No clear leader
Chicago’s hospital market strong and expanding, yet fragmented
CHICAGO BY ALL ACCOUNTS has a strong presence in healthcare, being home to a number of established systems, medical societies and trade associations. And yet, it does not possess a clear leading hospital in the same vein as its counterparts in New York, which has New York-Presbyterian, and Los Angeles, with renowned Cedars-Sinai.
The third-largest metropolitan area in the country does not have an entry on the list of the largest hospitals—measured by total operating revenue—until No. 10, a spot held by Rush University Medical Center, which sits just west of the city’s central business district.
Theories abound as to why Chicago, home to the American Hospital Association and the American Medical Association, does not have its own supersized hospital or health system.
One argument is that in Chicago, known as a city of neighborhoods, a highly competitive and fragmented healthcare market has evolved out of those neighborhoods and the local providers serving them. The metro area has five sizable academic medical centers all competing for market share and patient visits. Yet those medical centers were late to the party in terms of building systems, and only in recent years have they started growing their networks. Feeding that dispersion is the strong suburban sprawl that has grown around the city.
“There’s a lack of strategic conditions that really would create an M&A environment like you see in other markets,” said David Smith, a consultant and co-founder of the Health Care Council of Chicago, which recently produced a report on the local healthcare landscape. “You see big systems grow up in Chicago, but you don’t have a megasystem or megahospital like you do in other cities.”
The closest the city has to a behemoth system is the recently created Advocate Aurora Health, based in the western suburb of Downers Grove, forming the 10th-largest not-for-profit provider in the country, based on revenue. Following the combination of Advocate Health Care and Milwaukee-based Aurora Health Care, the system operates 27 hospitals, including two in Chicago and 12 total in Illinois—representing $11 billion in annual revenue.
Advocate Aurora holds the largest provider market share in Chicago at 16.8%, followed by Northwestern Memorial HealthCare (11.6%) and Rush (8.4 %).
Prior to the deal, Advocate had looked to merge with NorthShore University HealthSystem, based in the northern suburb of Evanston, but that deal was rejected by a federal judge in 2017. Advocate Chief Strategy Officer Scott Powder said he believes that rejection has had somewhat of a “chilling effect” on merger and acquisition activity in Illinois.
While Chicago’s hospital market is highly splintered, Illinois is dominated by one health insurer in Blue Cross and Blue Shield, which holds a more than 70% market share in the state. That lack of leverage with insurers leads to even greater competitive pressure on hospitals and systems in the area.
“Chicago tends to be among the least concentrated on the provider side and the most concentrated on the payer side, on a relative basis to other markets,” Powder said. “Clearly, that’s one thing that makes this market tick.”
The physical environment may even play a role, according to Mark Frey, CEO of Amita Health, a joint venture between Ascension and AdventHealth. Chicago’s lack of a true megaplayer stems partly from the long-established nature of many of its healthcare institutions, the city’s neighborhood-focused culture and a populace reluctant to traverse its snarled roadways for long distances, he said.
“A factor that has emerged over time is just the difficulty of getting from place to place,” Frey said. “It is just brutal in terms of traffic, construction, bad weather. So you have a tendency for people to try to focus on convenience and understand that, to the extent that it’s possible, going long distances across Chicago for your healthcare is pretty challenging. Which is not to say that’s not true in other environments, but it’s especially true here in Chicago metro.”
Access is a key consideration for Amita, based in the western suburb of Lisle. Along with its 19 hospitals, the system includes about 275 outpatient care sites. Frey said that convenience and keeping up with the delivery system’s rapid movement toward ambulatory care are both top of mind.
Pickup in M&A may be short-lived
Mergers and acquisitions have not hit a standstill, yet activity isn’t expected to grow significantly either. Recent deals include St. Louis-based Catholic giant Ascension’s acquisition of Chicago-based Presence Health in early 2018, which plugged it into Amita.
