Yet, while executives claim that scale is needed to survive amid rising costs and lower reimbursement, running a far-flung organization can offset some of those gains. As a result, some systems are keeping their scope of expansion more regional, unlike the mega-deal announced Dec. 7 that would combine Catholic Health Initiatives with Dignity Health. More systems are discussing how to form regional combos but many talks don't come to fruition, said Ken Marlow, chair of the healthcare department at Waller Lansden Dortch & Davis.
"I anticipate that these will increase the number of regional networks we see, but I think it will require parties to have a lot of (the) hallmarks of successful combinations," he said. Those hallmarks include data to create a better understanding of who their customers are, and awareness of what is needed to be the go-to provider for key service lines.
Downers Grove, Ill.-based Advocate saw its planned merger with nearby NorthShore University HealthSystem squashed over antitrust objections. Scuttling the deal-which would have given the combined entity a 60% market share in Chicago's affluent northern suburbs-influenced what type of partner Advocate would seek next. "We clearly learned painfully that the federal government defined markets in a smaller way than we expected," said Advocate CEO Jim Skogsbergh. "There was opportunity to grow in markets that are not necessarily contiguous ZIP codes; this clearly addresses that issue."
The Advocate-Aurora deal would combine comparably sized organizations to form the 10th-largest not-for-profit hospital system, with more than 3,300 employed physicians, 500 outpatient locations and 70,000 employees.
The board would be split equally between Advocate and Aurora, with Skogsbergh and Aurora CEO Dr. Nick Turkal serving as co-CEOs; each system would retain their respective brands as well as their current headquarters. The agreement is expected to close by mid-2018 pending customary regulatory review and approval.
Advocate and Aurora's operating revenue growth has slowed lately, which could be another driver. Their combined revenue growth over the past two years was 8%, the second-lowest rate out of the top 12 not-for-profit systems, according to Modern Healthcare financial data.
Whether it's a certain service line, a favorable payer mix or additional access points, health systems have targeted particular regions to grow, picking up where national players have struggled to manage costs and realize a return.
• SSM Health, an integrated network of 20 hospitals, has been steadily expanding its Midwest footprint. It plans to acquire two Wisconsin systems from the Congregation of Sisters of St. Agnes.
• Baptist Memorial Health Care and Mississippi Baptist Health Systems completed their merger in May, creating the largest not-for-profit healthcare system in the region with 21 hospitals in Arkansas, Mississippi and Tennessee.
• UPMC, which owns 25 hospitals and a not-for-profit health plan, affiliated with Pinnacle Health.
Revenue degradation paired with rising costs will produce more of these types of regional partnerships, said Rich Bajner, a managing partner at Navigant.
"This circular loop of cutting costs isn't enough to keep up with inflation trends," he said.