Aurora, Advocate complete merger More leverage
Combined system 10th largest in U.S.
Aurora Health Care and Advocate Health Care Network began operating as one health system Monday under the name Advocate Aurora Health. Now the hard part begins.
The merger of the largest health systems in Wisconsin and Illinois — which officially closed at 12:01 a.m. Sunday — creates the 10th-largest nonprofit health system in the country.
But integrating the two systems will take years.
“There’s going to be a fair amount of heavy lifting,” said Jim Skogsbergh, president and co-chief executive with Nick Turkal of the merged system.
For now, patients will notice few if any changes.
The people who provide care to patients, Turkal said, will be doing the same things today that they did last week.
“We want to be very cautious to move slowly on anything that touches patients,” he said.
The combined systems, which had revenue of $11.6 billion last year, employ more than 70,000 people, including 3,000 physicians, and operate more than 500 sites of care, including 27 hospitals.
Together, they had operating income of $558.8 million and net income, which includes the investment gains on their reserves, of almost $1.3 billion last year.
“This is not a situation where two weak organizations must come together and dramatically make changes,” said Skogsbergh, the former CEO of Advocate. “These are two strong organizations.”
Whether the merger will benefit patients — potentially improving quality and slowing the increase in costs — won’t be known for years, and then only if better information on quality and costs are available.
So far, there is no indication that mergers have slowed the rise in health care spending nationally. Studies have instead found the opposite. Consolidation has given health systems more leverage in negotiating contracts with health insurers and led to higher costs.
“I haven’t seen strong evidence that when hospitals merge they manage to operate more efficiently,” Chapin White, a health economist and senior policy re-
searcher at Rand Corp., said during a briefing last month on competition and consolidation held by the Alliance for Health Policy.
But Skogsbergh said Advocate has a demonstrated track record in slowing the rise in health care costs.
For example, Advocate ranked second in the country in savings out of 432 accountable care organizations participating in a Medicare program in which hospitals and physicians can share in the savings when they provide care at a lower cost while meeting quality measures.
“It’s hard work, and not everybody can pull it off,” Skogsbergh said.
Improving quality and controlling costs are why the two health systems merged, Turkal said.
“This is a different sort of health care merger with a different focus than what people have seen in other markets,” he said.
Turkal repeated what he said when the merger was announced: “Watch us.”
Aurora and Advocate operate in different markets and negotiate primarily with different health insurers, lessening any potential leverage they would gain from the merger. They also both operate in competitive markets.
Chicago, a metropolitan area with 9.5 million people, is very competitive, said Suzie Desai, a credit analyst with S&P Global Ratings.
The merger, though, is certain to bring disruptions.
“There are going to be challenges in integrating these systems, and they know that,” said David Gregory, a principal and health care consulting practice leader at Baker Tilly Virchow Krause.
“This is a different sort of health care merger with a different focus than what people have seen in other markets.” Nick Turkal, co-chief executive
Merger teams
Aurora, based in Milwaukee, and Advocate, based in Downers Grove, Ill., have had 24 teams working on various aspects of the integration.
In the short term, the merged system will focus on patient access, particularly in the fast-growing market of northern Illinois.
“We want to make sure we have the right access points for our patients,” Turkal said.
That can range from range from telehealth and urgent care clinics to outpatient surgical centers.
One immediate challenge will be moving Advocate’s hospitals and clinics to Epic’s system for electronic health records.
That’s the software used by Aurora and will be an important step in integrating the two systems. But it also will costs hundreds of millions of dollars and take three to four years.
Having an organization run by cochief executives — an organizational structure that rarely has worked longterm — will be another challenge.
“To their credit, they know this is not the norm,” Desai of S&P said. “It could be a challenging structure.”
But Turkal said he and Skogsbergh have worked together for several months and gotten to know each other.
“We see the world the same way around what we want to achieve for health care,” Turkal said.
One board
Advocate Aurora Health will have a single board, with an equal number of directors from each system. The two health systems also will continue to use their current names and maintain their current headquarters. Both health systems have strong positions in their markets and strong balance sheets.
Each has seen solid compounded annual revenue growth in the past five years — 5.8% for Advocate and 6.4% for Aurora. And both have profited from the strong stock market: Combined, they had a total of $1 billion in investment income last year.
To varying degrees, the two health systems have different strengths.
Advocate has less debt while Aurora has better profit margins.
Aurora is considered more clinically integrated, while Advocate is further along in negotiating contracts in which it assumes some or all of the risk of providing care to patients for a set amount.
The larger size and scale of the combined health systems will enable Advocate Aurora Health to take on a bit more risk and be a bit more innovative, Desai of S&P said.
Size is particularly important in taking on risk when contracting with health insurers.
Contracts in which health systems are at risk for the cost of providing care — as opposed to being paid for the services they provide — are expected to become more widespread over time.
So far, the move away from so-called fee-for-service to value-based care has taken hold more slowly than expected.
“We are not going to be able to flip the switch and go from fee-for-service to value-based care,” said Gregory of Baker Tilly.
Potential changes in the way hospitals and doctors are paid, though, are cited as one of the reasons for the burst of mergers among health systems.
Last year, 115 transactions among hospitals and health systems were announced, increasing the total over the past five years to 529, according to a report by Kaufman, Hall and Associates a consulting firm.
The trend also has been toward mergers among larger and stronger systems. The revenue of the hospitals and health systems that announced transactions last year was more than double of those that announced transactions in 2016.
“Systems are evaluating where they want to be in five years,” Gregory said.
Advocate Aurora Health also will face the same challenges that all health systems face.
One is the move away from inpatient care as more procedures no longer require an overnight stay in a hospital. New ways of accessing care, such as retail clinics and virtual visits, could mean less revenue. And projected federal budget deficits and an aging population are almost certain to bring further pressures to slow the increase in spending on Medicare.
More than anything else, slowing the rise in health care spending will mean slower growth in revenue overall for health systems and other health-care providers.
The question, said Desai of S&P, is whether the merged systems will be able to execute on their plans.
Both Skogsbergh and Turkal stressed that they plan to be thoughtful, deliberate and get input on decisions as they combine the operations of the two health systems. “We can take our time to do it right,” Skogsbergh said.