August 9, 2022

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After failed mergers and employee dissension, Beaumont Health seeks to join a rising star

In May 2007, William Beaumont Hospitals — which at the time operated community hospitals in Royal Oak and Troy — acquired the Bon Secours Hospital in Grosse Pointe.

The move was the first large acquisition by the health system, one devised to expand its scope to eastern Macomb County and into Detroit to attract new patients and revenue.

From there, the push to grow has never ceased.

Spurred by a Great Recession that crippled debt markets and uncertainty around the 2010 implementation of the Affordable Care Act, Beaumont began merger talks with almost anyone that would listen.

Insulating against any unforeseen financial strain became an industry norm, and Beaumont leaders followed through on its promise to cut costs, increase the scope of their operations and become the largest health system in Michigan by net patient revenue — at a cost.

Now, nearly two decades later, the Southfield-based health system has eight hospitals and nearly $3.5 billion in cash reserves and investments. But, clearly, it’s not enough. Beaumont plans to merge with the state’s rising star of the industry, Grand Rapids’ Spectrum Health, by the fall.

It remains unclear who benefits from this deal, but it’s the culmination of a myriad of factors making health care in America, and Michigan, too big to fail.

A dose of distress

Less than a year after Beaumont acquired Bon Secours Grosse Pointe, the Great Recession hit. The housing crisis and tanking stock market led to soaring unemployment, resulting in loss of employer-based health insurance for millions of Americans. Hundreds of thousands of Michiganians lost gold-plated health benefits provided by the auto sector. The number of residents under 65 using public insurance options like Medicaid jumped to 22 percent by 2008, doubling since the late 1990s. 

Beaumont initiated a $60 million turnaround plan, which included $46 million cut from expenses, $36.8 million of which was in staff reductions, out of a $2 billion budget in 2009.

“Hospitals are no longer recession-proof,” Ken Matzick, CEO of William Beaumont Hospitals at the time, told Crain’s in late 2008.

But more crucially to the health care sector, the debt markets dried up as banks and other lenders clamped back on lending. Ahead of and during the recession, William Beaumont Hospitals was outgrowing its footprint with patients.

“Beaumont was contemplating significant expansions, particularly of its emergency room at Royal Oak as it was one of the few trauma centers in Michigan,” said a longtime former board member at Beaumont who asked to speak on the condition of anonymity. “We needed to expand the ER and modernize it. It was overcapacity with patients. Then the credit market shut down. Beaumont had to face raising significant capital at a really high interest rate. That fear was all over the industry.”

That created an imperative to get bigger so you will have more financial strength to get through a recession or difficult times and be able to raise money at a more favorable interest rate.

“There was just too much turmoil in the whole health care industry,” the former board member said.

Ash Shehata, principal and U.S. leader for the health care and life sciences practice at advisory firm KPMG, said regionalization became the name of the game in health care, specifically for health systems to own physician networks and outpatient services. The easiest way to do that was to also acquire hospitals.

“There was a great leveling of outpatient and inpatient services,” Shehata said. “These health systems needed profit centers like outpatient centers and same-day surgery centers. That spawned a new wave of acquisition strategy and an undercurrent that bigger was better. More access in the community meant more access to money.”

The pressure mounted thanks to landmark legislation out of Washington, D.C.

On March 23, 2010, President Barack Obama signed into law the Affordable Care Act, creating even more heartburn for worried hospital administrators.

The former Beaumont board member said consultants were indicating Obamacare would pose a financial hit to Beaumont of $700 million or more as hospitals were expected to see an influx of Medicaid patients. That didn’t really happen, but administrators doubled down on the need to grow.

“Health care has been changing rapidly for quite some time and the changes have accelerated in recent years,” John Fox, Beaumont Health’s current president and CEO, told Crain’s in an emailed statement. “Forward-thinking health systems, like Beaumont Health, must consider how this changing environment affects our patients, team members, community and ability to provide care in the future. Health care reform, new models of care, shifting patient expectations and financial realities are all part of the headwinds facing health systems.”

Fox joined Beaumont in 2015. He previously served as the president and CEO of Atlanta’s nonprofit Emory Healthcare Inc., the largest health care system in Georgia.

Beaumont was also being hit by scandal at the start of the last decade. A series of whistleblower lawsuits emerged, starting in 2010, over allegations of high-profile physician kickbacks, including pay in excess of $700,000 annually by the system, use of hospital employees for their office practice without charge but still allowed to bill insurers, the government and patients themselves.

Fellow doctors called them the “royal family” of Beaumont. According to a settlement with the federal government and the state of Michigan, excessive compensation to induce patient referrals and procedures involved Beaumont cardiologists, oncologists and ophthalmologists.

