Aurora and Advocate Health Care to merge
Deal will create 10th-largest nonprofit system in country
Aurora Health Care, the largest health system in Wisconsin, and Advocate Health Care Network, the largest health system in Illinois, announced an agreement on Monday to combine their operations, a merger that would create the 10th-largest nonprofit health system in the country.
The combined system would have annual revenue of $11 billion, employ almost 70,000 people, including more than 3,300 physicians, and operate 27 hospitals.
Its operations would run from Bloomington, Ill., to Marinette.
The combined system would be named Advocate Aurora Health and have a single board, with an equal number of directors from Advocate and Aurora. Each system will continue to use its current name and maintain its current headquarters.
The planned merger, which
must be approved by state and federal regulators, is expected to close by the middle of next year.
It is a sign that the wave of mergers among health systems throughout the country is moving toward creating regional systems with large geographic footprints.
Aurora and Advocate are betting that size will result in additional financial strength and stability as well as economies of scale for providing increasingly complex care to pa-
tients, such as treatments based on patients’ genetic makeup.
The potential advantages from size also include making full use of the advances in information technology, such as analytics, to manage the care of patients.
“We don’t think status quo is the solution in health care,” said Jim Skogsbergh, president and chief executive officer of Advocate. “We think change is needed.”
But Aurora and Advocate will have the challenge of integrating two large organizations, and the proposed merger also is not without risks.
“Just because you get bigger doesn’t mean you are going to getting better,” said Martin Arrick, an analyst with S&P Global Ratings.
The planned merger was announced roughly eight months after Advocate and NorthShore University HealthSystem abandoned their planned merger.
The Federal Trade Commission challenged that merger, and a U.S. District Court in March granted the FTC’s request for a temporary restraining order and preliminary injunction blocking the merger.
Nick Turkal, a physician and president and chief executive officer of Aurora, called Skogsbergh shortly after the FTC blocked Advocate’s proposed merger with NorthShore.
“It just made sense to talk about coming together,” Turkal said. “It was an easy discussion to start.”
The two health systems share ownership of ACL Laboratories, and Skogsbergh said he had raised the idea of combining the two systems four or five years earlier.
Unlike the planned merger with NorthShore, which is headquartered in Evanston, Ill., the proposed merger of Aurora and Advocate would not lessen competition in their markets and is unlikely to be challenged by the FTC or state regulators.
Both health systems are nonprofit organizations and, unlike corporate mergers, no money will change hands.
Skogsbergh and Turkal will be co-CEOs — an organizational structure that generally hasn’t worked.
Neither of them is naïve about the challenges in having two CEOs, Skogsbergh said, but the structure has worked at some corporations and organizations.
“We believe that if anyone can pull this off, we can,” he said.
The two will share some duties and divide others.
“The conclusion we came to is there is plenty of work for both of us,” Turkal said.
Having co-CEOs also could counter the perception among employees that one system is taking over the other.
Turkal is 61 years old, and Skogsbergh is 59. Integrating the two systems will take years, and both executives could be near retirement by the time it’s done, clearing the way for the board to select someone to be chief executive of the combined health system.
Turkal stressed that no jobs would be eliminated because of the merger.
“We need everybody we have,” he said.
The merger could create jobs, he said, as the combined health system increases its presence in the Wisconsin and Illinois counties expected to grow from Foxconn Technology Group’s planned $13 billion plant in Racine County.
There is no firm deadline for the health system integration, Skogsbergh said, and the combined system will have the luxury of taking its time.
“Both organizations are in a position of strength,” he said. “There is no panic.” Aurora and Advocate each are strong financially. From the start of 2015 through the first nine months of this year, they have reported a combined total of $1.8 billion in operating profits and $2.5 billion in net profits, including investment gains on their reserves and other income.
Advocate has less debt and generated more income from its investments than Aurora has in recent years. However, Aurora has much higher operating profit margins than Advocate.
In May, Advocate announced plans to reduce its operating costs by approximately $185 million, citing the drop in its operating profit margins.
Aurora and Advocate made no promises that the merger would yield a set amount of cost savings.
“It may take 10 years for the benefits to fully materialize — and they may not at all. There is a lot of uncertainty.” Robert Town Economics professor at the University of Texas-Austin
Negotiating power
Studies have shown that health system mergers have led to higher prices for medical services by giving the combined systems more leverage when negotiating with health insurers.
There is little overlap in Advocate’s and Aurora’s markets. But a large regional health system still could have more sway when it is negotiating contracts.
