Philosophies on Mergers and Finances: Q&A With Beaumont Health System CFO Nick Vitale

Royal Oak, Mich.-based Beaumont Health System has come a long way since 2008.

That year was a struggle for many organizations as the financial industry brought the country to its knees. Beaumont CFO Nick Vitale remembers it all too well.

Mr. Vitale joined Beaumont in 2005 as vice president of finance at Beaumont Hospital, Troy (Mich.). Before nabbing his current position as CFO in June 2011, he was Beaumont's senior vice president of financial operations during the financial crisis. Beaumont had spent a lot of money on capital before the country's financial collapse, and to replenish the system's balance sheet, it had to issue debt. Then the dominos began to fall, first with Lehman Brothers declaring bankruptcy and then with other major banks requiring billions in bailed-out funds.

By the end of 2008, Beaumont had only 62 days of cash on hand, and it had to go to the bond market as soon as possible. Beaumont eventually built up its cash position, but Mr. Vitale says it came at the expense of "extremely high" interest rates on its bonds. Beaumont lost $30 million in 2008, "the first operating loss in our recent history," Mr. Vitale says.

However, since then, three-hospital Beaumont has recorded net operating profit every year. In fiscal year 2012, the academic medical center reported $108.9 million of profit on $2.2 billion in revenue — good for a 4.8 percent margin. Beaumont also made waves earlier this year after a potential merger with Detroit-based Henry Ford Health System fell by the wayside.

Here, Mr. Vitale discusses why the merger with Henry Ford was ultimately called off, what Beaumont's future plans are, how he divides his time as CFO and what his main financial and payer strategies are right now.

Question: The Beaumont-Henry Ford merger was being closely watched by many within the hospital and healthcare sector. It would have created a $6.4 billion, 10-hospital system, but both sides decided to call it off in May. Can you explain what happened with the negotiations? What issues ultimately led to the merger being dissolved?

Nick Vitale: Beaumont started down the path to explore partnerships two years ago. The initiative was led by our board. We developed a board task force, and we identified a number of organizations that we might be interested in partnering with — national, regional, local, for-profit and nonprofit. We narrowed the field down to Henry Ford, who had everything we were looking for in a partner. They met all of our needs and requirements. On Oct. 31, 2012, we signed a letter of intent that started due diligence that we were hoping ultimately would lead to a definitive agreement sometime during the summer.

During due diligence, we met a lot of great people at Henry Ford. We learned a lot about them and ourselves. However, at the end of the process, we realized our cultures were significantly different in several areas that we thought were very important. The medical staffs — ours is a predominantly a private practice model, theirs is predominantly an employed model — was one of them. There were several other issues that we were not able to resolve.

Q: What are some of the biggest challenges when it comes to the merger and acquisition market today? Internal and external scrutiny? Culture? Finances?

NV: We had done a significant amount of due diligence on the finance side [in the Henry Ford deal] and identified approximately $200 million of opportunities on revenues and expenses that could have been realized. That part of the process worked extremely well.

However, during the process, we realized that culture is key. This was especially true in our market, where we were two of the larger healthcare systems and had competed with each other for a number of years.

We entered the discussions with the goal of this being a "merger of equals" — that's really hard to do. I believe it is easier if one of the parties acquires the other.

One of our primary goals was to improve the value of the consolidated organization. We define value as quality divided by cost. In addition, we were attempting to create a model healthcare system for the future under healthcare reform.

Q: How does Beaumont plan on moving ahead in the future? Are there other future hospitals and/or systems Beaumont could partner with? How does this fit within the bigger context of healthcare reform?

NV: We are in the process of updating our five-year strategic plan, now that we know a little more about health \care reform and what the demands will be on our system. We'll look at a variety of opportunities with other providers to explore different operating models. Perhaps we'll consolidate back office functions to generate efficiencies, specifically in the supply chain and business office areas. We could explore opportunities to acquire one or two or three smaller hospitals or healthcare systems. We don't have a definitive plan yet, but we are going to create a menu of options and pick and choose from that.

Q: Beaumont is routinely considered one of the highest-performing academic medical centers in Michigan and the country. As CFO, what are your priorities to make sure the system is high-performing? How do you know when your system is high-performing?

NV: As CFO, although I love to get involved in operations, the way for me to do my job the best is to keep the organization as financially strong as possible. That means ensuring the balance sheet has sufficient liquidity and the organization is generating enough EBITDA and margin to reinvest in the system. This will ensure we are a financially sound organization and have the latest and greatest equipment to provide high-quality care. My focus is on spending the appropriate amount of money for capital while retaining enough on the balance sheet to maintain our financial metrics so that the organization is around for years to come.

