chapter8and10.pdf |

chapter8and10.pdf

CASESTUDIES

1.MovetoaConciergeModeloraDirectPrimaryCare–MedicineBusinessModel?

MichaelGlenrunstheGeneralMedicalClinic,agroupof22primarycarephysiciansinaprosperoussuburbofPhiladelphia,Pennsylvania.Hehasheldthispositionforjustovertenyearsandhasseenmanychangestothehealthcaresector.Theclinicincludesaspectrumofprimarycareproviders,withsixgeneralinternalmedicine,sixpediatricians,andtenfamilypractitioners.Theclinichasprospered,andalmostallthephysicianshavefullornear-fullpractices. However, in the past five years, expenses have continued to increase, whilerevenuesremainedstagnant.Althoughcomparedtonationalstandardsthephysiciansappeartomakegoodsalaries,theirtake-homepayhasbeenflatoverthepastthreeyears,andtheyareconcernedthatitmaydecreaseifhealthcarereformproceeds.Currently,GeneralMedicalClinic'sprimarycarepractitionersmakeabout$190,000peryear,withsomevariationforage,practiceintensity,andotherfactors.

Theclinichasbilledinsuranceandsoughttocollectthedifferencefromthepatientor,ifthepatientwasuninsured,wouldseektosetupapaymentplan.Itspatientloadconsistsof25percent Medicaid, 40 percent Medicare, 5 percent bad debt, and 30 percent commercialinsurance.Currently,itdidnothaveanycapitatedcontracts.

Michaelrecentlyattendedaconferencewherehelearnedaboutconciergemedicineanddirect primary care (DPC). The presenter noted that more and more physicians feeloverworked,revenuesandsalariesareflat,andmanydoctorsspendmoreandmoretimeonnonclinicalpaperwork.Manyprimarycarephysicians,shereported,havebeguntolookforpracticeoptionswithalternativefinancialarrangements.Capitationhasbeenoneoption,butithasnotbeenverysuccessfulformostprimarycarepractices.

Conciergemedicineanddirectprimarycare(DPC)aretworelativelynewoptionsthatcouldsolvetheseproblems,thepresentersaid.Inconciergemedicine,practiceschargetheirpatients a flat fee (monthly or annually) for enhanced services and greater access. These“enhanced”servicesusuallyincludesame-dayaccesstothedoctor,whichmightbedoneviacellular phone or text messaging. Such practices often also provide online consultations;unlimitedoffice visits with no copayments; and free prescription refills, house calls, andpreventivecareservices.Mostconciergemedicineservicesalsobillpatients’insurance.

ThewomanalsodescribedDPC,which,likeconciergemedicine,chargesamonthlyor

Walston, Stephen. Strategic Healthcare Management: Planning and Execution, Second Edition, Health Administration Press, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=6452271.Created from apus on 2022-03-24 02:22:02.

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annual fee to patients for enhanced services and access. DPC differs from conciergemedicine,aspracticesdonotbillinsuranceformedicalvisits,andgenerallynothird-partyinvolvementoccurs.Therefore,alloftheworkassociatedwithbillings,claims,andcodingiseliminated(Qamar2014).DPCservicesalsogenerallyincludebasiclabtests,vaccinations,andgenericdrugsatornearcost.Practicesusingeithermodelderivemostoftheirrevenuesfrommembershipfeesandgenerallyexperienceanincreaseinprofitability.

The proponents at the conference suggested that both models would work well forpatientswithcomplexmedicalconditionsneedingcarefulmonitoringandhelpcoordinatingmultiplespecialists.Asbotharerelativelynewpracticemodels,onlyafewstudiesexist,andtheysuggestbetteroutcomes.OnestudyshowedpatientsinaDPCmodelhad27percentfewer visits to the emergency department and 60 percent fewer hospital days, and theirhealthcarecoststheiremployers20percentless(Beck2017).Astudyonconciergemedicineshoweddecreasesinpreventablehospitaluse,with56percentfewernonelectiveadmissionsandmorethan90percentfewerreadmissions(Goodman2014).

Conciergepracticesgenerallychargemonthlyfeesbeginningat$175amonth,buttheycancostmorethan$5,000peryear.Mostpracticesthatmovetoconciergemedicineretainonly15–35percentoftheirexistingpatients.Aconciergephysiciangenerallymaintainsapatientpanelofonly300to600patients.DPCpracticeschargeabit less,however,withmonthlyfeesofabout$100.Therefore,DPCpracticestendtohavelargerpatientpanelsof600–800perphysician(Colwell2016).

Even though concierge medicine and DPC practices often target upper-middle-classfamilies, some seek higher-income families and maintain an even more restrictive andexpensivepractice.Afewveryrestrictivepracticescharge$40,000to$80,000perfamilyforanextensive,immediatearrayofservices.Thesepracticesmayincludeonly50familiesintheirpatientpanels.Thesehigh-endpracticescanincreaseaprimarycarephysician'sannualincometoabout$600,000(Schwartz2017).

General Medical Clinic's primary care physicians each currently serve 2,000–3,000activepatients.Theolderphysicianshaveenjoyedarelationshipwithmanyoftheirpatientsformorethan20years.Movingtoeithermodelwouldmeaneachphysicianwouldloseover1,000patients—morethan22,000individualsforthefullclinic.

TheinsurancemarketinPennsylvaniahaschangedandwillcontinuetodoso.ThesechangesmayencouragefamiliestoconsiderconciergemedicineorDPC.Onesurveyshowsthatoverhalf(51percent)ofworkershaveahealthcareplanthatrequiresthemtopayupto$1,000 of out-of-pocket costs for healthcare before their insurance covers any of theexpenses.Patientsalsocomplainabout the longwaits inphysicianofficesandveryshortphysicianconsultationduringvisits.Datashowthatanaverageprimarycarephysicianinatraditionalpracticespends13to15minutesseeingapatient,whileaphysicianinaDPCpracticewouldspend30to60minutes(Ramsey2017).

Some studies show that patients appear to like concierge medicine and DPC, as themonthlyfeeprovidesbasiccheckupswithsame-dayornext-dayappointmentsandtherighttopurchasemedicationsandlabtestsatornearwholesaleprices.Theseservicescomewithvirtually round-the-clock access to a primary care doctor, which might include usingFaceTimewhileafamilyisonvacationorameetingintheofficeforstitchesafterabadfall

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on a Saturday night. Since DPC practices do not accept insurance, patients owe nocopaymentsorothercostsbeyondthemonthlyfeeforofficevisitsandprimarycare.

Yetthereareafewproblems—forexample,up-front,prepaidfeesinbothmodelsdonotqualify as medical expenses that can be reimbursed from a flexible spending account orhealthsavingsaccount.Thebiggestchallengeisthatpatientsmusthavethefinancialmeanstopaythefees.InGeneralMedicalClinic'scase,mostofthelesswealthypatientswouldnotparticipate.Amovetoeithermodelrequiresthattheclinictargetitsaffluentpatients.

Michael also read that a large company from Philadelphia plans to enter conciergemedicineandDPCacrosstheEastCoastandannounceditsintenttoenrollupto800,000workersinthenextfewyears.Itplanstoofferveryhighsalariestoattractgoodprimarycarepractitioners for its expansion. Given General Medical Clinic's current business model,Michael fears that he would be unable to match any lucrative salary offers from thiscompany,andhisphysicianswouldleave.

Michael also has ethical concerns about both models. Adopting either model forcespatients to find a new physician in a market with primary care shortages. Decreasing aphysician'spatientpanel,asbothmodelsdo,wouldalsointensifytheprimarycareshortage.Inaddition,currently,primarycarephysiciansrefermanypatientstospecialists.Reducingtheprimarycarepanelswoulddirectlyreducethenumberofreferralstospecialists,whichmightaffecttheclinic'sabilitytonegotiatebettercommercialinsurancecontracts.

GeneralMedicalClinicwillholdanexecutivecommitteemeetingintwodays.Michaelwantstobeabletopresentbothoptionsfairly.Heneedstodevelopanoverviewandmakearecommendation.

Questions1. WhataretheadvantagesanddisadvantagesoftheGeneralMedicalClinicmovingits

primarycarephysicianstoconciergeorDPCmodels?2. HowwouldGeneralMedicalClinic'sbusinessmodelneedtochangeifitmovedtoeither

model?Specifically,howwoulditsvalue,input,processes,andrevenueschange?3. Giventhedirectionofhealthcare,whatwouldyourecommendifyouwereMichael?

2.TheVirulentVirus

BackgroundAnewdisease,aguasangre,wasdiscoveredabouttenyearsago.Itisanonfatalbutannoyinginfirmitythatcausesthesolesofthefeettosweatprofuselyandemitaterriblesmell.Ithasaninfectioncycleofabouttwoyears.Onceitmanifests,ittakesapproximatelythreemonthstoreachanepidemicstageandthendisappears,onlytoreemergeacoupleofyearslater.Populations can receive immunizations against the disease, but the vaccines must beredevelopedeachtimeitreemergesfromitssiteoforigin.Thissitevaries,althoughitisoftensomewhereintheAmazonBasin.Eachtimethevirusmutates,thesiteoforiginchanges.Ifsomeonefindsthenewsiteoforiginsoonenough,avaccinecanbedevelopedandsold,butoncethevirusreachesanepidemicstage,thevalueofthevaccinedropsprecipitously.Ifthe

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siteisfoundandsamplesaredeliveredtotheresearchcenterinParana,Argentina,withinthreemonths,hugeprofitscouldbemade.

SituationAnoutbreakoccurredtwoandahalfmonthsago.YouhadinformationthatsuggestedtheoriginationsitewasnearIguazu,Brazil.YouimmediatelytraveledtoBrazilandhavebeenwanderingupanddowntheParaguayRivertributariesfortwoandahalfmonths.Duringthisdangerousjourney,alargespiderbityourlefthand,andyourhandswelled.Youalsomildlysprainedyourankle.Atthispoint,youarelowonsuppliesbutdeterminedtopersevere.

Amazingly,youfinallydiscoverthesiteandobtainthesamplesneededtodevelopthevaccine.YouhaveexactlytwoweekstodeliverthesamplestotheresearchcenterinParana.Ithasbeenrainingoffandonforthreedays.Whenheavyrainsfallintheregion,largeareascanbefloodedforalongtime.Ifyouarrivelate,theepidemicwillhavepassedandyourworkwillhavebeeninvain.Youwouldliketocallinahelicoptertoliftyouout,butyoursatellitephonehasbeendamagedanddoesnotwork,andthereisnootherwayforyoutocommunicatewiththeoutsideworld.Aftercarefulconsideration,youcomeupwiththesealternatives:

1. Waitfortherainstoend.Yourhandandanklewillhealinthemeanwhile,andyoucanenjoyasafetriphomeandhopeforbetterlucknextyear.

2. CrosstheParaguayRiverbasin.Thistripcanbedangerous.Withtheheavyrains,partsofitmaybeimpassible.However,youcancrossitquickly;thetriptakesseventotendays—ifyoumakeitwithoutharm.Ifyouencountermorerainorareinjuredagainbeforeyouarriveontheothersideoftheriver,youprobablywillhavetoturnback.Ineithercase,youmayperish;piranhas,snakes,andotherwildanimalsinhabitthebasin,andthewaterisdeep.

3. Goaroundtheheadoftheriverbasin.Thispathislessdangerousandusuallypassable.Itisslowandtiring,however.Ingoodhealth,youcouldprobablymakeitintwotothreeweeks.

Theweatherappearsonlymoderatelyfavorable;heavywetcloudshoveroverthearea.Ithasbeendrizzling,butitcouldclearuporrainintensely.Youlistentoyourradio.Meteorologistsarepredictingthatin48hours,theywillknowifatropicaldepressionismovinginlandoroutwardtotheAtlantic.Youthinkofonemoreoption.

4. Waittwotofourdays.Atthatpoint,choose#2iftheweatherpermitsor#3ifitdoesnot.

Whatdoyoudo?(Circleyouranswer.) #1 #2 #3 #4

3.TheCaseofHumanaandVerticalIntegration

Humana,Inc.,isoneofthelargestpubliclytradedmanagedcarecompaniesintheUnitedStates.Thecompanyhasabout6.2millionenrolleesin16states.ItoffersprimarilyHMOand PPO plans, along with Medicare and Medicaid insurance products and other

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administrativehealthservices.Earlyinitshistory,however,Humanapursuedandseeminglyfailedtocarryoutaverticalintegrationstrategy.Thecompanybeganinthenursinghomeindustry,developedintoasophisticatedintegratedhealthcarecompany,andthendivestedtobecomeamanagedcarecompany.Thiscaseposesmanyquestionsregardingthevalueanddifficultyofbecomingalarge,verticallyintegratedcompany.

