The big winner in Advocate, NorthShore breakup? Blue Cross

Now that merger candidates Advocate Health Care and NorthShore University HealthSystem have split just shy of the altar, Blue Cross and Blue Shield of Illinois is playing the role of the relative who breathes a sigh of relief.

The dominant insurer in the state didn't support the merger even when some of its rivals did, including national players UnitedHealthcare and Aetna. Now Chicago-based Blue Cross, which already has a delicate relationship with Advocate, won't have to haggle with a much larger player over reimbursement rates. What's more, a Blue Cross executive who testified in April's trial said that the possibility of Advocate getting an insurance license post-merger posed a "small threat" to the Illinois Blues plans.

A Blue Cross spokeswoman said the insurer continues to work "with healthcare providers to create networks that allow our members access to quality, cost-effective care."

Combined, Advocate and NorthShore would have been the 11th largest nonprofit health system in the nation, a 16-hospital system stretching from north suburban Libertyville to downstate Normal. Federal regulators alleged the giant network would have commanded about 60 percent of hospital services in the northern suburbs.

"(Insurers) don't want organizations to get too big because it limits their ability to really manage a lot of the negotiating," Dan Marino, a Chicago-based executive vice president at consultancy GE Healthcare Camden Group, says of Blue Cross.

Yesterday, Downers Grove-based Advocate and Evanston-based NorthShore ended their years-long fight to merge after a federal judge sided with the Federal Trade Commission. In the nationally watched case, federal regulators argued that a combined Advocate-NorthShore would significantly hike prices and harm consumers.

The CEOs of health systems, meanwhile, said their marriage would do the opposite, contending that the combination would have lowered costs for consumers and boosted quality.

Both Advocate and NorthShore declined interview requests, but in separate statements expressed their disappointment. "The time, cost, and uncertainty of pursing any additional appeals would not be worthwhile," each CEO said in his statement.

And while the merger scuttle gives insurers the upper hand at the bargaining table, there's another potential side effect: a chilling effect on big hospital mergers here and nationwide.

Consolidation will still happen, with large hospital systems picking off smaller ones. In fact, Marino expects the Chicago area to continue to have its share of deals, with just a handful of health systems here at some point.

But the pace at which already big health systems will be able to bulk up (Northwestern Medicine, for example, has been on a buying binge) could be dampened by Advocate and NorthShore's failed attempt.

"It certainly says that mergers of large systems that would create market power above a certain market share will receive significant scrutiny," says Allan Baumgarten, an independent consultant in Minneapolis who studies hospital markets.

Consider this too: the FTC has been on a roll winning cases that target health care consolidation.

Ultimately, the failed marriage is a blow to consumers, says David Johnson, CEO of Chicago health care consultancy 4Sight Health. He believes that an insurance product Advocate-NorthShore planned to forge together would have cut costs. "They weren't doing it just to get bigger in order to have more negotiating power, which is what the FTC would have us believe," he says of the marriage.

Other experts disagree.

"Consumers are the big winner here," says Martin Gaynor, professor of economics and health policy at Carnegie Mellon University and director of the Federal Trade Commission's Bureau of Economics from 2013 to 2014. "We know hospital mergers between close competitors lead to higher costs and higher premiums."

"Chicago is a market where there's still some meaningful competition," he adds. "The court made a decision that preserved that."

"The big winner in Advocate, NorthShore break up? Blue Cross" first appeared in Crain's Chicago Business.