Advocate plans to merge with Wisconsin hospital giant Aurora

Dec. 04--Advocate Health Care is ready to give a merger another try -- this time with Wisconsin giant Aurora Health Care, in a proposed deal that would create the 10th largest not-for-profit hospital system in the country.

Under terms of the planned "50-50 merger" announced Monday, neither system would pay the other cash, and the deal could close by the middle of 2018, pending regulatory approval. A combined health system, to be called Advocate Aurora Health, would have 27 hospitals and nearly $11 billion in annual revenue.

No job cuts are expected as a result of the merger, according to Advocate President and CEO Jim Skogsbergh and Aurora President and CEO Nick Turkal, who would serve as co-CEOs.

Advocate's last attempt to merge with a large health system didn't end well. In March, Advocate walked away from a 2 1/2 -year bid to unite with NorthShore University HealthSystem after a federal judge ruled in favor of the Federal Trade Commission, which had challenged the deal. The failed attempt cost Advocate $15 million.

In that case, however, Advocate and NorthShore's hospitals were much closer together geographically, with each having hospitals in Cook and Lake counties. The FTC had argued the combined health systems would have had enough leverage to impose price increases on Illinois insurers.

In this case, Advocate's hospitals are in the Chicago area and central Illinois. Aurora's hospitals are in Wisconsin, though it operates three health centers in northern Illinois. "These markets are very distinct," Skogsbergh said. "This is not a series of ZIP codes in the northern area of Chicago."

Skogsbergh said the merger would allow both systems to improve patient outcomes, lower costs and provide better patient services. "We think ultimately this provides a more stable, more secure future for our organization," he said.

Like many hospital systems in Illinois and across the country, Downers Grove-based Advocate and Aurora, based in Milwaukee, have faced financial challenges in recent months. Hospitals nationwide have grappled with reimbursement rates from federal programs that don't cover the full costs of care, increases in unpaid medical bills known as "bad debt," and reimbursement rates from nongovernmental insurers that no longer offset other costs, among other things. Both systems recorded lower operating income during the first nine months of the this year compared with the same period a year ago, according to unaudited financial statements.

In May, Advocate announced it planned to make $200 million in cuts after missing revenue targets. In the fall, Advocate laid off about 75 of its 37,000 employees as part of those cuts.

But the CEOs of both systems said in an interview that financial issues didn't drive the deal. "I think it would be a mistake to say Aurora or Advocate had a particular (financial) year and that caused them to seek each other out," Skogsbergh said. "This is about a long-term play."

Aurora also recently announced it would increase prices for some services by 4.5 percent in 2018. But Skogsbergh said Chicago-area residents needn't fear the same thing happening here.

"You're not going to see price increases as a result of this transaction," Skogsbergh said. He said that in Illinois, health systems are "price takers not price makers" because of the dominance of insurer Blue Cross and Blue Shield of Illinois. He also said Advocate has a track record of making health care more affordable. Advocate was recently cited by the federal government as saving Medicare the second highest amount of money in the country last year as part of a federal program meant to cut health spending.

A single board of directors, composed of an equal number of members from Advocate and Aurora, would oversee the new system. The two systems already have jointly owned and operated ACL Laboratories, which has a number of locations in Wisconsin and the Chicago area, for about 20 years. Hospitals in the system would keep their current names.

If the marriage goes through, Advocate and Aurora would not be the first hospital systems to grow by crossing state lines.

It's unlikely the Federal Trade Commission would challenge the Advocate-Aurora deal, given their mostly separate geographic footprints, said Lisl Dunlop, a partner at law firm Manatt, Phelps & Phillips who works on antitrust issues.

"When you can't do a deal in your existing market like Advocate ... becoming a bigger regional system is a kind of logical extension, if you're deal-minded and want to be bigger," Dunlop said.

Research has shown that generally, hospital consolidation results in higher prices for insurance companies, and those costs can be passed along to consumers through higher premiums and other payments. Price increases are possible, but not as certain when it comes to mergers between hospital systems in different states, said Amanda Starc, an associate professor at Northwestern University's Kellogg School of Management.

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