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Our Take: Advocate Aurora, Atrium Health plan to combine, creating a $27 billion health system

May 16, 2022

Advocate Aurora Health, based in Milwaukee and Downers Grove, Ill., and Atrium Health, based in Charlotte, N.C., announced Wednesday that they intend to create a joint operating company and combine the two health systems.

The resulting entity would have 67 hospitals and more than 1,000 sites of care in six states. Based on last year’s revenue of $14.1 billion for Advocate Aurora Health and $13 billion for Atrium Health, the combined health system would be the fifth largest in the U.S.

While the parent company is to be known as Advocate Health, the health systems said their hospitals and other facilities would continue to use their existing names. Advocate Aurora Health serves patients in Wisconsin and Illinois, and Atrium Health provides care in North Carolina, South Carolina, Georgia, and Alabama.

The combined entity would have nearly 150,000 employees and 7,600 employed physicians, and leadership has pledged to create more than 20,000 new jobs in the communities the health systems serve.

Leadership has also pledged $2 billion to address health inequities in rural areas and underserved urban areas within the health systems’ current markets and has made a commitment to achieve carbon neutrality by 2030.

The combined organization would serve 5.5 million patients and provide a community benefit of about $5 billion, including charity care and other types of un- and under-compensated care.

Advocate Aurora’s president and CEO, Jim Skogsbergh, and Atrium Health’s president and CEO, Eugene Woods, would serve as co-CEOs for the first 18 months, after which Skogsbergh plans to retire and Woods would then become the sole CEO.

The new board of Advocate Health would comprise an equal number of members from each health system, with Atrium Health’s current chairman, Edward Brown, serving as chair of the new board of directors through 2023. Michele Richardson, who now chairs Advocate Aurora’s board, would then chair Advocate Health’s board for a two-year period.

The current boards of both health systems unanimously approved the planned deal, but it must still undergo the regulatory approval process at both the state and federal levels. The health systems hope to receive the necessary approvals by the end of this year.

If all approvals are granted, then Charlotte will be the headquarters of the combined system, with a “strong organizational presence” to be maintained in Chicago and Milwaukee. That presence includes a planned institute for health equity in Milwaukee.

Our Take: Bringing these two health systems together could be the biggest deal we’ll see this year in the M&A space — though technically this is neither merger nor acquisition, as no assets or debt will be transferred.

Atrium Health has grown considerably since Woods became CEO in 2016. At that time, the health system was known as Carolinas Healthcare System. The organization announced the name change to Atrium Health on February 7, 2018, signaling the possibility of expanding beyond North Carolina and South Carolina.

Sure enough, a day later, Atrium Health revealed its plans to combine with Macon, Ga.-based Navicent Health. That transaction was officially finalized on Jan. 1, 2019.

Then, in April 2019, Atrium Health said it was exploring a partnership with Wake Forest Baptist Health and Wake Forest University to create a new academic health system. Those plans were finalized in October 2020.

Meanwhile, in late 2019, Atrium Health signed a letter of intent to combine with Rome, Ga.-based Floyd Health System. Although the pandemic delayed matters, that transaction was completed in July 2021.

This deal with Advocate Aurora is by far the largest expansion Atrium Health has attempted. If it succeeds, in many regards Atrium Health will double in size, giving it not just a much larger footprint but also considerably more power.

Atrium Health also stands to benefit from Advocate Aurora’s experience in value-based care. Advocate Physician Partners Accountable Care and Aurora Accountable Care Organization were among the earliest participants in the Medicare Shared Savings Program (MSSP), back before Advocate Health Care and Aurora Health Care merged in 2018.

By the MSSP’s third year, Advocate Health Care’s affiliated ACO earned the third-largest total savings of all participants in the program, at $72.6 million. The following year, it ranked second in savings among the program’s 432 participants, at $60.6 million. In 2019, Advocate Aurora Health’s three affiliated ACOs combined generated savings of $85.7 million — the most of any health system in the country. Last year, Advocate Aurora’s ACOs generated $110 million in savings, bringing its total value-based care savings to more than $414 million.

The new Advocate Health entity will have 2.2 million managed lives across 15 accountable care organizations, four clinically integrated networks, and nearly 60 value-based contracts, according to the announcement.

Since Advocate Aurora does not have a medical school, Wake Forest University School of Medicine will serve as Advocate Health’s academic core. Eugene Woods said combining the two health systems would not affect the timeline for building an additional campus of the medical school in Charlotte, which is expected to welcome its first students in 2024.

It will be interesting to see what the regulatory response is to this intended combination of two very large health systems. Typically, when there’s pushback on a proposed merger, it’s out of concern that consolidation will decrease competition in the local market and prices will increase. But in this case there is no geographic overlap between the two health systems.

In many ways, this latest proposed deal is similar to the mega-merger between Catholic Health Initiatives (CHI) and Dignity Health, initiated in late 2016 and completed in early 2019, which created Chicago-based CommonSpirit Health. That transaction involved 142 hospitals and more than 700 care locations in 21 states. There was little geographic overlap between those health systems, other than some of Dignity Health’s acquired urgent care centers being located in states where CHI had hospitals and clinics.

Regulators didn’t interfere with that merger to any great extent. In fact, the primary hurdle was gaining the Vatican’s approval, as 15 of Dignity’s 39 hospitals offered services prohibited by the Catholic Church. Xavier Becerra, then California’s attorney general, imposed conditions pertaining to charity care and access to key emergency and reproductive health services, but the Federal Trade Commission had no objections.

This is a different administration, though, and the White House has made it clear that the FTC and the Department of Justice should more closely scrutinize large mergers.

North Carolina’s state treasurer, Dale Folwell, issued a statement the same day Advocate Aurora and Atrium Health announced their intent to combine. In the statement, he said, “With independent hospital and physician practices increasingly on life support, more mega-mergers are the wrong prescription for the health care industry. Consumers of health care, and the taxpayers who pick up the tab for tax-exempt, multibillion-dollar investment companies disguised as nonprofit hospitals, which are run by multimillionaire executives, ultimately will pay the cost of this ill-advised merger.”

Folwell urged regulatory authorities to “exercise diligent oversight, and conduct a vigorous examination of this merger to stop and reverse the punishment that these health care cartels are having on the citizens of North Carolina.”

Barak Richman, a professor at Duke Law School, also criticized the health systems’ plans to combine. Richman said the proposed deal was “very, very alarming” because such a sizable consolidation could result in higher prices, suppressed wages for nurses and physicians, and more expensive national insurance plans, the Charlotte Observer reported.

Our guess is that North Carolina’s attorney general, Josh Stein, will most likely give the transaction his blessing — for the potentially positive financial impact it could have on the state, if for no other reason — though his office said in a statement that it “will have additional questions and intends to closely watch this deal.”

Stein did say a year ago, in response to Cone Health and Sentara Healthcare’s decision not to pursue their proposed affiliation, that he had “real concerns about this trend,” referring to a recent “wave of hospital consolidations” in North Carolina.

“Bigger doesn’t always mean better,” Stein said. “In fact, it often means worse and more expensive.”

In the Charlotte Observer article, Jim Skogsbergh pushed back against the notion that “big is bad.” He said, “We frankly don’t believe that. We think bad is bad. We think inefficient is bad. We think ineffective is bad. But we think if we do this right, we’re going to get stronger and patients are going to benefit from it.”

We’ll see if the health systems can convince Stein and other regulatory authorities that combining the two is, to borrow Stein’s own words, “in the interest of the patients and communities they serve.”

What else you need to know
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