Atrium Health-Advocate Aurora Health merger could spur other hospital deals

Atrium Health and Advocate Aurora Health are planning to merge and create one of America’s largest nonprofit healthcare systems, and it could be a precursor to other deals.

Even though there have been few mergers so far in 2022, analysts have said they expect more deals to happen. Experts say the spike of COVID-19 cases at the beginning of the year had an impact, as hospital executives had little time for deal-making.

Kenneth Kaufman, managing director and chairman of the Kaufman Hall consulting firm, is one of those who expects to see more mergers and acquisitions. Kaufman Hall is advising Atrium Health and Advocate Aurora Health in their plans to merge.

“I’d be really surprised if this is a one-and-done deal. I think we’ll see a handful of these other transactions,” Kaufman told Chief Healthcare Executive.

Some organizations feel “stymied” and don’t perceive themselves to be at “their best fighting weight,” he said.

“Some will say there’s a lot to be interested in and create the same kind of relationship,” Kaufman said.

Atrium Health and Advocate Aurora Health announced last week they intend to join forces and form an organization with $27 billion in annual revenue.

Eugene Woods, president and CEO of Atrium Health

Assuming federal regulators approve the deal, the new health system would operate 67 hospitals and 1,000 ambulatory sites in six states. The new system would employ nearly 150,000 workers and serve 5.5 million patients. The merged organization will be known as Advocate Health but the existing brands would remain in their local markets.

The new Advocate Health would become America’s fifth largest healthcare system, Atrium Health President and CEO Eugene Woods told The Charlotte Observer in an interview last week.

The two organizations don’t currently compete in the same geographic markets, which could alleviate some concerns from regulators in weighing the deal. Atrium, based in Charlotte, N.C., runs hospitals and care sites in North Carolina, South Carolina, Georgia and Alabama. Advocate Aurora, with corporate offices in Downers Grove, Ill. and Milwaukee, Wisc., operates in Illinois and Wisconsin.

Woods and Jim Skogsbergh, president and CEO of Advocate Aurora, said the new system aims to expand access to vulnerable communities in urban and rural areas and provide top-notch care at lower costs. The system plans to invest $5 billion to address health equity and other community needs, the CEOs said in a video announcing the deal.

Woods said the merger will produce “one nationally leading system.” (The story continues after the video.)

‘A strong social justice agenda’

Critics of hospital mergers say they tend to drive up healthcare costs for patients.

In an executive order last year, President Biden directed his administration to apply close scrutiny to mergers and acquisitions, including those involving healthcare and hospitals, to ensure competition and guard against higher costs for consumers.

North Carolina State Treasurer Dale Folwell said last week the Atrium-Advocate Aurora merger “raises many red flags.” Folwell urged the Federal Trade Commission, the U.S. Department of Justice and state officials to closely examine what he described as an “ill-advised merger.”

“North Carolina, already home to one of the country’s top five metropolitan markets with the highest level of health care concentration, is no stranger to the ill effects of consolidation,” Folwell said in a statement. “Research consistently shows mergers and acquisitions do not deliver on hospital executives’ promises, but instead trigger higher costs, reduced access and the same or lower level of care.”

Atrium Health and Advocate Aurora Health have experience with mergers and acquisitions and are well prepared for the regulatory review, Kaufman said.

The leaders of the systems also are very focused on eliminating disparities in healthcare in underserved populations, Kaufman said. He noted that wasn’t a cosmetic element in the announcement of the deal but a founding principle in the partnership.

“These issues were front and center right from the beginning,” Kaufman said.

“Jim and Gene have really set a strong social justice agenda for the new organization. I think that's really important,” he said. “They stated in their documentation they will look really hard at the root causes of health equity.”

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‘They know what works’

Both Atrium and Advocate Aurora have been expanding in recent years.

Atrium Health, formerly known as the Carolinas Health System, has merged with Wake Forest Baptist Health, Navicent Health and Floyd Health in the past three years.

Jim Skogsbergh, president and CEO of Advocate Aurora Health

Advocate Aurora Health is the product of the merger of Advocate Health Care and Aurora Health Care, a deal that was completed in 2018. Advocate Aurora also signed a letter of intent to merge with Beaumont Health in Michigan in 2020, but both sides ended talks after five months.

Woods, Skogsbergh and the two boards are very experienced in mergers, and that knowledge helped in striking the deal.

“These guys are very deal savvy. They know what works and they know what doesn’t work,” Kaufman said.

“This was a highly organized process. They were able to put a calendar together and a set of responsibilities and things that needed to get done,” he said.

Assuming regulatory approval, the newly merged system will be based in Charlotte, N.C., but the new organization plans to maintain a strong presence in the midwest, officials said.

Both Woods and Skogsbergh will serve as co-CEOs for the first 18 months, and then Skogsbergh plans to retire. At that point, Woods will serve as CEO for the new Advocate Health.

It isn’t common to have two CEOs running an organization, and it can lead to hassles. Conventional business wisdom rejects having two chief executives, but Kaufman said there is upside in having two leaders of a newly merged organization.

Critics “dwell on what doesn’t work but don’t focus on how it calms and balances the transaction and gives everyone the time to make more tough decisions,” Kaufman said. “I’m more positive about it than some commentators.”

If one executive leaves quickly after a merger, Kaufman said, “that makes everybody nervous.”

It also helps that Woods and Skogsbergh are closely aligned in their views on healthcare and concern for health equity. The two leaders are “close personal friends,” Kaufman said.

The two sides also came together on board leadership. The new Advocate Health board will be split evenly with members from both organizations.

Edward J. Brown III, chair of Atrium Health’s board of directors, will chair the merged board of directors until December 31, 2023. Michele Richardson, chair of Advocate Aurora Health’s board of directors, will succeed Brown and chair the board for a two-year term.

The importance of agreeing on board leadership and succession can’t be overlooked. Some potential deals have dissolved because the two parties couldn’t concur on board leadership, Kaufman said.

‘Change before we have to’

Advocate Aurora and Atrium were able to come together because they share similar values and missions, Kaufman said. “In the not-for-profit area, one of the critical aspects of doing a successful transaction is the basic culture and values of the organization line up,” he said.

In a video announcing the merger, Woods said one of the driving factors among the organizations is, “We change before we have to.”

“This is the best time to create the future,” Woods said.

In the wake of the COVID-19 pandemic, hospitals have to assess how they best deliver care, Kaufman said.

“The reason this deal is so important is it addresses really critical healthcare decisions coming out of the pandemic,” Kaufman said.

“Healthcare is no longer a solely community-based product,” he continued. “It’s a series of really hard problems and trying to create an organization with the size and scale and intellectual capital to solve those problems.”

The two systems don’t serve a contiguous geography, but the new system will have “the ability to develop effective products for healthcare consumers.”

“We need that organizational punch to get this done,” Kaufman said.

The new system will have a diverse mix of patients and payers, and a strong mix of clinical expertise, he said.

In the video announcing the deal, Woods said the partnership “will transform the way care is delivered in this country.”

With the Atrium-Advocate Aurora deal, the leaders talked at length about health equity, expanding access to urban and rural areas, and also sustainability. The new organization is aiming for carbon neutrality by 2030.

In the video, Skogsbergh said, “We’re going to be great community citizens in all the communities we serve, but we’re going to be great citizens of this earth, when we talk about sustainability.”

Both Atrium and Advocate Aurora’s leaders see the merger as an important opportunity, Kaufman said.

“The message that they're sending is that you need large, imaginative organizations to attack these problems,” Kaufman said.