Advocate Health crosses state lines to merge with Aurora

Advocate Health Care unveiled Monday that it plans to merge with Aurora Health Care in a deal that would create the 10th largest not-for-profit system in the country.

Downers Grove, Ill.-based Advocate has turned its focus to Wisconsin's largest healthcare provider after walking away from its merger with NorthShore University HealthSystem earlier this year, which failed after a protracted antitrust review battle. The Advocate-Aurora deal would create a health system with 27 hospitals and $10.7 billion in annual revenue, the organizations said.

The Advocate-Aurora deal would form a cross-state marriage of comparably sized organizations to include more than 3,300 employed physicians, 500 outpatient locations, 70,000 employees and 2.7 million unique patients. The merger would allow the combined organization to cut costs by bundling purchases and expand patient access and improve quality through boosting investment in technology like telehealth, executives said. Terms of the deal were not disclosed.

In March, a U.S. District Court judge reversed his initial support of the Advocate-NorthShore merger that would have resulted in a 60% market share in the North Shore suburbs of Chicago, saying the combination of the two Illinois providers would have been too hard to unwind and "recreate pre-merger competition."

The NorthShore deal influenced what type of partner Advocate would seek, particularly from a geographic standpoint, Advocate CEO Jim Skogsbergh said.

"We clearly learned painfully that the federal government defined markets in a smaller way than we expected," he said. "There was opportunity to grow in markets that are not necessarily contiguous ZIP codes—this clearly addresses that issue."

Both the Advocate and Aurora boards approved the plan, which builds on a 20-year joint ownership and operation of ACL Laboratories.

The board would be split equally between Advocate and Aurora members, with Skogsbergh and Aurora CEO Dr. Nick Turkal serving as co-CEOs. While balance sheets will be consolidated, each will retain their respective brands as well as their current headquarters. The agreement, which is subject to customary state and federal regulatory review and approval, is expected to close by mid-2018.

Both organizations have been pursuing initiatives on population health and how to deliver more value, Turkal said.

"We can do it more effectively together, and from a simple basis we will have a larger population to take care of," he said. "We have a contiguous but not touching geography so we have the ability to fill in care in between and provide care for more people through an effective, high-quality model."

It will also give the combined entity a stronger voice nationally, Turkal added.

Aurora reported excess revenue of $98.3 million in the third quarter, up 18% from $83.3 million in the third quarter last year.

Advocate's excess revenue dropped about 27% to $169.6 million in the third quarter from $231.8 million last year. The health system has been implementing a $200 million cost-cutting plan as rising bad debt and dwindling reimbursement rates have squeezed margins.

"The pressures on healthcare costs are not dissipating over the next 24 months," Skogsbergh said.

If the tax bill that recently cleared the Senate is reconciled with the House version and ultimately passes, its corporate tax cut could free up some merger and acquisition dollars and spur more consolidation. But it would also limit tax-exempt financing for not-for-profit organizations, which almost exclusively rely on tax-exempt bonds to fund capital expenditures and other growth.

Provisions in both bills would also restrict interest payment deductions, add a tax on compensation for high-earning executives, and levy an excise tax on endowments at universities and academic medical centers.

These factors may slow investment and growth of not-for-profit providers, as well as accelerate their cost-cutting plans, industry experts said.