Froedtert Health and ThedaCare signed a letter of intent to merge, potentially forming a roughly $5 billion system with 18 hospitals in Wisconsin.
Milwaukee-based Froedtert and Neenah, Wisconsin-based ThedaCare on Tuesday announced the combination, which executives said would improve recruitment and retention efforts, advance research at the Medical College of Wisconsin and expand services.
“We didn’t do this because either one of us needs to find another partner, we did this because we think we found the right partner in terms of alignment,” Froedtert President and CEO Cathy Jacobson said during a news conference.
While operating margins have waned at Froedtert and ThedaCare in recent months, similar to other health systems, both organizations have high credit ratings and recorded annual operating incomes.
Froedtert reported $95.9 million of operating income on $3.35 billion of revenue in its 2022 fiscal year that ended June 30, down from $221.9 million of operating income on $3.11 billion of revenue in 2021.
ThedaCare reported $10.3 million of operating income on $1.19 billion of revenue in its 2022 fiscal year that ended Dec. 31, down from $48.4 million of operating income on $1.16 billion of revenue in 2021, according to its unaudited annual financial statement.
Jacobson would initially assume the role of CEO of the combined entity and retire after a six-month transition period. ThedaCare President and CEO Dr. Imran Andrabi would then become president and CEO.
The deal requires regulatory approval from state and federal agencies. The proposed merger follows several recent health system combinations that include academic medical centers, such as Marietta, Georgia-based Wellstar Health System’s proposed takeover of Augusta University Health System, the proposed merger of Sioux Falls, South Dakota-based Sanford Health and Minneapolis-based Fairview Health Services, and North Carolina-based Advocate Health, which was formed in December after Advocate Aurora Health and Atrium Health combined.
Most recent deals involve organizations with operations in different states, as health system executives try to steer clear of challenges from the Federal Trade Commission. The FTC is often hesitant to challenge cross-market mergers because antitrust law focuses on in-state transactions and minimal legal precedent exists for cross-state combinations. Federal regulators have sued to block in-state hospital combinations, citing research that shows that prices tend to increase after hospitals in the same or adjacent markets combine.
Froedtert, which predominantly serves southeast Wisconsin, and ThedaCare, which mostly operates in northeast and central Wisconsin, do not have any overlapping service areas, Jacobson said. The combined organization would have an 18-member system board, with representatives from both organizations.
The healthcare market around Lake Winnebago known as the Fox Valley is highly competitive, said Brett Norell, a principal at the mergers and acquisition consultancy Newpoint Healthcare Advisors and former CEO of what is now called Froedtert Holy Family Memorial hospital in Manitowoc.
“There is a lot of logic to the partnership in the sense that ThedaCare is one of the last remaining independent systems in the area and patients tend to flow to Milwaukee for higher levels of care versus Madison, which is a little out of the way,” he said. “From a population standpoint, the communities from Appleton to Oshkosh are growing fast.”
It’s unlikely the FTC would challenge the proposed transaction, given how crowded the market is, said Joe Lupica, chairman of Newpoint.
In November, Green Bay-based Gundersen Health System and La Crosse-based Bellin Health completed their merger to form an 11-hospital system. St. Louis-based SSM Health, St. Louis-based Ascension and Charlotte, North Carolina-based Advocate Health also have strong presences in the area, Lupica said.
“It is obvious that Froedtert would like to move north,” he said.
The merger proposal builds off a Froedtert and ThedaCare joint venture launched in October to build two micro-hospitals in Fond du Lac and Oshkosh, which will feature fewer inpatient beds than typical for hospitals and outpatient services. The hospitals are slated to be completed in 2024.
“I think about a partner like the Medical College of Wisconsin and the ability to take the next generations of physicians and providers who potentially come in that pipeline, the research—it just elevates everything to a whole different level,” Andrabi said during the news conference. “To be able to bring them not only to our urban and suburban communities but to our rural communities as well, that is the real magic here.”