Spectrum Health’s former chief financial officer was “stunned” when he learned about the health system’s proposed merger with Beaumont Health, and doubts the plan will achieve the intended goals.
In an open letter to Spectrum Health directors that he posted on LinkedIn on Thursday afternoon, Michael Freed wrote that the Grand Rapids-based health system over the years “discussed possible mergers routinely.” Freed wrote that he does not “see any value in this merger” with the Southfield-based Beaumont.
“I only see the potential for massive financial loss, both historically and an undetermined amount going forward, to the region that produced all of Spectrum Health,” he wrote. “I love Spectrum Health. I consider the people who work there as family. I readily admit I don’t see a compelling reason for Spectrum Health to merge with anyone.”
Freed served as CFO at Spectrum Health from May 1995 to December 2013. The period included the formation and rise of the health system following the merger of the former Butterworth Hospital and Blodgett Memorial Medical Center, and the subsequent acquisitions of community hospitals across the region. During that time, Spectrum grew to become the largest health system and care provider in West Michigan.
Spectrum — after the most recent acquisitions of Pennock Health Services in Hastings in 2015 and Lakeland Health in 2018 that has hospitals in St. Joseph, Watervliet and Niles — today has 14 hospitals, a large group medical practice, and a network of outpatient care centers across the region.
Freed also served as CEO of the Spectrum Health-owned Priority Health from May 2012 until his retirement in January 2016.
Freed’s open letter goes over the 1997 Butterworth-Blodgett merger and the Federal Trade Commission’s legal challenge that was settled with a consent decree that allowed the merger to go forward. The consent decree included commitments on Spectrum’s operating margins, financial transparency, and temporary price caps.
In a statement this morning to MiBiz, Spectrum Health said it remains committed to the commitments in the 1997 agreement. Spectrum, for instance, regularly posts quarterly financial statements on its website.
“Spectrum Health remains enthusiastic about the prospect of bringing together two of Michigan’s most respected health systems to create a new system for Michigan by Michigan. Spectrum Health is fully committed to fulfilling its consent decree obligations and will continue to uphold its tenets,” the health system said. “It is a significant part of our vision and strategy to provide affordable health care and coverage. We remain confident that creating a new system not only meets our current obligations to our local communities but will also improve the health of individuals in West Michigan and throughout the state.”
LOCAL CONTROL CONCERNS
Spectrum and Beaumont on June 14 signed a letter of intent to explore the creation of what would become the largest health system based in Michigan. The new health system would include 22 hospitals, 305 outpatient care centers and about $13 billion in operating revenue with more than 7,500 employed, affiliated and independent physicians and 64,000 employees.
The new health system would have dual headquarters in Grand Rapids and Southfield and initially operate under the temporary name of “BHSH System.” Executives hope to complete due diligence, integration planning and regulatory reviews by this fall.
Spectrum Health President and CEO Tina Freese Decker has described the merger and formation of a larger health system as “a fantastic opportunity to transform health care in Michigan” that can “deliver greater value and exceptional care that is accessible, (and) it is equitable and affordable, while maintaining our unwavering commitment to our local communities in Michigan.”
In his letter, Freed raises concerns about the potential lost local control over Spectrum Health and Priority Health that were built in West Michigan over more than two decades.
“In your marketing of the new brand, you trademarked the expression, ‘For Michigan, By Michigan,’ but that was not your responsibility, under the Consent Decree, to our region and to the trustees and citizens who came before you. Your responsibility was, and still is, ‘For West Michigan, By West Michigan,’” he wrote. “Can you honestly look the citizens of West Michigan in the eye ... and tell them you’re doing everything possible to maintain and enhance the value that they created?”
Freed urges Spectrum directors to take a few steps before the merger goes forward. Those steps include reducing Priority Health’s on-hand, risk-based capital, which is a way to measure the minimal amount of capital needed to support business operations based on its size and risk profile. The resulting $495 million, which is based on his estimate, could go into a “Futures Fund” for West Michigan at local foundations “to be used for health care, education, community development, business development, the arts and other nonprofit initiatives that invest in this region.”
He also suggested that directors in the future sell or spinoff Priority Health into a stand-alone health plan and direct the potential proceeds into the “Futures Fund.” Even if that were to occur, “What such a dividend will never accomplish, however, is to compensate West Michigan for the loss of control of all future margins, earned in West Michigan, which may be spent elsewhere,” Freed wrote
“On behalf of the West Michigan community that has built the Spectrum Health system, where is their compensation for giving up all control of how and where their health care dollars will be spent going forward in THIS merger?” Freed wrote. “If, as a Board, you insist on pursuing this path, then first execute your fiduciary responsibility to the region that depends on you and provide appropriate compensation to that region before embarking on a new path. When you sign the documents that will permanently change this region, your signature will forever hold you accountable for the repercussions. Please sign carefully.”
In its statement to MiBiz, Spectrum Health said, “We have no plans to sell Priority Health.”