Northwestern merger puts Cadence's Cleveland Clinic alliance in jeopardy

Though they have agreed to merge into one health system, Northwestern Memorial HealthCare and Cadence Health haven't yet decided on one key issue: the fate of Cadence's highly touted clinical affiliations with Cleveland Clinic.

Cadence inked an agreement with Cleveland's Heart & Vascular Institute in 2010, giving patients at the Winfield, Ill.-based system, at the time known as Central DuPage Hospital, access to some of the country's top cardiac specialists. In 2012, the two systems signed a similar deal for cancer care, the Cleveland's first national affiliation for adult oncology.

The two affiliations have been a cornerstone of Cadence's branding, figuring prominently in television and radio advertisements and in online video clips.

“The affiliation with Cleveland Clinic is extremely important because the more heads you have in the game, the better,” a Cadence lung cancer surgery specialist says in a video posted on YouTube last month.

Yet it's doubtful that the affiliations will continue after Cadence's union with Northwestern closes in the fall, at least in their current form, experts said. With its own highly regarded heart and cancer programs, Northwestern would hardly want an open door for acutely ill patients to leak to an out-of-state rival. Plus, keeping the affiliations intact could amount to an admission of Cleveland's higher status.

“It seems unlikely to me that that relationship (between Cadence and Cleveland) is going to survive,” said Jordan Shields, a vice president at Chicago-based Juniper Advisors LLC, an investment banking firm that specializes in nonprofit health systems. “Northwestern has a justifiable view that they have strong offerings across cardiac surgery and oncology.”

Another reason the combined system, which would operate under the Northwestern Medicine name, might nix the Cleveland affiliations: They don't come free.

Clinical affiliations typically cost the local partner a hefty annual fee just for participation. Once Cadence gains Northwestern's muscular brand, the value of the Cleveland agreement diminishes.

“Why pay the licensing fee if the Northwestern brand is strong enough to give you the same value?” said Elyse Forkosh Cutler, president of Chicago-based Sage Health Strategy.

Cadence and Northwestern in March signed a letter of intent to discuss a merger, which the boards of the two systems approved last week. The union still must be approved by state and federal regulators.

A Cadence spokesman said no decision has been made on the affiliations.

“As you can imagine, there are a lot of layers to combining two health systems,” the spokesman, Christopher King, said in an email. “While the terms have been finalized, there are still ongoing discussions on the future of this combined system, including affiliations.”

A spokesman for Cleveland said it was too early to know what effect the merger will have on the affiliations, which will continue "as-is" for now.

Rather than growing through mergers and acquisitions, internationally known systems like Cleveland and Mayo Clinic in Rochester, Minn., more often build their own satellite locations or sign smaller community-based systems up to affiliations. The arrangements garner Cleveland and Mayo a new revenue stream at little cost and a potential source of patients from outside their home markets. In exchange, community systems like Cadence hope some of their partners' brand equity rubs off.

Cadence's affiliations are not the only clinical affiliations between a Chicago-area health system and a health system with a national brand and presence. In 2012, NorthShore University HealthSystem of Evanston, Ill., signed an agreement with Mayo. If the Cadence-Cleveland agreements go kaput, Cleveland likely will seek another partner in the area, Cutler said.

“There's no way they would step away from the Chicago market,” she said. “It's too big and too close.”

Anchored by 894-bed Northwestern Memorial Hospital and 201-bed Lake Forest Hospital, Northwestern posted $131 million in operating income on $1.71 billion in revenue in the year ended Aug. 31, 2013. Cadence, which was formed in 2011 when 333-bed Central DuPage merged with 159-bed Delnor Hospital in Geneva, posted $123.6 million in operating income on $1.13 billion in total revenue, according to financial statements for the year ended June 30, 2013.

Meanwhile, Cleveland has a main campus in its namesake city, eight community hospitals and dozens of other facilities in northeast Ohio, plus locations in Florida, Nevada, Toronto and Abu Dhabi. It raked in $294 million in operating income on $6.45 billion in revenue in 2013.

"Northwestern merger puts Cadence's Cleveland Clinic alliance in jeopardy" originally appeared on the Crain's Chicago Business website.