April 07--Antitrust scrutiny of hospital consolidation in the Chicago area isn't stopping Northwestern University's academic medical center from pursuing another merger.
Chicago-based Northwestern Memorial is in talks with Centegra Health System, based in northwest suburban Crystal Lake, to explore a potential combination. There's no guarantee that the discussions will lead to a full-blown merger, but Northwestern has been more successful than not in closing deals.
Northwestern and Centegra say a combination would benefit patients by increasing access to high-quality care. But studies suggest that hospital consolidation in the U.S. has led to higher prices and the impact on quality of care is limited and mixed. The Federal Trade Commission has challenged some of the mergers and acquisitions.
In 2014, Northwestern scooped up Cadence Health in suburban Winfield and then went further west, acquiring KishHealth System in DeKalb at the end of last year. The deals expanded its footprint beyond its traditional downtown power base in an increasingly competitive Chicago-area market where most hospitals are treating with fewer patients. The expansion also gave Northwestern much-needed clout with insurance companies that are not big fans of the high-cost medical care provided by academic medical centers.
A deal with Centegra would bring Northwestern additional access to patients in a suburban area that is expected to experience substantial population growth. Centegra has hospitals in McHenry and Woodstock and is set to open a third in August in Huntley. The health system has the largest market share in its primary service area of McHenry County, with about 42.3 percent of hospital admissions through the second quarter of 2015, according to Fitch Ratings, a credit rating agency.
"In the world of health care that we are moving to, it's all about having enough scale to spread risk," said Casey Nolan, a managing director at Navigant who leads the health care provider strategic planning practice. "That's what's driving a lot of the merger activity in the industry right now."
But federal antitrust regulators have grown increasingly wary of hospital consolidation, suggesting that consumers may be victimized by the trend. The FTC has stopped some recent mergers and is attempting to block Advocate Health Care's planned combination with NorthShore University HealthSystem, which would create the largest health system in Illinois.
Northwestern's disclosure of its talks with Centegra come on the eve of a trial set to begin Monday in the FTC's lawsuit against Advocate-NorthShore. In fact, Northwestern's chief legal officer is scheduled to testify for the FTC, suggesting that the health system opposes the merger.
The FTC contends that an Advocate-NorthShore combination would have too much market power in the northern suburbs and could charge substantially higher prices. The hospitals counter that the agency has too narrowly defined its geographic market and that it competes with systems throughout the Chicago area, including Northwestern.
Northwestern's potential deal with Centegra could bolster Advocate's argument because Northwestern would become an even bigger competitor. The new Huntley hospital is about 10 miles away from Advocate Sherman Hospital in Elgin. Advocate and Mercy Health System in southern Wisconsin opposed the Huntley project but were unsucessful in their efforts.
The $233 million investment in the 128-bed Huntley hospital has stressed Centegra's balance sheet. The system issued about $193 million in bonds in 2014 to finance construction, increasing its debt burden by 47 percent, according to Fitch.
Even though Centegra had modest profitability of $3 million on revenues of $458.3 million in the year ended June 30, industry experts said the health system is well-run with a strong market position, making it an attractive acquisition target.
Centegra CEO Michael Eesley said last year that he was open to partnerships with bigger hospital networks, which likely opened the door to Northwestern. A tie-up would upgrade Centegra's image because of Northwestern's sterling reputation and bring access to specialty services and potential recruits because Northwestern is the primary teaching hospital for the university's medical school, Nolan said.
For the year ended Aug. 31, Northwestern had revenues of $3.8 billion, an increase of 60 percent from a year earlier thanks to the Cadence merger. Operating income grew 46 percent, to $206.9 million.
asachdev@tribpub.com
