Why Advocate Aurora wants a Beaumont doctor — 5,000 of them — and wants them to be happy

Advocate Aurora Health wants a Beaumont doctor. Actually, it wants 5,000 of them. But if the likely strategy it's pursuing is going to work, it also needs them to be happy.

The Illinois-based health system is interested in a merger that allows it to sign value-based agreements with payers, which pay more for quality, or contract directly with employers, as it seeks to wrap up a deal that has caused consternation for physicians and other staffers at the largest health system in Michigan.

Advocate Aurora CEO Jim Skogsbergh told Crain's in an exclusive interview that he is aware of Beaumont's issues with physicians and expects them to be resolved without interfering with the timing of the planned merger, which is currently on hold.

"We've been tracking and talking with (Beaumont CEO) John (Fox) and members of the board," he said. "It's my general impression that a lot of this goes back a ways" before the merger was announced, he said. "Beaumont is a great organization. We are pleased Beaumont is taking this time to address and sort out their local issues."

Aside from adding Southfield-based Beaumont's $5 billion in annual revenue to its balance sheet for economies of scale and scope advantages, Advocate Aurora wants Beaumont's physicians to expand its managed care contracting strategy with payers and employers to Michigan. A look at how it does business in other states offers insight into the deal and why Skogsbergh said Advocate Aurora has developed close working relationships with its doctors, mainly through employment arrangements.

"Our (Advocate Physician Partners medical group) in Illinois has been sort of our secret sauce" to contract with payers, Skogsbergh said. "We've got a number of independent physicians as well. When you get those folks all working together, that's kind of magic. We have some structures in place, at least in Illinois, that have worked pretty well for us. We would certainly want to do the same thing in Detroit."

Advocate Aurora's managed care approach with payers and employers in Illinois and Wisconsin, where it operates 26 hospitals, is also attractive to Fox. Along with a promise to spend $1 billion for capital and equipment in Beaumont, Fox has said Advocate Aurora's managed care contracting experience is partly driving the merger, plans for which were announced in June.

Skogsbergh told Crain's that the nonprofit system has different managed care approaches for Illinois and Wisconsin because of the market dynamics and relationships with payers. He said the system would bring its contracting expertise to Southeast Michigan, although a specific strategy hasn't yet been created.

Experts say Aurora could be seeking to package Beaumont physicians into risk-based, value-based or capitated contracts as it does with Blue Cross in Illinois or Wisconsin. But it all starts with the physicians.

A big plus for Advocate Aurora with Beaumont is its network of physicians. It is very hard to start a new network in a new market, experts say.

Value-based contracts usually include shared saving provisions that offers doctors and hospitals financial incentives for hitting patient quality and health outcomes targets along with reducing unnecessary hospitalizations and diagnostic procedures. Under capitation, hospitals and doctors agree to cover a set of services for monthly per-member, per-month rates.

Both types of contracts are also designed around narrow, health system-owned provider networks where patients must choose a hospital or doctor in the network or pay greater costs to go outside.

Many leading health systems over the past several years have been striving to partner with their doctors and create internal efficiencies to successful contract in alternative payment arrangements with insurers, said Andreas Dirnagle, managing director and head of global health of health care research with New York-based Mitsubishi UFJ Financial Group.

Dirnagle said some health systems have been successful with working with physicians in contracts that pay more for quality, and some have not.

"Physicians want to feel like they are included in that process, that it's not just the guys with the green eyeshades in the back room who are making these decisions," Dirnagle said. "(The disconnect) is physicians are driven by clinical data and payers are driven by financial data. ... You have to take your time when bringing in doctors to these shared risk contracts."

Advocate Aurora has 3,300 employed physicians with another 5,000 private doctors participating in many of the contracts. Beaumont has 1,300 employed physicians and another 3,700 private doctors on its hospital medical staffs.