Humana is a good subject for analysis and highly relevant to typical corporatehealthcaredecisionmakingbecauseithasexperiencedmultiplestagesofdiversificationanddevelopment,onbothaproductlineandcompanywidebasis.Atonetime,itwasoneofthelargesthospitalcompaniesintheUnitedStates,knownforitsefficiencyandcentralization.ItferventlypursuedexpansionintohealthinsuranceandofferedthisproductfirstinJanuary1984.

Humana'sHistoryIn 1961, four friends put up $1,000 each to found a nursing home. Subsequently theyexpandedintomorethan40facilities,andbythelate1960stheircompany,ExtendicareInc.,wasoneofthelargestnursinghomecompaniesintheUnitedStates.WiththepassageofMedicare,theybranchedintothehospitalbusinessandby1970ownedtenhospitals,whichbecamesoprofitablethattheydivestedtheirnursinghomesin1972.

Theychangedthecompany'snametoHumanain1974.Throughintensecostcontrols,centralization, and high volumes from growth, Humana achieved economies of scale andcontinued to earn significant profits. By the early 1980s Humana was one of the largesthospitalcompaniesintheUnitedStates.Humanadeterminedthatowningitsowninsuranceproductscouldbenefititshospitalsbygarnering70percentofreferrals,andsoitbegantoofferhealthplans.However,inrealityHumanawasunabletoattractmorethan46percent,anddifficultiesandconflicteruptedamongitshospitals, insurancedivisions,andmedicalstaffmembers.

Bythelate1980s,Humana'snetincomeplunged,promptingthecompanytorestructureits hospital and insurance businesses. By the early 1990s, its managed care plans weregenerating more than $2 billion in revenues and had become more profitable than itshospitals. Finally, in 1993, Humana spun off its hospital division of 76 facilities into acompanycalledGalenHealthCareInc.,whichmergedwithColumbiaHospitalCorporationsixmonthslater(seewww.fundinguniverse.com/company-histories/humana-inc-history/).

AnumberofsignificantproblemsmotivatedHumanatodivestitshospitalbusiness.Thefirstproblemwastheconflictingeconomicobjectivesofthehealthinsurancebusinessandthe healthcare-providing business. The purpose of a health insurance company is to sellinsurancepoliciesbykeepingitspremiumslow.Thebestwaytocontrolitsexpensesistominimize its customers’ use of healthcare services. The majority of a health insurancecompany's savings result from lowering the incidence and length of hospitalization. Incontrast,healthcareprovidersincreasetheirincomebyincreasingutilization.Theyhaveanincentivetogivetheirpatientsthebestandmostofeverything.Inthisway,theymaximizetheirpatients’welfareandtheirown.

Second,transferpricingencouragedtheuseofnon-Humanahospitals.Humana,likeallintegrated companies, used transfer prices (see chapter 4) to account for the sale of its

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hospital services to its insurance division. Generally, transfer pricing may be set at fullcharges, at cost of goods, or at a discounted rate. But surprisingly, despite the financialexpertise of Humana cofounder David Jones, Humana set the transfer prices for its ownhospitalshigherthanthemarketpricesforitscompetitors’hospitals.Asaresult,Humana'sinsurance division preferred to refer its patients to non-Humana hospitals. After all, thehospitalsthatwerenotownedbyHumanachargedtheinsurancedivisionless.Ironically,theverticallyintegratedfirmwaspayingtoputitspatientsincompetitors’hospitalswhilebedsinitsownhospitalsstayedempty.

Third, Humana's relationships with its physicians were problematic. Predominantly,HumanaorganizeditsHMOsaroundphysicianpracticesknownasIPA-modelHMOsinsteadofemployingdoctorsdirectly,asdidstaff-modelHMOs.WhatHumanarecognizedtoolatewas that the IPAs often didnot representHumana's best interests.Humana's HMOs, likeothersintheindustry,triedtotrimcostsbycuttingtheamountofmoneytheypaiddoctors.Because Humana's doctors were not on the company's staff but under a contractualrelationship with Humana as well as other HMOs, the doctors could—and did—retaliatewhenHumanaloweredtheamountitpaidtotheIPAphysicians,referringpatientsawayfromHumana'shospitalsandintocompetitors’beds.

Another problem concerned doctors not selected to be on Humana's HMO panels.PhysicianswhohadbeenexcludedfromtheHumanainsuranceplanwereoftenangry—soangry that they also started referring more of their patients to non-Humana hospitals.Humanawelcomedthesephysicianstoolateintotheinsuranceplan.Whenitfinallyincludedthem,yetanotherproblemsurfaced:Humanahaddiminisheditspowertoinfluencethesephysicians’ behavior. Humana's health insurance plan was not a significant part of thesenewly included doctors’ practices; it covered only a few of their patients, and Humanathereforehadlittlepoweroverthem.ThislackofincentiveandinfluencebredindifferenceamongphysiciansandoccasionedanincreaseinthelengthofHumanaenrollees’hospitalstays—andmanyoftheseextrahospitaldayswerespentinnon-Humanafacilities.

The fourth problem was costs. Humana's hospital costs grew because the hospitaldivision'smanagementwasdistractedbymanyofthecompany'snewacquisitionsandlackedexperience in the insurance area. David Jones had started the health insurance divisionpreciselybecauseof the largenumberofemptybedsinHumana'shospitals.Thesalariedphysicians in Humana's primary care centers did little to enhance referrals to Humana'shospitals.Humana'stightlycentralizedhospitalmanagementhadnoexperienceinguidingsalariedphysicianpracticesandcouldoffer littleadvice to theirphysicianmanagers.Thephysiciansearnedthesamesalaryregardlessofthenumberofpatientstheysaw,andmanyofthemfailedtodevelopapatientfollowingintheircommunities.Asanownerratherthanarenter, Humana was forced to pay the full costs of its hospitals and full salaries to itsphysicianswhethertheyhadpatientsornot.

In theearly1990s,HumanafoundthatowningbothHMOsandhospitalsput itatadisadvantagewhenitcametimetosigncontracts.Jonesstated,

Afterthestrategiesbegantoappeartosomeextentincompatible,westartedhavingtroublecarryingwateronbothshoulders.Itseemedthatifwesolvedaproblemforthehospitalitwouldcreateaproblemwiththehealthplan,and[viceversa].Wecouldseethatconflict,butamazinglyenough,itdidnotsurfaceforanumberofyears.Westartedin

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1983beinganintegratedcompany,andthestrategyworkedreasonablywellforawhile.Butitgotmoredifficultaswegotlarger,whichsurprisedme.Iwouldhavethoughtitwouldhavegotteneasieraswegotlarger.(Luke,Walston,andPlummer2004,243)

After the hospital divestiture, Humana divested and outsourced other operations. Itexitednumerousunderperformingmarkets,divestedaunitthatsoldandadministeredflexiblespending accounts, sold its wholly owned health centers, transferred the risk andadministrationofitslong-termdisabilityproductstoDuncanson&HoltServices,andsolditsMedicaresupplementandworkers’compensationbusinesses.

ThesetransactionsenabledHumanatofocusonacorebusinessofhealthinsuranceandtoinvestintechnologicalenhancements.Thecompanysoughttopositionitselfasaleaderinthe“digitalhealthplanindustry”andpossiblyasthefirsthealthplantooperatefullythroughthe Internet. During the 1990s, Humana made more than 20 corporate acquisitions andbecame one of the United States’ largest managed healthcare plans. By 2011, Humana'smedical benefit plans had grown to about 11.2 million members and its other specialtyproductstoapproximately7.3millionpeople,with76percentofitsrevenuescomingfromcontractswiththefederalgovernment(Humana2012).

Atonetime,Humanawasoneofthemostpowerfulverticallyintegratedplayersinthehealthcarefield.Asaresultofbothenvironmentalpressuresandthedifficultiesofsustainingaverticalorganizationinhealthcare,Humanahasbecomeastronghealthinsurancebusiness.

Questions1. WhatcanhospitalsconsideringverticalintegrationlearnfromHumana'smishaps?2. WhydidHumanaintegrateandthenevolveintoamanagedcarecompany?3. DidHumanaactmostefficientlybydivestingitsproviderassets?Whatmightthe

companyhavedonetoovercometheproblemsinherentinmanagingbothproviderandinsuranceoperations?

4. DidHumanahavedifficultytransferringmanagerialknowledgeacrossbusinesslines?Whyorwhynot?

5. Wasverticalintegrationanissueasaresultofthefourproblemsmentionedinthecase,orisitanissueinalllargeorganizations?HowcanlargenessaffectthemanagerialabilityofacompanysuchasHumana?

6. WhatproblemsdidHumana'schoiceoftransferpricingpresent?WhywerethetransferpricesofHumana'shospitalssethigherthanmarketprices?WhatrecommendationwouldyouhavegiventoHumana?

7. Whatwerethespecificreasonsphysicianrelationshipsandincentivescausedproblems?Whatstructuralorincentiveplansmighthavehelpedresolvetheseproblems?

4.AnOrthopedicGroupDecidestoConstructaSpecialtyHospital

The“AboutUs”webpageofOrthoIndy,anorthopedicgrouppracticebasedinIndianapolis,Indiana,states:“Withover80physiciansprovidingcaretocentralIndianaresidentsfrom

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morethan10convenientlocations,OrthoIndyprovidesleading-edgebone,joint,spine,andmusclecare.”

OrthoIndy has adjusted its practice over time. For years its physicians took patientemergencycallsforallhospitalsintheareaandprovidedservicestoalltypesofpatients.Asthe market became more competitive and the physicians’ incomes declined slightly,OrthoIndydecidedtoreducecallsandcoveronlykeyfacilities(MethodistHospitalsbasedinGary, Indiana, and Indianapolis-based St. Vincent Health) and stopped treating Medicaidpatients.Thisdecisionupsetmostofthehospitalsinthearea,aswellasorthopedistswhowerenotaffiliatedwithOrthoIndy.SomeofOrthoIndy'spartnerswereconcernedabouttheethicalandpoliticalramificationsofthedecision,butultimatelyallpartiesagreedwithit.Althoughthesechoicesimprovedtheincomeandlifestyleofthepracticingphysicians,theywishedtoaugmenttheirsalariesfurther.Thegrouppracticealreadyownedalarge,profitablesurgicalcenter.

TheOrthoIndygrouphadalwaysbeensupportiveofcommunityactivities,especiallysports.Itservedmorethan15teams,includingprofessionalfootball,basketball,andracingteams,aswellashighschoolteams.OrthoIndy'spatientcommitmentisstatedonitswebsite(Revolvy2017):

ThephysiciansandstaffatOrthoIndyandIOHarecommittedtoourpatients.ThefollowingisourcommitmenttoYOU:

AtOrthoIndy,ourphysicianssetouttocreateapatientexperienceunlikeanyotherinCentralIndiana.Theresult,theIndianaOrthopaedicHospital[is]oneofthehighestrankedfacilitiesinthecountryforpatientsatisfaction.

Our patients are at the center of everything we do, and their collective experience—both clinically andpersonally—istheresultofeveryinteractiontheyhavewitheachpersoninourhospital.Andthat'swhywestrivetotreatourpatientsasmembersofourownfamilyinalike-homeenvironment.AtOrthoIndyandIOH,ourhighly-skilled physicians and staff are committed to our patients’ health, safety and the comfort of their individualorthopaediccare.

Theopening(orimpendingopening)offourspecialtyhearthospitalsintheIndianapolisareacausedOrthoIndytoanalyzethepotentialforajoint-venturedorthopedichospital.Frommanyofthephysicians’perspectives,thecardiologistsworkingatthenewhearthospitalswere gaining a new stream of revenue and, along with their partners, would be able toprovidenew,beautifulfacilitiesandequipmenttoattractbetter-payingpatients.Followinglengthyandsomewhatheatedarguments,OrthoIndydecided toproceedwitha for-profit,partnership-style organization—a state-of-the-art hospital that would specialize inmusculoskeletalcare.OnlymembersofthegroupcouldbecomepartnersinthenewIndianaOrthopaedic Hospital. Those with ethical or other reservations could distance themselvesfromtheventure.

