(co-authored with Holly Carnell)

On Oct. 31, 2012, Beaumont Health System and Henry Ford Health System announced that they had signed a letter of intent to combine their operations into a $4.6 billion organization. The announcement followed less than two weeks after Trinity Health and Catholic Health East (CHE) went public with the news that the two Catholic healthcare systems intend to merge. The combined Trinity/CHE system will have annual operating revenues of about $13.3 billion and assets of about $19.3 billion.

Discussing both the Beaumont/Ford and the Trinity/CHE mergers, representatives acknowledged the changing healthcare environment and the need to deliver integrated care and focus on population health. According to Rex Burgdorfer, an investment banker with Juniper Advisory, which is actively advising several hospital boards of directors in the state, “the mergers have added to the sentiment among smaller systems and independent hospitals that staying the course may no longer be a viable option for institutions committed to fulfilling their mission to serve the community.”

Healthcare reform is contributing to the increase in hospital and health system affiliations. According to Burgdorfer, “Organizations have acknowledged that pricing for services is switching from the traditional fee-for-service model towards a bundled payment model, and to survive in this new environment, access to capital and the ability to manage risk will be critical.” The changing reimbursement model means that health systems will be responsible for the overall health of patients. This is in contrast to the historic model where hospitals are paid for each individual service provided to a patient.

The two October announcements followed several other 2012 Michigan hospital transactions, including the following:

  • In January, McLaren Health Care acquired Northern Michigan Regional Hospital — now rebranded as “McLaren Northern Michigan.” Then in May, McLaren purchased and re-opened Cheboygan Memorial Hospital (CMH), which had filed for Chapter 11 bankruptcy in March 2012. The former CMH is now operated as McLaren Northern Michigan, Cheboygan Campus.
  • In May, Spectrum Health in Grand Rapids acquired 61-bed Gerber Memorial Health Services in Fremont. In early 2012, Spectrum, which has six hospitals totaling 2,000 beds, also engaged in formal talks to partner with Munson Healthcare. However, these discussions concluded in September 2012 with no deal struck.
  • In September, Duke LifePoint Healthcare (DLP), a joint venture of Duke University Health System and LifePoint Hospitals, announced that it had finalized the acquisition of Marquette General Health System in Michigan’s Upper Peninsula. McGuireWoods and Juniper represented Marquette General in the transaction. As part of the $483 million transaction, DLP will invest $350 million in capital improvement projects and physician recruitment over the next 10 years. The DLP/Marquette transaction was only the second for-profit acquisition of a Michigan hospital or health system (the first was Vanguard’s 2010 acquisition of Detroit Medical Center).

While Michigan is a great example of a state that is rife with hospital and health system affiliation activity, it is not alone. The current consolidation trend is likely to continue on a national level into 2013. Burgdorfer observes, “[I]n 2013 we expect to see more business combination activity between significant, multistate health systems. In addition, new structural models, such as hybrid joint ventures between regional nonprofit systems and investor-owned companies, will increase the number of strategic options available to hospital systems that are exploring transactions.”