Did you catch the discussion of hospital merger and acquisition activity at JP Morgan Healthcare conference this year? Divesting hospital systems discussed their market for community hospital sales, suggesting that valuations would be reasonable or even attractive as market centered large hospitals seek to make “strategic” acquisitions, building regional healthcare delivery systems by acquiring presence in outlying communities. Leaders for urban based, generally not-for-profit hospital systems openly discussed their interest in doing exactly that.
This may be sound direction for both divesting and acquiring hospital systems, but it is a direction pursued before, only to be broadly abandoned as execution of the strategy became financially and clinically challenged.
So, what happened the first time, what is or might be different today and what are possible keys to building effective, sustainable regional healthcare systems this time around?
Large, urban hospitals derive a significant percentage of complex, more highly compensated care from patients referred to them from outlying communities. Often, a transfer occurs from a community hospital to the large facility. Patients are treated in the local Emergency Department, diagnosed, stabilized then transferred for care beyond local capabilities. Hub facilities sought to capture all of these referrals by owning the outlying facility. Ownership and branding could be used to enhance the Hub hospital reputation and position as a regional, prestigious medical center. There may have been an operating model forecast projecting economies from consolidation in supply, services, management and other operating costs. These would improve the collective bottom line. Healthcare system bargaining with payers seeking to achieve billing discounts should result in a stronger negotiating position, inclusion in more networks, at higher levels of compensation. So, the theory goes that all facilities would benefit from increased capture of market share, improved or at least stable reimbursement rates, lower operating costs and improved efficiency. Sounds pretty good.
What went awry?
Hub hospital executives, quite naturally, became executive leaders of the healthcare delivery system. Often, there were no operating plans to consolidate IT tools, create metrics, restructure supply chain controls, rationalize supplies and medications, restructure medical staff bylaws, standardize clinical practices and workflows, integrate delivery of care, order sets and treatment plans across all facilities. Instead, change of ownership might mean a new name, marketing materials, a roll up of local accounting practice into a consolidated statement for the network, while allowing or actively supporting local practices to remain unchanged. This was often seen as reassuring local medical staff, hospital staff and community leaders that local control was being sustained and that change would not be forced on anyone. All gain and no pain. This move, while reassuring, effectively prevented realization of any economies of scale to operating costs.
Capital is always an asset which experiences more demand than supply. When decisions about capital projects had to be made, a former Hub hospital executive readily appreciates the necessity of prioritizing Hub hospital projects and needs ahead of Spoke facility requests. Over time, outlying facilities, already capital challenged, did not receive even minimal facility and capability capital investments. Their individual and network value begins to erode.
Hub hospital practices intuitively resulted in encouragement of out migration of patients and their care from community hospitals to the Hub. With direct ownership, this practice becomes even more effective and institutionalized as Hub leaders seek to maximize central hospital utilization and performance. Spoke hospital volumes decline, reducing local volumes for some medical services to the degree that Hospital System executive management begin to close some medical services in favor of delivering them centrally. Spoke volumes and revenues decline further, making individual financial performance appear less and less attractive, making further capital investment even more difficult to justify.
Eventually, healthcare system (Hub) executive management cease to look at Spoke facilities as an asset and instead see them as a financial liability which may also be a threat to Hub hospital reputation for clinical quality and sophistication. Divestitures, generally at a loss, became the direction as Hub hospitals changed strategy to focus on quality, breadth and depth of service and being “patient centric”.
What is different today?
Most facilities today, come packaged with a significant number of employed physicians. While employment has been a cyclical practice for decades, this now appears to be a sustained long-term trend. Direct employment offers the opportunity to effectively engage physicians in healthcare system workflows, standards and practices – but managing physicians as employees is still a work in progress for both the employee doc and the manager.
Accountable Care Organizations are back (they were HMOs in the past). Providers bearing more and more risk for cost, quality and accessibility of care for patients is public policy and not just a market initiative as it was in the past. Healthcare entities wishing to be an ACO will need scale, control and service area coverage to be viable. The same goes for offering Population Health Management services to payers.
IT tools, standards and analytics are much more mature, broadly deployed and, potentially, enabling of sound operating management across a larger, complex and geographically distributed healthcare delivery system.
There is broader recognition, at least in concept, that clinical standards, based on evidence, consistent clinical practice, use of generics to control medication costs and other elements of consistent practice are all good things for patient care, expense and access.
There are new care venue models and increased ability to leverage non-physician providers to expand patient access and convenience at reduced cost for many routine, low level healthcare encounters.
There is much broader experience with managing change, standardization and optimization of clinical and other operating practices in healthcare – although this is still not a broadly held, core competency for many organizations.
So, what are the keys to success this time?
Design your healthcare system operating model up front. Maximize utilization of the facilities on the edge, integrating them with treatment plans and processes for every procedure and diagnosis to keep patients local as much as possible.
Create sound healthcare system leadership and governance. Hire executive leaders and seat directors on the board that are committed to the successful operation of the system, avoiding an intuitive bent to favor the Hub.
Have a formal, metric based and well governed assimilation plan and practice. Be candid with Spoke hospitals and medical staff that acquisition means real centralization of controls, standards, data definitions and practices. Being a system means more than sharing patients or patient data or access to capital. It means really working together with common values, practices, clinical language, purchasing standards, order sets, formularies and more.
Integrate medical staff. Each facility may be required to “own” medical staff governance and relationships locally, but bylaws, clinical standards, practice expectations, training and so on should be consistently implemented across the entire system. This move will do more than any other to demonstrate to the region that all venues of care in the system bring a high, consistent standard of practice to every community and patient encounter.
Centralize and standardize inventories, purchasing and supply chain operations to aggregate spend, maximizing available discounts while assuring that purchasing standards are adhered to.
Centralize and standardize IT systems, administration, control and configuration to deliver engineered and disciplined tool support for standard workflows and practices. Leverage operating, adoption and performance metrics derived from tool utilization to make every aspect of system operation objectively transparent to all levels of management, staff and other key stakeholders.
Embrace the necessity of leading change from local to system wide practices aggressively, persistently and unrelentingly. Executive leadership must be meaningfully engaged in change operations and governance to clearly communicate serious institutional commitment to building a regional healthcare delivery system which delivers quality patient care in an effectively sustainable manner.
Investing or supplying HIT products and services to regional systems? Building a regional system? Engage BrightWork Advisory, LLC to help navigate the challenges.