Theplanwastofast-tracktheopeningofIndianaOrthopaedicHospitalbyshorteningitsconstructiontimebysixtotenmonths.OrthoIndy'sleadersjustifiedtheventurebyassertingthattheirstand-alone,state-of-the-artfacilityownedandoperatedbyOrthoIndyphysicianswouldprovidepatientshigher-qualitycareandbettertreatmentoptions.

Byofferingvariousservices,OrthoIndyaimedtodifferentiatethenewhospitalfromtheother general hospitals practicing orthopedics in its market area. From admission todischarge,patientswouldenjoya“like-home”atmosphere,completewithsatellitetelevision

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andaccesstoe-mailandtheInternet.Patientroomswouldbespaciouslyandwellappointedandwouldincludeaworkorreadingnookforfriendsandfamilymembers.Afterdischarge,patients would enjoy additional conveniences, such as coordinated postoperativeappointments with their physician's office and referrals to the state-of-the-art, on-campusphysicaltherapycenter.

With great effort, construction crews completed the hospital on time. The followingannouncementwaspublishedonitsopeningday(PRNewswire2005):

INDIANAPOLIS,March1—OrthoIndyannouncedtodaytheopeningoftheIndianaOrthopaedicHospital,centralInd.'sfirstandonlyorthopaedicspecialtyhospitallocatedatI-465andWest86thStreet.Spanning130,000squarefeet,thehospitalrepresentsa$50millioncommitmenttothecityofIndianapolis,itsresidentsandtothepatientswhowillreceivecareatthisstate-of-the-artfacility….

TheIndianaOrthopaedicHospitalwasbuiltwhenOrthoIndyphysicianssawan increasingneed todeliverspecializedorthopaediccareinapatient-focusedenvironment.Approximately60physiciansfromcentralInd.willpracticeatthehospitalthatwillfocusoncomplexsurgicalprocedures,includingtotaljointreplacementsandspinalcases.Amenitiesinclude10spaciousandtechnologicallyadvancedoperatingsuites,37patientrooms,39preandpost-operative rooms, 16 post-anesthesia care unit (PACU) rooms, an imaging center with digital radiography,MagneticResonanceImaging(MRI),andCatScan(CT)availability,inandoutpatienttherapyservices,apharmacyand cafeteria. Additionally, each patient room features a workspace area for guests and is equipped with theGetWellNetwork™ which provides patients with an Internet connection, satellite television and access to patienteducationalmaterials.

Interestingly, about a year later, one of the larger hospitals in the area—St. VincentHealth—spent$9milliontoimproveitsorthopedicservicesbyforminga61-bedorthopediccenterandtocreate“somethingthatwillbethebestintheMidwestfororthopediccare.”Other area healthcare leaders were expected to respond to St. Vincent's investment inorthopedicsandincreasethecompetitioninthismarket(Murphy2006).

Questions1. WhatstrategyperspectivesdidOrthoIndyemployindeterminingtobuilditsown

hospital?2. DoyoubelieveOrthoIndy'sstrategictacticsworked?Whyorwhynot?3. WasthestrategycongruentwithOrthoIndy'smission?Whyorwhynot?4. Whateffectdoyouthinkthenewconstructionhadonconsumers?5. DoyouthinkthataspecialtyhospitalsuchasIndianaOrthopaedicHospitalwould

increaseordecreasethecosts,quality,andavailabilityofcareforconsumers?6. Howwerethegeneralhospitalsnearthespecialtyhospitalsaffected?WhydidSt.Vincent

Healthcreateitsownorthopediccenter?7. HowdidOrthoIndy'sbusinessmodeldifferfromthoseofothercompetitors?

5.TheStruggleofaSafetyNetHospital

Thecostsofcaringforuninsuredandunderinsuredpatientsareshoulderedbybothpublicandprivateorganizationsbutoftenfallprimarilyonolder,publiclyownedfacilities.Thecostpressuresanddemandsforcareoftenfarexceedthebudgetsandresourcesofmanypublic

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providers.WishardHealthServices, located inIndianapolis, Indiana, isanexampleofapublic

providerthathasstruggledtopositionitselfstrategicallytoachieveitsmissiontocareforthepoor of Marion County. Its mission, vision, and values are as follows (Wishard HealthServices2013):

OurMissionThemissionofWishardHealthServicesisto:

AdvocateCareTeachServe

withspecialemphasisonthevulnerablepopulationsofMarionCounty.

OurVisionWishardHealthServiceswillenhancecontinuouslyourabilitytomeettheneedsoftheunderservedandallpeopleofMarion County, will be sound economically, and will lead innovatively in clinical care, research, education, andserviceexcellence.

OurValues

ProfessionalismRespectInnovationDevelopmentExcellence

By 2003, Wishard was under tremendous pressure. The hospital was owned andoperated by the county and, as noted, had a mission to care for the vulnerable andunderservedpopulationofthecounty.Althoughtherewerealmostadozenotherhospitalsinitsserviceareathatprovidedsomecaretotheindigent,thecountyhospitalwasseenasthemainproviderforthissegmentofthepopulation.Althoughtheotherhospitalsdidnotrefusetoprovideemergencycareforthepoor,mostelectiveMedicaidandindigentpatientswereroutinelysenttoWishard'sfacilities.Almost90percentofitspatientswerecoveredbyagovernmentprogramorhadnoinsurancecoverage.Asaresult,revenueswerealwaysshort,operatinglosseshadtobesubsidizedbytaxrevenues,andcapitalprojectswereconstantlydeferred.Withnofundstoexpandorrefurbishitsfacilities,WishardHospitalandWishard'sclinicswereextremelycrowdedandlookedoldandworn.Thefacilities’condition,coupledwith their location in a poor part of Indianapolis, Indiana, discouraged the patronage ofinsuredpatients.

In2003,thesituationseemedtobeworseningfurther.Wishardwasindeepfinancialtrouble, and its executives discussed ways to reduce the system's losses. Wishard's CEOpubliclystatedadeepconcernabout the144-year-old institution's future.WishardHealthServices included its 492-bed hospital, six community health clinics, and MidtownCommunityMentalHealthCenter,whichtogetherservedabout800,000patientsperyear.AccordingtoDr.RobertB.Jones,thehospital'smedicaldirector,50percentofthosepatients

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wereinsuredbyMedicaidorMedicare,and40percenthadnoinsurance.CityofficialsalsowereworriedaboutthefinancialhealthofWishardandtalkedabouta

potentialshortfallofbetween$20millionand$80millionoutofa$385millionbudget.ThebestestimatewasthatWishardwasontracktoendtheyearwithspendingat$35million,butitcouldturnouttobemuchworse.Thehospitaldidhavecashreservesthatcouldcoverthisdeficit in 2003, according to Wishard's president Matthew Gutwein. But if the deficitcontinuedandworsenedin2004asexpected,thisreservewouldbecompletelyempty,andWishardessentiallywouldbebrokebytheendof2004withevenworseyearstocome.

Wishard'sabilitytosurviveandfulfillitsmissionwasseriouslychallenged.Theprimaryfactorscontributingtothedeeplossesincludedthefollowing:

DecliningreimbursementsfromtheMedicareandMedicaidprogramsfortheelderlyandpoor(Forevery$1inhospitalbillssubmittedtothetwofederalprograms,Medicarepaidjust82cents,comparedto89centsfouryearsearlier.Medicaidpaid70centsforeverydollarofservice,downfrom90cents.)Increasingnumbersofpatientswithoutinsurancetopaytheirbills(Nationwide,thenumberofuninsuredhadreached43millionresidents,700,000ofwhomwereinIndiana.)Continualhikesinthepricesofdrugsandnewequipmentandinwagesfornursesandspecialists,whowerealwaysinshortsupplyStiffcompetitionfromspecialtyhospitalsandsurgerycentersthatappealedtowell-off,payingpatients,whommainlinehospitalsdependedontoearntheirprofitsAweakstockmarketthatsenthospitalendowmentinvestmentincomeplummeting

Something had to be done, and Wishard was seriously considering almost all of itsoptions,includingthese:

ClosingWishard'sheavilyusedandhighlyrespectedemergencydepartmentMergingwithClarianHealth,whichoperatesIndianaUniversity,RileyChildren's,andMethodisthospitals,orenteringjointventures,potentiallyinvolvingconstructionprojectsBuildingahospitaltoreplaceWishardfacilities,someofwhichhadbeenbuiltin1914Increasingcopaymentsforoutpatientstoreduceunnecessaryoutpatientvisits

Wishard's CEO stressed that construction of a new hospital would not be likely foranother 5, 10, or even 15 years, depending on the pace at which fundraising set asidesufficient monies for construction or on the ability to pass a county bond to fund theconstruction.Theconstructionwouldbeveryexpensive;replacementofthewholefacilitycouldcostupto$750million.

WhileWishardwasstrugglingtodecidewhattodo,aconstructionboomoccurredandcompetition increasedamongareahospitals.HospitalsaroundIndianapoliswerespendinglavishly,investingmorethan$700millioninneworupdatedfacilities,mostwithinteriordecorandlobbiesfitforluxuryhotels.TheseelaboratenewfacilitiesmadeWishardappearevenworseoff.

ThisnewfocusonconsumerismandprofligatespendinginthehospitalbusinessgaverisetowhatDanielEvans,presidentofClarianHealth,called“mindlesscompetition.”For

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example, the$60millionHeartCenterof Indiana inCarmel,whichopened inDecember2002,offeredcooked-to-ordermeals.City-focusedClarian,thelargesthealthcaresysteminthearea,expandeditsmarkettothesuburbsbybuildinga$150millionhospitalinHendricksCountyanda$235millionhospitalinCarmel.TheHendricksCountyMedicalCenterwassituated in a parklike setting that included a half-mile of walking trails in a sereneenvironmentintendedtoreducethestressofavisitorstayinthehospital.Tokeeppatientsandattractnewones,bothSt.VincentandCommunityHospitaltookonphysiciangroupsasequity partners in their heart hospital projects, while Clarian sought to partner withphysicians at its two for-profit suburban hospitals. St. Vincent opened a $24 millionchildren'shospitalin2003,becomingthefirstfacilitytocompeteheadtoheadwithClarian'sRileyHospital forChildren,previously theonlychildren'shospital incentral Indiana.St.Vincentalsoopeneda$15millioncancercenter,completewithaserenitygardenandanindoorwaterfall,whileClarianplannedtocounterwithanevenlargercancercenternearIUHospital.

Areahospitals’struggletocompetewascompoundedbythemarketentryofnationalfor-profitproviders.Forexample,almostalllocalhospitalsofferingcancercarelostbusinessto an aggressive for-profit operator, U.S. Oncology, which opened four cancer treatmentcenters in theIndianapolisarea in theprevioussixyearsunder thenameCentral IndianaCancerCenters.Thesefreestandingcenterswereprojectedtotreatmorethan43,000patientsin2003.Thecancercenterscouldhandlepatientsatalowercostbecausetheylackedlargehospitals’ overhead stemming from their big maintenance staffs, parking garages, andbuildingneeds.

ThehospitalsalsofacedcompetitionfromOrthoIndy,alargeorthopedicspracticethatwasbuildinga$30millionorthopedichospital,andthe60-roomHeartCenterofIndiana,whichfeaturedahighlytrainedstaff,oneofthefirstall-computerizedpatientrecordsystems,and furnishings befitting a Fortune 500 firm. Other hospital sites also demonstratedopulence.Clarian'sfuturistic$40millionPeopleMoverwasdesignedtoferrydoctorsandstaffovercitystreetstoitsscatteredhospitals,andthelobbyofClarian'stwo-year-old,$30millioncardiovascularcenterfeaturedaterrazzostonefloor.

Amid all of this change, most hospitals were receiving lower reimbursements frominsurersthantheyhadpreviously,andthegrowingdemandforcharitycaredecreasedtheprofitability of three of Indianapolis's four largest hospital networks. The following tableshows these threenetworks’ revenue,earnings,andfull-timeequivalents in2002and thepercentagechangeinrevenueandearningsfrom2001.ThefiguresforSt.Vincent,thefourthnetwork,arefromthefirsteightmonthsofthe2002–2003fiscalyearandincludeitshospitalinCarmel.

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Althoughtheirreimbursementsandprofitsdecreased,allofthehealthcaresystemsexceptWishardstillmademoneyin2002.

