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Advocate, NorthShore merger would create giant health system in Illinois

Advocate Health Care, Illinois' largest system, and NorthShore University HealthSystem, the dominant health network in Chicago's northern suburbs, announced today they will merge to form a 16-hospital system to be called Advocate NorthShore Health Partners.

Together, the two non-profit systems generated $7.3 billion in revenues and $361 million in operating income in 2013, according to the Modern Healthcare Financial Database. Presence Health, the 12-hospital network formed in the 2011 merger between Resurrection Health Care and Provena Health, was the second-largest system by revenue in the state with $2.8 billion in total revenue, according to the database.

The merger would be the largest in recent memory in the state. It would be the latest in a flurry of local hospital consolidation, as health systems fight to build geographic reach and financial brawn in an industry beset by increasingly stingy insurers and steeply rising operating expenses. Being bigger helps health systems command more favorable reimbursements rates from payers and lower per-patient costs through economies of scale.

The Chicago area is more fragmented than many major hospital markets, though this deal would make it less so. Advocate NorthShore would become the 16th largest system in the country, based on 2013 system revenue, according to the Modern Healthcare Financial Database.

“In order to improve outcomes and lower cost, we need scale, and to be attractive to payers and employers we need geographic reach,” said Advocate CEO James Skogsbergh, 56, who will serve with NorthShore CEO Mark Neaman, 63, as co-CEOs of the new system. “This certainly fills a hole for Advocate.”


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Neaman has agreed to remain in the position for at least two years following the close of the deal, which is expected in early 2015.

Spread mostly through the northwest and western suburbs with two hospitals in the city, Advocate was formed in 1995 with the merger of Evangelical Health Systems Corporation and Lutheran General HealthSystem. Its 11 adult acute-care centers include Advocate Christ Medical Center in Oak Lawn, Advocate Illinois Masonic Medical Center in Chicago's Lakeview neighborhood and Lutheran General Hospital in Park Ridge. It's most recent acquisition occurred in 2013, when it scooped up Sherman Hospital in Elgin.

NorthShore once was known as Evanston Northwestern Healthcare, but changed its name in 2008 when it ended its teaching affiliation with rival Northwestern Memorial Healthcare in Chicago. Anchored by Evanston Hospital, NorthShore has built its employed physician group into one of the largest in the state, with nearly 900 doctors. That put it behind only the medical groups of Advocate and Northwestern.


Regulatory approvals

The deal must be approved by the Illinois Health Facilities and Review Board, the state body that regulates mergers, acquisitions and changes of ownership in the healthcare industry. The Federal Trade Commission will also scrutinize the union to ensure that it does not run afoul of antitrust laws.

The agency has nicked NorthShore before. After it acquired Highland Park Hospital in 2000, the FTC filed a complaint alleging that the merger allowed the hospital network to improperly raise prices. In 2007, the FTC ruled the merger was anticompetitive and required that Highland Park's contracts with insurers be negotiated separately from those of NorthShore's other hospitals. A separate class action suit related to the Highland Park allegations is ongoing.

Word of the proposed merger comes just days after the Sept. 1 closing of a union between Northwestern Memorial Healthcare in Chicago's Streeterville neighborhood and Winfield-based Cadence Health. Anchored by Northwestern Memorial Hospital in the city and Central DuPage Hospital in the western suburbs, that new four-hospital system is operating under the Northwestern Medicine name and will generate at least $3 billion in annual revenue.

Messrs. Skogsbergh and Neaman said that they have talked periodically in recent years about collaborations, but Neaman approached his counterpart about a merger about six months ago, just after the Northwestern-Cadence deal was announced.

“We're seeing Northwestern with Cadence, Alexian (Brothers Health System) with Adventist (Midwest Health),” Neaman said. “The triggering point was what was happening in the external marketplace.”


More leverage

With its increased scale and reach, the larger system will likely have significantly more leverage in contract negotiations with insurers. At the same time, the deal will put pressure on the dwindling number of independent hospitals to more strongly consider partnering with a larger system.

The Advocate-NorthShore merger potentially will help both systems expand their efforts in managing the treatment of large groups of patients and the value-based payment models sweeping the industry. As both government and commercial payers shift to contracts that reimburse providers for good outcomes rather than high service volumes, hospitals and physicians must coordinate care from the doctor's office to the emergency room to keep patients healthy and eliminate unnecessary services.

Many hospitals systems and physicians are forming accountable care organizations to better manage the health of large patient populations. Such ACOs are paid by private insurers or Medicare under contracts that reward them for the good health of a defined group and penalize them for bad outcomes such as excess hospital readmissions.

The state Medicaid program is also contracting with health systems and doctors in accountable care entities, or ACEs, a form of managed care for members of the state-federal program for the poor in which providers are paid a fixed amount per member per month to cover the costs of care.

The economics of accountable care are such that providers must reduce the per-patient encounter costs. The only way to make up for the loss in revenue is to increase patient volume and keep patients healthier so they don't need expensive hospital care.

“The trick is, how are we going to get paid for that so we can invest in our healthcare organizations,” said Skogsbergh.


Pioneer in health management

Skogsbergh was named Advocate CEO in 2002, after serving as chief operating officer since 2001. Prior to that he was executive vice president of Iowa's largest health system.

Under his watch, Advocate has been a pioneer in population health management, starting a commercial ACO contract with Blue Cross and Blue Shield of Illinois in 2011 that is believed to be the first of its kind. The contract, which covers about 380,000 members in the Chicago area, has shown early signs of reducing utilization and costs.

NorthShore has done little with ACOs, though like Advocate, it is contracting with the state Medicaid program to form an ACE. With its large employed doctor base and advanced information technology infrastructure, it's prepared to take on the risks involved, Neaman said.

For Neaman, the merger would be the last chapter of a 40-year career at the same health system that started when he joined as an administrative trainee. He took over the CEO slot in 1992, building the system through expansion of outpatient services and small acquisitions, careful not to stray too far from its sweet spot on the North Shore, where patients have high incomes and most have private insurance.

"Advocate, NorthShore merger would create giant hospital network" originally appeared on the website of Crain's Chicago Business.


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