Beaumont settled the suits in 2018 for $84.5 million.

A malady of mergers

By late 2012, Beaumont had found a partner in Detroit’s Henry Ford Health System. The pair planned to merge to create a $6.4 billion system with 40,000 employees, 10 hospitals and 200 outpatient centers. Most importantly, it would control 40 percent of the Southeast Michigan health care market.

Beaumont would gain access to Henry Ford’s owned Health Alliance Plan insurer, a lucrative means to control costs and allow Beaumont access to several benefits contracts with automotive workers.

But that deal fell apart only six months later. Leaders couldn’t agree where to locate the merged entity’s headquarters — Detroit where Henry Ford sits or in Royal Oak with Beaumont.

Talks also broke down over business operations, as Beaumont wanted Henry Ford to open HAP members to Beaumont’s suburban hospitals and Henry Ford said no, as Crain’s reported. Beaumont also wanted Henry Ford to shrink the footprint of its flagship Detroit hospital to control costs, and likely force more patients to Grosse Pointe and Royal Oak.

Beaumont leadership went back to the drawing board and found willing partners in Dearborn-based Oakwood Healthcare Inc. and Farmington Hills-based Botsford Hospital. The group closed on a $3.8 billion deal in 2014 to merge in a bid that created Beaumont Health, which took control of 30 percent of the local inpatient market.

Executives of the new system, which was renamed Beaumont Health, claimed it would see $134 million in cost savings from operating a single electronic health record system, consolidating back office business functions, billing and collections and purchasing. 

It’s unclear whether the system was ever able to achieve those savings. Beaumont’s safety record did decline at its Royal Oak hospital after the merger, according to the Leapfrog Hospital Safety Grade quarterly ratings. The hospital’s safety grade dropped to a C in the Spring of 2021 from a B at the time of the merger in 2014. Beaumont did improve the safety grades at the Dearborn and Grosse Pointe hospitals.

Fox was hired to lead the new health system in 2015. His goal was singular: Cut costs and expand the new organization’s scope. A merger was always top of mind, he said.

“For Beaumont Health to continue to be the leading health system in Michigan, we must make bold decisions about our future,” Fox said. “For some time, Beaumont Health’s board of directors and leaders have been evaluating how we can best serve patients today and in the future. Our board looked at four options to determine the best path forward for our organization: remain the same, be acquired by a larger system, acquire other smaller health systems, if available, or become an equal partner with another comparable health system.”

Beaumont tried three of those four options in the past 18 months.

Beaumont signed a letter of intent to acquire Akron, Ohio-based Summa Health in July 2019, only to cancel that deal in May 2020 as revenues collapsed during the COVID-19 pandemic.

In June 2020, Beaumont announced another letter of intent to merge with Downers Grove, Ill.-based Advocate Aurora Health. That merger would have created a $16 billion, 36-hospital system with locations in Michigan, Illinois and Wisconsin.

Beaumont officials touted that merger as a potential boon, as the letter of intent outlined a $1.12 billion investment in Beaumont over three years at $375 million annually, as Crain’s reported.

“Once these merger talks start, they never stop,” said the former board member. “It’s a small industry and everyone knows each other. Plus the cottage industry of consultants are dependent on deals getting done. One way for executives and consultants to make a lot of money is through a merger.”

Shedding weight, connecting coasts

It didn’t take long for an outcry to start.

A month after announcing the letter of intent with Advocate Aurora, a “no confidence” petition began circulating among Beaumont’s physicians, calling for the system’s board to fire Fox and Chief Medical Officer David Wood Jr.

“Over the last five years, we the medical staff of Beaumont Health have seen a rapid and progressive deterioration in every aspect of patient care at Beaumont Health. We no longer have confidence in the administration’s ability to provide a safe place for us to care for our patients,” the doctors wrote in the petition.

The petition also took aim at the Aurora merger, fearing it would remove local control from Michigan hospitals. Beaumont’s board quickly responded that the Michigan hospitals would remain under local control.

But the damage had been done. In August, Beaumont and Aurora announced merger talks had been delayed and those talks ultimately ended in October.

The explosion of physician unrest at Beaumont is the culmination of years of cost-cutting amid merger talks.

Fox has spent much of his time looking to boost Beaumont’s profit margins, largely as a means to be valuable to potential partners but also to build Beaumont’s investment portfolio in preparation for unforeseen financial strains the industry may face in the future and to reinvest in technology.

