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Executive Session: How hospitals and independent practices co-exist in a wave of consolidation

Podcast - August 23, 2021

Partnerships, Mergers & Acquisitions

Strategic Planning

Value-Based Operations

David N. Gans MSHA, FACMPE, SENIOR FELLOW
 

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It’s easy to recognize that healthcare in the United States is complicated; understanding the depths of that complexity is something else entirely. Among those who do, very few have put it into words.

Lawton Robert Burns, PhD, MBA, James Joo-Jin Kim Professor, The Wharton School, University of Pennsylvania, is one of those few. Dr. Burns is the co-director of the Roy and Diana Vagelos Program in the Life Sciences and Management at Wharton, and he also teaches courses on healthcare strategy, strategic change, strategy implementation, organization and management, managed care and integrated delivery systems.

Dr. Burns’ recently published text, The U.S. Healthcare Ecosystem: Payers, Providers, Producers, is the most comprehensive assessment of today’s healthcare system that I know. His book is the first publication for the general public that “gets it right” in its explanation for how medical groups function in the public and private sectors.

As he explains during our recent Executive Session podcast, his decades-long work teaching MBAs about healthcare prompted him to tackle a broad range of subject matter — including business models, revenue models and the myriad tech sectors that intersect with healthcare — to get a sense of how different players in the U.S. healthcare ecosystem operate, compete and interrelate.

“I'll confess, after 35 years, I just feel like I'm beginning to understand it all,” Burns said. “It's just so much to get your arms around.”

Dr. Burns’ text comes at a time when the COVID-19 pandemic has significantly impacted the financial realities of medical practices, health systems and hospitals, fueling continued dealmaking and consolidation that had picked up steam prior to 2020.

Editor’s note: The following is an abridged Q&A of the full podcast conversation.

Q. You devote a chapter to how hospitals have attempted to mimic corporate America. You also describe how the growth avenue for hospitals is no longer in their core inpatient business, but in ambulatory and ancillary services that traditionally were physician managed and part of practices. As part of the process of expanding their scope of business, hospitals have created horizontally integrated multihospital chains on a local, regional and national basis. Can you give us your insight into what is driving these changes?

A. What I've noticed is that the hospitals developed into hospital systems over a long period of time in several phases. ... Most recently, I've written a chronicle of the multihospital systems in a new book with David Dranove [Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University's Kellogg School of Management] called Big Med. (You can get a sneak peek by viewing a blog written for Psychology Today, “Where Did All Our Provider Systems Come From?”)

And that's basically what these hospital systems are, they're Big Med. … There are three phases in this development, at least, and each one's tied to an initiative by the federal government to expand health insurance:
  1. Medicare in 1960s
  2. The Clinton health plan in 1993
  3. The Affordable Care Act in 2009 and 2010.
Each of those initiatives fostered renewed growth in multihospital systems. Provider consolidation and these multihospital systems were an unanticipated consequence of these federal moves to expand insurance coverage. Initially, when Medicare was passed, Medicare provided financial incentives for hospitals to form systems. So that was the initial push — there was some money to be made here. Starting with the Clinton plan, the multihospital systems are developed by providers who [feared] what all this federal involvement in insurance may bring. … They thought it may be a safety-in-numbers strategy — “If we band together, we can deal with this uncertain new legal environment we're going to be dealing with.”

Rhetorically, the name of the game for these hospital systems was coordination of care, scale economies and efficiencies, integrated healthcare, patient-centric care, engagement and things like that. In reality, the name of the game was different. It was basically strength in numbers, survival and bargaining power over commercial insurers. Another unfortunate reality is these were efforts by hospitals to try to mimic corporate America and deploy modern management structures and techniques to the hospital whether or not they actually fit. This includes information technology, eHealth, multidivisional structures. … We had a bunch of misguided corporate strategies brought into healthcare by what we might call “four-cylinder consultants” who tried to blindly apply them to eight-cylinder jobs.

Q. Another element is that as hospital systems expanded their service mix into ambulatory care and ancillary services, they're directly competing with independent doctors, who traditionally owned ambulatory healthcare. Obviously, this leads to conflict, and one solution has been for hospitals to acquire those practices. Can you give us some of your ideas on how a hospital can coexist with independent practices?

A. Hospitals did not own or manage physician practices for the bulk of the history of the U.S. healthcare ecosystem. Hospitals and doctors are interdependent — they do need one another, but they don't need to own one another. The business and revenue models of these two parties are quite different — so is their scale of operation. … I don't think any of the evidence shows that ownership is the solution, because we can't find any efficiencies when combining the two. In fact, oftentimes we find that combining the two, ownership leads to higher prices, higher costs of care and sometimes even lower quality.

