The two midwestern health systems have officially merged to form an $11 billion organization. What's next?
After receiving approvals from state regulators in Illinois and Wisconsin, as well as the Federal Trade Commission, the newly formed Advocate Aurora Health now encompasses $11 billion in combined total revenues while employing over 70,000 people at more than 500 facilities.
In the wake of the deal closing, analysts and industry watchers are discussing what impact the move will have on its immediate service area and its competitors.
Matthew Fisher, JD, a partner at Mirick, O'Connell, DeMallie & Lougee, LLP, told HealthLeaders Media the merger between two regional nonprofit systems in separate markets is an interesting dynamic that is going to be examined in the months and years ahead.
"Arguably, finalizing a deal is actually the easy part," Fisher said. "The integration of two wholly developed systems is going to be the challenge that won't, and shouldn't be expected to, happen overnight. It'll probably be a multiyear process."
S&P projects negative outlook for Advocate
Though the merger will double Advocate's current operating revenues, the S&P report, "Illinois Finance Authority Advocate Healthcare Network: System," gave the system a negative long-term bond outlook citing concerns about taking on Aurora's debt, the competitive Chicagoland marketplace, and its new operational structure with co-CEOs.
Currently, Advocate holds the highest rating, AA+, but according to the report there is still a one-in-three chance it could be downgraded to AA within two years.
Suzie Desai, a healthcare analyst at S&P Global Ratings who authored the report, told HealthLeaders Media that the credit agency is waiting to see if the new partnership can accomplish its goals as a large organization in ways the two providers couldn't pursue individually.
"On the balance sheet side, Advocate would be taking a little bit of a hit as they enter into this," Desai said. "And there's certainly opportunities on the enterprise profile side as they come together as two large providers, but we wanted to make sure that those positives on the operating side are enough to offset the balance sheet deterioration we are likely to see. So that negative is there for that."
The report indicates that Advocate can benefit from a more favorable payer mix in Wisconsin, considering Illinois features a high Medicaid population. Desai said S&P wants to see whether the new system will realize the advantages from diverse revenue sources and a new payer mix.
The long-term success of the post-merger future for Advocate Aurora also depends on how smoothly both companies can integrate their cultures and operations. Desai said they are both "pretty good operators," which should help them but they have to prove that combining the administrative structures of the two systems will mesh well.
Leading the integration process will be Jim Skogsbergh, president and CEO of Advocate, and Nick Turkal, MD, president and CEO of Aurora. However, S&P remains concerned at the prospect of co-CEOs, stating in the report, "we believe that can be a challenging leadership structure as it could hinder decision-making and execution."
Will efficiencies be achieved?
As with any merger, organizations work toward targeted efficiencies, such as the consolidation of administrative services and an increased scale of purchasing power.
Allan Baumgarten, an independent healthcare policy analyst, told HealthLeaders Media that Advocate's decision to adopt the same electronic health record (EHR) system as Aurora is the first of many steps toward achieving gains from the deal.
However, Baumgarten added that EHR changes are not simple changes to make since they typically cost millions of dollars, take months to implement effectively for staff use, and can potentially result in billing errors that lead to lost revenue.
Regional strategy for national dreams?
Health systems in the midwest will likely respond to the merger in the coming months as they now view the $11-billion system as a threat.
Baumgarten said Advocate Aurora will push its competitors, such as Ascension, to pursue new partnerships and consolidation opportunities. For the fiscal year ended June 2017, Ascension recorded $22 billion in operating revenues, running the second largest health system in Wisconsin, and has taken over Presence Health hospitals in Illinois with help of Adventist Healthcare.
Ascension's recent strategy has been to rebrand its purchases under a single brand, including in states outside of its shared market with Advocate Aurora. Baumgarten expects Ascension to look at its assets in the midwest, specifically those in Michigan, and integrate their holdings between states.
Industry experts suggest that if Advocate Aurora is successful in combining its operational and financial efforts, the merger could set the stage for a larger move to expand outside of the midwest as a national player.
Baumgarten cited numerous mergers from last year between health systems that have no geographic overlap, including Catholic Health Initiatives-Dignity Health, Mercy Health-Bon Secours, and Ascension-Providence St. Joseph's. But talks between Ascension and Providence came to a halt last week due to issues regarding plans to restructure and combine the two systems.
Putting health plans on notice
However, this M&A activity has not occurred in a vacuum. The merger will impact regional and national insurers as well.
As part of the Trump administration's aim to control rising consumer costs due to growing consolidation, the Department of Justice blocked two proposed mega-mergers last year, including deals between Cigna and Anthem, as well as Aetna and Humana.
Baumgarten said pressure from consolidating health systems and the government's position on mega-mergers will likely lead to regional plans being "gobbled up" by national insurers.
"I think that this challenge of large national provider systems merging is a challenge to both small and large regional health plans," Baumgarten said. "I think with Priority Health or the Henry Ford Health System in Michigan, national payers are going to go to the larger employer accounts and say, 'You need to have access to these national provider systems, and we're the best vehicle to get the best access at the best price.' "
Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.