WhatShouldWishardDo?Somebelievedthatthedaysofastand-aloneWishardwereover.Dr.Brater,deanoftheIUMedicalSchool,believedthattherewerestrongreasonstoconsiderbringingWishardintothe Clarian network in a formal way. Few (if any) inner-city, tertiary hospitals providinghigh-level,specializedcarecouldsurvivewithinaone-mileradiusofeachother.In1995MethodistHospitalmergedwithIU'shospitals,whichwerelocatedlessthanonemilefromWishard.Amergerwouldpotentiallyeliminateduplicationofservicesandcreateeconomiesofscale.

WouldClarianagreetotakeonWishard'smassivecommunityburdenofindigentcare?What effect would this liability have on the competitiveness of Clarian Health Partners,especiallyaftertheconstructionandfinancialcommitmentsithadrecentlymade?

Short of a merger—which was not a foregone conclusion—Clarian and Wisharddiscussed ways to collaborate and save money. They considered options that would beinvisibletopatientsandthepublic,suchasjointbillingandpurchasing.Collaborationonmedicalinitiatives,evenjointventuresinvolvingconstruction,alsowasapossibility.Somecollaborationalreadyexistedbetweenthetwo.Wisharddidnotprovideopen-heartsurgery,soitsentitsopen-heartsurgerypatientstoClarian.Wishardoperatedaburnunit,whereasClarian'slocalMethodistHospitaldidnot,soClariansentitsburnpatientstoWishard.

Wishardwasrecognizedasanimportantpartofthearea'shealthcaresystem.TheotherareahospitalsandcommunityknewthatclosingWishardwouldhaveadevastatingimpactonarea healthcare providers in that they would have to absorb the indigent care. Indigentpatientswouldalsohaveamuchmoredifficulttimefindingcare.

Mark Mueller, a patient whose perspective on Wishard had changed with his ownfortunesandhealthproblems,exemplifiedthestruggleofindigentpeopletoobtaincare.HecountedonWishardforalmostallofhishealthcare—infact,hislifedependedonit.Hehadbeendiagnosedwithdiabetes,andhiskidneyshadfailed.Hehadbeenunemployedforsixyearsandlivedondisability.Hehadlosthisinsurancecoverage,soWishardwastheonly

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placehecouldgoforcare.“Iwouldn'thaveanyoptions,”saidMueller,awidower.“Ijustdon'tseehowthepoor…well,alotofthemwon'tsurviveifWishardgoesdownthetubes”(Penner2003a).

AnInterimSolutionWishardhad todosomething tostemits losses.Frustrated,Wishard'sboardrealized thatmost of the options it had considered were too long-term or impractical. However, itseriously discussed yet another option—increasing and enforcing copayments. While theoverallpurposeofWishardwastocareforthepoor,themorepoorpatientsitserved,thegreater the hospital's losses. In an effort to reduce the number of visits by poor patients,Wishard implemented a new copayment policy on October 1, 2003, that dramaticallyincreasedcopaymentsforpatientsvisitingphysicianclinicsandusingemergencydepartmentservices.Althoughrevisionsofthispolicyin2004decreasedtheamountofup-front(timeofservice)copaymentrequiredofself-paypatients,copaymentsstillrangedfrom$35to$120,asignificantamountformostindigentpatients.

Collectionofcopaymentsalsobecamevigorouslyenforced.Inthepast,theclinicsandtheemergencydepartmentoftenoverlookedit,understandingthatmanyoftheirpatientshadlittleornomoney.Beginninginlate2003,eachclinic,hospital,andemergencydepartmentwasrequiredtocollectcopaymentsfromallnonemergencypatientsupfront.

Someboardmembersandphysicianswereconcernedthatthispolicywoulddiscouragevulnerable patients from seeking care. They speculated that pregnant women might skipphysicianvisitsandwinduprushingtotheemergencydepartmentatthetimeofdelivery.Theyalsofearedthatpatientswithdiabetesandhypertensionmightself-treatandseekcareonlyinemergencies,whichcouldincreasehospitalstaysandtheoverallcostofcare.

Wishardcontinuedtostruggletofinditsstrategicdirection.Theonlycertaintywasthatthefuturewouldbecomeonlymoredifficultforallhealthcareproviders,especiallythoselikeWishardthatprimarilyservedpoorandvulnerablepopulations.

Sources:Penner(2003a,2003b);Swiatek(2003).

Questions1. WhatwasWishard'scompetitivesituation?2. DidWishardhavedirectcompetitors?Ifso,inwhatareasdiditcompete?3. WhatstrategicleveragedidWishardhaveovertheotherareahospitals?4. Fromasocietalperspective,whatproblemsoccurbyhavingastand-alonepublichospital

withaprimarymissionofservingtheindigentpopulation?5. WhatstrategicstepswouldyourecommendforWishard?

6.St.John'sReengineering

St.John'sHospital,amedium-sizedhospitallocatedinSeattle,Washington,wasestablishedin1894withaprimarymissionofcaringforthesickanddowntrodden.Thehospitalhadgrownanddevelopedasasolofacilityuntil2000,whenitmergedwithasuburbanhospital,

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St.Agnes.Thismergercausedmanychangesintheorganizationalstructureofbothhospitals.Acorporateofficewasestablishedandlocatedapproximatelyhalfwaybetweenthefacilities.The president of St. John's, Abhishek Ghosh, was promoted to the position of corporatepresident,andthepresidentofSt.Agnesbecametheseniorvicepresident.

Theearly2000swasabusytimeforthecorporateoffice.By2002,ithad45employees.Thehospitalsdiversifiedtheirorganizationbypurchasinganumberofurgentcarecenters,physicianofficepractices,andskillednursingfacilities.Ghoshwascertainthatintegrationwouldcreatestabilityandfinancialsuccess.However,theurgentcarecentersandtheskillednursing facilities barely broke even, and the physician office practices lost almost half amillion dollars per year. As the years progressed, it became increasingly critical for thehospitals to generate enough cash flow and profit to subsidize the other parts of thecorporation.

Bothhospitalsdidreasonablywellintheearly2000s,butwithreductionsinMedicaidandMedicarereimbursements,theirmarginsnarrowed.By2003,bothhospitalswereearninglessthana2percentnetprofitmargin,andtheprospectsfor2004seemedworse.In2003,patientrevenuesdidnotcoverexpensesforthefirsttime.Afterseeingthesefigures,Ghoshcalledanemergencyexecutivesession.Thoseinattendanceincludedthepresidentsofbothhospitals,Ghosh,andcorporatelegalcounsel.Theonlyitemontheagendawastofigureoutwhattodotogetbackintotheblack.

ThefirsttospeakwasJoeAlexander,whoatthatpointhadservedascorporatecounselforfouryears.Hehadbeenastaunchpromoteroftotalqualitymanagement(TQM)sinceithadbeenintroducedin1993.However,becausethesystemhadnotprosperedrecently,heandmanyothershadbecomediscouragedwiththeprinciplesofTQM.Somethingstrongerwasneededtoreenergizethehospitalsandcorporation.Afewweekspriortothemeeting,Alexanderwasponderingthisdilemmaasheopenedtheafternoonmail.Amonghismanyletters,abrightmailercaughthiseye.Itwasaninvitationtoa localseminaronhospitalreengineering. He had read material about reengineering in Fortune and other popularmagazinesandknewthatprominentcompanieslikeTacoBellandAT&Tclaimedtheyhadexperiencedhugeimprovementsasaresultoftheirreengineeringefforts.Thelocalseminarcost only $250, so he decided to attend. He finished the seminar the day before theemergencyexecutivesession.

“I just came back from a seminar that may be the ticket to saving our hides,” saidAlexander.“Reengineeringhasbeenwidelyused inmany industries to radically improvefirms’costs,quality,andspeed.Iwishwehadlearnedmoreaboutthisopportunityearlier;wemightnothavewastedsomuchtimeonTQM.”

“Tellusmoreaboutit,”saidGhosh.“Well,it'sawaytoimproveprocesses.Everythingwedoinanorganizationinvolves

processes.Reengineering involvesdesigningand implementing themostefficient,neededprocesses. It dramatically lowers costs—some say as much as 30 percent—and improvesquality.”

Additionaldiscussionensued,duringwhichthedecisionwasreachedtoputAlexanderinchargeofanefforttoreengineerbothhospitals.

With great enthusiasm, Alexander took the corporate chief financial officer (CFO),

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Yoon Tae Chong, to another conference to learn how to implement this great processinnovation.Theywantedtobethorough,sotheyworkedwithanexternalconsultingfirmanddevelopedaseriesofprinciplesonwhichtofocus.AlexanderpresentedthemtoGhoshforapproval.

Alexanderstated,“Thankyoufortheopportunitytodevelopthisprocess.Ithinkwithour team and these guiding principles we can really reduce our costs and strategicallypositionourselvesforcompetitiveadvantage.”

Ghoshsaid,“Tellmeagainthesevenprinciplesyoudeveloped.”Alexander responded, “First, process-oriented organization, benchmarks set as

achievementgoals,andblanksheets(biasesaretoostrongamongestablishedpeople).Afterthosethree,standardizationbetweenthehospitalsandemployee-ledteams(whichare themostefficientstructurebecausetheyreducetheneedformiddlemanagers).Thenweshifttothreekeyareasoffocus:access,materials,anddeliveryofcare.Andfinally,dealingwithunionissuesdefacto.IjustneedyourapprovaltogetmovingandtogetYoontohelpusstartsavingmoney.”

“Joe,Ithinkyou'vedoneawonderfuljob,”repliedGhosh.“Gettoworkandlet'sgetthishospitalsysteminshape.”

Alexanderquicklybegantoorganizeanimplementationteam.HebroughtinSecondChanceConsultingInc.,andwith theCFO,selected36employees fromeachof the twohospitalstodesignchanges.Theseemployeesweredividedintothreegroups.Onegroupwasputinchargeofaccess,oneinchargeofmaterials,andoneinchargeofdeliveryofcare.Theconsultantssetbenchmarksof20percentreductionsincostsineacharea.Alexanderwasconcernedthatstaffinthekeyareasmightberesistanttochangingtheirprocesses,andhewantedafreshperspective.Hethereforeaskedthatallofthepeopleinvitedtoparticipatebeassigned to areas outside their own. He also decided not to include any of the hospitalmanagersanddepartmentheads,believingtheywouldnotrepresentthebestforthehospitalasawhole.

Theteamsspentatotalofsixweeksintensivelydesigningnewstandardizedprocessesthat could be implemented across the two hospitals. At hospital roadshows, corporatepersonneltalkedaboutthegreatchangesthattheteamsweredesigning.Staffweretoldthatthechangeswouldsavethehospitalsfromruinandreversetheirfortunes.

However, some expressed skepticism. As the date of implementation neared, thehospitals’ administrators—perturbed by what they considered a show of disloyalty—toldmanagers that those who did not support the effort should look for other work. Dissentimmediatelywentunderground,andtheadministratorsbelievedtheyfinallyhadallmanagersonboard.

Attheendofthesixweeks,leadershipdraftedadetailed“battleplan”toreengineertheorganization.Fourfromeachteamwereretainedtoimplementthedesignedsolutions.Therestoftheteammembersdisbanded.Eachemployeeinvolvedindesigningthechangeswasgivenalaptopcomputerasthanksforherwork.

The first action was to eliminate two-thirds of the nursing middle managers. Thischangewasprojectedtoyieldsavingsof$2millionperyear.Itwasinstitutedtopromoteteam-basedauthorityamongthenursingunits,althoughmanynursesfearedthatqualityand

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communicationwouldsuffer.Otherchangessoonfollowed.Thecafeteriawaseliminated;patientfoodmenuswereminimized;anewpositioncombiningfoodservice,housekeeping,andtransportationwascreated;andtheadmissionsstaffwascutbyhalf,amongothermajorchanges.

Hospitalexecutivesrequiredthatemployeesimplementchanges,butmanagersandrankand file found that many were impractical. Some issues caused by the changes were notaddressed,suchasadmittingMedicaidpatientsafterhalfoftheadmissionsstaffhadbeeneliminated.AccesstothehospitalslowedtoacrawlbecausemanyMedicaidpatientshadtowaitforverificationofbenefits.Theeliminationofthecafeteriaforcedemployeestobringinfoodorleaveformeals,reducingemployees’worktime.Theminimizationofpatientfoodmenus was a disaster. The three same menus were rotated over and over, and dinner onWednesdayswasalwaysthesame:cornedbeefandcabbage.Patientcomplaintsaboutfoodskyrocketed.

