No smoking guns as Beaumont releases LOI over failed merger attempt with Advocate Aurora Health

Crain’s analysis of the LOI confirmed that the merger agreement contained a $1.12 billion investment in Beaumont over three years at $375 million annually.

Of the $1.12 billion promised to Beaumont, the breakdown on projects includes $75 million for relocation of the William Beaumont Oakland University School of Medicine from Rochester to Royal Oak; $15 million for the $45 million mental health hospital in Dearborn; $26 million to finish an urgent care center in Macomb County.

In addition, Advocate Aurora would have contributed $100 million for Beaumont’s Innovation Fund, $100 million for information technology (telehealth, artificial intelligence and applications development), $10 million for a population health initiative and $20 million for the Beaumont Research Initiative.

The LOI also also said that the purchase price of acquiring an unspecified large physician practice would not be included in the annual $375 million investments by Advocate Aurora.

However, the LOI also contained an unusual “pandemic qualifier clause,” an adverse financial provision that allowed Advocate Aurora to reduce the amount Beaumont would have been funded based on financial losses the system incurred stemming from the pandemic.

In August, Advocate Aurora CEO Jim Skogsbergh said the health system was projecting a $550 million loss for the year. He said it was possible the amount promised to Beaumont in the LOI might be paid out over five years or more.

Fox explained that the LOI was written in February, a month before the COVID-19 pandemic began hitting the Midwest when it was uncertain how bad finances might become in the health care industry.

In June, “we did not know how financially damaged we were going to be, nor did Advocate Aurora,” said Fox, adding that the pandemic clause was necessary at the time. “It was the only prudent thing to do. I don’t think anybody would do a merger today, without considering the need to adjust it, because of the pandemic.”

But Fox added if executives knew at the time that a coronavirus vaccine could be developed soon, he isn’t sure the pandemic provision would have been necessary.

“Hopefully Beaumont will get its shipment of (Pfizer) vaccine in days, maybe Friday,” Fox said. As soon as possible, Beaumont plans to inoculate at its corporate office in Southfield an unspecified number of its frontline health care workers who are at the highest risk of exposure, he said.

“Back in June, we didn’t know when a vaccine might be available. (Experts) were talking about maybe at the end of 2021,” Fox said. “The only way to go forward (with the merger) was to acknowledge we are in the middle of a pandemic” and that financial losses were expected to mount.

In fact, Fox said Beaumont was forced to terminate the merger proposal in May with Akron, Ohio-based Summa Health because its revenue was down 52 percent. He said Summa refused to agree to a pandemic provision and the possibility of fewer dollars coming from Beaumont.

Fox was asked if agreeing to a pandemic provision to let Advocate Aurora off the hook in funding Beaumont investments made the merger less valuable to the community.

“It can, but let’s go through the math,” he said. “We had averaged spending $260 million a year of capital for the prior three years. And like a lot of systems in Michigan, we were struggling for replacement equipment and other things we need for patient care.”

Fox has said one major reason for Beaumont to seek a merger with a larger and successful health system was to tap into Advocate Aurora’s financial resources.

Under the LOI, Fox said Beaumont’s annual capital funding would have gone up $115 million a year by partnering with Advocate Aurora, a clear win.

“The LOI never got finalized (in a definitive agreement). We were going to revisit that and get better numbers,” said Fox, adding that Beaumont would have wanted to negotiate a higher investment number from Advocate Aurora in the final agreement as the financial losses were slowing.

The LOI included a provision that the definitive agreement would be signed by July 15, only 30 days after the LOI was approved.

Fox was asked why that was so quick and whether that indicated Advocate Aurora and Beaumont planned to sidestep the discussion process with physicians, community members and the public.

“The lawyers thought it could get done in 30 days. Within a week (after signing the LOI) we realized it would take longer,” said Fox, adding: “You had so many constituencies to potentially process it. And those constituencies were much less accessible because of the pandemic. There were so many constituencies needed to process it.”

