Banner merger with UAHN signals academic centers' future

The merger last week of the University of Arizona Health Network and Banner Health highlights the stark challenges academic medical centers face in the new economics of healthcare.

Under public and private reform initiatives, where the goal is to reduce costs, these sprawling downtown hospitals are fast becoming bloated relics of another era.

The Banner deal sparked speculation that other midsize academic medical centers could follow UAHN's path. Indeed, last month, Emory University disclosed it has entered discussions with WellStar Health System to combine their hospitals in the Atlanta area.

“They are being forced to accept a new reality,” said Norman Tabler, a healthcare attorney at law firm Faegre Baker Daniels, Indianapolis. “It's extremely difficult and extremely painful for them.”

The UAHN takeover grew out of discussions not-for-profit Banner had in 2013 with the University of Arizona for Banner to become the primary teaching affiliate for the university's Tucson-based medical schools. But the talks ended with the university asking Banner to consider a broader transaction.

“It's not unusual for academic medical centers to face stresses,” said Ann Hart, president of the University of Arizona. UAHN, built in the 1970s, has “completely out-of-date inpatient and ambulatory facilities,” she said. And it lacks access to capital for upgrades.

UAHN previously operated in the black. But over the past year, expenses in its acute-care and health insurance businesses outpaced gains in revenue. It saw an operating loss of $66 million on revenue of $1.3 billion, or a negative operating margin of 5.1%, compared with the prior year's surplus of $18.6 million on $1.2 billion in revenue.

Under the Banner deal, it will receive a $500 million capital injection over the next five years. Banner also pledged to create a $300 million endowment for clinical research and pay off $146 million in UAHN debt.

In a traditional merger scenario, an academic medical center's inefficiencies actually could be an opportunity. “If I were a CEO of a for-profit system, I would assume that there was a lot of waste and a lot of fat that I could bring out,” Tabler said. “I think Banner could reasonably assume that any academic medical center could operate more efficiently.”

Banner CEO Peter Fine said his system has become efficient at spreading costs over a larger base. “We see with the University of Arizona a fair amount of expense that has to exist in a stand-alone organization but that we can absorb, therefore bringing down the cost per unit of service,” he said.

Banner is one of the largest health systems in the country by revenue, with 25 hospitals in seven states as well as Banner Medical Group. It's a major player in Arizona, where it has 43.5% of the Phoenix market, according to an investor presentation. Dignity Health is a distant second, with 13.9% of the Phoenix market.

After the merger, Banner estimates that 82% of the Arizona population will have access to a Banner facility.

Follow Beth Kutscher on Twitter: @MHbkutscher