STRENGTH IN SCALE
Advocate Aurora Health plans to double in size by 2025
The merger that created Advocate Aurora Health could be just the start for the health system.
Jim Skogsbergh, the CEO of Advocate Aurora, last month set out the ambitious target of increasing the health system’s revenue to $27 billion a year and more than doubling its size by 2025.
He acknowledged that the target is somewhat audacious and characterized it as aspirational.
“Those numbers will sort of get finetuned,” Skogsbergh said.
But the health system created by the merger of Aurora Health Care, the largest health system in Wisconsin, and Advocate Health Care Network, the largest in Illinois, is sold on size.
“Every time we’ve scaled up,” Skogsbergh said, “we’ve gotten stronger.”
Skogsbergh is quick to cite the potential advantages of size, such as consolidating administrative operations, getting better prices when negotiating purchasing contracts and making it easier to recruit staff.
“There are all kinds of reasons that scale is important,” he said.
Advocate Aurora employs about 74,000 people — slightly more than the population of the city of Waukesha — and now is one of the largest nonprofit health systems in the country.
“It opens up opportunities for other partnerships,” said Dominic Nakis, chief financial officer of Advocate Aurora.
The health system’s size has made it an appealing partner for startup companies to test their products and services. The health system has partnered with several, and in some cases invested in the companies.
“We now have the ability to kind of peek around the corner a little bit and see what’s coming,” Skogsbergh said.
Those investments could be a source of future growth.
Size also brings advantages for health systems that have their own health plans by spreading the potential risk among a larger population. And it could help health systems navigate some of the changes taking place in health care. They include the move to outpatient services as fewer procedures require an overnight stay in a hospital, the push to provide services that are more convenient and closer to patients, and tele-health and new competitors.
‘It is very well focused’
Though it’s a short measuring stick, the merged system so far has shown positive financial results — and shed $243 million in annual costs.
For the first nine months of last year, it reported revenue of $9.4 billion, compared with $9 billion for the same period in 2018. Operating income during the same time frame rose 13%. And the operating profit margin increased from 4.3% to 4.6%.
“In general, it is an organization that is very well run and very well governed,” said Ken Kaufman, managing director of Kaufman Hall, a consulting firm that does work for Advocate Aurora.
“It is very well focused on day-to-day operations,” Kaufman added. “We think that Advocate does that as well as anyone we work for.”
Advocate Aurora also continues to build new hospitals and clinics. Those projects include:
❚ Spending $250 million to build a hospital and medical office building in Mount Pleasant as well as clinics in the area. The projects are expected to be completed next year.
❚ Spending $325 million to build a new hospital and campus in Sheboygan to replace its existing hospital. The project is expected to be completed in 2022.
❚ Spending $130 million to build an ambulatory surgery center and medical office building in the Kenosha and Pleasant Prairie area. The project is expected to be completed this year.
Open to more mergers
New sites, services and markets would contribute to Advocate Aurora’s target of more than doubling in size by 2025. But coming even close to that target would require merging with other health systems.
“We certainly are having conversations with other organizations,” Skogsbergh said.
He stressed that these were conversations — not negotiations.
“There is not one lever here,” Skogsbergh said. “There are many levers that need to be pulled.”
Advocate Aurora isn’t alone in betting that size brings benefits.
Mergers and acquisitions among health systems and hospitals have accelerated since 2010 — more than 500 were announced from 2014 through 2018, according to a presentation on hospital consolidations by the National Institute for Health Care Management Foundation.
The mergers or acquisitions also are increasingly among large, strong health systems, creating regional and national systems.
“There is this sort of logic that bigger is better,” said Jeffrey Remsik, a principal and senior adviser at Michael Best Strategies, a consulting firm.
Just how big is big enough? “The answer I hear is at least as big or bigger than the guy next to me,” Remsik said.
Advocate Aurora probably would look for merger candidates outside the Chicago market but contiguous to the health system’s footprint in northern Illinois and eastern Wisconsin, Remsik said. That makes it easier to market the company and to negotiate contracts with health insurers.
Executive leadership shift
One change already in place is that most of Advocate Aurora’s top executives — 11 out of the 17 listed as its executive leadership — work out of Downers Grove, Illinois. Only six work out of Milwaukee, even though it is referred to as the system’s headquarters.
Skogsbergh, who had been co-CEO with Nick Turkal, a physician and the former CEO of Aurora, became the sole CEO of the health system in July.
The two decided early last year that having co-CEOs — a model that has rarely worked — was not the best structure going forward and asked the board which of the two should be CEO. Turkal subsequently left the health system.
But Remsik said that what matters is people’s relationship with their health care providers.
“Most people don’t care about the corporate ownership,” he said.
Better savings, quality of care?
What is unknown is whether the merger that created Advocate Aurora helps slow the rise in health care costs or improve quality of care.
Advocate Aurora has a target of finding $1.1 billion in cost savings by 2025. But numerous studies have found that consolidation results in higher hospital prices — though not when health systems in two different states combine.
“There is nothing inherently wrong with their growing as long as the growth and scale bring down prices,” said Dave Osterndorf, a consultant and chief actuary for Health Exchange Resources in Glendale.
Just providing more services to gain market share would be of little value to employers.
There also is little evidence that consolidation improves the quality of clinical care, according to the presentation by the National Institute for Health Care Management Foundation.
That includes a study published in the New England Journal of Medicine last month that found no evidence that mergers and acquisitions improved quality based on four measures, such as the rate of re-admissions and mortality.
Advocate Aurora said that its merger has resulted in more standardized care based on recommended guidelines, such as those for treating sepsis and initiatives that are improving quality.
It also is investing in information technology, such as so-called predictive analytics, to identify high-risk patients.
Other health systems are doing the same, though, and Skorsbergh acknowledged that Advocate and Aurora were working to improve quality before the merger.
“That journey is never finished,” he said.
But smaller health systems, such as Bellin Health in Green Bay and Gundersen Health in La Crosse, have shown that they can be just as innovative — and maybe more so — as well as provide higher quality care based on certain measures than larger systems.
Size can bring advantages in the ability to offer new services and lower costs, said Suzie Desai, a director who oversees not-for-profit health systems at S&P Global Ratings.
“It certainly can help,” Desai said. “But it doesn’t mean that it always helps.”