‘Where Are The Gains?’: 3 Cost-Reduction Opportunities in Advocate-Aurora Merger

Jack O'Brien, December 6, 2017

The two systems looking to merge plan to keep all their employees. Where will the savings come in?

Aside from increasing its operating revenue, the proposed mega-merger announced Monday between Advocate Health Care and Aurora Health Care has highlighted potential areas for cost reduction.  

Advocate and Aurora are implementing a “50-50 merger.” They will retain their respective CEOs and forgo layoffs, keeping all 70,000 employees across hundreds of facilities and 27 hospitals. All of this leaves Allan Baumgarten, an independent healthcare policy analyst, with an unanswered question: where is Advocate Aurora going to save money?

“The question is how do they propose to achieve savings if they’re saying, at least right now, that they’re going to maintain the separate brands independently and administrative infrastructure?” Baumgarten says. “Where are the gains to be had?”

In January, the American Hospital Association (AHA) released a study by Charles River Associates entitled “Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis.” The study, which featured interviews with health system executives and an analysis of mergers from 2009 through 2014, found that acquired hospitals provided healthcare that was both high-performing and high-value.

The study affirmed the notion that mergers “decrease costs due to economies of scale, reduced costs of capital and clinical standardization among other efficiencies.” It also showed a 2.5% reduction in annual operating expenses at acquired hospitals, totaling an average $5.8 million per hospital.

Below are three suggestions from the report as to how past mergers have reduced costs.

1. Back office and administrative infrastructure

Baumgarten says both Advocate and Aurora monitor operating revenue and net income figures which will influence staffing decisions to maintain profitability. Despite reassurances to employees, he adds, healthcare jobs are constantly at risk due to the challenging and changing nature of the industry.

Lisa Lesniak, vice president of public affairs for Advocate, tells  HealthLeaders Media both organizations are still working through the details about how the merger will affect their administrative infrastructure plans going forward.

2. What about EHRs and supply chains?

In the AHA study, IT costs are highlighted as a largely fixed cost for system installation and maintenance. However, it remains a significant financial investment the company will have to consider regarding whether to unify their respective electronic health records (EHR) systems.

Implementing a new EHR system can be expensive, often amounting to a multimillion-dollar investment. Greenville Health System in South Carolina, for example, spent $97 million to integrate its EHR system in 2014.

Jack O'Brien

Jack O'Brien is an associate editor at HealthLeaders Media. 

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