‘Where Are The Gains?’: 3 Cost-Reduction Opportunities in Advocate-Aurora Merger

The two systems looking to merge plan to keep all their employees. Where will the savings come in?

Aside from increasing its operating revenue, the proposed mega-merger announced Monday between Advocate Health Care and Aurora Health Care has highlighted potential areas for cost reduction.  

Advocate and Aurora are implementing a “50-50 merger.” They will retain their respective CEOs and forgo layoffs, keeping all 70,000 employees across hundreds of facilities and 27 hospitals. All of this leaves Allan Baumgarten, an independent healthcare policy analyst, with an unanswered question: where is Advocate Aurora going to save money?

“The question is how do they propose to achieve savings if they’re saying, at least right now, that they’re going to maintain the separate brands independently and administrative infrastructure?” Baumgarten says. “Where are the gains to be had?”

In January, the American Hospital Association (AHA) released a study by Charles River Associates entitled “Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis.” The study, which featured interviews with health system executives and an analysis of mergers from 2009 through 2014, found that acquired hospitals provided healthcare that was both high-performing and high-value.

The study affirmed the notion that mergers “decrease costs due to economies of scale, reduced costs of capital and clinical standardization among other efficiencies.” It also showed a 2.5% reduction in annual operating expenses at acquired hospitals, totaling an average $5.8 million per hospital.

Below are three suggestions from the report as to how past mergers have reduced costs.

1. Back office and administrative infrastructure

Baumgarten says both Advocate and Aurora monitor operating revenue and net income figures which will influence staffing decisions to maintain profitability. Despite reassurances to employees, he adds, healthcare jobs are constantly at risk due to the challenging and changing nature of the industry.

Lisa Lesniak, vice president of public affairs for Advocate, tells  HealthLeaders Media both organizations are still working through the details about how the merger will affect their administrative infrastructure plans going forward.

2. What about EHRs and supply chains?

In the AHA study, IT costs are highlighted as a largely fixed cost for system installation and maintenance. However, it remains a significant financial investment the company will have to consider regarding whether to unify their respective electronic health records (EHR) systems.

Implementing a new EHR system can be expensive, often amounting to a multimillion-dollar investment. Greenville Health System in South Carolina, for example, spent $97 million to integrate its EHR system in 2014.

Lesniak says Advocate Aurora will establish an integration team to evaluate opportunities to make the company “more effective and efficient, while leveraging the strengths of both organizations.”

She also pointed to additional opportunities to affect cost-savings through supply chain management. The AHA study says supply chain costs are “particularly substantial” but indicated that large hospitals initiating direct negotiation with suppliers were effective ways to secure a lower price.

3. Standardized clinical processes and quality measures

Lesniak says the biggest opportunity for Advocate Aurora to reduce costs post-merger centered on “the efficient delivery of healthcare—focused on population health.” The approach will rely on evidenced-based practices, reducing variability and improving outcomes, she says.  

“Our combined scale and expertise provides a unique opportunity to achieve efficiencies and advance population health efforts resulting in improved outcomes and lower costs to deliver better value for consumers, communities and employers,” Lesniak said. “One of the exciting transformational opportunities is our shared commitment to enhancing the consumer experience through virtual access.”

Acquired hospitals also experienced improvements in quality through unifying protocols, facility upgrades, and expanding the scope of services for patients, according to the AHA study.

Baumgarten, however, insists the benefits of mergers can also be achieved through contract work and joint ventures with outside providers.

Most of what Advocate proposed during its unsuccessful bid to merge with NorthShore, could have been achieved through a joint venture to ensure the independence of each system while still coordinating certain services together, Baumgarten says.  

Additionally, provider systems are experimenting with several approaches outside of large-scale mergers. These includes delving into clinically integrated networks, forming personal health plans, as well as Medicare ACOs and commercial ACOs.