Their apparent success in blocking Advocate could fuel similar opposition to future acquisitions by doctors, communities, and elected officials unwilling to add their local hospitals to a large, nongovernmental chain. The setback also raises new questions about how and where the $ 12 billion Downers Grove-based hospital system can achieve the growth it is looking for.
The pool of potential acquisition targets in the upper Midwest is shrinking. Chains in Advocate’s strongholds of Chicago and Milwaukee are likely down due to antitrust concerns, and many others are being picked up by major academic medical centers.
A Beaumont contract with eight hospitals would have earned Advocate an additional $ 5 billion in revenue and brought the system closer to its goal of growing sales to $ 27 billion by 2025. Advocate would also have hired nearly 5,000 physicians in Michigan in order to quickly expand its value-driven contract strategy to another state. Such arrangements are attractive to health insurers and employers who want to cut costs by containing unnecessary care.
Without Beaumont, Advocate could be looking for a number of smaller deals, but a few doctors here and there – or even a few standalone hospitals – likely won’t deliver the growth spurt CEO Jim Skogsbergh wants.
“It has to be a big system or two,” says Tim Classen, associate professor of economics at the Quinlan School of Business at Loyola University in Chicago.
A system like Indiana University Health would be a logical next step and would significantly increase Advocate’s revenue, Classen says. The 16-hospital system has four physician networks, one health insurance company and $ 6.7 billion in revenue. The partnership with the Indiana University School of Medicine would also be attractive to Advocate, which here competes with academic medical centers such as Northwestern Medicine and University of Chicago Medicine. “IU Health has a long-standing commitment and mission to serving Indiana’s health needs as an independent not-for-profit health system, and we have no plans to change that,” said an IU Health spokesperson.
Skogsbergh unveiled his vision of Advocate as a “Multimarket Consolidator” at an industry conference in January, more than two months before the COVID-19 pandemic hit hospital revenues. Patient volumes declined across the country as lucrative non-emergency surgeries were postponed, and operating costs rose as hospitals offered much-needed personal protective equipment and paid extra staff and overtime to cope with the influx of COVID patients.
Advocate posted an operating loss of $ 302.7 million for the first half of the year, compared to operating income of $ 245.1 million for the same period last year. Sales fell 3 percent to $ 6 billion.
“The value of the scale”
Despite the financial challenges, Skogsbergh has stated that Advocate’s size is helping it withstand the pandemic better than some other hospital chains.
“We’re big advocates of scale,” Skogsbergh told Modern Healthcare in August. “It’s not big for size, it’s really getting stronger. And that strength can then be translated into what we say is better health outcomes and less cost.”
Even if patient volumes recover, the pandemic will continue to weigh on hospital finances and is expected to lead to more dealmaking. The average seller size by annual sales remains high at just under $ 400 million in the third quarter, when 19 transactions were announced. This emerges from Kaufman Hall’s latest M&A activity report.
Skogsbergh said Advocate could expand in other parts of the country to jump from 10th place to second place among the largest nonprofit healthcare systems in the country by revenue.
“In today’s virtual landscape, the geographic location and size of a potential partner are far less important than” shared values like a commitment to safety, health outcomes and the affordability of health care through value-based care, “said Brigid Sweeney, spokeswoman for Advocate Aurora E-mail.
There is little evidence that consolidation improves the quality of care. In fact, a recent study by Harvard University scientists found that hospital fusions were associated with a slight decrease in patient experience scores and no change in readmission or death rates.
Large multi-state mergers provide hospital chains with much-needed diversification, such as a mix of urban and rural hospitals or a broader network that leads patients to large specialty facilities, says Jennifer Perry, managing director of consulting firm FMG Leading.
“Post-COVID in particular, many systems are finding that you can weather some of these storms more effectively if you have a larger size and some diversification,” Perry says.
Advocate will likely work to expand its network of doctors and gain more bargaining power with insurers. In the Midwest, 55 percent of doctors already work for hospitals, according to a report from consulting firm Avalere Health and the Physicians Advocacy Institute.
“The slow and steady path” of devouring medical offices while gaining more pricing power will help drive revenue, says Anthony LoSasso, a professor at DePaul University who specializes in health economics.
The size also offers the possibility of cutting insurers out of the mix and concluding more lucrative direct contracts with employers. Advocate’s focus on riskier value-based arrangements where doctors are compensated for patient health has likely turned off some Beaumont doctors.
“Not all doctors will like this type of model,” says Classen. “Finding more doctors or a large group who would tolerate such risk-based contracts in the model used would be a key feature of their next expansion target.”