“Yes, we strive for a 4 percent margin so that we have the resources to continue advancing care for our patients,” Fox told Crain’s in an email. “A 4 percent margin is adequate, but not excessive for internally generating some of the capital needed to replace worn-out equipment, obtain new medical technology, etc. Our margin has given us the opportunity to reach more patients through new outpatient campuses in Macomb and Wayne counties, opening 28 urgent care facilities to provide more convenient access to patients and to better address the mental health crisis by opening a new behavioral health hospital (in Dearborn) and residency program later this year.”

At the end of the first quarter of 2021, Beaumont Health had $3.06 billion in cash on hand — or twice as much as Southfield-based Lear Corp., the fourth-largest public company in Southeast Michigan.

The board member said more hospital boards have put importance on the cash on hand as it’s more stable and predictable than policy and health care operations.

“Beaumont, like many large hospital systems, is in two separate businesses — providing health care and managing the money,” the board member said. “Systems can earn significant amounts of money on their investments. That’s a huge portion of the income for Beaumont.”

Spectrum, comparatively, had $5.3 billion in cash and investments at the end of 2020.

Meanwhile, Beaumont continues to cut costs. For example, a year ago, Beaumont shifted its anesthesiology services to a contractor, Texas-based NorthStar Anesthesia, which resulted in Northstar offering the Beaumont nurse anesthetists $12,000 less in benefits and pay to stay on at Beaumont.

Beaumont has also suffered from high-profile physicians leaving amid that unrest, according to a letter 20 powerful and high-profile donors sent to Beaumont’s board last year.

“The loss of (medical) staff as well as recent surveys, including those by doctors and nurses, demonstrate that something is seriously amiss,” said the letter, which sources told Crain’s was delivered to board members on Sept. 18.

“This situation must be addressed and improved immediately and with an immediate sense of urgency. This must be your primary focus. Among other things, we believe this requires that the proposed transaction with Advocate Aurora Health should not divert your attention or even be considered unless and until the current crisis at Beaumont is fully addressed.”

Despite the cash, investments and cost-cutting measures, Beaumont Royal Oak remains one of the lowest-reimbursed health systems in the region.

Health plans paid only 143 percent above Medicare for inpatient and outpatient services at Beaumont Royal Oak, according to the Hospital Price Transparency Study released by RAND Corp. That’s only more expensive than Henry Ford Macomb Hospital and Henry Ford Wyandotte Hospital in the region.

The board member said Beaumont has never been able to successfully raise its reimbursement from large insurers like Blue Cross Blue Shield Michigan to align with its competitors because the Royal Oak hospital started as a community hospital instead of an academic one like Michigan Medicine or a “community-critical” hospital like the Detroit Medical Center.

“Beaumont Royal Oak always got a lot of patients and attracted good doctors because it was in a good location, but it wasn’t primarily an academic and teaching hospital,” the former board member said. “These things get built into the system. DMC was always paid more too because it was deemed a safety-net hospital. The point is (that) other private insurers pay different amounts per procedure for different hospital systems. It makes no sense, but Beaumont has suffered because of it and that’s part of why you’ve seen this pledge to get bigger.” 

Fox acknowledged the lower reimbursements and said the merger with Spectrum, and access to its in-house insurer Priority Health, will offer benefits on cost.

“Yes, some insurance payments are lower for Beaumont due to a variety of reasons and circumstances,” Fox said. “Beaumont works with all payers, including Blue Cross, and we recognize the importance of those ongoing relationships. One of our goals in working with Spectrum Health is to make health care more affordable, accessible and equitable for the communities we serve. When Beaumont works more closely with Priority Health, a division of Spectrum Health, we believe it will help mitigate rising health care costs and provide patients and employers with greater overall value.”

Presumably, the merged companies will have greater negotiating power with Blue Cross, the region’s largest health insurer, especially with the threat of a competitive Priority.

Shehata said that’s what all these mergers are really about — leverage.

“Hospitals are becoming multiprong enterprises,” Shehata said. “The systems that have grown to some scale in size have more power. They can take on more long-term agreements with the health plans and physician networks. They can better control the market. Those with larger cash reserves and infrastructure have been able to rebound more rapidly during crises. But who wins is the question left unanswered. The consumer can be the winner if these entities bring out new advancements in technology, making patient care more available to the broader community. But right now the power sits with the consolidators, and it’s not clear it will help.” 

Beaumont Health at a glance

HQ: Southfield

President and CEO: John Fox

Employees: 33,000

2020 operating revenue: $4.6 billion

2020 operating income: $176.6 million

Hospitals: Dearborn, Farmington Hills, Grosse Pointe, Royal Oak, Taylor, Trenton, Troy, Wayne

EDITOR’S NOTE: The online version of this story has been updated from its original form.