Can Munson Remain Independent?

A wave of merger-and-acquisition activity raises questions about whether Munson Healthcare, Traverse City's eight-hospital, $1.8 billion health care system, will get swept up by a larger health system.

Not if Ed Ness, Munson’s chief executive officer, has anything to say about it. Ness says Munson’s strategy is to remain independent through a major, $50 million restructuring undertaken last year and partnerships with other health systems.

“We want to make sure we’re around for another 100 years,” he says, adding that there are no discussions with other health care organizations about possible mergers.

Grand Rapids-based Spectrum Health acquired Beaumont Health in 2022 to form the state’s largest health care system. Henry Ford Health announced last year it would take over Ascension Michigan’s 12 metro Detroit hospitals and its Genesys Hospital in Grand Blanc. MyMichigan Health purchased Ascension hospitals in Saginaw, Standish and Tawas City. 

Experts say Munson has a good chance of remaining independent, but probably not for the next 100 years.

“The value of a hospital is a function of the market it serves and its share of the market,” says Rex Burgdorfer, a partner at Chicago-based Juniper Advisory, which advises hospitals on mergers. “Munson has most of those things going for it. It’s a very good market and Munson has developed a really good niche. I wouldn’t forecast that it’s imminent for them to do (a merger.)”

Munson had a dominant 52.2 percent hospital patient market share in the 24-county northwest Michigan market in 2022, according to a bond rating review last year by Fitch Ratings. McLaren Northern Michigan in Petoskey significantly trailed Munson with a 14.6 percent market share.

Alan Baumgarten, a Minneapolis health care consultant, says Munson’s financial strength could be “an attractive target” because of its market niche and “fairly strong reputation for quality.” 

Burgdorfer says a potential merger partner for Munson could be the University of Michigan Health System, possibly through MyMichigan Health with which U-M has a business and clinical partnership. He cautions he is not predicting such a combination.

“Most experts believe academic medicine is the way of the future” for its innovation and quality of care, Burgdorfer said. “And U-M is seeking growth.”

Over the past several years, U-M has acquired Metro Health in Grand Rapids and Sparrow Health in Lansing. It raised eyebrows in March by purchasing part of the recently demolished Kmart headquarters building in Troy where it intends to build an ambulatory medical center.

Marschall Runge, CEO of Michigan Medicine, U-M’s hospital complex in Ann Arbor, said the purchase was part of U-M’s broader plan “to create a statewide network of care that allows Michiganders the ability to receive our world-class care close to home.”

A merger between Munson and neighboring MyMichigan Health, two similarly sized health care systems, could fit into that plan, Burgdorfer says.

“It would not be dissimilar to Beaumont and Spectrum merging to become Corewell Health, but on a smaller scale,” he says.

Rural hospitals, especially, face serious costs pressures, including staffing and implementing new technologies. They also tend to have older, sicker patients that cost more to treat and don’t receive adequate reimbursements, forcing them to merge with larger systems.

Munson’s patient population is wealthier than those served by many rural hospital systems. Revenues from Medicaid and patients without insurance represented just 14.8 percent of total revenues in 2022, according to Fitch Ratings, which called Munson’s revenue mix “very good.”

Ness says Munson has lost money on patient care for the past two years, mostly a hangover from the 2020 COVID pandemic.

Its 2022 audited financial statement shows that Munson had an operating loss of $32.4 million on revenue of $1.3 billion for its fiscal year ending June 30. But that loss was erased by $58.7 million in government COVID relief funding. Fitch Ratings said it expects Munson to become profitable again this year.

“Our goal is to break even this year,” Ness says. “We’re making a lot of progress on that with a lot of hard work.”

At the heart of Munson’s plans to remain independent is its three-year Regional Care Transformation Plan announced last September. The plan responds to a growing trend of more health care services being performed outside the hospital.

Under the plan, more complex inpatient procedures will move from Munson’s smaller hospitals to its Traverse City medical center. Its Gaylord and Cadillac hospitals will become regional hospitals while its remaining hospitals will focus more on outpatient care.

“Our goal is to make Munson Medical Center a regional referral center,” Ness says.

Munson will also seek to expand linkages with larger health care systems to provide clinical and business services, he says. 

“We certainly need relationships with bigger organizations and we’ll continue to pursue them where they make sense from a clinical or business standpoint,” he says.

Munson also has been expanding into the Petoskey-area market largely controlled by McLaren. It acquired a primary care practice in Harbor Springs several years ago and last year bought a vacant Art Van furniture store, which Munson is transforming into an ambulatory medical center.

And it has been acquiring primary care and other physician practices locally to bolster its finances, a move that doesn’t sit well with some providers who themselves are trying to remain independent.

Jim Stilley, chief executive officer at Great Lakes Orthopaedic Center, says Munson is attempting to drive more business from private physician practices to its own hospitals and clinics, which doesn’t always benefit patients from a cost and safety standpoint.

“Munson is a great hospital,” Stilley said. “But our major philosophical difference with them is that certain things should be done at Munson and certain things shouldn’t be done there.”

Ness is no stranger to hospital merger controversies. He took over as Munson’s chief executive officer in 2010, just months after his predecessor began merger talks with what was then Spectrum Health.

But the merger blew up after the community revolted against it. Richard Witham, who with his wife and children donated $2.5 million to Munson in March to create the Witham Family Stroke Center, says he's pleased the health system ended merger talks and is confident it can remain independent.

"I'm glad the community felt that way," says Witham, who served for years as board chairman of the former Hackley Hospital in Muskegon, now part of Trinity Health. "Munson is such a significant organization now. Quite honestly, I think Munson is in a position where it's highly likely to maintain its independence and go forward very well."

This is an excerpt from a larger feature in the May Traverse City Business News. To read the full story, become a TCBN subscriber here.