CHICAGO – Citing the need for boldness in the midst of a rapidly transforming health care industry, two of Michigan’s largest health care providers Wednesday announced plans to merge.
Beaumont Health System and Henry Ford Health System, both single-A rated providers located in the Detroit area, said they signed an exclusive, 120-day letter of intent to explore a partnership.

They join a growing number of providers across the country – including some of the nation’s largest systems – to announce merger plans. Consolidation is the sector’s fastest-growing trend as providers brace for changes in the new federal health care law and continue to grapple with ongoing economic and fiscal challenges.

“This kind of change is sweeping every hospital in the U.S.,” Gene Michalski, Beaumont’s chief executive officer, said Wednesday at a press conference with Henry Ford officials.  “There’s a monumental shift from inpatient care to outpatient care and a demand for greater value in health care today. The need for strong partnerships has never been greater, and even strong leading systems like ours are responding to these challenges by forming very creative partnerships.”

The new organization would help the systems deal with looming capital costs – most tied to IT – and reimbursement cuts that are part of the new federal health care law.

“With the kind of payment reductions we expect to see, it is essential we have a larger platform,” Henry Ford chief executive officer Nancy Schichting said.

Both systems have been talking with various hospitals about mergers for months, officials said.

The new system would feature 10 hospitals, 200 patient sites, 38,000 employees, and $6.4 billion in annual operating revenue. One analyst said the system would command nearly 40% of the Detroit-area market.

The Federal Trade Commission, which reportedly is heightening its scrutiny of health care mergers, and the Michigan Attorney General would need to sign off on the deal, as would other state regulatory bodies.

They hope to announce a final plan by spring. Details on the system – how it would be governed and whether systems would close – remain uncertain.

The A-rated Henry Ford system operates seven hospitals as well as the state’s second-largest health insurer.

Standard & Poor’s in mid-October revised its outlook on the credit to negative from stable, warning of a “significantly softer financial performance” in 2012 and cramped financial flexibility. The system has just under $700 million of outstanding bonds.

Royal Oak-based Beaumont operates three hospitals and has roughly $910 million of outstanding bonds.

Southeast Michigan, like the national health care landscape, is seeing major consolidation among its main hospitals. Michigan-based Trinity Health last week announced plans to join with Catholic Health East, which would create one of the country’s largest systems. In 2010, for-profit Vanguard Health Systems Inc. bought the Detroit Medical Center, an eight-hospital system that was the area’s safety-net provider, for $850 million.

Credit analysts agree that the consolidation trend is generally positive for both credits and bondholders. In a recent comment, Moody’s said the trend has sparked a surprising trend of upgrades outpacing downgrades during the most recent third quarter.

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