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(Janesville, WI) By Jim Leute, Gazette

Leaders of Rockford Health System said Janesville-based Mercy Health System is the perfect partner to lead the way through health care reform.

The two systems announced Monday they will merge early next year to form an organization with 7,500 employees, 80 facilities and more than $1 billion in annual net revenue.

“The merger was motivated by each organization's desire to more fully serve patients,” said Javon Bea, Mercy's president and chief executive officer.

“The Mercy Health System and Rockford Health System partnership is a joining together of dynamic equals to better serve area patients.”

Rockford Health System has been in search of a partner for several years.

Nearly two years ago, it sought proposals from a number of potential partners.

Mercy responded.

“Our board, especially, went way out of their way in terms of interviewing different organizations and studying different markets and different opportunities and always had the patients' best interests in front of them,” said Gary Kaatz, Rockford's president and CEO.

“We are just thrilled to have found an excellent partner in Mercy.”

Pending approval from Illinois, the new not-for-profit system should be finalized early next year, Bea said.

For the time being, the merged operation will be known as Interstate Alliance.

The names of the two organizations will not change, and each will maintain its individual identity and operations at this time, Bea said.

A major motivator behind the merger is the Affordable Care Act, which rewards vertically integrated organizations that are financially strong, Bea said.

Since the phased-in ACA became law in 2010, consolidations have become more prevalent in the industry.

“Once they get the cost situation sorted out, the ACA is really moving toward integrated care and bundled payments,” Bea said.

Bundled payments are a middle-ground model of Medicare reimbursement in which providers are paid on the basis of the expected costs for “clinically-defined episodes of care.”

It's between the typical fee-for-service Medicare model that pays providers for each service given to a patient and another that pays a lump sum per patient regardless of how many services the patient receives.

Bundled payments tend to be more feasible for larger facilities because they can easier shoulder financial risks and be more efficient in reducing costs.

That's typically not the case for smaller and rural facilities with significant overhead costs. Coupled with lower reimbursement rates from Medicare, smaller hospital systems already face difficulty generating enough revenue to cover treatment costs.

STRENGTHENED STATEMENTS

Mercy annually delivers about $1.3 billion in health care, which when adjusted for charity and unreimbursed care results in net revenue of about $600 million, Bea said.

Rockford Health System has gross revenues of about $1.2 billion and net revenues of about $500 million, Bea said.

“Combined, we will have about $1.1 billion in net revenues, which is significant because it will help us get better bond ratings that will get us better access to capital at lower costs,” he said, noting that Mercy has invested about $220 million in its facilities in the last several years.

In addition to essentially doubling each organization's income statements, the merger is significant because the systems do not compete for each other's patients, Bea said.

Without poaching patients, the two systems will create a contiguous regional network that will expand patients' health care options, Bea said.

Rockford Health System does not have an insurance component.

Mercy does: MercyCare Health Plans.

Bea said the merger will allow for the expansion of MercyCare in the Rockford market.

Mercy has 4,000 employees working in 68 facilities in 29 communities in southern Wisconsin and northern Illinois. It has hospitals in Janesville, Walworth and Harvard, Ill.

Bea said Rockford Health System has about 3,500 employees at 12 facilities in 11 communities.

It includes Rockford Memorial Hospital, Rockford Health Physicians outpatient clinics and an inpatient rehab hospital it operates in a joint venture.

The 396-bed Rockford Memorial Hospital includes a Level 1 trauma center, heart and vascular center, brain and spine center and a children's medical center with the area's only pediatric intensive care unit and Level 3 neonatal intensive care unit.

 “In Janesville, we never had the volume to justify a neonatal or pediatric intensive care unit,” Bea said. “Rockford has that and—outside of the Chicago market—is really considered the major draw for that in central and northern Illinois.

“Its neonatal and pediatric ICU makes it a natural partner. It will provide a continuum of care that will help Mercy round out its spectrum of services.”

Both systems' flagship hospitals include trauma centers. Mercy's is Level 2, while Rockford Memorial's is Level 1.

Bea said some might wonder why a system needs two trauma centers.

The merger, he said, will provide trauma surgeons who can back up each facility. That's otherwise a costly undertaking, he said.

“That's just one example of a number of clinical efficiencies we expect by bringing more than 550 multi-specialty physicians together,” he said.

REGIONAL ACCOUNTABILITY

Bea said the merged operation would become a large regional accountable care organization focusing on population-based health initiatives.

A primary goal of the Affordable Care Act is to reduce health care costs with the formation of accountable care organizations.

ACOs are groups of doctors, hospitals and other providers that work together to coordinate and provide high quality care to their Medicare patients. The goal is to ensure that patients get the right care at the right time without unnecessary duplication of services and medical errors.

When an accountable care organization meets benchmarks, it shares in the savings it generates for the Medicare program.

Mercy Health System is currently an ACO, while Rockford Health System is not.

Since Bea arrived in Janesville in 1989, he has worked to transform Mercy from a standalone hospital to a vertically integrated system.

“Who knew that what we were doing with integration and the model we created 20 years ago would be what the federal government has now decided is the best way to deliver health care?” he said.

Bea said the merger allows for greater opportunities for innovation, provider recruitment and an overall improvement of community health.

“It positions us for even greater success as an ACO by adding the population base Rockford currently serves, expanding ACO contracts and population health initiatives over a larger market area … as well as expanding MercyCare insurance into the Illinois market,” he said. “All these reasons increase our agility in today's rapidly changing health care market so we can efficiently and effectively respond to health care reform.”

Bea said one factor that didn't weigh into Mercy's merger decision was the entrance of SSM Health Care to the Janesville market with its 2012 opening of St. Mary's Janesville Hospital.

Both Mercy's inpatient and outpatient volume have grown since the opening of St. Mary's Janesville and the subsequent merger between SSM and Dean Health System, he said.

Previously, Dean physicians had admitting privileges at Mercy Hospital.

“That wasn't at all what prompted this,” Bea said.

Combined, the new Interstate Alliance will operate 80 facilities in 40 communities.

Bea will be the CEO and sit on a parent board that includes four representatives from each of the Mercy and Rockford boards.

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