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Doc-group acquisition boosts Northwestern Memorial's revenue


By Rachel Landen
Posted: April 18, 2014 - 12:30 pm ET
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Northwestern Memorial HealthCare reported stronger revenue for its second quarter thanks in large part to its acquisition of a large physician practice group from Northwestern University.

Helped along by an influx of $395.4 million in revenue from the physician group, the Chicago-based system booked a consolidated $1.2 billion in revenue for the six-month period ended Feb. 28, 2014. The boost in overall revenue represents a 42% increase from the $849.8 million posted for the year-ago period.

That improvement was a direct result of the integration of the 900-plus physician group renamed Northwestern Medical Group, particularly because revenue from the system's other operations remained relatively flat. Northwestern Memorial Hospital, the system's downtown flagship, and suburban Northwestern Lake Forest (Ill.) Hospital reported revenue increases of 1.4% and 2.3%, respectively.

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Overall, the system reported an operating surplus of $95.5 million on the $1.2 billion in total revenue, representing a margin of 7.9%, which is down one percentage point from its operating margin in the year-ago period.

The system as a whole also saw outpatient registrations, other than those in the emergency room, rise 1.8% to 380,108 for the six-month period, up from 373,373 in the year-ago period. Meawhile, both inpatient and outpatient emergency room visits were down, with inpatient ER visits dropping 7.2% from 11,571 to 10,736, and outpatient ER visits declining 5.1% from 55,007 to 52,181.

Inpatient surgeries rose 8.4%, or from 6,783 to 7,356, as outpatient surgeries essentially stayed flat, going from 13,735 to 13,782.

But the long-standing operations of Northwestern Memorial's two hospitals accounted for most of the impact to the system's bottom line, moreso than the addition of Northwestern Medical Group, which operated with a margin of only 1.8%. The 885-bed academic teaching facility had an 11.5% margin, and the 188-bed suburban hospital had a margin of 6%. That, according to experts, shouldn't come as a surprise.

When Moody's Investors Service released its 2014 outlook for the not-for-profit hospital sector last November, Moody's Analyst and Assistant Vice President Daniel Steingart warned of weakening business conditions and contracting margins as hospitals adapt to changes resulting from the Patient Protection and Affordable Care Act. Specifically, Steingart and Moody's pointed to the expansion of physician practices, which they said “generally operate at a loss, but are seen as important for drawing referrals.”

“As the ACA takes hold and we're starting to see an emergence of narrow networks, I think many organizations are anxious about being left out of those networks and are trying to expand their range and scope and ensure they have a steady supply of referrals,” said Dr. Mitch Morris, leader of the national provider practice at Deloitte Consulting. “It's true of all hospitals, but I think with academic health centers and their reliance on tertiary care, they can feel particularly threatened.”

In its most recent financial statement, the not-for-profit system explained its affiliation with the academic faculty practice group as a move that “positions Northwestern Memorial for expected market changes, including national healthcare reform, by providing the platform for improving the patient experience through improved quality across care settings and enhanced care coordination.”

Since acquiring the group Sept. 1, Northwestern Memorial has paid the university $170.1 million, still owes another $12.0 million and is contractually obligated to provide at least $39.5 million in annual research and educational funding through 2016. So far, for the first half of its fiscal year, Northwestern Memorial has provided the university $21.7 million in funding.

As much as finances factor into a health system's operations and strategies, spending significant dollars to acquire practices with slim margins might seem counterintuitive. But it's a tale being played out all across the country as hospitals, health systems and health plans buy up physician groups.

“It's part of a sustained national trend as health systems look to drive volume and revenues to the system,” said Dr. Phillip Polakoff, senior managing director and chief medical executive in FTI Consulting's health solutions practice.

It's also seen as a way for physicians to buffer themselves against declining outpatient revenues, Polakoff said. And it's not a new phenomenon.

“Clinical integration was actually formulated and passed legislatively in 1996 by the Federal Trade Commission and the Department of Justice,” Polakoff said. “It's the ability for physicians, both independent and employed, to forge a partnership with another entity to enhance quality of care and reduce costs so patients are in a better position.”

Part of that involves building the infrastructure needed for population health management, Morris said.

In recent years, high-profile deals from UnitedHealth Group and Humana have drawn attention to this goal. And in the past five years, systems such as Bon Secours Health System, Marriottsville, Md., have gone on a buying binge. As of Aug. 31, 2009, Bon Secours employed 467 physicians. Four and a half years later, the system employs 761 physicians and advanced practice clinicians.

“I think we're going to continue to see consolidation and convergence in our industry,” Morris, said. “The hope is that we'll be able to drive unit costs down, preserve margins and be competitive with accountable care, and I don't see any of those things going away anytime soon.”

In March, Northwestern Memorial signed a non-binding letter of intent for a potential affiliation with Cadence Health, a two-hospital system based in Winfield, Ill. Discussions are still underway.

Follow Rachel Landen on Twitter: @MHrlanden


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