Deal likely to steer clear of FTC pitfall that foiled Advocate's prior merger plans.
Advocate Health Care and Aurora Health Care announced plans Monday for a merger that would create the 10th-largest not-for-profit health system in the country.
The proposed deal would serve as a “50-50 merger” between Chicago-based Advocate and Milwaukee-based Aurora, with no job layoffs expected, the companies said. Should the deal receive regulatory approval, the merged system, which would go by the name Advocate Aurora Health, is projected to have a total operating revenue of about $11 billion and employ 70,000 people across hundreds of facilities in Illinois and Wisconsin, including 27 hospitals.
The announced merger continues a trend among health systems to merge, buy, or sell. Since the Tenet-Vanguard merger in 2013, a $4.3 billion acquisition, large-scale mergers between health systems have become routine to keep pace with an increasingly competitive and consolidated industry.
As health systems and hospitals adjust to the push for value-based care, alternative payments and accountable care organizations, systems with less experience and knowledge have to factor in how they will achieve those goals.
The attraction of corporate consolidation
David Chou, Chief Information and Digital Officer for Children’s Mercy Kansas City, says healthcare organizations are pursuing mega-merger deals in order to maintain relevance. A company used to need $6 billion to compete, a number that has since ballooned to $10 billion, he says.
Companies have pushed toward consolidation also to achieve scale, which can enable cost-reduction and improve financial viability. Chou says healthcare companies ultimately aim to mirror the “classic Kaiser model,” referencing industry giant Kaiser Permanente of Oakland, California. In 2016, Kaiser Permanente’s total operating revenue was $64.6 billion.
Sarah Wilson, a senior analyst with Decision Resources Group, says a specific amount, such as Chou’s $10 billion figure, isn’t always a prerequisite to staying relevant, but she agreed that large-scale mergers have become increasingly common in the healthcare sector. She attributes this to the increasing cost of healthcare delivery despite the push to drive down costs.
Distance makes the heart grow fonder
Ken Field, JD, MBA, who worked for the FTC from 2006 through 2012 and now co-chairs Jones Day’s global healthcare practice, says Advocate’s proposed merger with Aurora is likely to sidestep the controversy that spoiled Advocate’s prior plan to merge with NorthShore University HealthSystem.
Given their respective geographic footprints, Advocate and Aurora appear to be complements to one another, not substitutes, Field says. While Aurora, located 93 miles north of Chicago, does serve some patients in northern Illinois, its primary clientele base hails from Wisconsin.
By contrast, Advocate’s failed NorthShore merger entailed two systems serving some of the same Chicagoland areas. Advocate defended its merger plans successfully at trial, but the decision was overruled on appeal. The prolonged and expensive legal fight ended last March.
The FTC’s acting chair, Maureen K. Ohlhausen, cited the foiled Advocate-NorthShore merger as among her team’s 2017 victories in the fight to protect competition in healthcare markets—a series of victories that mark a shift in the case law affecting the business of healthcare.
“Last year we successfully blocked two major hospital mergers, winning victories in cases involving healthcare systems in the suburbs of Chicago and the Harrisburg area of Pennsylvania,” Ohlhausen said during a speech last month at the American Bar Association’s fall forum, according to her remarks as prepared for delivery. “Together, these two cases moved an important area of the law into a much more settled place and will likely serve both the agency and the public for many years to come. We have already started building on that very sound foundation.”
Field says these two cases affirmed the FTC’s analytical framework for hospital competition as the appropriate interpretation of the law. So now there’s precedent to support the FTC’s model, which could soon prove decisive in a similar case in South Dakota, where the FTC and state attorney general are challenging Sanford Health’s planned acquisition of Mid Dakota Clinic.
Even with the new direction-setting in Washington under President Trump, the FTC’s approach to protecting competition in healthcare is expected to stay the course.
“The only indication so far is that they’re going to continue applying the same model and with the same vigor that we experienced in the last administration,” Field says.
The FTC declined to comment on Advocate’s planned Aurora merger, noting that the commission does not confirm the existence of any investigation.
Dust settling after the announcement
Wilson, the analyst, says effective mega-mergers rely on a significant amount of backend work prior to the announcement. After the plan is unveiled, companies must follow due diligence in meetings with federal and state regulatory authorities to secure approval.
“I think there’s that process of speaking with regulators, going through all of the paperwork and preparing for the actual merger to ensure you have alignment,” Wilson says. “Once you get down to the closing of the deal, [companies] make sure to have their mission, vision and values lined up. It’s a lot of work getting everything ready, speaking with employees and working through best practices.”
The risk of duplication of duties remains at a company with two CEOs, which is an interesting obstacle to face. Chou said he will be interested to see who “calls the shots” after the merger is formalized.
Citing her experience in handling health system mergers and acquisitions, Wilson says “50-50 mergers” are not uncommon. The move to keep two CEOs could be successful since the companies do not compete in the same market, she says.
Another challenge includes how to combine each company’s assets and decide on how to implement practices which provide the best care to patients. Chou advised both companies to focus on fostering a cohesive environment for employees and providing the best care for patients, rather than fixating on the politics of the merger.
Wilson echoed Chou’s sentiments, saying the post-announcement process should be deliberative and ensure employees understand the merger and its effects on the company culture.
HealthLeaders Media editor Steven Porter contributed to this report.
This story was updated to include a response from the FTC.
Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.