There's a lengthy literature out there on how to get the two parties to work together in ways that are collaborative, productive and financially rewarding. … The issue becomes the solution on how to get the parties to work together. The solution requires a lot of interpersonal relationship work, it requires a lot of trust. It requires tenure in office by both the hospital executives and the leaders of the medical staff so that they can learn how to work together and to generate these productive relationships and trust. It involves real involvement by clinicians in all decision-making — which means hospital management, financial issues, access to financial data — and it requires physician-led initiatives to control costs and improve quality.

When we talk about integrated healthcare, integration is a verb. It's a process of working together between the hospital side and the medical side. That takes a lot of time and effort, and I think that's perhaps why it's not often done. Purchasing a doctor's practice is quick, easy and effortless on the part of the hospital CEO, but actually working collaboratively takes a lot of time and effort.

Q. You also observe that this strategy has evolved in the past 30 years, and that what is happening today is quite different than the initial surge in practice acquisition in the 1980s and 1990s. What are some of the factors that have changed and have enabled hospitals to have a better strategy for building their physician enterprise?

A. There were phases in the hospital consolidation. There have also been different phases in vertical integration between doctors and hospitals. The strategies pursued in the 1990s to vertically integrate doctors and hospitals differ from the strategies that have been pursued over the last 10 to 15 years.

These are no longer guaranteed contracts. … [Previously], we’d just buy a physician's practice [and put doctors on a salary], with no productivity and no other strings attached. Now, just about every contract between a hospital and doctor is productivity based. The doctors are still paid basically on a productivity model.

The biggest change between the 90s and today is in the 90s, hospitals were acquiring primary care physicians because everybody feared that the California model of HMOs was going to sweep eastward, and you’d need to have a primary care physician component. Well, that never happened. Instead, hospitals began to integrate more with specialists — especially cardiologists, oncologists, [specialties] where there were some money-making opportunities. There was also a squeeze on the incomes of those specialties, which impelled them to consider looking at hospital employment.

What's common between the 1990s and today is the employment binge continues. The rationales have changed — today we talk about accountable care organizations (ACOs), the Triple Aim, developing service lines, improving patient experience, patient quality and safety … but I still think the vertical integration strategy persists in the mind of the hospital CEOs. We've changed the labels, but the strategy continues.

Q. You mentioned that the goal of many health systems has been to enhance patient experience, to improve population health, reduce the cost of care and improve the work life of healthcare providers. Unfortunately, not every health system or hospital manages to do all of these, and many of them may even have difficulty managing one or two of these factors. What enables some integrated systems to have better results than others?

A. People need to switch their thinking from vertical to horizontal approaches. In other words, stop thinking up top-down control models, and think more in terms of peer-to-peer, lateral influence models, and how we're going to shape physicians’ decision-making and how we help physicians to reframe the decisions they do make, which may involve more peer education and normative pressure using social influence of their peers and local networks. Focusing on communication among physicians — we call this relational care coordination — is a totally different view than most other perspectives.

I think we need to shift away from just financial metrics to nonfinancial motivations. We need to reduce the emphasis on what colleagues in my field call “financial integration” — they focus on employment and salaries and stuff like that. I'm not sure that's what ultimately satisfies a clinician. I think what clinicians want are greater clinical autonomy on the front line of care, being able to control their work environment and themselves improving their work environment — figuring out what's the best way to gather and collect and report the data rather than having that all imposed on them.

We need to reconsider how we use clinical expertise. Physicians are the most highly trained human resource, and we ought to be investing more in how we leverage that resource in physician leadership development. How do we foster greater tenure in the physicians who take leadership roles, who can then help develop change initiatives?

We also need to recognize that one size does not fit all — the different clinical areas and specialties will require different solutions, which resists a top-down approach, and requires people to understand the clinical context of each specialty and how that will drive the solution to reducing costs and the length of stay. It's going to require a lot of local clinician initiative and leadership.

I would also suggest to these hospitals that may need to consider integrating the doctors on the inside before trying to integrate doctors on the outside. … They may need to figure out ways to reformulate or reframe the medical staff organization, which people have been talking about for some time but most places haven't done it.

The focus of efforts should be on integrating, coordinating [and] cost cutting, rather than structures that try to do it. I think process is much more important than structure or technology. Structure is not integration. Technology is not the solution. These are just tools. It's a lot of process work.

It's [about] the unobtrusive controls, rather than obtrusive structures and metrics. … One of the things that Penn Medicine is doing is they're embedding choice architecture into the EHR and using clinician-guided behavioral economics to frame the decisions that doctors make. You don't tell them what to do, but you reduce the friction and make it easier to do the right thing.

Another guiding principle is that we should be focusing more on small-scale changes, rather than disruptions or the silver bullets to change healthcare. I don't think any of those things have ever worked. Small-scale, local change always works better than top-down, big-picture change.