Currently at Beaumont, we have a very healthy balance between what is right for operations while continuing to build our financial strength. Everyone understands where their counterparts are coming from and respects their input in our discussions. But at the end of the day, our physicians and operating staff focus on quality and safety while finance makes sure we provide the resources needed. We organized centers of excellence and integration councils that focus on advancing our progress in quality, safety, service and growth. They are physician-led, nurse-partnered and administratively supported and bring leaders from all our hospitals together to decide on priorities and develop business plans addressing all these "pillars." This approach has worked very well for us and helped us maintain focus and drive our success.

Generating a margin between 3 to 4 percent is essential, but it is extremely difficult in the Michigan market. This is due to the economy in southeast Michigan and the structure of commercial insurers. It is important to generate sufficient net operating income to support a strong balance sheet. This means looking at cash-to-debt ratio, debt-to-equity and making sure we have enough liquidity to be able to buy what we need and weather any financial storms in the future. After living through 2008, which was a low point, we've been steadily improving.

Q: Among Medicare, Medicaid and commercial payers, which one is giving you the biggest ulcer right now?

NV: In 2008, when we went through our turnaround, one of our stated goals was to break even from Medicare. Medicare is almost 50 percent of our [payer mix], and Beaumont Hospital, Royal Oak is the third-largest Medicare hospital in the U.S. We actually achieved that within 24 months, and we make a small profit on Medicare inpatient [reimbursement] because we were able to cut our costs.

The payer that is causing the biggest ulcer is Medicaid. Because Beaumont is so large, we pay a significant provider tax to the state, but our Medicaid percentage isn't quite as high as some other providers. This creates a disadvantaged position for Beaumont, and it has hurt us over the years. We are reimbursed approximately 53 percent of costs from Medicaid. We're working with the state now on changing the [provider fee] formula so it's more equitable. That provider tax program has been in place for 12 years. It's generated additional dollars, but the state hasn't put any new money into increasing Medicaid rates. I was the CFO at Detroit Medical Center when this program went into place, and it was established, at the time, to cover safety-net hospitals. But the program has grown significantly over the past 12 years, and it has created a significant burden for Michigan hospitals that are disadvantaged.  

Q: What are some of the most unique financial strategies Beaumont employs?

NV: When we went through the financial turnaround, we knew we couldn't generate significant improvements on the revenue side, so we really went after costs. We tried not to put this on the backs of employees. We had some downsizing and restructuring of benefits and pay, but for the most part, we looked at renegotiating with vendors in supply chain, managing the cost of care more appropriately and looking at clinical pathways and protocols, which really drive quality up and costs down.

[Beaumont President and CEO] Gene [Michalski] said at the time, "I want no regret strategies. We should be doing stuff that is the right thing to do no matter what happens to reimbursement going forward." We know that the industry is moving more toward value-based care and less toward volume-based, so we're looking to improve how we manage the care for a population of people as opposed to episodes of care. As we get more into healthcare reform and negotiating with insurance exchanges, we want to be in the best position possible to provide value for the population we serve.

Q: You mentioned the health insurance exchanges, which are a major tenet of the Patient Protection and Affordable Care Act. Currently, 14 health insurers have applied to sell health plans on Michigan's exchange. How do you think those will play out?

NV: It's interesting. These are supposed to be up and running in October. There is a tremendous amount of work that still needs to be done. I suspect there will be some scrambling, and it may take many months, if not a year, to figure out who's on first. But going forward, they will provide a mechanism for people to get lower-cost health insurance and benefits for their needs. It's not clear to me how many employers will opt out of buying insurance for their employees and pay the penalty to do this. I think it's going to be an interesting time over the next few years to see how it plays out.

Q: What is a typical day like for Nick Vitale?

NV: This is a good question. First, I don't have a typical day. Every day is different. I go to a lot of meetings representing the organization, both internally and externally. Meetings typically start at 7 a.m., sometimes 6:30 a.m. if physicians want to get into the operating room on time. I staff the finance committee, attend board meetings and am always preparing for quarterly or monthly meetings. There are many ad hoc meetings to discuss revenue cycle issues, looking at debt, working with our bankers — really every day is different. It keeps the job interesting.

Most days during the week, there is a late meeting or dinner function, some for our foundation. Two to three nights a week, I'm out doing something with the organization. Luckily, I'm at a point in my life where my kids are older and out of the coop, which makes it easier to do.

More Articles on Hospital CFOs:
Spectrum Health CFO Michael Freed: On a Journey to Price Transparency
6 Ways Hospital CFOs Can Improve Their Leadership Skills
Coordinating Care and Incentives: Q&A With Cleveland Clinic CFO Steve Glass

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