Advocate, NorthShore merger continues trend toward regional supersystems

The merger between Advocate Health Care and NorthShore University HealthSystem creating a $7 billion academic-suburban behemoth reinforces the growing national trend of large, financially stable hospital systems realigning as regional mega-systems.

Advocate and NorthShore executives say the deal is driven by a fast-changing business and policy environment demanding that they deliver more integrated and efficient care. But it's a trend not everyone believes is for the greater good.

Many experts in the industry say the deal makes sense on paper for Advocate and NorthShore. “In large metropolitan areas across the country, there's a focus on a stronger regional presence,” said Dave Atchison, CEO of Ponder & Co., a financial advisory group that specializes in healthcare. “Chicago has been kind of slow to accomplish that compared to other markets.”

Advocate CEO Jim Skogsbergh and NorthShore CEO Mark Neaman, who will serve as co-CEOs of the new system, said recent consolidation in the Chicago-area market—such as Northwestern Memorial HealthCare and Cadence Health, and Adventist Midwest Health and Alexian Brothers Health System—arises from longstanding local fragmentation.

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. Many of those hospitals and doctors are located throughout the Chicago area's affluent north, west and southwest suburbs. Both systems have strong balance sheets and credit ratings.

But healthcare executives realize financial strength now does not guarantee stability in the short-term future, as payments from federal, state and commercial insurers 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.

Advocate and NorthShore, with this merger, are breaking free of their legacy identities and achieveing that genuine transformation, said James Blake, a managing director at financial consulting firm Kaufman Hall.

This shift in how to care for patients, spurred in part by the healthcare reform law, is a big reason why mergers have proliferated over the past few years, said Jim LeBuhn, an analyst at Fitch Ratings. He argues that the Advocate-NorthShore merger confirms that the 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 extensive provider organizations in suburban Detroit. 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. Advocate and NorthShore also recently created accountable care entities to serve Medicaid beneficiaries in Illinois. Together, the new system will cover about 660,000 people through some type of ACO, Skogsbergh said.

But America's Health Insurance Plans weighed in on the Advocate-NorthShore deal, saying it was time “to revisit serious consequences of anti-competitive hospital consolidation.” BCBS of Illinois declined to comment and said it “will reserve comment for the public regulatory approval process.” 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 might be more vulnerable. Stand-alones like Rush University Medical Center and other organizations 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. “This just adds to the pressure for them to consider the overall structure of the Chicago market.”

Peter Butler, president of Rush, said most organizations now are exploring various options for partnerships.

Edward-Elmhurst, a recently created system based in Naperville, Ill., only 10 miles from Advocate's Downers Grove, Ill., headquarters, said in a written statement that it did not think the Advocate-NorthShore merger would affect its operations.

Sinai Health System, a safety net provider on Chicago's South Side, struck the same tone. “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, particularly combining information technology systems. 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 EHR systems on the ambulatory side. Skogsbergh and Neaman said Advocate will move to Epic for its physicians, and the new system will evaluate whether to convert all of its hospitals to one vendor.

The organizations also have to ensure the deal goes smoothly with their physicians. Advocate NorthShore will have thousands of what it calls clinically integrated physicians. About 2,000 of them will be directly employed through a combined medical group, while the rest will be independent but affiliated.

The executives said they are not ruling out 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 deal 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. Approval from the Federal Trade Commission will be no slam dunk.

David Marx Jr., an antitrust lawyer with McDermott Will & Emery, said he suspects the FTC will approve the deal but not without taking a close look at some issues. 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 FTC scrutiny. 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 insurer contracting rules.

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