Skip to main content

Alexian, Adventist to Create 'JOC' in Chicago

 |  By John Commins  
   June 23, 2014

Described as "neither a merger nor an acquisition," the deal between Alexian Brothers Health System and Adventist Health to form a "joint operating company" is intended to reduce overhead and improve economies of scale as they move toward population health models.

 

Mark A. Frey
President and CEO of Alexian Brothers Health System

Alexian Brothers Health System and Adventist Health System are moving toward a "joint operating company" that that will create an integrated health system in Chicago's northwestern suburbs.

The deal, announced with a letter of intent agreement last week, is expected to be completed by the end of the year. It allows both health systems to keep their religious identities and missions, while integrating operations, reducing overhead, and improving economies of scale as they move toward population health models.

The two health systems say they have signed a letter of intent to move toward the JOC. David L. Crane, president and CEO of Adventist Midwest Health, and Mark A. Frey, president and CEO of Alexian Brothers Health System, were in agreement as they explained the reasons why in a telephone interview with HealthLeaders.

"It is neither a merger nor an acquisition," Frey clarified. "Both of our respective companies will retain our assets and our balance sheets remain intact. Alexian Brothers Health System continues to own and operate its assets and Adventist does the same thing. Our parent corporations will be able to consolidate the earnings. We will share a profit-and-loss statement with our respective organizations. So it is a shared P&L. None the less, both companies will continue to own their assets."

ABHS, part of St. Louis- based Ascension Health, operates five hospitals in the northwestern suburbs. AMH, part of Adventist Health System, operates four hospitals in the area. A definitive agreement between the two systems would have to be cleared by the state of Illinois. Frey and Crane say they anticipate those hurdles to be cleared in the coming months and the deal finalized by the end of the year.

Crane says the JOC came about in response to Chicago's changing healthcare market.

"The truth is that we are both strong organizations but as we looked into the future we recognized that to really be able to do population health well in the accountable care environment we needed scale," Crane says.

 

David L. Crane
President and CEO of
Adventist Midwest Health

Frey describes ABHS as "a little bit undersized" for Chicago.

"That is not to say we are not a large organization. We are. We have a niche position in the northwest suburbs of Chicago. As you look out over the next five or 10 years you are going to need a much broader network."

The JOC will combine nine hospitals and more than 3,000 physicians now affiliated between the two systems.

"It gives us a geographic footprint almost overnight that really enhances our ability to deliver services across a broader part of the geography in Chicago," Frey says.

Allan Baumgarten, a close observer of the shifting landscape for hospitals and health systems across the Midwest, says the JOC is a good fit for both systems.

"The two systems are very similar and compatible - west suburban geography, generally affluent patient base, similar payer mix, with less than 20% Medicaid patients, both part of strong multi-state, religious networks," Baumgarten said in an email exchange.

"The sum of the parts gives them strength against the Advocate hospitals, which is the largest system in the state, and which has two very strong hospitals on the west side, Lutheran General and Good Samaritan. Based on 2011 net patient revenue numbers, the two combined have about 6.8% of the market, which is well below Advocate (15.3%) but put Alexian-Adventist in the top four."

The following is an edited transcript.

HLM: Why a JOC?

Crane: The structure allows two strong organizations to work together and yet be able to preserve their mission and their ownership of assets. Adventist Health Systems has done this very successfully in Denver for the past 20 years in its partnership with Catholic Health Initiatives. We like it because it's a hybrid that allows us to do business together and collaborate without having to give up legacy assets. Both of us have a proud heritage. We didn't want to give up that identity but we wanted to create something with enough scale that we could do what is required of us going forward.

HLM: How does this work with your parent systems?

Frey: Both of our parent organizations consolidate our financials and roll them up into the national organizations. Both of the national parents will continue to roll up the P&L, and consolidate that on the national P&L, just like they do today.

Adventist has their own balance sheet and we have our own balance sheet.
Were we build something together, say theoretically we build three or four ambulatory care centers, then that would probably go on the balance sheet of the new organization's umbrella company.

But we don't have anything on that balance sheet today. That is not to preclude that from happening in the future.

HLM: How will the JOC change the way you do business?

Crane: The biggest advantages for us is that we will be able to do our clinical integration work together. Even though we both have fairly advanced PHOs and we have a large number of affiliated positions this will double our capabilities. As we make these big investments in technology, whether it is a population health registry, risk systems, the ability to stratify and manage risk in this ACO world, this gives us the opportunity to do that together.

The second thing is we both are larger organizations, but we need to continue to work on that cost curve. There are overhead redundancies that we can eliminate. We want to take advantage of that. We don't think the future is more reimbursements. We think the future is less reimbursements.

HLM: Have you identifies redundancies or other areas that you might cut?

Frey: We do have two complete C-suites and we have two complete sets of infrastructure that support our respective organizations. So, when you think about the clinical delivery system at the local level and the work that is being done at the bedside, I don't think there is going to be significant changes there.

Where we are going to see changes and try to take out redundancies and duplication is more at the executive level and more at the infrastructure and administrative levels where we have two departments of everything, marketing communications, legal.

Crane: Neither one of us wants to impact the clinical care at the bedside. We both have benchmark quality standards that we want to maintain. We are looking at those places where we don't impact patient care but where we can achieve more economy.

Management would be one. All of the overhead kinds of services that we could do together, whether that is centralized billing, or revenue cycle or marketing, when you can spread your costs over nine hospitals instead of four or five it makes us more efficient.

HLM: You have nine hospitals in Chicago between the two systems. Will any of them close?

Frey: I do not anticipate that at all. There is appropriate spread of geography in the different markets. These facilities are positioned extremely well in their respective markets.

Crane: All of our hospitals are in situations where we are doing really quite well. Even though the Chicago market in general has excess capacity nobody that I am aware of in our group of nine facilities is in that kind of immediate jeopardy.

It's true that as acute care continues to change that demand curve is going to change too. But for today, the future looks pretty solid for all of our hospital campuses.

HLM: Will there be conflicts over reproductive health services?

Frey: Because Alexian Brothers Health System is a Catholic healthcare organization, part of Ascension, we are bound by the ethical and religious directives. Adventist has not a completely dissimilar approach. They are able to do some things that we are not able to do. That won't change. To the extent that today they may do sterilization procedures or offer contraception, those particular things that they do today won't change in the future.

HLM: Have you JOC'd yourself out of a job?

Frey: I will be the CEO of the new organization. I am not JOC'd out of a job.

Crane: I am happy to serve as long as I can add value. We recognize that at some point in the future there may be economies that would make us less necessary, and I am speaking for myself. That may happen but that is the last thing I am thinking about.

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

Tagged Under:


Get the latest on healthcare leadership in your inbox.