Fox was asked if he felt he made any mistakes in describing the merger proposal to the public, doctors or donors.

“Not that I know of. There were a lot of things said verbally. Some could have been misconstrued, but there was nothing intentional,” Fox said.

During the summer, Fox held multiple Zoom and in-person meetings with doctors and donors to explain the merger. While some doctors seemed to support the merger, the majority of doctors appeared not to like it.

For example, one of Beaumont’s top cardiologists, Dr. Robert Safian, expressed concerns publicly about the merger, how cost-cutting was affecting quality and safety, leading to top physician departures, and called for the board to replace Fox.

Over that time period, physicians, nurses and donors expressed a deepening dissatisfaction with Fox, COO Carolyn Wilson and Chief Medical Officer Dr. David Wood Jr. They described to Crain’s a number of management decisions they say led to cost-cutting, low morale, inadequate staffing, and a lack of critical supplies and equipment at hospitals.

In separate medical staff and nurse surveys during late July and August, 76 percent of 1,555 physicians said they had no confidence in corporate management and 70 percent expressed opposition to the merger with Advocate. An even greater percentage of nurses expressed lack of confidence in management (96 percent) and opposition to the merger (87 percent).

Some donors also have come out against Fox and his top lieutenants. Three donors told Crain’s they are concerned about a decrease in the quality of the medical staff, including more than 50 departures of top doctors.

Other concerns raised by Beaumont donors, doctors and local legislators had to do with reserved powers and governance of legacy Beaumont after the merger.

Under the LOI, Beaumont would get five directors on the new 15-member Advocate-Aurora-Beaumont board, but there would not be a legacy Beaumont chairperson for the first four years. The first chair would be from Advocate, the second from Aurora and then Beaumont. Each chair would serve two-year terms.

Fox said Beaumont would not be disadvantaged by waiting its turn.

“The chair does certain things but it’s not like being chair in a publicly traded company,” said Fox, noting that Beaumont would have had chairs in three of the nine committees of the board, including finance, quality and safety, and strategic.

Another aspect of Beaumont joining a larger organization is giving up final decision making and instead having reserved powers. For the first seven years, Beaumont’s local reserved powers would be limited to reviewing and recommending capital and operating budgets, quality and safety and strategic plans.

“Advocate, Aurora and Beaumont. It’s a single organization. It all has to add up. I don’t know of any merger where any party retains the ability to totally control their own budget. You might as well not have a merger,” said Fox.

Currently, Advocate Aurora has corporate offices in metro Chicago and Milwaukee. The LOI said the Newco executive team would be located in Chicago, with regional offices and executives also located in Detroit and Milwaukee to maintain local management, shared services, philanthropic and civic engagement.

If a new name for Newco was not developed at time of closing of the merger, the new name of the system would have been referred to as “AAB Health” until a new name and brand was chosen, the LOI said.

Another provision in the LOI covered possible sale of assets of Beaumont properties or services. During the first four years, the newly merged system could not sell any Beaumont asset, including a hospital or medical center, unless three of the five legacy Beaumont members approve the decision.

Community leaders and doctors have been concerned that Beaumont might want to sell its Wayne or Trenton hospitals, a move that Fox said hasn’t been under consideration.

“We (Advocate, Aurora and Beaumont) have all said we are going to keep our community hospitals,” said Fox, adding that even if any assets were sold in the future all the proceeds would remain in the local communities.

“We are investing more than $5 million in the Wayne hospital breast center” and “will be expanding other parts of the facility,” Fox said.

Finally, the issue of who would be CEO of the newly merged entity was addressed in the LOI. The document makes it clear that Skogsbergh would have remained CEO of Advocate-Aurora-Beaumont.

If the merger would have been completed, and even now, Fox said he plans to remain on as Beaumont’s local CEO at least until his contract expires in 2022.

Contrary to a well-publicized rumor, the LOI contained no “golden parachute” clause that would have given Fox $20 million or more if he left after the merger was completed.

“Contracts can be extended. … It’s hard to predict the future,” he said.

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