Advocate Aurora Health and Beaumont Health announced Wednesday the not-for-profit health systems plan to combine to form a $17 billion system with hospitals in Wisconsin, Illinois and Michigan.
The resulting system would have 36 hospitals and employ more than 100,000 people. With about $17 billion in annual revenue, it would be the country’s seventh-largest not-for-profit health system by revenue, behind Livonia, Mich.-based Trinity Health.
Advocate Aurora, headquartered in Milwaukee and Downers Grove, Ill., and Southfield, Mich.-based Beaumont, both have been hit hard by the ongoing COVID-19 pandemic. But the organizations sought to dispel any notion that their letter of intent was prompted by the crisis, noting that their talks began last year.
“Our discussions were paused by COVID-19, but in no way are they caused by COVID-19,” Beaumont CEO John Fox said in virtual news conference Wednesday morning. “This announcement would have come sooner if we had not gone through the pandemic.”
The deal would bring Advocate Aurora, currently the 10th-largest not-for-profit health system by revenue, significantly closer to its goal of doubling its revenue to $27 billion by 2025.
Advocate Aurora and Beaumont said combining would strengthen both organizations. Advocate Aurora CEO Jim Skogsbergh called Beaumont a “like-minded, purpose-driven organization” in a statement, but declined to comment further.
Fox said the deal would allow Beaumont, which has eight hospitals and $5 billion in annual revenue, to make investments in its clinical programs, facilities and technology that it couldn’t do alone. He ticked off increased investment in its research institute and potentially relocating its medical school campus as specific examples.
Advocate Aurora is in a good financial position but is restricted in its ability to make acquisitions of this size, particularly in a competitive market like Chicago, said Ken Marlow, a partner and healthcare industry chair with the law firm Waller. Extending the system’s patient population into Michigan and combining Beaumont’s medical school and Advocate Aurora’s health plan makes this a fully integrated system, he said.
“It really does have a lot of the elements we’ve see in these megamergers where they’re looking for a more fully integrated system that can provide healthcare across the continuum of care,” Marlow said.
The systems said they have notified attorneys general in each of the three states about the potential deal, which they hope to close this year.
On its face, the deal appears relatively safe from an antitrust perspective, said Peter Mucchetti, a partner with Clifford Chance and the former chief of the Justice Department’s healthcare and consumer products section. The traditional horizontal overlap challenge, which argues that the systems are trying to serve the same set of patients, would be difficult because Advocate Aurora and Beaumont facilities are so far apart.
In the Federal Trade Commission’s challenge of the would-be merger between Advocate Health and NorthShore University HealthSystem, the agency focused on the geographic area between Chicago and the Wisconsin border, Mucchetti noted.
“It’s worth noting that Beaumont’s Detroit-area hospitals are far outside that market,” he said.
Kevin Hahm, a partner in Hunton Andrews Kurth’s antitrust group and former assistant director of an FTC mergers division, agreed that if the FTC were to challenge this case from a cross-market perspective, it would require them to define a very broad market “which could really undercut all the hard work they’ve done over the past 10 to 15 years.”
Hahm, who was involved in the FTC’s Advocate-NorthShore challenge, said in that case and others like it, the agency successfully convinced the courts that hospital competition is local in nature.
“At the end of the day, I would be surprised if the FTC ultimately challenged it,” he said, referring to the Advocate Aurora-Beaumont deal.
If there is a challenge, Marlow said he thinks it may come from the state attorneys general, who have been active in recent years and may work together in reviewing the deal.
Both Advocate Aurora and Beaumont have said they’re under stress because COVID-19 has forced them to cancel profitable procedures to make way for coronavirus patients.
Beaumont’s Fox in March predicted the system could lose up to $2 billion of its $5 billion in annual revenue to COVID-19, which he said “in no way” could be absorbed by its 4% operating margin and cash reserves.
Advocate Aurora posted a $85.7 million operating loss in the first quarter of 2020, which ended March 31, a 2.7% loss margin. That doesn’t include the brunt of COVID-19’s impact, since the health system didn’t start canceling elective procedures until two weeks before the quarter ended.
News of the potential deal comes just a few weeks after Beaumont called off its acquisition of Akron, Ohio-based Summa Health. Fox said that decision had nothing to do with Advocate Aurora, saying it was because of a disagreement over contract changes Beaumont wanted, but Summa didn’t agree to.
Fox said Beaumont would retain its own CEO, leadership team and headquarters. Advocate Aurora, by contrast, has a single executive leadership team with one CEO and operations leaders in both states, spokesman Adam Mesirow wrote in an email. The resulting health system’s board would be made up of one-third Beaumont representatives, one-third from Advocate and one-third from Aurora.
“As for future leadership structure, we are at the early stages of our discussions,” Mesirow said.
The reaction from health insurers, especially the Blues plans that operate in the three states, to the potential deal will be important, as they’re key players in the markets that the health systems serve, said Rick Zall, a partner at Proskauer and chair of its healthcare industry practice.
“Because they’re in different markets, it’s certainly a more viable proposal, I would think, than if they were competitors in similar markets,” he said.