The University of Michigan’s Michigan Medicine and Lansing-based Sparrow Health System have officially merged, creating what executives say is a single $7 billion system that will operate more than 200 care sites, with a market share of 60% of patients in the region.
It’s the second major health system consolidation in the state in recent years, after Beaumont Health and Spectrum Health combined to officially become Corewell Health last year. And it comes as the Biden administration is trying to crack down on massive health system mergers, following years of research showing healthcare consolidations have often meant higher costs for patients and lower quality of care.
But this time will be different, executives from both health systems promised in a virtual press conference Monday.
The merger “allows both institutions to grow and provide optimal health care,” said Dr. Marschall Runge, CEO of Michigan Medicine.
"Actually, we think that we can deliver care now less expensively by combining our assets. … Of course, as always, the proof is in the pudding.”
But Runge acknowledged that with previous megamergers, where "corporations that have acquired many, many hospitals, there has been an increase in costs." But this, he said, is "not what I would call a megamerger."
(According to industry consultants KaufmanHall, a “megamerger” is when the smaller party has more than $1 billion in annual revenue, which Sparrow does.)
Bret Jackson, however, is dubious. He’s president and CEO of the Michigan Economic Alliance, which tries to lower healthcare costs for businesses and unions.
“The University of Michigan is a fantastic health system, but they are also [one of] the most costly health systems in the state to private purchasers, people who have insurance. And so when they command the highest dollar, and they are expanding into another market, are they going to accept a lower reimbursement? Of course not. There's no history that that has ever happened in the hospital consolidation marketplace.”
For decades now, the U.S. healthcare system has been consolidating, with smaller hospitals getting squeezed out. The pressure for health systems to merge only intensified during the pandemic, when many hospitals saw revenue drop while costs grew. Sparrow Health System recently posted a $174 million decrease in net assets (without donor restrictions) for 2022. And while the University of Michigan (which includes the U of M health system and its statewide affiliates) posted a decrease in net position of $205 million last year, it still boasted a “strong” net position of $19.3 billion overall.
The reality is, it’s getting harder and harder to be the little guy in healthcare: from 1998 to 2021, mergers reduced the number of hospitals in the U.S. by about 2,000, according to researchers at the University of Pennsylvania. And Sparrow administrators hope joining Michigan Medicine will help them survive, whether it’s attracting more workers, lowering their costs, or expanding their services.
“Our goal is, we want to treat complex cancer patients here like head, neck, breast cancer, etc., as well as complicated reconstructive surgeries,” said Sparrow Health System President and CEO James Dover. “So we see that as being the first one out of the gate. Number two is anesthesia. Believe it or not, we're very short on anesthesiologists in our region. We've had trouble recruiting. We actually have a couple of ORs that are shut down right now because of our lack of anesthesiology … so within the first hundred days [of this merger] we want to see improvements in those two areas.”
It’s true that smaller health systems can lower some of their costs by merging with a bigger system, Jackson said. But whether those savings get passed on to patients is another question.
“The hospitals themselves may be able to buy equipment cheaper, because they're buying it in more of a bulk. … But what we end up seeing is that those savings, either on the administrative side or the purchasing of goods and services that the hospitals purchase, never end up translating down to what the purchasers pay.”
In fact, healthcare consolidations have largely reduced “access to health care for the most vulnerable populations through hospital closures and higher prices in highly consolidated markets,” said David Grande, the director of policy at the University of Pennsylvania Leonard Davis Institute of Health Economics, at a panel earlier this year.
But the Sparrow and Michigan Medicine merger won’t reduce competition, executives insisted on Monday.
“We served separate markets, and that really typically is the biggest concern," with health system consolidation, said Sparrow Health System Board Chair John Pirich. “And quite honestly, the competition that exists in the market is increasing. We have McLaren [Health Care] with a brand new facility here in mid-Michigan. … We have entrees coming from Corewell [Health] in the Grand Rapids market, in terms of some of the areas of specialization."
"The reality is there's competition throughout this entire region," Pirich said. "So we're confident that you're not going to see any of the kind of price increases that have been reflected in some other markets.”
Both Sparrow and Michigan Medicine submitted the proposed deal to the FTC this winter, and the regulatory board didn’t come back with questions or concerns, administrators said. And the Michigan Nurses Association, which represents a local chapter of about 2,200 staff at Sparrow, says they are “cautiously optimistic for the future.”
“Nurses and healthcare professionals have known for a long time that major changes are needed at the bedside at Sparrow,” an MNA spokesperson said via email Monday. “We hope that Michigan Medicine follows through on its commitment to invest in the frontlines and provide comprehensive quality care to our community. … No matter what happens, our goal as a union will remain unchanged. We will always seek to make sure that patients come before profits at our hospital.”
