University of Michigan Health will acquire Sparrow Health System in a move that expands the university system's footprint for both systems while providing a fiscal infusion for Sparrow's operational and capital ailments.
Sparrow's board approved the agreement at a meeting Nov. 28 and the university Board of Regents signed off Thursday. The acquisition is pending regulatory approval with closing anticipated in the first half of 2023.
With the addition, U-M Health will become a $7 billion organization with more than 200 care sites across the state, the system said in a statement. The acquisition expands U-M Health's presence from the southeast to cover the middle region of the state.
"This is an important step toward our long-term vision of a statewide system of highly coordinated care, a vision that Sparrow also embraces and is excited to build toward," Marschall Runge, chief executive office of Michigan Medicine, said in the statement.
The126-year-old Sparrow operates hospitals in Lansing, Carson City, Charlotte, Ionia, and St. Johns, as well as Sparrow Specialty Hospital.
Michigan Medicine operates five hospitals and 125 clinics and includes U-M Medical School. It had $4.75 billion of revenues in 2021.
The two systems have partnered through an affiliation agreement since 2019 for pediatric services.
As part of the acquisition, U-M Health will provide $800 million for facility projects, operations, and other strategic investments for Sparrow over an eight-year period.
"We will invest in numerous improvement and growth initiatives based on community need…and geographic growth across the communities we serve," Joseph Ruth, Sparrow Health System's executive vice president and chief operating officer, said in the statement. "This infusion of investment into Sparrow services will provide job growth and career development opportunities that would not otherwise be available to our caregivers."
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Sparrow also now joins the
The systems did not provide information on the fate of Sparrow's existing debt. Sparrow carries ratings in the single-A category and had $386 million of long-term debt as of last year, according to S&P Global Ratings. The university carries triple-A ratings from S&P and Moody's Investors Service.
On Nov. 23, S&P downgraded the Sparrow Obligated Group to A-minus from A and placed it on CreditWatch with negative implications.
"The downgrade reflects our view of a multiyear trend of accelerating operating losses that have continued through the nine-month interim period ended Sept. 30, 2022," S&P analyst Kay Sifferman said in a news release. "The CreditWatch placement reflects our view that there is a one-in-two chance we could further lower the rating within the next 90 days pending review of certain strategic initiatives provided by management."
Moody's affirmed its A2 rating on $160 million of Sparrow bonds in April 2021 saying the report it viewed the affiliation with the university as a positive credit feature.
Healthcare sector challenges post a risk for the university's balance sheet. "U-M's key credit challenge is a high reliance on patient care revenue through Michigan Medicine which exposes the university to revenue and operating pressures from regulatory and government payer changes," Moody's said.