The hospital unions also complained and refused to cooperate. The new positionrequiredalotofcross-training,andtheuniondemandedwageincreasesforeachnewskillemployeeshadtoacquire.Mostnewpositionsincreasedexistingpersonnel'swagesbyabout$1.00/hour.Materialsmanagementwasdecentralized,and18newpeoplehadtobehiredasaresult;thischangeseemedtoincrease,notdecrease,costs.

Although the changes clearly were not producing positive results, managers werereluctant to express their concerns to hospital administrators. The executives remainedpositiveandwerecertainthatthechangeswouldsavetheirhospitals.Alexandercontinuedtobeabigsupporterofreengineeringandcitedsabotageandbadattitudesasreasonsforthelackofsuccess.Hisfocuswastostaythecourseandfullyimplementtheplan.Heremindedmanagersthatloyaltyandcommitmentwererequiredtomoveforward.

After a tumultuous year of implementing the changes, the hospitals’ financial lossesaccelerated. Costs did not decline significantly, but the number of patients declined.Employeeandpatientsatisfactionwereatanall-timelow.St.John'sboardoftrusteesbecameconcernedandbegantoquestiontheorganization'sdirection.

Questions1. WhatproblemsaroseduringthereengineeringatSt.John's?2. HowcouldtheexecutiveshaveimprovedtheprocessofchangeatSt.John's?3. Whatnextstepswouldyouhaverecommendedtothecorporation'sboard?

7.TheBattleinBoise

OnewouldnotexpectIdaho,astatewithfewerthan2millionresidents,tobehighlightednationally as an example of heightened conflict among physicians and hospitals.Nevertheless,competitivepressuresandthetrendofphysicianemploymenthaveprofoundlychangedthestate'shealthcaremarket.In2012,thedominantSt.Luke'sHealthSystemanditssmaller competitor, Saint Alphonsus Health System, employed about half of the 1,400doctorsinsouthwesternIdaho.

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St. Luke's is a regional health system consisting of seven medical centers insouthwestern Idaho. Its largest facility is a 399-bed hospital in Boise. The system hasexpandedintherecentpastandcontrolshospitalsinTwinFalls(228beds),Jerome(25beds),Ketchum(25beds),andMcCall(15beds)(St.Luke's2013).ThesystemalsoaggressivelyprepareditselfforthechangesthatwillbeinstitutedbytheAffordableCareAct.

SaintAlphonsus,ontheotherhand,belongedtoTrinityHealth,alargenationalsystemofapproximately30hospitals.SaintAlphonsushadtwofacilitiesinsouthwesternIdaho:the381-bedSaintAlphonsusRegionalMedicalCenterinBoiseanda152-bedhospitalinNampa(TrinityHealth2017).

By2012,accordingtoanarticleintheNewYorkTimes,manyindependentdoctorswerecomplaining that both hospitals in Boise, especially St. Luke's, had too much power andcontrolovertheirmedicalpractices(CreswellandAbelson2012b).ThedoctorsaccusedSt.Luke'sofdictatingwhichtestsandprocedurestoperform,howmuchtocharge,andwhichpatients to admit. Independent specialists claimed that their referrals from the physiciansemployed by St. Luke's had dropped sharply and that patients frequently paid more fortreatmentatthehospitalthantheywouldpayatanindependentphysician'soffice.

Atthesametime,employedphysiciansvoicedgrowingpressuretomeetthefinancialgoals the hospitals had set for them, which in the physicians’ opinions often entailedunnecessarytests,procedures,andhospitaladmissions.

Althoughthetwohospitalshavecompetedfordecades,theirrivalryintensifiedintheyearsjustpriorto2013.SaintAlphonsus,tryingtoslowSt.Luke'sperceiveddomination,evensoughtacourtinjunctiontostopSt.Luke'sfrombuyingphysicianpractices.Thislegalmaneuver claimed that St. Luke's market dominance allowed them to raise prices and todemand exclusive or preferential agreements with insurance companies. As an example,SaintAlphonsusclaimedthatthepriceofacolonoscopyhadquadrupled,andthatSt.Luke'schargesforlaboratoryworkwerenearlythreetimesthefeeschargedbyothersinthemarket.SaintAlphonsusarguedthatSt.Luke'sdominancewashurtingSaintAlphonsus'sbusinessandcreatingsteepdeclinesinhospitaladmissionsandreferralsfromphysiciansemployedbySt.Luke's.

St.Luke's justified itsactions,saying itwaspositioning itself tobettercompeteandimprove itsability tocoordinatepatientcarewhenitwas tobecomeanaccountablecareorganization(ACO).ACOsrequireclosecoordinationbetweenhospitalsandphysiciansandare predicted to cut healthcare costs by eliminating unneeded procedures and tests andkeepingpatientsoutofthehospital.

Asaresult,theFederalTradeCommission(FTC)andtheIdahoattorneygeneralbeganto investigate St. Luke's. Jeffrey Perry, an assistant director in the FTC's Bureau ofCompetition,wasquotedintheNewYorkTimes:“We'reseeingalotmoreconsolidationthanwedid10yearsago.Historically,whatwe'veseenwiththeconsolidationinthehealthcareindustryisthatpricesgoup,butqualitydoesnotimprove”(CreswellandAbelson2012a).

Thenumberof independentphysicians in theUnitedStates is rapidlydecreasing. In2000, 1 in every 20 physician specialists was a hospital employee. By 2012, 1 in 4 wasemployed and 40 percent of primary care physicians were hospital employees. By oneestimate,Medicareispayingupwardofabilliondollarsmoreannuallyforthesameservices

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becausehospitalscanchargemorewhentheirdoctorsareemployees.Forinstance,lasereyesurgerycancost$738whenperformedbyahospital-employeddoctor,comparedto$389whendonebyanindependentdoctor.Likewise,anechocardiogramcancost$319ifdoneinahospitalversus$143ifperformedinanindependentdoctor'soffice.

EmployedphysiciansinBoisealsostatedthattheywerestronglyencouragedtorefertootherdoctorsworkingfortheiremployer,evenifthosedoctorswerenotthebestchoiceofprovider for their patients. (Hospitals employing physicians have financial incentives toretainreferralsandadmissions.)InBoise,doctorsemployedbySt.Luke'swerepressuredtorefer only within the St. Luke's system, according to Saint Alphonsus's complaint. SaintAlphonsusclaimeda90percentdropinadmissionstoitshospitalsbyphysiciansemployedbySt.Luke's.Thecomplaintalsocontendedthatindependentdoctorsinanearbycommunityoftensentpatients40milesawayforCTscansbecauseof themuchhigherpricesatSt.Luke's.

Mr.Pate,St.Luke'sCEO,statedintheNewYorkTimes thatpricesforsomeoftheirserviceshadincreased,buthejustifiedtheincreasebysuggestingthattheserviceshadbeenexceptionallyunderpriced.HebelievedthatoverallcostswoulddeclineatSt.Luke'sasaresultofphysicianemploymentbecauseitwouldbebetterabletocoordinatecare,preventexpensiveemergencydepartmentvisits,andeliminateredundanttests.Nevertheless,manyareaphysiciansremainedskepticalthatpatientswouldbebetterserved,especiallyafterthepriceincreases.

Sources:CreswellandAbelson(2012b);Jameson(2012).

Questions1. TheAffordableCareActencouragedverticalintegrationandconsolidationtoimprove

thecoordinationofcare.However,toomuchconsolidationcangiveoneorganizationtoomuchmarketpower.Whatcouldbedonetobalancetheneedtocoordinatecareandmaintainsomelevelofcompetition?

2. Whataretheadvantagestodirectingphysicianreferralswithinonesystemofcare?Disadvantages?

3. Whycouldcosts(orcharges)increaseifservicesareperformedwithinahospitalsettingversusinanindependentphysician'soffice?

4. Howcouldvirtualintegrationbeusedtocoordinatecarewithoutraisingfixedcosts?

8.ResponsetoSt.Kilda'sACOOffer

InJanuary2013,St.Kilda's,ahealthcaresystemlocatedontheWestCoast,wasselectedbytheUSDepartmentofHealth&HumanServices(HHS)toformanewaccountablecareorganization(ACO)toencouragegreaterphysicianandhealthcareprovidercoordinationandhigher-qualitycare.Atthattime,HHShadassistedinsettingup250ACOsforMedicarebeneficiariesthatsetstandardsforqualityandfurnishedsharedsavingsforproviders.Qualitymeasures were guided by the 33 indicators that the Centers for Medicare & Medicaid

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Services(CMS)hadestablished.St.Kilda'sreasonsforcreatingtheACOincludedthefollowing:

Takingaleadershiproleinprovidingeffective,evidence-basedcarethattrulyservestheneedsoftoday'spatients,families,caregivers,andcommunitiesBuildingastrongnetworkofprimarycare—amedicalhomewherepatientsbuildarealrelationshipwiththeirhealthcareteamFocusingonpreventiontokeeppatientshealthyandoutofthehospitalMovingtowardasystemthatrewardsprovidersforqualitycare,successfuloutcomes,andcost-efficiency—notjustforthenumberofprocedurestheyperformEliminatingwasteinresources,timespentwaiting,andduplicationoftests

By2015,St.Kilda'sreportedhavingover24,000patientsparticipateinitsACOandhavingsavednearly$5million,but,evenwiththis,itdidnotreachthenecessary2.4percentminimumsavingstoachievethegovernment'sshared-savingspayment.However,St.Kilda'sleadersthoughtparticipatinginthisprogramwasworthwhile,asitallowedtheorganizationtoharnessnewandinnovativewaystoimprovehealth.Itsleadershipbelievedthat“aswemoveawayfromthefee-for-servicemodelandgetclosertoafee-for-valueapproach,wemustmastertheconceptofpopulationmanagement.Tomakethathappen,wemuststepupoureffortsinpreventionandhealthmaintenance.”

In 2016, St. Kilda's Health Partners (SKHP), a wholly owned subsidiary of the St.Kilda's Health System, had an integrated network of approximately 1,400 employed andaffiliatedhealthcareprovidersinitsACO.ItwasanticipatedthatbyJanuary2017,SKHPwould be in value-based arrangements with multiple payers to provide care forapproximately 170,000 members. The anticipated patients spanned the health–illnesscontinuumfromhealthytohigh-riskdiseaseconditions.

As most of the value-based business, existing and anticipated, would be paid bycapitation,SKHPsoughtwaystoreduceitscosts.Forexample,inNovember2016,arequestfor proposals (RFP) identified high-cost services unavailable in its system and sought toestablishpreferredprovidersandcentersofexcellencethatwouldbewillingtomeetbothqualityandcostcriteria.Itrequestedresponsesinthefollowingspecialtyareas:

Transplantation,includingsingleorgan,multipleorgan,andbonemarrowWomen'shealthGastroenterologyBariatricsOncologyNeurosciencesandspineservicesMusculoskeletalandorthopedicsCardiologyUrologyRehabilitationBehavioralandmentalhealthEndocrinologyanddiabetes

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Pediatrics

Successfulbidderswouldhavetoimproveaccesstoqualitycareandensureseamlesscare and communication with primary and specialty care providers. The bid listed thefollowing“valuepropositions”thatsuccessfulbidderswouldhavetoaddress:

ImprovedqualityImprovedvalueReducedbarrierstoaccessEnhancedpatientandcaregivercomfortandconvenienceStandardizationEfficienciesPatientsatisfactionPhysiciansatisfactionImprovedprocessesImprovedcommunication

Respondentstothebidwereaskedtoprovidealonglistofspecificdatapertinenttotheirareaofexpertiseandspecialtyrelatedtotheabovecriteria,including

LengthofstayRisk-adjustedmortalityindexProceduralinfectionrateOperatingroomtimeProcedurevolumePatientcompliancetotreatmentplanDisease-specificimprovementrates(e.g.diabetescontrol,weightloss)TransplantwaittimeTransplantgraftsurvivalrateExperiencewithCMSorpayerandemployerbundledpaymentsReadmissionrateCostpercaseAbilitytodemonstrateaffordabilityandconveniencetopatientandcaregiverwhileseekingcareawayfromhome(e.g.,accesstolow-costorcomplimentarylodging,utilities,meals,transportation)PatientperceptionofeaseofaccessandtimelinessofappointmentsClinicalGroupHospitalConsumerAssessmentofHealthcareProvidersandSystemsandtheHospitalConsumerAssessmentofHealthcareProvidersandSystemsPatientcommunicationwithhealthcareteamAccreditationinformationAbilitytodemonstrateaccessibilityandtimelinessofcareAbilitytodemonstrateaplantomanagethecareofSKHPpopulationProofofamultidisciplinary,patient-centeredapproachtocaredelivery

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Respondents were also requested to submit a cost proposal that would delineate themethod and amount the respondent would charge St. Kilda's for agreed-on services,including, but not limited to, medical expenses, necessary travel, overhead, supplies, andmiscellaneouscosts.Thecostproposalhadtobevalidforatleastoneyear.Contractsweretobeforthreeyears,beginningApril1,2017.

