Presbyterian Healthcare Services and UnityPoint Health announced plans Thursday to merge, creating an organization with roughly $11 billion in annual revenue.

The combined nonprofit organization would have 48 hospitals, a health insurance plan offered through Presbyterian and 40,000 employees.

The deal represents the latest consolidation move connecting cross-state health systems in an effort to spread the costs related to managing technology, purchasing supplies and workforce recruitment over a broader organization.

In an interview, Dale Maxwell, president and CEO of Albuquerque, New Mexico-based Presbyterian, and Clay Holderman, president and CEO of Des Moines, Iowa-based UnityPoint Health and former chief operating officer of Presbyterian, pointed to the opportunity to reduce their administrative overhead by combining under a new parent company.

But healthcare economists have countered that many combined health systems do not glean those savings, given the complexity of managing massive organizations.

Health systems across the country are courting potential partners as they deal with higher labor costs, inflation and other financial headwinds. These changes are structural, not cyclical, Maxwell said.

“These financial challenges are not going away and it takes a bold move to create something different,” he said. “If we can bring two like-minded systems together to create a sustainable path forward and address financial concerns through administrative efficiencies while at the same time preserving the trusted brand of each legacy system, it will strengthen healthcare in our local markets.”

The transaction would increase access to capital and diversify top-line revenues, Maxwell added. Both organizations use Epic for their electronic health records, he noted.

Holderman said a big selling point was Presbyterian’s insurance plan, potentially using it to bolster its Medicare Shared Savings Program and accountable care organization offerings.

The letter of intent was signed Thursday but details remain to be worked out regarding headquarters and board composition.

Many health system mergers in the same or neighboring markets stumble over which brands to maintain, where to locate the combined entity’s headquarters and how to manage physicians, Holderman said.

“This allows us to respect our local healthcare operations, keep our trusted brands and physician alignment plans in places and focus on the administrative savings that so many mergers don’t achieve,” he said.

The deal requires a definitive agreement and approval from state regulators. There is no timetable for the deal’s close, but the organizations have spoken to the respective attorneys general and their approval “does not appear to be a barrier,” Holderman said.

The Federal Trade Commission is often hesitant to challenge cross-market mergers because antitrust law focuses on in-state hospital mergers and minimal legal precedent exists for these other transactions.

Presbyterian and UnityPoint are following a string of recent cross-state mergers, including Charlotte, North Carolina-based Advocate Health, which was formed in December after Advocate Aurora Health and Atrium Health combined. Sioux Falls, South Dakota-based Sanford Health and Minneapolis-based Fairview Health Services expect to close their proposed merger in May, amidst criticism from Minnesota Attorney General Keith Ellison (D). Salt Lake City-based Intermountain Healthcare and Broomfield, Colorado-based SCL Health completed their deal in April.

“Like Advocate-Atrium, these are two strong regional players coming together to take advantage of scale synergies,” said Jordan Shields, a partner at Juniper Advisory, which specializes in nonprofit hospital and health system consolidation.

Synergies around purchasing, for instance, do not require geographic proximity, Shields added.

Yet most economists say the savings are hard to produce post-merger. That equation is even less certain in far-flung organizations, said Lawton Robert Burns, professor of healthcare management at the University of Pennsylvania Wharton School.

The driving force behind these deals is no longer to increase their market penetration and extract higher rents from insurers, Burns said. “It is to just get bigger without invoking the ire of the FTC and of the state attorneys general,” he said.

A study published in the Journal of American Medical Association in January found that system-owned hospitals produced higher costs than non-system hospitals. Average spending on care for commercial and Medicare patients provided by system physicians in 2018 was 4.7% and 5.2% higher, respectively, than spending related to non-system patients.

Mark Pascaris, a director at the ratings agency Fitch Ratings, said the FTC and state officials are poised to review more cross-state mergers as “conversations are being had between players big and small.”

“When an industry is under financial stress, that is going to be the catalyst for partnerships like these,” he said. “Everyone is looking to be more efficient, generate economies of scale and do everything they can to manage the bottom line and generate enough cash flow to reinvest in their communities.”

Presbyterian and UnityPoint are relatively strong financially but like most health systems, their balance sheets have deteriorated over the past year.

The nine-hospital Presbyterian system recorded a $105.4 million operating loss in 2022, down from $69 million in operating income in 2021. Annual operating revenue grew 8.7% to $5.55 billion.

UnityPoint, which owns 20 hospitals and manages 19 hospitals in Iowa, Illinois and Wisconsin, recorded a $151.1 million operating loss through the first nine months of its 2022 fiscal year ended Sept. 30, the latest data available. The health system reported a $85.9 million operating income in 2021. Revenue rose 4.6% to $3.72 billion.

UnityPoint planned to merge with Sioux Falls, South Dakota-based Sanford Health in 2019, but the deal fell through amid opposition from UnityPoint’s board.