday and voted to pursue the merger.

Beaumont, with hospitals in Royal Oak, Troy and Grosse Pointe, has been courting potential merger partners for at least the past six months, according to industry officials.

The Henry Ford system has 23,000 employees and operates seven hospitals plus 30 medical centers, and its Health Alliance Plan (HAP) subsidiary is the state’s second largest health care insurer behind Blue Cross Blue Shield of Michigan.

The two systems have agreed on a due diligence period of at least 90 days, one source said. The intent is that the two systems will eventually operate under one governance body, but it has not yet been decided who will be the top executive. Nancy Schlichting is the CEO at Henry Ford; Gene Michalski is CEO of Beaumont.

Other items to be discussed include the hospitals’ relationships with medical schools. Henry Ford is linked closely with Wayne State University’s medical school in Detroit’s midtown area, while Beaumont is affiliated with the new med school program at Oakland University.

Most importantly, the two groups must decide whether there are areas where their facilities overlap, either in the geographic regions they serve or the medical services and specialties they provide. One health care executive said significant cutbacks of facilities and staff could occur as a result, since neither of the nonprofit groups is flush with cash.

There would also be regulatory hurdles to clear, including an examination of the competitive impact of an HFH-Beaumont merge.

Both hospital groups are highly respected with national reputations. Beaumont has long been Oakland County’s leading health care system, with hospitals in Royal Oak and Troy, but has faced increasing competition for suburban patients in recent years, as Henry Ford and St. John Providence Health System opened large new hospitals in West Bloomfield and Novi, respectively.

The Beaumont system has more than 1,700 licensed beds, 18,000 employees, six medical centers and four nursing facilities.

Henry Ford officials acknowledged last Friday that their board had met and discussed possible partnership. Beaumont said then that it had talked with many other organizations as part of its strategic planning discussions.

Other Michigan health care officials said Beaumont had been seeking a partner for the past six months and that potential suitors included the Nashville-based for-profit Vanguard Health System, which acquired the Detroit Medical center two years ago.

Other Michigan hospital groups that have been mentioned potential alliance partners included St. John Providence, McLaren, University of Michigan and Grand Rapids-based Spectrum.

Tom Walsh| Detroit Free Press

Like other hospital groups during the financial crisis of 2008-10, Beaumont’s bond ratings were downgraded amid liquidity concerns, but recent reports on Beaumont’s bonds by the Fitch and Standard & Poor’s rating agencies classified the hospital system’s financial outlook as stable. The Fitch report in mid-July called Beaumont’s cash position “adequate,” saying the system had the equivalent of 113 days cash on hand at the end of March.

Political uncertainty around the presidential election and the future of the Affordable Care Act signed by President Barack Obama has health care groups scrambling to become more flexible and streamline costs.

Earlier this month, Reuters reported that Standard & Poor’s Ratings Service revised the rating outlook on Henry Ford Health System to negative from stable. S&P affirmed its A rating on the system’s fixed-rate series 2006A and 2009 bonds, affecting about $698 million of debt.

S&P said the outlook revision reflected its view of weaker financial performance so far in 2012 and recent strategic spending affecting Henry Ford’s balance sheet, Reuters reported.

Schlichting, CEO of the Henry Ford system since 2003, has been credited with turning around an ailing hospital group a decade ago and transforming it into a financially sound system, recognized for both pioneering care in areas such as robotic surgery and innovation in patient service at the West Bloomfield location.

Contact Tom Walsh: 313-223-4430 or twalsh@freepress.com

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