InDecember2016,ElizabethNarvaez-Luna,directorofstrategyatalarge,nationallyknownpediatricmedicalcenter,wascontemplating thebidwithherstaff. In thepast, itsmedical staff and administration had enjoyed a positive relationship with St. Kilda's andcertainlywantedtomaintainthisrapport.TheydidnotwantotherfacilitiestosiphonawaythepediatricvolumescurrentlycomingfromSt.Kilda'sprimarymarketarea.However,anumberofsignificantissues,bothpositiveandnegative,caughtthestaffmembers’attention.Theseincludedthefollowing:

1. St.Kilda'sHospital(notitsACO)hadbeenincrementallyaddingpediatriccapabilitiesforyears.Someoftheseserviceswereappropriatefortheirpopulation,butrecentlysomewereventuringintoareasbelievedpotentiallyunsafe,aswellasinefficientforthelargerregion(suchasapediatricbloodandmarrowtransplantationprogramforahandfulofpatientsorapediatriccardiacsurgeryprogram).PartneringwithNarvaez-Luna'spediatricmedicalcenterwouldallowSt.Kilda'stoeliminateordiminishthesemarginalprogramsandgethigh-qualityservicestoitscommunitythroughthecontract.

2. Thebiddidnotguaranteeorevenaddresschannelingpatients.Itcontainednoprovisionfordirectingpatientsintopediatricspecialtycare.Priorexperiencesuggestedthatrespondingtosuchbidstakesalotofworkanddatasharingonthemedicalcenter'spart,butthepediatricmedicalcentergainslittleinreturn,becausethebidsallowpatientstogoanyhospitaltheywish.Currently,St.Kilda'spediatriconcologistsrefertoalargenumberofpediatriconcologyprogramsacrossthewest.Withoutasteeringmechanism,thestaffwasconcernedthatthemedicalcenterwouldreceivenoadditionalvolumes.Ontheotherhand,workingthroughthisbidmighthelpbetterpositionindividualprovidersatSt.Kilda's,toexpandtheirreferralnetworks.

3. Thebidaskedbroadlyforcostinformation,butthetypeofrequestedproposalwasunclear.Themedicalcenterhadaverypowerfulcostaccountingsystemandcouldpriceservicesquiteaccurately—therefore,thepediatricmedicalcenterhasexperienceprovidingcareundercapitationandbundledpayments.Thereareadvantagesanddisadvantagestoeachpaymentsystem.

4. TheRFPcalledforbidsinthreeweeks.Itwasnotreasonabletodevelopbundledpaymentproposalsinthatperiod.Inaddition,thestafffeltsomefundamentaloppositiontobundledpayments,seenasa“racetothebottom,”inwhichmuchenergyisexpendedtosetapricethatissoontobeundercutbyacompetitor,triggeringyetanothercut.Thehospitalhadexperiencedthiscycleinthepastinotheropportunitiestosetbundledpayments.Oneoptionistosharethehospital'soverallcostpositioncomparedtocompetitors(whichisverygood)butnottocommittospecificprices.

Discussion continued. Ultimately, the director and staff knew they had to develop a

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recommendation to their CEO. Some of the points they would have to cover in therecommendationincludedthefollowing:

1. Whatisthevalueinrespondingtotheproposal?2. Howshouldthemedicalcenteraddressthelackofpatient-steeringmechanismsinthe

proposal?3. Whattypeofcostproposalorcostinformationshouldbeincludedinthebid?4. Whatcouldbetheanticipatedresponsefromcompetitors?

9.DecidingonaPopulationHealthReferralContractApproach

Jackie,thedirectorofstrategicplanningatHealthyHospital,wasworkingwithherCEOtodeterminewhatstrategytheirorganizationshouldtakeforspecialistproviderstowhomtheyrefertheircapitatedbusiness.Currently,15percentoftheirbusinesswaspaidonapopulationhealthorcapitatedbasis,butwhenspecialistswererequired,patientswerereferredtooutsidedoctorsandpaidoutofthecapitatedpoolofmoney.Thisamounthasbecomesignificant,withmostpaymentsmadeatfullcost.Jackie'sbossbelievestheremustbeawaytolowercostsand,atthesametime,improvequalitybycreatingasmallerspecialistpanel.

Sherealizesthatthecontinuedmovetopopulationhealth,ineffect,restrictsmoreofHealthyHospital'smarket'spatientsbycontracttospecificprovidersand,asitacceptsmorefullycapitatedarrangements,itneedstoexpanditsnetworkfromemployedproviderstoagroupofspecialists,whichwouldeffectivelylockdownthereferralpatterns.

Ratherthanonlylookingatthefinancials,Jackiehaswrittentheassumptionsithasusedtodate.Theseincludethefollowing:

1. Althoughcapitatedpaymentshavebeenslowtomaterialize,thenumberofpatientscoveredbysuchpaymentswilldoubleinthenexttwoyearsandquadrupleinthenextfouryears.

2. Payerswouldprefertohavefullycapitatedpopulationcontracts.3. High-qualityspecialistprovidersarewillingtocontracttopromotepopulationhealth.4. HealthyHospitalhastheabilitytoscreenpotentialprovidersforefficiency,quality,and

effectiveness.5. Betterqualityofcarecanbedeliveredbyapopulationhealthfocus.6. Largeprovidersystemsarerequiredtoprovidepopulationhealth.

Shehasalsolistedthehospital'spossiblechoices:

Donothingandcontinuetopaybilledchargesforreferrals.Establishapay-for-performancecontract.Contractwithspecialistsforimprovementsinoverallcostandquality.Movetobundledpayments.Thissystemworksbestforhigh-volume,electiveprocedures

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withsomepredictabilityincosts.Itcouldleadtoaracetothebottom.Enterintotraditionalcapitationforallpatients.Morepatientswouldbepresenttomoderatevariability,butitwouldbechallengingbecauseofthebreadthofcontracting.Enterintospecialtycapitationforthehighestcostpatients.Asmallernumberofpatientscreateshighervariationinpatientcosts.Enterintoaspecialtycapitationforabroadgroupofconditionsacrossmultiplespecialties.Thisarrangementwouldrequirecontractingwithalargegroupofmultispecialtyproviders.

JackieplanstopresenttheassumptionsandpossiblechoicestoherCEOtodeterminewhichoptionsarerealistictopursue.

Questions1. AreallofJackie'sassumptionscredible?Haveanyofthesechangedorarechanging?2. HowcouldJackiestrengthenherpresentationbyincorporatingherorganization's

mission,vision,andvalues?3. Whatadditionalproblemsmayarisewitheachofthechoicesshepresents?

10.BuildaNewServiceBecauseofaLargeDonation?

YouaretheregionalvicepresidentofamidsizehealthcaresysteminWestHadley.Awealthyphilanthropisthasservedwithyouforyearsonthesystem'sboard.Recently,hisyoungestbrotherinLittleBarringtondevelopedkidneyproblemsandrequireddialysis.However,thecommunity,withonly40,000residents,lacksdialysisservices.Thisshortfallnecessitateda50-miledrive,threetimesaweek,tothenearestdialysiscenter.Asthetraveltimeandfourhoursoftreatmentatthecentertookupthreefulldaysaweek,thisscarcitywasasignificantburdenonthisfamily.

ThephilanthropistwantedtoimprovethecareandmetwithLittleBarrington'smayorandtheCEOofahospitalinyoursystem.Duringthemeeting,heannouncedthathewaswillingtogive$8milliontoestablishadialysiscenterinthecommunity.Themayorwasecstatic,whiletheCEOwaspubliclyappreciativebutprivatelyabitapprehensive.Afterthemeeting,themayorissuedapressreleasepraisingtheforthcomingdonationandtheCEOimmediatelycalledyoutodiscussthematter.

Thehealthcaresystemhadstruggledwiththisissueinthepast.Donorshadofferedtogive a large financial gift for a service (an intensive care unit, pediatric wing, or otherexpensiveitem).Theseindividualsweregenerallyhighlyalignedwiththehealthsystemandfrequently prominent in the community. In addition, the donor was almost always highlycommitted to her pet cause. Frequently, however, community volumes made the serviceunsustainable.Ontopofthis,thevolumesatthenewserviceswouldsometimescannibalizethevolumesatalargersitewithinthesystem,makingthenewserviceevenlessefficientsystemwide.Qualityofcarecouldalsobeaffectedbythehalvedvolumesafterthelossofcriticalmassandsupportservicesneededroundtheclockandthedifficultyofhiringpeopleintospecialtyroleswithoutadequatevolumetokeepthembusy.

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You discuss the situation with the CEO, recognizing the aforementioned issues andacknowledgingthatthe$8millionthatwasofferedwasenoughcapitaltobegintheservicebut would not provide funds for continuing operation costs. The state currently has onedialysiscenterforevery76,000residents,fewbeingprofitable.Giventhis,itisprobablethattheproposeddialysiscentercouldrunataloss.TheCEOwouldlikedirectionfromyou.

Questions1. Whoarethekeystakeholdersinthiscase?Whowouldbethemostinfluentialand

engaged?2. IfyouweretheVP,whattypeofanalysiswouldyouasktheCEO(orhis/yourstaff)to

completepriortomakingadecision?Whatarethekeydecisionfactors?3. Howcould/shouldthemissionofthehealthsystemandindividualhospitalbetiedtoyour

decision?4. Whatalternativestoafixeddialysiscentermightyousuggesttothephilanthropist?

11.DissolvingaLong-StandingAffiliationandMovingOn

ByKhanhuyenVinh

Partnershipsandaffiliationsmaylastalongtime.However,whentheydissolve,animosityand increased competitiveness may result. A renowned medical school had a productiveworkingrelationshipfordecadeswithahospital.However,increasingclashesandperceivedcompetitivemovescausedtheschool tosever thedecades-oldaffiliation.Asaresult, thehospitalisurgentlyseekingtoinitiateimmediatechangesthroughthedevelopmentofseveralinitiatives.Thechangeswillhelpattractsuperstarsurgeonsandresearcherstopartnerwiththe hospital in its quest to become a world-class academic healthcare provider, whileseriouslydamagingitsformerpartner.

L Hospital (LH) is an 800-operating bed teaching hospital in an extraordinarilyfinancially strong healthcare system that includes three community hospitals and a homehealthagency.LH,astheflagshiphospital,wasaffiliatedwithJSchoolofMedicine(JSM),alocalmedicalschoolrankedamongthetop15inthecountrybyUSNewsandWorldReport.LHwasaccustomedtowinningannualaccoladesforseveralofitsservicelines.

However, when the medical school terminated its affiliation with the hospital, LH'sleadership was angry and almost immediately began aggressively pursuing multipleinitiativestocombatthelossoftheformeraffiliationandfulfillitsgoalofbecomingatop-tieracademichealthcareinstitution.Thenewinitiativesconsistedofemployingprimarycarephysicians and establishing a graduate medical education (GME) program, building aresearchinstitute,andbuildinganewoutpatientclinic—allofwhichwouldbelocatednearthehospitalandownedprimarilybythehospital.LHalsosoughtanaffiliationwithanothermedical school. Although perhaps strategically sound, these developments tested therelationshipsandloyaltyofkeyphysicians,requiredimmensefinancialresources,andtaxedadministrativeandclinicalleaders.

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LHhadexperienceinemployingprimarycarephysicians.Inpreviousyears,thehospitalsimultaneouslypursuedbothfoundationandequitymodelstoacquireprimarycarephysicianpractices throughout the city. The foundation model later dissolved, while a modifiedframeworkoftheequitymodelremained.Followingtheterminationofthepartnership,LHchosetodirectlyemployprimarycarephysiciansandplacetheirofficepracticesphysicallyadjacenttothehospital,therebyestablishingitsowngeneralmedicineserviceand,toalesserdegree, contribute to the pipeline of patients admitted into LH. Direct employment, asopposed to relocating an acquired practice into the hospital facility, would expediteassimilationintotheLHculture,asLHwasattemptingtobuilditsmedicalserviceswiftly.

