Advocate Aurora Health, Atrium Health to form $27 billion system

Advocate Aurora Health and Atrium Health will form a $27 billion health system spanning seven states, making it the sixth largest health system in the country, the not-for-profit providers said Wednesday.

The combined organization would have 67 hospitals—40 from Atrium and 27 from Advocate Aurora—and nearly 150,000 employees across Illinois, Wisconsin, North Carolina, South Carolina, Georgia and Alabama. The health system will use both the Advocate Aurora and Atrium brands, but transition to Advocate Health for the parent company. Its headquarters will be in Charlotte, North Carolina, with a strong presence in Chicago and Milwaukee, the company said.

The transaction represents the latest attempt to leverage the scale of a multi-state hospital system.

“The challenges we face in healthcare, like the workforce shortage, are large problems that require a large footprint to address,” Jim Skogsbergh, president and CEO of Advocate Aurora Health, said in an interview.

Skogsbergh and Eugene Woods, president and CEO of Charlotte-based Atrium Health, will serve as co-CEOs for the first 18 months of operation, pending the customary regulatory review. Woods would take over after Skogsbergh retires.

Advocate Aurora, based in Downers Grove, Illnois, and Milwaukee, and Atrium would have an equal number of executives on the combined system’s board, which would be led by Atrium Board Chair Edward Brown through 2023.

The combined health system plans to boost investment in data analytics and digital consumer-facing infrastructure, executives said. The organizations pledged to spend $2 billion to address the root causes of health inequities, become carbon neutral by 2030 and create 20,000 jobs.

“We know the war for talent is significant, but as a $27 billion organization with almost 150,000 employees, we believe we can be a national talent magnet for digital health and telehealth,” Woods said. “We will collectively pool our investment resources to advance in that direction.”

Salt Lake City-based Intermountain Healthcare and Broomfield, Colorado-based SCL Health officially formed a $14 billion organization in April that operates 33 hospitals in seven states. Other large not-for-profit hospital systems like CommonSpirit Health, Ascension, Providence and Trinity Health have established national footprints.

“We’re going to see an uptick in this type of transaction,” said Jordan Shields, a partner at Juniper Advisory, noting that HCA Healthcare created the model of building scale locally and nationally. “The new Advocate can have a stronger IT platform while spending less per bed and that can move the needle on patient care.”

Integrating two geographically diverse health systems poses challenges, but even small-scale improvements could accrue tens of millions of dollars to the bottom line, he added.

Health system executives claim that consolidating their administrative workforce in billing, revenue cycle, supply chain and other back-office departments will reduce their overhead. Atrium, for instance, saved $83 million over a three-year period after its 2018 acquisition of Macon, Georgia-based Navicent Health and $147 million in about a year, following its 2020 acquisition of Wake Forest Baptist Health, Woods said.

“Our combination (of Atrium and Advocate Aurora) will have a multiplier effect in efficiencies from combining back-office support and improving revenue cycle, pharmaceutical and supply chain management,” he said.

But those savings can be harder to come by when far-flung organizations combine, research shows.

“Hospitals are doing this for two reasons—to get big and powerful and push others around,” said Lawton Robert Burns, professor of healthcare management at the University of Pennsylvania Wharton School, adding that some CEOs get bonuses when mergers are completed. “They are either leveraging payers or suppliers; you can probably get a few percentage points (in savings). But putting together these deals are costly, so you better have the synergies to make it worthwhile.”

While mergers between competing hospitals typically lead to higher prices, cross-state mergers didn’t produce significant price changes, according to research conducted by academics from Harvard and Columbia universities. Still, hospitals in separate service areas may be able to negotiate higher rates with insurers due to a common customer base—often large employers demanding insurance coverage for their employees in different regions, researchers said.

Hospital consolidation’s impact on quality isn’t conclusive, most studies show.

“Hospitals could get more pricing power if they have some self-contracting employers who occupy multiple markets,” Burns said. “There are opportunities to increase prices, especially if there is any overlap in markets.”

Similar to Intermountain and SCL, Advocate and Atrium executives said their service areas do not overlap. Both organizations are also financially stable.

“This announcement is more evidence that geographic proximity is no longer a necessity when other strategic factors are present,” said Joe Lupica, chairman of Newpoint Healthcare Advisors.

The credit lines of Advocate and Atrium are “AA” and “AA-” rated, and the combination will not likely change the new entity’s profile on the capital markets, Lupica added.

Advocate Aurora reported $593.6 million of operating income on $14.06 billion of revenue in 2021, up from $213 million of operating income on $13.13 billion of revenue in 2020. The health system, which was bolstered by $1.3 billion of investment income in 2021, received more than $821 million in COVID-19 relief grants over the past two years. It had 348 days cash on hand as of Dec. 31.

Atrium reported $328.6 million of operating income on $9.44 billion of operating revenue through the first nine months of its 2021 fiscal year ended Sept. 30, the most recent data available. That was up from a $51.2 million of operating income on $11.16 billion of operating revenue in the prior-year period.

It received $577.3 million in COVID-19 relief grants from 2020 through Sept. 30. Atrium had 308 days cash on hand, as of Sept. 30.

The estimated combined revenue of Advocate and Atrium would trail Kaiser Permanente, HCA Healthcare, CommonSpirit Health, Providence and Ascension.

Advocate Aurora has proposed mergers with health systems outside of its geographic area, including a failed merger with Beaumont Health, since regulators opposed its deal with NorthShore University HealthSystem, which is based in the Chicago suburbs.

Mergers can hinge on transparency, or a lack thereof, said Leslie Solomon, a principal at FMG Leading.

“Organizations need to be clear about the alignments and lack of alignments—that is a hidden but important variable that can make the difference,” she said. “Leaders need to make sure key stakeholders are engaged early and build strategies about how to integrate those differences. It is that space of the unknown that causes the most disruption.”

Atrium is in the process of converting all its facilities to the Epic electronic health record, which Advocate Aurora uses.

Unlike membership-substitution deals, the new entity will be structured under a new parent company and board via a joint operating agreement, similar to Advocate Aurora’s previous mergers. Advocate Health, the new parent, will have the authority over Advocate Aurora and Atrium, except for certain “legacy” operations, according to the merger filing.

Debt will not change hands as part of the transaction, and the organizations plan to combine credit lines where possible, the filing said.

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