But Beaumont's physicians are disgruntled over a number of issues, including a new physician compensation plan they say cuts their salaries, lack of support staff and nurses, supplies and equipment. Fox says some doctors' pay will be increased and some decreased, leading to an overall wash, a claim doctors tell Crain's they don't believe.

Employed doctors say the plan is simply to cut their compensation to reduce system expenses, boost system profit margins, prepare for the merger and value-based contracting that will initially result in lower physician base payments for services.

Fox rejects those theories. He said Beaumont's 2018 settlement with the Department of Justice over excessive compensation to induce patient referrals and procedures required Beaumont to rework its employment compensation program.

Last month, two groups of physicians, including eight hospital medical staff presidents and leaders representing private doctors, presented the Beaumont board with a list of grievances and physician and nurses surveys that showed overwhelmingly lack of confidence in management.

Afterward, Beaumont's 16-member board agreed to pause final negotiations with Advocate Aurora until the physicians issues are resolved. Skogsbergh confirmed the pause and said the two systems have halted merger planning.

Advocate Aurora growth plans

At the J.P. Morgan Healthcare conference in January, Skogsbergh outlined Advocate's vision as a "multimarket consolidator" that features the health system reducing costs, improving operations, acquiring hospitals and health plans in multiple markets and developing new "customer facing" products and services.

"Our overall strategy is to make us so good on cost and quality that we are invaluable" to payers and employers," Skogsbergh told Crain's.

By 2025, Skogsbergh said he wants to boost the Downers Grove- and Milwaukee-based chain's revenue to $27 billion from $12.2 billion, slash $1 billion, or 30 percent of costs, and more than triple its patient base from 3.3 million to 10 million.

If approved by the boards later this year as executives hope, the combined 34-hospital Advocate Aurora Beaumont Health system would create a $17 billion revenue company with 4,500 employed doctors and 650 outpatient sites across three states. It would become the nation's seventh-largest not-for-profit health system by revenue, behind Livonia-based Trinity Health.

However, Attorney General Dana Nessel must approve the merger, a process that could take months. Crain's has reported at least one potential problem involving restrictions on the sale of three of Beaumont's Downriver hospitals.

Beaumont's efforts to modernize its managed care approach

Over the past three years, Beaumont has been trying to improve its managed care contracting with payers to keep up with competing systems that have closer relationships with their physicians. Since 2018, Beaumont has signed several limited narrow network contracts with Priority Health and UnitedHealthcare.

But earlier this year, Beaumont declined to participate in a value-based, shared savings contract offered by Blue Cross Blue Shield of Michigan. Some 18 other health care organizations signed the innovative risk-sharing contract, including Henry Ford Health System, Ascension Michigan, Trinity Health Michigan and Michigan Medicine.

In 2018, Henry Ford signed a direct health services contract with General Motors Corp. for its 24,000 salaried employees. The Michigan Blues will be third-party administrator, but will use pricing agreed upon by Henry Ford Health and GM rather than the Blues' fee schedule.

Beaumont and Ascension Michigan were finalists with GM, but sources told Crain's the two systems were not as ready as Henry Ford. GM has said it could expand its direct contracts.

Allan Baumgarten, a health care consultant based in Minneapolis who is familiar with the Illinois, Wisconsin and Michigan markets, said Advocate Aurora's managed care strategy could work in Michigan if they can convince Beaumont doctors to sign up.

"They could do the same value-based contracting" with the Michigan Blues, "but they need buy-in from physicians," Baumgarten said. "They don't exert the same control over doctors as Advocate Aurora does. Bringing in the machinery is one thing, but changing the physicians from a troubled relationship is another thing."

For years, Beaumont has considered purchasing or starting a health insurance company to compete with state rivals such as Henry Ford Health with its Health Alliance Plan and Grand Rapids-based Spectrum Health with its Priority Health.

While Fox has said owning a health plan in Michigan isn't in the cards with Advocate Aurora as a partner, developing complete managed-care products that can be sold to employers or health insurance companies is important.