Tobeateachinghospitalrequiresapipelineofmedicalresidents.LHrealizedthatiteithermustdependonanothermedicalschooltoprovidethispipelineorbuilditsownsourceofmedicalresidents.Typicalofits“goingsolo”mentality,LHdecidedtobuilditsownGMEprogram to be accredited by the American Council for Graduate Medical Education(ACGME).MedicalstudentswouldapplydirectlytoLHforresidency,therebybypassingthehospital'sdependencyonamedicalschool.

Thenewresearchinstituteservedthepurposeofattractingresearchersattheforefrontoftheirfieldsbyprovidingavenueforwell-funded,cutting-edgeresearch.Thecombinationofpreeminent researchers conducting novel investigations that may redirect the course ofmedicinewouldelevatethehospital'simageandsecureitspositionasatop-tieracademicmedicalcenter.

Medical advances have allowed for more procedures to take place in an outpatientsettingwithoutrequiringaninpatienthospitalstay.Thehospital'scurrentoutpatientbuilding,located across the street, had reached capacity. A new outpatient building wouldaccommodate additional volume to capture downstream patient revenue, especially asmanagedcareincreasinglydirectedpaymentstooutpatientprocedures.

Amergerwithanothermedicalschoolwouldbecriticaltothehospital'svisionofbeingapremierteachinghospitalandformedthebasisfordevelopingthesenewinitiatives.Thismedicalschoolneededtobereputable,sothatLHcouldattractprominentphysiciansandresearchers.

The dissolution of the hospital and medical school affiliation represented a novelphenomenon.LH andJSM built their50-year relationshipon a foundationof power andprestige.JSMboastednationallyrecognizedphysiciansandresearchprograms.LHbroughtitsextensivefinancialresourcestofundthemedicalschool'sacademicservicesandresearch,astate-of-theartinstitution,andpatientsformedicalresidentstostudy.Thehospitaltreatedcelebrities,aformerUSpresident,internationalroyalty,andestablishedpatientsacrossthecity and nation. A world-renowned cardiovascular surgeon claimed affiliation with bothinstitutions.Together,bothentitiesaimedtoclaimapositiononthenationalandinternationalstage.Becauseoftheirtopphysiciansandresearchprograms,JSMbelieveditcontributedincreasinglytoLH'sprofitability.However,LHbelieveditsfinancialsuccessresultedfromitsownstrategicinitiativesandnotfromitsrelationshipwithJSM.

The increasingly tumultuous affiliation between the institutions ultimately crumbledbecause of the desire for control, as well as the personalities involved. LH had beenprovidingapproximately$50millionannuallytoJSM'sacademicservicesandannouncedit

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wantedanaccountingoftheseexpenditures.Ontheotherhand,JSMwantedtobuilditsownoutpatientclinictogeneraterevenue.Furthermore,JSMwantedonlyitsacademicphysicianstomakedecisions,therebyusurpingallauthorityheldbyprivatephysicians.LHvehementlyrefused a JSM-controlled outpatient clinic, fearing competition with its hospital. Theaffiliationagreementrequiredbothpartiestoconcuronsuchconstruction.LHinsistedthatitsprivate physicians be included because they brought in more than 60 percent of hospitalrevenues.

Thepersonalitiesofseniorleadershipfromtheentitiesalsoseemedtoconstantlyclash.Board members from both facilities consisted of individuals with strong roots in thecommunity. The JSM chairperson came from a prominent family with multigenerationalphilanthropiccontributionstotheartsandsciencesthroughoutthecity.ThenewlyrecruitedJSMpresidentwastoutedasanexperiencednegotiator.TheLHchairpersonwastheformerleaderofaFortune500company,whiletheLHsystemCEOhelddeep-rootedtiestothehospitalandlocalcommunityformorethan20years.Allfourpeoplefailedtounderstandtheoppositeparty'sneedsandseemedwillingtobattletotheend.

Distrustbybothpartiesledtostalleddiscussions.Aggravatingthesituation,numerousinternal leaks to the press revealed that the sides had labeled each other “antagonistic,”“dishonest,” and “not forthright.” The breaking point was reached when JSM publiclyannouncedithadenteredintonegotiationstoaffiliatewithSt.XHospital,acompetitorofLH, which would offer JSM more autonomy but less financial support. LH took thisannouncementtobeadefactoterminationofitsaffiliationwithJSMand,subsequently,LHrespondedbyannouncingitschangeinitiatives.

LH's and JSM's primary stakeholders consisted of academic physicians and privatephysicians, both of whom counted superstar surgeons among their ranks. The chiefs ofserviceatLHalsotraditionallyassumeddepartmentchairpositionsatthemedicalschool.TheseveredaffiliationbetweenJSMandLHforcedtheacademicphysicianstochoosesides.Theyhadtoassesstheirrolesateachentityandweighthefutureoftheirresearchprograms,whichweresupportedbyLH'sdeeppocketsandstellarfacilitiesandequipment.Theprivatephysicians were incensed that JSM wanted to exclude them from negotiations, therebyseverelylimitingtheirinfluenceonhospitaldecisions.

Otherprimarystakeholdersincludedtheboardsofboththemedicalschoolandhospital.TheJSMboardwantedmorefinancialautonomy,control,anddecision-makingauthoritybutstoodtolosesubstantialfunding,asfewhospitalsinthecountrypossessedLH'sfinancialcapability.TheLHhospitalboarddesiredanaffiliationwithabrand-namemedicalschooltoattracttopphysiciansandleadcutting-edgeresearchtoelevatethehospital'sreputationandprominence.

Thesecondarygroupofstakeholdersconsistedofpatients,whotraveledfromacrossthecity,country,andworldtoreceivecare.Thesepatientswerewell insuredorcash-paying.Theirsocialprominenceaugmentedthehospital'sreputation.

The system- and hospital-level CEOs at LH, along with the renowned chief ofneurosurgery, maintained routine communications with both the large physician practicegroups and the individual academic and private physicians. Those communication effortsservedtoopentheflowofinformationbetweentheleadershipandthephysicians.Theboard

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andseniorhospitalexecutivesaggressivelysoughttoattractacademicandprivatesuperstarsurgeons,while invitingallphysicianswhowouldjoinforceswithLH.Tothisend, theyannouncedaninitialcommitmentofapproximately$100millionfor theresearchinstituteand$70millionfortheoutpatientcenter.

TheLHCEOestablishedcommitteesforeachinitiativechange(physicianemployment,GME, research institute, and outpatient center), which were cochaired by a hospital vicepresident and a chief of service (or an influential physician designee, in cases where theservicechiefhadremainedloyal toJSM).Otherphysiciansparticipatedin thecommitteeworkgroupsbyprovidinginputtocreateasuccessfulimplementationplan.Eachworkgroupmetweeklyorbiweeklytofleshoutdetails,provideupdates,andidentifynextsteps.Thechair of the board, system and hospital CEOs, consultants, and legal experts handledapproachinganothermedicalschoolwithwhichtopursueanaffiliation.

Atthesametime,LHimplementedpolicychanges.AnewpolicyrequireditschiefsofservicetoadmitthemajorityoftheirpatientstoLH.Asaresult,chiefsofservicecouldnotconcurrentlymaintaintheirdepartmentchairpositionsatthemedicalschoolandadmitthemajorityoftheirpatientstoacompetinghospital.Thismeasureforcedtheacademicianstoidentifytheiraffiliationwitheitherentityexplicitly.Inaddition,officeleasesforacademicphysiciansintheLHbuildingsweretosoonexpire.LHhintedateitherevictionorarateincrease for its nonaffiliate physicians. The hospital justified rate increases to meet fairmarketvalue,asrateshadnotbeencomparablyadjustedforaboutadecade.

Established academicians with deep ties to both entities sought for reconciliationthrough letters tobothboardsandmultiplemeetings.Once itwasclearnoreconciliationwould result, physicians who supported LH welcomed the new direction. The privatephysicians, in particular, rejoiced in the absence of JSM. However, many academicphysicianswerebothconcernedandupsetaboutthedivision.

LHproceededwithitschanges,ultimatelyresultingincompletionofall theplannedinitiatives. A hospital physician organization was created to employ general medicinedoctors,therebyestablishingamedicineserviceatLH.TheGMEprogramwasestablishedformedicalandsurgicalservices.Approximatelyadecadeafterthedissolution,LHoffers36GME programs accredited by ACGME. The hospital purchased land within walkingdistance,demolished theexisting building, andbuilt a research institute. Asof 2015, theresearchinstitutesupports277principal investigatorsandscientistsperformingmorethan840ongoingclinicalstudiesconductedin540,000squarefeetofspace,andhasreceived$70millioningrantfunding.

Tobuildanoutpatientcenterconnectedtoitsexistingbuildings,thehospitalpurchasedanadjacentlotfromalocaluniversity,constructedabuildingfortheuniversityatanotherlocation, demolished the former university building on the lot, and then constructed theoutpatientcenter.These landpurchasesrepresentedasignificantfeatbecause thehospitalwaslandlocked,andrealestateinthatvicinitycommandedpremiumpricesasaresultofhighdemand.Asof2015,theoutpatientcenterconsistsof14operatingrooms,36pre-opbeds,and30postanesthesiacareunitbedslocatedina1.6-million-square-footbuilding.Whileafewprominentchiefsofserviceremainedwiththemedicalschool,agreaternumberofchiefsofservicepledgedtheirloyaltytothehospital.Finally,LHannounceda$100millionmerger

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withanIvyLeaguemedicalschoolasitsprimaryacademicaffiliate;atthattime,USNewsandWorldReportrankedthismedicalschoolhigherthanitsformerpartner.PhysiciansfromLHweretobegrantedacademicprivilegesattheIvyLeaguemedicalschool.Overtheyears,theLHSystemaddedcommunityhospitalsandphysicianpractices.The2013consolidatedfinancialstatementfortheLHSystemreportedgrossrevenueof$2.6billionandnetrevenueof$683million.

Questions1. Whatcausedthelong-standingaffiliationbetweenLHandJSMtodissolve?Whatcould

orshouldhavebeendonetorectifytheproblemsthatledtothedissolution?2. WasLHultimatelybetteroffwithoutJSM?Whyorwhynot?3. WhatfactorsdoyouthinkcontributedtothesuccessofLH'schangeinitiatives?4. HowdidLHinvolveprimarystakeholdersinitsdecision-makingprocesses?5. Howdidparticipationbyphysiciansinthevariousworkgroupsaffecttheoutcome?6. Whatelementsinthisscenariowerebeyondthecontrolofhospitalmanagement?How

couldorshouldthesebemitigated?

12.ValueinCapitationforHospitalists?

ByKhanhuyenVinh

Abusinessopportunityaroseforahospitalistphysicianpractice(MCHA)topartnerwithaninsurance payer (Healthsprings) to manage the insurance company's dual-eligible patientsadmitted to the hospital where it currently treats patients. Healthsprings currently has acontractwithacompetinghospitalistphysiciangroupbutisdissatisfiedwithitsperformance.This partnership would position MCHA to manage this patient group at the hospitalexclusively.Althoughanexcitingoption,partnershavequestionedwhetherthiscapitationcontractwithHealthspringswilladdvalueforthegroupofhospitalists.

MCHAisa20-physicianhospitalistgrouppracticingata large,prestigious, teachinghospitalintheSouthwestwithjustunder900beds.Thehospitalrecentlytransitionedtoaclosedpanelforhospitalmedicinephysicians,whichgavehospitalistgroupsexclusivecareforallmedicinepatients.Currently,thehospitalhascontractedwithsixhospitalistgroupsthatmanageapproximately1,300patientcasesmonthly.

MCHAisthelargestgroupandmanagesthehighestvolumeofpatientcases.Itperformscompetitively on hospital key performance indicators consisting of length of stay (LOS)index,mortalityindex,30-dayall-causereadmission,patientsatisfaction,andcoremeasures.Inparticular,MCHAusuallyleadsontheLOSindexmeasureandreportedthelowestLOSindexofallgroupsfromJanuarythroughMay2015.MCHAoperatesonafee-for-servicemodel with no capitation contracts. Its payer mix consists of 44 percent Medicare orMedicaid,54percentprivateinsurance,and2percentself-pay.

Referralsbyspecialistsandotherprimarycarephysicians(PCPs)providetheprimarysource of patient volume for all six hospitalist groups, thereby increasing competition.