“It definitely gives you more leverage,” said Lisa Phillips, editor of HealthCareMandA.com, owned by Irving Levin Associates.
But Robert Town, an economics professor at the University of Texas-Austin, said that the net effect of the mergers has varied.
“Some are not good for consumers, and some are great for consumers,” said Town, who has studied consolidation among health systems and hospitals.
Advocate has been at the forefront of negotiating contracts with health insurers that change the way the health system is paid, moving away from so-called fee-for-service toward receiving a fixed amount for providing care for patients.
The new contracts enable the health system to share in the savings if it can provide care at a lower cost while meeting quality targets — but also put it at risk of losing money if it can’t.
As of Sept. 30, 21% of Advocate’s operating revenue came from the contracts, according to its most recent financial statement.
Cost controls
Advocate also has shown impressive results in providing care at a lower cost in a Medicare program that provides the same incentives.
Aurora, too, has moved to control costs since Turkal became chief executive officer in 2006.
The operating costs of Aurora hospitals in southeastern Wisconsin increased by only 2% from 2003 to 2015, according to a study done by Milliman Inc., a consulting firm, for the Greater Milwaukee Business Foundation on Health. In 2003, they were the highest in the region.
Hospital care accounts for 30% to 35% of commercial health plans’ total costs.
At the same time, Aurora’s profits have increased significantly, and it has paid down debt.
But the planned merger of Aurora and Advocate is certain to bring challenges. The merger will result in a larger, more complex organization. And controlling costs and improving quality is a difficult and painstaking task for much smaller health systems.
“It may take 10 years for the benefits to fully materialize — and they may not at all,” Town said. “There is a lot of uncertainty.”
One clear challenge is Aurora’s system for electronic health records uses software from Epic Systems in Verona, while Advocate’s system uses software from Cerner and Allscripts.
To integrate the two health systems in all likelihood will require moving to one system for electronic health records, a task that would take years and potentially cost hundreds of millions of dollars.
Changes in how health care is delivered and the pressure to slow the rise in health care spending will be other challenges.
More than half of all procedures now don’t require a hospital stay, cutting into health systems’ revenues.
And health insurers are increasingly balking at paying higher hospital prices for services that can be provided in less costly settings.
For example, Anthem this year said it would no longer cover MRI and CT scans done at a hospital unless medically necessary.
High-deductible health plans have led to more bad debt. The ongoing efforts to repeal the Affordable Care Act could result in more people being uninsured.
And most economists expected the proposed tax cut now likely to become law to increase future budget deficits, resulting in more pressure to spend less money on Medicare.
Advocate operates in a large but competitive market and competes with academic medical centers affiliated with the University of Chicago, Northwestern University and other schools.
Advocate also operates in a state in dire financial straits because of unfunded pension obligations — a situation that does not bode well for spending on that state’s Medicaid programs.
Medicaid programs account for 16% of Advocate’s revenue, and the state of Illinois has routinely not paid Medicaid claims on a timely basis.
Merger momentum
But health systems throughout the country are betting that size will help them navigate these and other changes expected in the industry.
Since the start of 2014 through Nov. 30, there have been 337 health system or hospital mergers or acquisitions in the United States, according to Irving Levin Associates.
The trend can be seen in Wisconsin. Ascension, the parent of Columbia St. Mary’s, is now the second-largest system in Wisconsin, having merged with the parent of Ministry Health in 2013 and adding Wheaton Franciscan Healthcare’s operations southeastern Wisconsin to its system last year.
United Hospital System in Kenosha is now affiliated with Froedtert Health and the Medical College of Wisconsin.
And in recent years, Meriter Health Services in Madison merged with UnityPoint Health, SwedishAmerican Health System in Rockford merged with UW Health, and Rockford Health System merged with Mercy Health System in Janesville. That’s just a sampling.
Although the pace has quickened in recent years, the trend is not new.
Aurora’s roots go back to the merger of St. Luke’s Medical Center and Good Samaritan Medical Center in 1984.
But what started with cross-town mergers has evolved into regional combinations. And the proposed merger of Aurora and Advocate dwarfs any of the recent mergers in Wisconsin.
The merger would give the new entity — Advocate Aurora Health — national prominence. Whether it results in a health system that can slow the rise in health care costs and improve the quality of care won’t be known for years.
Aurora and Advocate clearly are betting that it will.
“The final thing I would say,” Turkal said, “is just watch us.”