Advocate CEO Jim Skogsbergh and NorthShore CEO Mark Neaman, who will serve as co-CEOs of the new system, agree that recent consolidation in the market—such as Northwestern Memorial HealthCare and Cadence Health, and Adventist Midwest Health and Alexian Brothers Health System—mirrors a healthcare community in and around Chicago that has been fragmented.
“I just think it's reflective of the external environment we're seeing in the greater Chicago region,” Neaman said.
The renamed Advocate NorthShore Health Partners will have 15 acute-care hospital campuses, a children's hospital and one of the area's largest groups of employed and affiliated physicians—with many of them located throughout Chicagoland's affluent north, west and southwest suburbs. Both systems are also sufficiently profitable and have strong balance sheets and credit ratings.
But healthcare executives realize financial strength now does not guarantee stability in the short-term future, as reimbursements from federal, state and commercial payers have mostly stagnated or declined. Providers have shifted their focus away from treating as many patients as possible and toward population health and value-based payments—buzz phrases that refer to coordinating care for an entire group of people, and receiving payment based on the quality of that care.
This shift in how to care for patients, spurred in part by the healthcare reform law, is a big reason why hospital and health-system mergers have proliferated over the past few years, said Jim LeBuhn, an analyst at Fitch Ratings. He believes the Advocate-NorthShore merger confirms that the feverish pace of health system consolidation is likely to pick up even more, especially in other major metro areas.
For some regions, it already has. Beaumont Health completed its three-system merger this month, creating one of the most expansive provider organizations throughout Detroit's suburbs. In Dallas last year, Baylor Health Care System and Scott & White Healthcare combined to form the largest not-for-profit system in Texas. And in New York City, Mount Sinai Medical Center and Continuum Health Partners consummated a deal that created Mount Sinai Health System, one of the largest private health systems in the area.
In each of those mergers, and now with Advocate NorthShore, population health has been cited as a major factor. Advocate has aggressively pursued this strategy in the past three years in the form of accountable care organizations and clinically integrated physician groups. Advocate has a Medicare Shared Savings Program ACO as well as an ACO contract with Blue Cross and Blue Shield of Illinois, the state's dominant commercial insurer. Advocate and NorthShore also recently created accountable care entities with the state of Illinois. ACEs are essentially ACOs for low-income Medicaid patients. Together, the new system will cover about 660,000 people through some type of ACO, Skogsbergh said.
But not everyone has viewed such mergers in a favorable light. Health insurers argue the growing number of mega systems squashes competition and raises prices. America's Health Insurance Plans weighed in on the Advocate-NorthShore deal, saying it was time “to revisit serious consequences of anticompetitive hospital consolidation.” BCBS of Illinois declined to comment and said it “will reserve comment for the public regulatory approval process.” However, Skogsbergh and Neaman said they believe the merger will make the system “attractive to payers” and will force it to be more competitive on pricing.
Many of the Chicago market's other players look a lot lonelier in light of the news. Rush University Medical Center and large, standalone suburban entities such as Centegra Health System and Edward-Elmhurst Healthcare may have to “reconsider their position,” said James Burgdorfer, a principal at Juniper Advisory, a healthcare M&A group. “They are in complicated positions. This just adds to the pressure for them to consider the overall structure of the Chicago market.”
Peter Butler, president and chief operating officer of Rush, said most organizations now are at least exploring various options for partnerships, and they “work best” when they are focused on the interests of their respective communities. “Both Advocate and NorthShore are fine organizations that I'm sure have this in mind as they begin this new relationship,” Butler said.
Edward-Elmhurst, a recently created system based in Naperville, Ill., a mere 10 miles from Advocate's Downers Grove, Ill., headquarters, said in a statement that the news is “evidence that we are in unprecedented times in healthcare because of the demands and opportunities of healthcare reform.” But the system said it didn't believe the Advocate-NorthShore merger would affect its operations.
Sinai Health System, a safety net provider on Chicago's South Side, struck the same tone. “While this additional consolidation of health systems reduces further the number of independent health systems in Chicago, we do not anticipate it directly impacting Sinai or the communities we serve,” Sinai CEO Karen Teitelbaum said.
Advocate and NorthShore still face several hurdles in completing their deal. Combining information technology systems is a big one.
NorthShore uses an electronic health-record system from Epic Systems Corp. for its inpatient and outpatient settings. Advocate uses a Cerner Corp. EHR for its hospitals and several systems on the ambulatory side. However, Skogsbergh and Neaman said Advocate will move to Epic for its physicians, and they are going to evaluate whether they should convert all of their hospitals to one vendor.
The organizations also have to ensure the deal goes smoothly with its clinical base. Advocate NorthShore will have 6,000 of what it calls clinically integrated physicians. About 2,000 of them will be directly employed through a combined medical group, while the remaining will be independent but affiliated.
“We'd like to think we're going to have the best of both worlds,” Skogsbergh said of the physician base.
The executives said they are also not ruling out the notion that other providers may want to join the system, though no immediate plans have been made. “Future growth is certainly a part of our program,” Skogsbergh said.
The transaction is expected to close early next year pending approval from the Federal Trade Commission, state officials and the United Church of Christ, which is Advocate's religious sponsor. And approval from the FTC will be no slam dunk.
David Marx Jr., an antitrust lawyer with McDermott Will & Emery, said although he suspects the government may approve the deal, some aspects may raise an eyebrow. For example, he said the FTC may focus on NorthShore's Evanston Hospital and Advocate Lutheran General Hospital. The two tertiary hospitals are 10 miles from each other and could give the system a big hold on specialty care. “That could raise some competitive concerns,” Marx said.
NorthShore is no stranger to the FTC's review. In 2007, after NorthShore acquired Highland Park (Ill.) Hospital, the FTC ruled the system violated antitrust law. But it allowed NorthShore to keep the hospital as long as it abided by strict payer contracting rules.
Follow Bob Herman on Twitter: @MHbherman
