CHICAGO – The largest not-for-profit healthcare systems in Illinois and Wisconsin announced plans Monday to join forces to create what would become the 10th biggest nonprofit hospital operator nationally.

As part of their merger, neither Illinois-based Advocate Health Care nor Wisconsin-based Aurora Health Care agreed to assume any liability or guarantee the other’s debt. The two plan to “evaluate optimal credit structure alternatives and whether the refinancing of all or a portion” of their existing debt “could be considered beneficial to the combined organization,” the systems said in a statement.

Aurora St. Luke's Medical Center in Milwaukee, Wisconsin. Owned by Aurora Health Care
St. Luke's Medical Center in Milwaukee. It's owner, Aurora Health Care, announced plans to merge with Advocate Health Care. Aurora Health Care

“Any refinancing would be dependent on market conditions, management considerations and other factors,” the statement read. “There can be no assurance that any Advocate debt or Aurora debt will be refinanced in connection with the transaction.”

Not-for-profit health systems would lose their ability to tap the tax-exempt market for borrowing under the tax legislation that has cleared the House. The Senate version of the tax bill keeps privat activity borrowing, but both tha eliminates private activity borrowing. Both versions would ban advance refundings.

The Advocate and Aurora boards approved the merger but regulatory approval is needed. The two want to close the deal by mid-2018.

The system would be known as Advocate Aurora Health and it would operate 27 hospitals, employ more than 3,300 physicians, and have combined annual revenues of $11 billion. Advocate is the largest system in Illinois with 12 hospitals in Chicago, the suburbs, and central Illinois, while Aurora has 15, mostly in southern Wisconsin.

"This merger is about transforming care delivery and reimagining the possibilities of health as bigger meets better and size meets value to benefit consumers," Jim Skogsbergh, president and chief executive officer of Advocate.

The system would be run by a single board with equal number of members from Advocate and Aurora. Skogsbergh and Aurora CEO Nick Turkal would serve as co-CEOs. The Advocate and Aurora names would continue to be used and each system will maintain its current headquarters. Advocate is based in the Chicago suburb of Downers Grove and Aurora is based in Milwaukee.

The merger follows Advocate’s failed attempt to join forces with NorthShore University HealthSystem earlier this year. The two dropped their efforts after court rulings favored the Federal Trade Commission's efforts to block the union. The FTC had fought the merger, arguing it would harm consumer pricing and violate anti-trust rules.

Talks between the two began after Advocate’s failed merger with NorthShore. The two have little overlap in their regional footprint. The healthcare sector has seen a wave of consolidation as systems adjust to federal healthcare reforms and larger scale operations help reduce costs and dilute payor dependencies.

Republican efforts to repeal and replace the ACA and the possibility that federal tax reform could eliminate tax-exempt healthcare borrowing could further fuel the consolidation wave.

No job losses are expected and Aurora said jobs could be created as a result of the proposed $13 billion Foxconn Technology Group’s plan to be built in southeastern Wisconsin.

Advocate has about $1.5 billion of debt and carries ratings in the double-A category. In a September report, Moody’s Investors Service affirmed its Aa2 rating based on Advocate's size, good geographic diversity, very strong liquidity that allows absorption of delays in state Medicaid payments, moderate leverage and very good debt metrics even during lower performance.

The system's fiscal 2017 margins are likely to be lower than the historical average given growing competition, pricing pressure from governmental and commercial payers, and shifts of business to lower revenue settings.

Aurora carries single-A ratings and has about $1.3 billion of debt. Fitch Ratings upgraded the system last year to A-plus saying it was due to “sustained operating profitability through interim 2016, which reflects strong cash flow ahead of historical levels.”

“While some softening is expected, cash flow is expected to remain above median levels going forward, driven by steady leading market position, growing clinical volumes as well as the significant completion of information system updates and related costs,” Fitch added.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.