Fox also has talked about the advantages of Beaumont using Advocate Aurora's customer-friendly technologies, which he calls population health tools.

David Burik, a health care consultant with Guidehouse in Chicago, said population health information technology is a critical element to a modern managed care contract.

"It helps get a more consistent product and is liked better by patients," Burik said. "It is a key part of Advocate Aurora's strategy and could be a key part of the Michigan market. I presume they could work it up very quickly."

Over the past year, Advocate Aurora has been rolling out a free LiveWell app for its Epic electronic medical record system for communicating with doctors, scheduling appointments, accessing medical records and connecting with patients for telemedicine visits.

Importance of effective managed care strategy

Aside from value-based or direct contracts with employers, Baumgarten said it is possible that a larger Advocate Aurora Beaumont system could gain leverage in contract negotiations with payers.

"Size matters, even though these are not contiguous market regions," Baumgarten said. "There are large employers with major sits in Wisconsin, Illinois and Michigan. The combined system can come to Blue Cross and say, here are the rates we get paid in Illinois and Wisconsin and we want something closer to those rates in Michigan."

Several health care consultants told Crain's that the Advocate Aurora Beaumont merger is completed the new system most likely would first adopt the managed care strategy in Michigan that Advocate Aurora has developed with the Illinois Blues.

In Illinois, Advocate Aurora has a two-year partnership with Blue Cross called BlueCare Direct with Advocate with 28,000 members, said Rick Klein, Advocate's chief business development officer. It is a global risk capitated product in a narrow provider network that features Advocate's doctors and hospitals in the Illinois counties of Cook, DuPage, Kane, Lake and Will.

Advocate also has a risk capitated contract called Blue Precision HMO on the Obamacare insurance exchange in Illinois that covers 30,000 lives, Klein said.

"In the Chicago area, Blue Cross Blue Shield of Illinois is the dominant payer. None of the payers in Wisconsin has the same level of market share," Baumgarten said. "If Advocate wants to do more value-based contracting, Blue Cross will agree. The academic medical centers in the Chicago area are probably seen as higher quality than Advocate but are also seen as expensive."

Overall, Advocate Aurora has 1.23 million patients under shared-savings, shared-risk and capitated contracts, primarily in Illinois with 900,000 members and 300,000 in Wisconsin, Klein said.

In Wisconsin, Advocate Aurora has a joint venture partnership with Anthem called the Wisconsin Collaborate Insurance Co. The WCIC Well Priority narrow network plan contracts with 500 employers and individuals in risk-based arrangements with 80,000 total lives, including some of the system's employees and legacy Anthem members, Klein said.

Advocate Aurora also filed papers with the state of Wisconsin to acquire a 15 percent interest in Quartz Health Plan Inc. with the intention of introducing a Medicare Advantage HMO in eastern Wisconsin in 2021. Quartz is also owned by three other health systems.

Wisconsin insurance department filings indicate Advocate Aurora plans to increase its 15 percent equity share in additional investment rounds. Klein declined to comment for competitive reasons.

Skogsbergh told Crain's done of the advantages of operating in multiple states is that Advocate Aurora can test managed care strategies in various markets to see how well they work.

Two sources told Crain's they expect Advocate Aurora's long-term strategy to include joint ventures with payers in Illinois, and possibly in Michigan, or purchasing health plans in those states, citing as one reason the J.P. Morgan conference presentation.

Carrie Espinosa, a benefit broker and employee benefit consultant with Horizon Benefit Services in Illinois, said Advocate Aurora is aggressively moving toward expanding risk-based arrangements where the less the system pays out for care the more profit it retains.

"Advocate is doing a great job doing with value-based care, but their (Medicare) accountable care organization model and value-based (commercial ACO) model with BlueCare Direct are closely aligned," Espinosa said. "You have more control over patient actions and care delivery" in a narrow network.

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