Why haven't Northwestern and Centegra merged already?

Two years ago, Northwestern Memorial HealthCare announced its plan to affiliate with Centegra Health System to expand into the far northwest suburbs. Since then, other hospital chains have wrapped up mergers within months. But the Northwestern-Centegra deal still hasn't been finalized.

For now, their merger is still on, representatives of the two systems say. Without getting into the reasons, a Centegra spokeswoman confirms they have extended the deal's deadline, yet again, to next fall.

But if it falls apart, Centegra would have the most to lose. The Crystal Lake-based system, which runs three hospitals, lost money last year and laid off more than 100 employees and outsourced more than 200 jobs to lower costs. It is also facing steep competition from rivals including Advocate Health Care, which cleared its final regulatory hurdle in March to combine with Milwaukee-based Aurora Health Care to form the nation's 10th-largest nonprofit health system, with 27 hospitals.

"Having this drag on for two years is bad for Centegra," says Jordan Shields, a Chicago-based merger specialist at Juniper Advisory, a health care consultancy.

For Northwestern, there may be little downside in holding on to Centegra for so long, or from simply walking away. The hospital network is one of the most affluent in the region, with $4.83 billion in revenue last year, seven hospitals, including its main campus in Chicago's Streeterville neighborhood, and a national reputation for top-quality treatment.

Nationwide, it typically takes about nine months from the time hospitals sign a letter of intent to produce a definitive agreement, says Lisa Phillips, who tracks hospital deals at Irving Levin Associates, a health care research company in Norwalk, Conn. But others have been speedier. Downers Grove-based Advocate and Aurora signed a letter of intent in August, and plan to close their deal on April 1.

Outsiders point to Centegra's financial woes as to why its engagement with Northwestern is lasting so long. Centegra had a $62.3 million operating loss in 2017—much worse than projected—after a $4.3 million profit in 2016. Centegra projects it will end the 2018 fiscal year in June at least $30 million in the red.

Centegra opened a hospital in 2016 at a time when most hospitals were doing the opposite: catering to patients who were looking for cheaper options at outpatient sites, such as doctors offices and immediate care centers. Centegra, like many other medical centers, also is grappling with patients who can't afford to pay their medical bills as their health insurance gets more expensive, leaving the hospital on the hook, while also treating more patients who are covered by low-reimbursing government insurers.

Northwestern is standing by, outside experts surmise, because Centegra has a niche of the suburban market in McHenry County and could refer more patients downtown when they need specialized care.

The hospital network has been methodical in how it pursues deals, waiting to find the right partner while competitors have hustled to pair up as their industry contends with costs that are rising faster than revenue, as well as regulatory turmoil

Besides the Advocate-Aurora deal, UChicago Medicine, an academic hub in Hyde Park on the South Side, absorbed Ingalls Health System in south suburban Harvey. Loyola Medicine, an academic medical center in west suburban Maywood, acquired nearby MacNeal Hospital in Berwyn.

Phil Kaplan, a Chicago-based managing director at Hammond Hanlon Camp, an advisory and investment bank firm focused on health care, says Northwestern is wise to wait. "The worst thing you can do is merge two assets before they're ready to be merged," Kaplan says. He adds that nonprofits tend to be "less cutthroat" than for-profit companies itching to finalize a deal. "It's unlikely that Northwestern could just leave Centegra hanging out there with just complete uncertainty," he says.

Then again: Northwestern has walked away from a prospective partner before. Talks broke down in 2012 with west suburban Elmhurst Memorial Healthcare, which had taken on hefty debt to build a $450 million state-of-the-art hospital. Elmhurst merged with Edward Hospital & Health Services instead.

"Why haven't Northwestern and Centegra merged already?" originally appeared in Crain's Chicago Business.