Advocate Aurora Health’s new investment unit is on the hunt for deals – Healthcare Dive

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Advocate Aurora Health is expanding its reach beyond its traditional hospital business with the launch of an investment group on the hunt for organizations it can either acquire or fund in the consumer and wellness sectors.

Advocate Aurora Enterprises was unveiled with its first two deals, the acquisition of Senior Helpers, a firm that offers in-home care for older adults and an investment in Foodsmart, a telenutrition company.

For years, the health system’s core focus has been providing a range of medical services to Midwesterners throughout Illinois and Wisconsin via traditional inpatient services as well as its vastly growing outpatient business. The hope is that this for-profit venture will yield an additional revenue stream to ultimately contribute to Advocate Aurora’s bottom line.

“What we realized is that there are a lot of other things that contribute to people’s broader health beyond just great medical care, and we want to establish a much deeper presence in a variety of what we call consumer health and wellness sectors,” Scott Powder, president of the new enterprise, said.

Advocate Aurora joins other major health systems, including Ascension and Providence, in establishing a venture arm.

The investment units have attracted scrutiny, though, reviving larger questions about whether health systems recognized as tax-exempt charitable organizations should retain that designation.

“There should be a larger debate about whether these healthcare entities are truly operated for charitable purposes, whether they are sufficiently focused on benefiting the most vulnerable in the community, and whether granting them the continued benefits of tax-exemption are justified,” said Erin Fuse Brown, director of the Center for Law, Health and Society at Georgia State University’s College of Law.

In 2020, Advocate Aurora, one of the nation’s largest nonprofit health systems, reported net income of $558 million on revenue of $13.1 billion. Like many health systems, federal funds helped prop up the system as the pandemic severely disrupted operations.

It saw big drops in patient volume last year throughout the COVID-19 pandemic. The aftermath of the public health emergency is likely to spur health systems to continue to diversify revenue, especially as more lucrative procedures move outside hospitals walls and telehealth services seem likely to be used frequently even after COVID-19 is less of a threat.

Beyond the four- or five-year exit

The spotlight on nonprofits mixing with for-profit entities comes as private equity firms have descended on the healthcare sector in recent years, from air ambulances, nursing homes to physician practices. These investors typically look to make a return within just a few years and potentially move on.

Powder contends Advocate Aurora’s investment strategy is different.

“We are not going in with a defined four- to five-year exit strategy because a big piece, obviously, of what we’re trying to do is contribute to the financial health of Advocate Aurora overall,” Powder said.

Unlike private equity or other venture capital groups, the enterprise is seeking to be a long-term investor or owner of the new assets.

Like allocating funds for capital projects, such as building a new hospital or renovating an existing one, Advocate Aurora earmarks a certain amount of money to fund the venture’s new deals. Powder declined to comment on the enterprise’s annual budget.

Powder’s group, which has about 12 full-time employees, is interested in funneling money to companies that fit in one of three categories: aging independently; parenthood; and personal performance.

The move follows the footsteps of some of Advocate’s peers.

Ascension, one of the nation’s largest nonprofit health systems, launched a similar unit Ascension Ventures. It has since invested in a slew of companies, from medical device companies to health services firms. The same is true of Providence, Spectrum Health, Northwell Health and Cedars-Sinai, among others.

A hallmark of the nonprofit health sector is balance sheet strength, Kevin Holloran, a senior director at Fitch Ratings, said. These systems tend to think “generation to generation” unlike for-profit companies that plan quarter to quarter. Preserving that strength of the balance sheet is a major driver for these nonprofit health systems, Holloran said, and deploying these venture arms can help them achieve their aims.

Skepticism over investment arms

The investment groups, though, have critics that question whether nonprofit hospitals should be delving into this area at all.

Many of the nation’s largest health systems are nonprofits, or what the IRS considers charitable organizations, and as such are tax-exempt.

While legal, the ventures raise larger questions about whether they should continue to be recognized as nonprofits and maintain that tax-exemption.

Over time, many nonprofit health systems have morphed into behemoth chains that generate billions in revenue and profit. In exchange for the tax advantages, nonprofit hospitals are required to provide some form of community benefit, which may include charity care.

Niall Brennan, CEO of the Health Care Cost Institute, was skeptical about such ventures. He said the public should question “how we arrived at a situation in the United States where nonprofit hospitals — who do benefit from significant tax advantages — somehow managed to have enough surplus income after building new wings, and handsomely compensating their executives, to essentially have money over and above that to start venture funds.”

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