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Referrals from these two sources are largely based on professional relationships andphysicianpreferenceforpracticestyles.AlthoughMCHAmanagestwiceasmanypatientcasesonaverageasthesecond-largesthospitalistgroup,itcontinuestocompeteforpatientvolume.

Thegroup'sgoalistocontinuetoincreasepatientvolumefromvarioussources.Thegroup is also one of two groups that have expanded their practice to cover emergencydepartment(ED)services.MCHAphysiciansalsomanagepatientsatLong-TermAcuteCareHospital(LTACH),whichservesasanothersourceofpatientvolumeforthegroup.MCHAbelieves thatexpansionopportunities includecaringforpatientsatLTACHandtakingoncapitationcontracts.

To understand more thoroughly where the hospitalists groups compete, MCHA'sdirectorcreatedthefollowingfigure,whichdisplayssourcesofpatientvolumeascomparedtolevelofcompetitionamongthesixhospitalistgroups.Thestrategycanvasillustratesthreehospitalist physician groupings. Four hospitalist practices (groups 1–4) together representone category because they demonstrate the same patient volume characteristics. Group 5constitutesthesecondcategorybecauseitcurrentlyhasthedual-eligiblecapitationcontractwithHealthsprings,andMCHAisthethirdcategory.Onlygroup5andMCHAmanagetheED's“no-doctor”admissions.AdmittedtothehospitalfromtheED,thesepatientseitherdonothaveaPCPwhohashospitalprivileges,haveadoctorwhodoesnotwanttomakeroundsatthehospital,orsimplydonothaveaPCP.

The hospital exclusively approached MCHA to provide patient care at the LTACHlocatedonthewestsideofthecity.ThisexclusivepartnershiphasbenefitedbothpartieswithmoreefficientcareforthehospitalandgreaterbillingsforMCHA.

Although managed care and capitation payments have not yet taken hold in itsmetropolitanarea,MCHAwantstolookbeyondthetraditionalreferralsourcestoaugmentitspatient volume. Because few other providers currently have managed care contracts, thebusinessopportunitywithHealthspringsprovidesMCHAanentrytoapotentialfirst-moveradvantage.MCHAbelievesthatwiththiscontractitcouldcaptureanotherimmediatesourceofpatientvolumeandpositionitselfforafutureinwhichcapitationbecomesthenorm.ThecapitationcontractwithHealthspringswouldalsoallowMCHAtomanagethedual-eligiblepatientpopulationexclusively.Giventhegroup'sabilitytoprovidequalitypatientcarewhilemanaging LOS, the contract could yield a net profit depending on the negotiatedreimbursementamountperpatientcaseandnumberofpatientsexpectedfromthisspecificpayer.TheadditionalcostscouldbemarginalunlessHealthspringsweretoincreaseitshighpatient volume dramatically—given MCHA's current physicians and existing capacity, itwouldnotneedtoaddphysiciansinitially.

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WhileMCHAfeelsitneedsnewsourcesofpatientvolume,theprofitabilityfromthisnewpatientbaseremainsuncertain.Medicarepatients,onaverage,havemorecomorbiditiesand require a higher level of medical care, and they form the majority of Healthspringspatients.Healthspringsalso tends to transfer itspatientsfromcommunityhospitals to theteaching hospital at which MCHA practices. These patient transfers translate toHealthsprings’enrollmentofsickerpatientswhorequiremorespecializedmedicalservicesandoftenprolongedtreatmentintheintensivecareunit.Asaresult,HealthspringspatientshavelongerLOS.Initially,theinsurancecompanyofferedacapitationcontractof$550perpatient per admission for an anticipated 15 patients per month. Healthsprings also wouldrequireMCHAphysicianstomeetwiththeHealthsprings’casemanagerstwiceaweek.ThispatientvolumewouldconstituteonlyasmallpercentageofMCHA'stotalvolume,butthelonger LOS and additional meetings would result in more work per patient for MCHAphysicians.

Thegroupwasdiscussingthepositivesandnegativesofthispossiblearrangement.ThemembersdidnotknowwhetherHealthspringswouldprovidealargerpatientvolumeoranincreaseintheircapitatedamount.

Questions1. Whataretheadvantagesanddisadvantagesofthisoffer?2. WhatarethespecificrisksMCHAwilltakeundercapitation?3. Whatcoulditdoornegotiatetomodifytherisks?4. WhatwouldbeMCHA'smarginalcostandopportunitycostsofthisproposal?5. WhatotherinformationwouldyouwantfromHealthsprings?6. Giventheinformationyouhave,whatwouldyourecommendtothegroup?

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13.BozemanHealth'sCompetitiveDilemma

ByEricConnell

BozemanHealthisanot-for-profithealthsystemthatoperatesinsouthwestMontana.ThemainhospitalinBozemanhas86beds,aLevel3traumacenterdesignation,andamedicalstaffofover200.Ithaspatientrevenueofapproximately$350million.BozemanishometoMontana State University (approximately 15,000 students) and is a haven for outdoorrecreationbecauseofitsproximitytomountains,rivers,andYellowstoneNationalPark.ThepopulationofBozemanis40,000.BozemanHealthis theprimaryhealthcareproviderforGallatinCounty,whichhasapopulationof100,000.ThecommunitycontinuestobeoneofthefastestgrowingmicropolitanareasintheUnitedStates.

YouarethenewCEOofBozemanHealth(BH)andhaveinheritedanorganizationthathasitsshareofchallenges.Followingalong-tenuredCEO,atBHforover20years,thelasttwo CEOs have been unable to stay long. One CEO resigned after nine months, statingdifferences with the board of directors. Rumor was that the CEO was pushing forproductivityincreasesandstaffreductions,upsettingcertaindoctors,whousedtheirpersonalrelationshipswiththeboardtoforcetheCEOout.

Thenextexecutivewasfiredforethical issues.Hehadfailed todiscloseacriminalconvictionduringthehiringprocess.Althoughtheoffenseoccurredover30yearsbeforehishiring,theboard'spublicexplanationwastheCEOhadfailedtobecompletelyhonestandliedonhisapplicationthathehadneverhadafelonycriminalconviction.Althoughthiswastheboard'spublicposition,rumorsspreadthattheethicalconsiderationwasonlyanexcuse.Stories surfaced that the CEO was actively engaged in trying to merge the hospital withSanfordHealth,a largehealthsystemin theDakotas—andbeingpaidunder the tablebySanford.Inashorttime,theCEOpushedtheorganizationtoimplementanelectronichealthrecordsystemhostedbySanford,despitecontraryrecommendationsfromBH'sinformationtechnologydepartment.Theimplementationwasafailure.TheCEOalsomadeaunilateraldecisiontojoinSanford'sgrouppurchasingorganization(GPO)andchangethenameoftheorganizationfromBozemanDeaconessHealthServicestoBozemanHealth,whichwastoosimilarformanytoSanfordHealth.

YouknowthattheBHcultureisverystable,anditsleadersaredeeplyentrenchedinthewaytheorganizationoperates.YouareworriedthatitcouldbeaseriousthreattoBH'slong-termviability.Duringtheinterviewprocess,yourecognizedthatmostoftheseniorleadersatBozemanHealthareclosertotheendoftheircareersthanthebeginningandestimatethatmostwillberetiringwithinthenextfiveyears.

ThemainhospitalinBozemanisneitherlovednorhatedinthecommunity,andthislukewarm response is also troublesome. You know that your biggest advantage is thatBozeman Health is the only hospital in the county, essentially giving the organization amonopoly. But Bozeman has a relatively high percentage of commercial payers and agrowingpopulation.Yourecognize thateventually theremaybeanotherhospital inyourprimarymarket.

BillingsClinic,whichoperatesawomen'shealthclinic,hasaninterestinthemarket.It

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hadpreviouslyexpressedplanstobuildahospitalintheresorttownofBigSky,45milesfromBozeman.BozemanHealthviewedthisasathreatandfast-trackeditsownplanstobuildahospitalinthetown.BecauseBHalreadyownedtheland,itwaseasytoturnthefirstshovelofdirtandkeeptheBillingsClinicfromenteringthemarket.Thefour-bedhospitalopenedinDecember2015andwaslargelyadefensivemove.TheBigSkyMedicalCenterisunlikelytobreakevenforthenexteightyears.

The main campus in Bozeman is a sprawling web of various construction projectsintended to meet the services demands in the growing community. The original hospitalbuildingwasconstructedin1986.A$10millionadditiontotheemergencydepartmentwascompleted in 2012; an additional office tower was completed in 2015; and in 2016, BHopeneda$10million,37,000-square-footoutpatientclinic inabedroomcommunityninemilesfromBozeman.

Itseemsasthougheverydepartmentisaskingforadditionalspace.Yourfamilybirthcenter,forexample,had1,300birthsinthelastyearandwasfrequentlyrequiredtodivertpatientstootherhospitalsbecauseofalackofspace.NursesstruggletooperateintinyICUroomsthatweredesignedinthe1980sandarenowfilledwithlife-sustainingequipment.Operatinginspacesthatarenotoptimizedforworkflowscreatesadditionalworkandstressforprovidersandstaffmembers.Patientsrightlycomplainoflimitedparking.Fortunately,theorganizationownshundredsofacresoflandadjacenttothecampusthatweredoantedtotheorganizationandhasyettodeterminehowtousethespace.

Afterspeakingwithkeyphysicians,boardmembers,anddepartmentheads,youwonderwhatyouhavegottenyourselfinto.Youfaceamultitudeofchallengesandaveryuncertainfuture. If you are unable to implement an effective strategy, it is highly likely that theorganizationwillstruggleandyouwillloseyourjob.EstimatethatyouhavetwotothreeyearstogetBozemanHealthonapathtosuccess,butyouwanttotakeafewmonthstogettoknowtheorganizationbetterbeforeyoulayoutadetailedplan.

However,timeisnotyourfriend.Fourmonthsbeforeyoustarted,theBillingsClinicannouncedthefollowingintheBozemanDailyChronicle.

BillingsClinicBuys54acresinBozemanByLewisKendall,StaffWriter,Jan6,2016

BillingsClinicannouncedWednesdaythat ithaspurchased54acresof landasitpreparestoexpanditsmedicalservicesinBozeman.

The lot, purchased for an undisclosed amount, is located west of Costco near the North 19th Avenueinterchange.Clinicofficialswillnowmeettodecidewhattypeoffacilitytodevelop,saidJulieBurton,theclinic'sdirectorofcommunications.

“Wewillhavethatconversationandmakedecisionswhenthetimeisright,”saidBurton.“Itwillhavetorunitscourse.”

For comparison, the lot size of the adjacent Costco is about 13 acres, while Bozeman Health DeaconessHospitalsitsonapproximately34acres,accordingtostatetaxrecords.

TheclinichaslongbeenlookingtogrowitsofferingsinBozeman,Burtonadded.“Thiswasanopportunitythatcameupandthelocationofthelandwasideal,”shesaid.“Wethoughtthiswas

theperfectplacetolookforward.”TheclinicalreadyoperatesanOB-GYNfacilityonHighlandBoulevard,whichhasbeenaroundformorethan

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adecade.Foundedin1911, thenonprofitemploysaround4,000people inMontana,WyomingandNorthandSouth

Dakota.

TheBillingsClinicisaformidablefoe.Ithasbeenaggressiveintheregionbuthaddonerelatively little in Bozeman. You have spoken with Billings Clinic providers, and theysuggestthattheBillingsClinicmightmoveslowly,butthispacecannotbeguaranteed.YouareconcernedthattheclinicmightseekacapitalpartnershoulditdecidetomovequicklyinBozeman.

TodayyouarriveatBHat7amforabrainstormingsessiontooutlinekeyissueswithyourvicepresidents.Youknowthatyoujustdonothavethenecessarytimetoconstructathoroughandvettedstrategicplanningprocess.Infact,youmayonlyhavemonthstodevelopa strategic direction. You need to formulate an agenda and desired outcomes for yourupcomingmeetingnow.

Questions1. Giventhechallenges,howwouldyoustructureastrategicplanningprocess?2. InyourcompetitionwithBillingsClinic,whoarethekeystakeholders?3. WhatalliancesandpartnershipscouldyouconsidertoimproveBH'scompetitive

position?4. WhatshouldyourpublicpositionberegardingthepossibleentryoftheBillingsClinic

intoBozeman?Whatwouldyourinternal,strategicpositioningtowardBillingsbe?

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