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A big shift in Chicago's hospital market: Breaking down the Advocate-NorthShore merger

The merger of Downers Grove-based Advocate Health Care and Evanston-based NorthShore University Health System comes at an interesting time in the Chicago market, and the deal's structure is rather unique as well.

Downers Grove-based Advocate Health Care and Evanston-based NorthShore University Health System unveiled plans to consolidate create a 16-hospital system yesterday. The newly created Advocate NorthShore Health Partners will be the largest in Illinois and the 11th largest nonprofit system in the country.

Both boards voted unanimously this week to approve the deal, which still needs regulatory approval but is expected to close early next year. The merger comes at an interesting time in the Chicago market, and its structure is rather unique as well.

Timing of the deal
The Advocate NorthShore announcement might be Chicago's latest (and biggest) example of healthcare consolidation, but it is part of, rather than the start of, a trend. There's been a wave of activity in the area this past year: Chicago-based Northwestern Memorial HealthCare and Winfield-based Cadence closed their affiliation Sept. 1. In June, Hinsdale-based Adventist Midwest Health and Arlington Heights-based Alexian Brothers Health System, part of St. Louis-based Ascension Health, signed a letter of intent to form a joint operating company.   

Mark Neaman, president and CEO of NorthShore, told Crain's Chicago that news of the Northwestern-Cadence deal put some pep in the systems' step. Mr. Neaman and Advocate President and CEO Jim Skogsbergh periodically discussed collaborations in recent years, but aforementioned activity in the market added urgency to those conversations. "The triggering point was what was happening in the external marketplace," Mr. Neaman told Crain's.

But once the deal is finalized, the co-CEOs (at least for two years, until Mr. Skogsbergh takes over) will head an organization far ahead of its next rival in Chicago's fragmented healthcare market. It would take several transactions to comprise a comparable system, as there is not a single-step move that would rival the new 16-hospital Advocate-NorthShore. There are deals that could come close, however, such as the addition of Chicago-based Presence Health (the largest Catholic system in Chicago) to Ascension, which would expand the Alexian-Adventist JOC by default.

Their respective strengths
Eleven-hospital Advocate and five-hospital NorthShore are powerhouses in the Chicago healthcare market. While they share some similarities, they are also bringing unique strengths to the table.

As the primary teaching hospital for the University of Chicago Pritzker School of Medicine, NorthShore has a robust research base. It also has a large employed physician group — more than 800 physicians and specialists — a strong outpatient presence in a favorable service area, and a healthy balance sheet and payer mix. As of 2013, commercial payers made up roughly 57 percent of net patient revenues, while only 7 percent was self-pay.

Advocate has a nationally recognized clinical integration vehicle. Through its affiliated Advocate Physician Partners, the system has integrated more than 4,000 physicians, 3,000 of whom are independent practitioners. "It is, if not the best, among the best hospital systems in the country as far as working with independent physicians," says Jordan Shields, vice president with Juniper Advisory in Chicago.

Advocate has also positioned itself as a leader in population health management, striking one of the earliest and largest accountable care organizations with Blue Cross Blue Shield in 2010 and removing costs from the system through chronic disease management. Related to population health, Advocate has a broader Chicago- and metropolitan-wide footprint, whereas NorthShore has maintained a strong market position in the northwest suburbs.

It's safe to say the marriage of such strengths will improve the new system's leverage with payers, but Mr. Shields says that doesn't seem to drive the deal. "I think the No. 1 goal of this is not a contracting play, I think it's population management and covering a broader [patient base]," he says. "Better rates are secondary to the logic of the transaction."

The interesting structure of the deal
The technical name for the deal is a "consolidation," which involves some specific terms. "You have two parent organizations — Advocate and NorthShore — and you are dissolving them to create a new company whose board is 50 percent legacy Advocate and 50 percent legacy NorthShore," says Mr. Shields.

Mr. Shields says this is an interesting structure for a few reasons, and one he doesn't see often. "This is not Advocate, which is twice the size of NorthShore, buying NorthShore. You're ripping up Advocate, ripping up NorthShore and creating a new system, while hopefully retaining the strengths of both."

As Mr. Shields said, Advocate is twice the size of NorthShore, yet will represent 50 percent of the new company's board. This sacrifice, so to say, signals how important a relationship with NorthShore is to Advocate. At the same time, this appears to be a good deal for Northshore, as it will now control 50 percent of the state's largest health system. "It's a cashless transaction, and now it is one of the largest systems in the country, not just the metropolitan area," says Mr. Shields.

As for leadership, Mr. Skogsbergh and Mr. Neaman will serve as "co-CEOs." After two years, Mr. Neaman will step down and leave Mr. Skogsbergh as the primary CEO. Eleven leaders from both systems will make up ANHP's executive team.

Although this straightforward "consolidation" structure might not be most prevalent today, it has proved itself as an effective mechanism in past deals. "If you look at successful systems in the country, a lot were formed through consolidation," says Mr. Shields. Those types of mergers — consolidations — tend to be very successful." In fact, Advocate — formed in 1995 — resulted from the consolidation of Evangelical Health Systems and Lutheran General HealthSystem.  

More articles on Chicago health system consolidation:
Advocate, NorthShore merger to create 16-hospital system
Northwestern Memorial HealthCare, Cadence Health finalize merger
Alexian Brothers, Adventist Midwest Health to Affiliate

 

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