HAP and Mercy Health's Care Choices talk merger
Health Alliance Plan has started merger talks with Care Choices HMO to create the state's largest health maintenance organization.
With more than 503,000 subscribers, Detroit-based HAP is the state's second-largest HMO, while Care Choices in Farmington Hills is fourth with about 175,000 members.
Combined, their membership and $1.1 billion in annual revenue would far surpass those of the state's leading HMO, Blue Care Network of Michigan.
Southfield-based Blue Care Network of Michigan was created earlier this year through the merger of four regional Blue Care Network divisions into one statewide organization. It has membership approaching 600,000 and annual revenue of about $900 million.
Blue Care Network is a subsidiary of Blue Cross and Blue Shield of Michigan Inc., the state's largest health insurer with annual revenue of about $7 billion.
A HAP collaboration with Care Choices and its corporate parent, Mercy Health Plans, would give the combined entity sweeping coverage across metropolitan Detroit and into western Michigan, said Cleve Killingsworth Jr., HAP president and CEO.
HAP has the dominant marketshare position among Detroit area HMOs, while Care Choices is strong in the Ann Arbor area and into Grand Rapids and Muskegon, he said. 'The advantage for subscribers would be increased physician choice for the members of both organizations,' Killingsworth said.
HAP and Mercy Health Plans are owned by hospital companies. HAP belongs to Henry Ford Health System, the Detroit area's second-largest hospital company, with revenue of about $1.8 billion.
Mercy Health Plans, which includes Care Choices HMO and Care Choices PPO, is owned by Farmington Hills-based Mercy Health Services Inc., the state's largest hospital company, with about $2.1 billion in revenue.
HMOs and other managed-care companies are being required by customers to have a statewide and regional presence, said Thomas Summerill, Mercy Health Plans president.
Employers such as the Big Three want uniform care and services for their workers across the state, Summerill said. Government purchasers of care, reflected in the Medicare and Medicaid programs, also want statewide coverage, he said.
HMOs are responding by merging and forming alliances that will provide wide geographic coverage and allow the merging companies to import best clinical and management practices from one another to reduce costs, he said.
Killingsworth, who earlier this year left Kaiser Permanente's Ohio regional office to become HAP CEO, said HAP and Mercy Health Plans hope to have a deal ready for board approval by late summer. The two sides are trying to complete a letter of intent to proceed with a due-diligence exploration of each other's financial and operational information, he said.
A merger is the preferred structure for a collaboration, Killingsworth said. 'That would allow us to capitalize best on the strengths of either organization,' he said.
Care Choices, like many other local HMOs, has absorbed losses over the past year as it has sought to hold down medical costs, while investing heavily in new products, especially a Medicare HMO for seniors.
Care Choices posted a loss of $2.5 million in the first nine months of 1997, compared with net earnings of $2.4 million in the year-earlier period. Revenue in the nine months grew to $197.1 million from $189 million for the same period in 1996.
HAP, meanwhile, has shown a healthy bottom line. The HMO posted net earnings of $15.6 million for the first nine months of 1997, compared with $8.8 million in the year-earlier period. Revenue for the nine months was $680.5 million vs. $637.8 million for the same period of 1996.
The merger talks continue an accelerating tightening of ties between Henry Ford Health System and Mercy Health Services, Killingsworth said.
In September, Mercy granted admitting privileges to Henry Ford Health physicians at its St. Joseph Mercy Hospital-Oakland in Pontiac, giving HAP physicians a pivotal beachhead in Oakland County. Henry Ford Health has no hospital in the county. Under the agreement, the two systems also plan to advance clinical programs at the hospital, especially in oncology, cardiac care and occupational health.
The arrangement is the third major hospital alignment between Henry Ford Health and Mercy Health Services.
In Detroit, Henry Ford Health manages the 268-bed Mercy Hospital under a management agreement that dates to 1990. Henry Ford Health and Mercy Health Services also co-own St. Joseph's Mercy of Macomb, a 512-bed hospital in Clinton Township, near Mt. Clemens.
The two systems jointly select the CEOs of the two hospitals and contribute their substantial resources to both operations.
Killingsworth said he expected the relationship between the two systems to continue to grow as they move forward with the HAP-Care Choices merger discussions.