Q. What should the leaders of independent practices do to maintain their independent relations within their health systems that lets the health system excel? And what should leaders in the health systems do to enable their system to excel?

A. Practices need to make sure they're financially solvent and buoyant. … That involves the ancillary staffing that might make the physicians in the group more productive; managing overhead costs to try to reduce them as much as you can. A big issue going forward is physician recruitment and retention, because problems with physician recruitment and retention can lead to a downward spiral.

The relationships with the external hospitals and their market — that is a two-way street. Historically, hospitals can and do often help local groups with financial support to assist in hiring new physicians, because that will eventually benefit the hospital in terms of admissions or referrals. Those types of relationships need to be cultivated.

At the same time, the groups need a certain size and scale to gain and keep the attention of their local hospital systems and be viewed as salient partners. … Hospitals are growing, managed care organizations are growing, so the physician practices have to be at least stable, if not growing themselves, just to be on a level playing field.

This has both positive and negative overtones. The positive overtone is that a bigger practice is going to be a bigger and better referrer to the hospital and bigger source of the hospital’s business. … It doesn't hurt if your medical group members have the ability to staff ancillary areas of the hospital, whether it's the emergency department, anesthesia, the NICU units, other units. Hospitals are under financial pressure, and they may feel a need to outsource some of these ancillary services to organized groups on the outside. That can be a big revenue opportunity for some of these medical groups.

The negative overtone of the medical group getting big is that you now become a bigger competitor to the hospital. You also have the threat of moving market share to competing hospitals to maintain some alternative hospital privileges.

Right now, everybody's gotten big. The latecomer to the scale party, the merger and acquisition party has been the medical groups, and I think they're now beginning to recognize [they] may need to be a little bit bigger, figure out ways to ally with or combine with other medical groups to increase salience and scale in the local market.

Q. Another issue is the emergence of value-based insurance programs, in which doctors or hospitals are bonused or put at financial risk based on cost and quality performance. What should practice executives expect from their affiliated health systems in value-based care delivery?

A. Consolidation and integration help [groups] to gain contracts by virtue of the fact that you can serve up to a payer — whether it's an employer or a managed care organization — a broader provider network of both hospitals and doctors. You can even have the potential to launch your own Medicare Advantage plan. … You can develop this broader network in the form of an ACO or a clinically integrated network (CIN). … To me, that's just the beginning.

We're not sure how much we all benefit from these value-based contracts. There are a few problems with value-based contracts:
  1. It's hard to define value. Most people couldn't define value if they tried — at most, what they'll come up with is “quality divided by cost,” which is accurate. What they don't acknowledge or even think about is the numerator, and that quality divided by cost. The numerator of value is really a vector of a boatload of quality metrics that are not highly correlated with one another. How do you divide a vector by cost? You can't. Trying to compute value, at least empirically, is really a tough sell.
  2. Most of the alternative payment models used in value-based contracting, such as pay for performance, don't really impact the cost and quality of care. Pay for performance … has been a total dud. … Most of the alternative payment models, which are associated with an ACO or a CIN, don't move us off fee-for-service reimbursement. The financial incentives have not really changed; the physicians are still basically paid on a productivity model. That whole movement from volume to value? It never happened. We're still incentivizing doctors and hospitals based on volume, no matter what payment model people say they're using.
  3. Most of the new organizational models that are used to deliver value-based care really haven't moved the needle on cost or quality.
Q. These are issues that practices should educate their doctors and key staff members on regarding how healthcare operates in the United States. Is there anything you would like to add to our discussion?

A. It's virtually impossible for any player in the healthcare system to understand at all. In fact, I think we want our doctors to be focusing and concentrating on their specialty to deliver the highest quality care they can — we shouldn't expect them to know all this stuff.

As James Madara [CEO of the AMA] said, we're looking at the physiology of healthcare, not the structure or anatomy of healthcare. We're really looking at how this healthcare ecosystem really operates. And I think the operative word here is “ecosystem.” There's no system of healthcare. There's no rational design. … This is a series of actors and players who've arisen and developed independently of one another … and they're all working with one another or against one another, bargaining with one another, signing contracts with one another.

People come to healthcare with some pretty simplistic ideas of what it is and how to change it. And what you really need to know is to understand how this ecosystem really operates, the fact that we're likely not going to have coordinated care or integrated care, given the proliferation of all these actors. We really need to recalibrate our expectations, to curb our enthusiasm for what we can achieve in the short term. I think it behooves all of us to develop a little bit more of a wider scan of what's involved, and what areas can we work on in the short term.
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About the Author

David N. Gans
David N. Gans MSHA, FACMPE, SENIOR FELLOW
Industry Affairs MGMA

David N. Gans, FACMPE, can be reached at dgans@mgma.com. 

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