Catholic Health Initiatives and Dignity Health caught the healthcare community’s attention when the respective Englewood, Colo.- and San Francisco-based systems chose Chicago for the headquarters of their merged organization in February. Now known as CommonSpirit Health, the combined entity has 142 hospitals, 150,000 employees, almost $30 billion in revenue and more than 700 care sites across 21 states, none of which are in Illinois.
But given recent signals from the Federal Trade Commission and declining for-profit interest in the Chicago market, Smith said he expects somewhat of a slowdown in local M&A.
The city has seen a shrinking share of for-profit players due to a dwindling population, strict regulatory climate and the strong foothold of well-established not-for-profit players, the Health Care Council of Chicago noted in its State of the Chicago Health Care Industry report, released in October. Only 16 of the area’s medical centers are operated as for-profits after national chain Tenet Healthcare Corp. unloaded its four local institutions and Quorum Health also reportedly may exit the Land of Lincoln.
Following the failure of the NorthShore deal and successful completion of the Aurora partnership last year, Advocate has aimed to “reframe the conversation” around the transition to value-based care, Powder said. Chicago is such a “massive market” with so many leading providers that he sees the city as “ground zero” for experimentation.
“It doesn’t get the reputation that the coasts do in terms of some of the venture capital-types of investment that are going on around technology,” he said. “But there is a lot of care model innovation taking place inside of Chicago, because it is so big and fragmented and there are so many opportunities.”
Fueling that innovation is Chicago healthcare incubator Matter, which has worked to create ties between systems and industry.
Advocate Aurora now serves 1.5 million individuals under value-based contracts, with about 400,000 under capitated arrangements, in which the system assumes full financial risk for the cost and quality of care. As such, the system has experimented with new ways to bend the cost curve.
As one example, it recently opened a clinic that caters exclusively to patients with multiple chronic conditions. It’s still early, but Advocate has found “promising” results in reducing unnecessary emergency department visits and keeping frail elderly patients in their homes, when possible, Powder said.
Other ways to tip the scale
While scale and geographic reach are of utmost concern for some of the city’s biggest players, others are not quite convinced of its necessity. Rush University System for Health CEO K. Ranga Rama Krishnan acknowledged that “everybody is talking to everybody,” but expressed doubts that Rush would ever be part of a megasystem.
Scale provides better buying power on the commodity side and impacts back-end functions in the hospital. However, Krishnan does not see size impacting the delivery side of the equation, and he worries about the eventuality of becoming “too big to fail.”
“Scale gives you a couple of things, but you also lose a couple of things, too,” Krishnan said. “It only works if you think scale is the one leverage point. I personally don’t think so.”
Community partnerships have proven crucial as leaders seek ways to bring the city’s world-class expertise into its impoverished neighborhoods while leveraging system resources. Those challenges led to the formation of West Side United, a collaborative between community stakeholders and several big-name local hospital players. Their aim is to close the health gap between the city’s prosperous Loop and the struggling West Side, which has high rates of unemployment and poverty, by 2030.
“We realized that this needed to be addressed separately and could not be done alone,” said Dr. David Ansell, senior vice president for community health equity at Rush. “These conditions are structural, they’ve been pervasive and persistent for almost a century if not longer, and because they’re structural, the solutions are largely structural.”
Sinai Health System CEO Karen Teitelbaum is particularly excited about a new housing project called Ogden Commons located across the street from its campus. The mixed-use development, created in partnership with several other entities, is slated to include 500 units of mixed-income housing and more than 45,000 square feet of retail and commercial space, on land that was long vacant. She said this is one of the biggest investments in the community in decades and touches several needs including employment and housing.
Mergers may help to address some of Chicago providers’ biggest challenges, but she finds such creative partnerships equally effective in moving the disparity needle in the city.
“While there’s something really nice about the systemness of joining together, you can also accomplish the same ends in terms of service and scale with a good partnership,” she said. “There are many different ways to get at the scale issue.” ●