Hospital Consolidation Gets a New Playbook

This article first appeared in the January/February 2013 issue of HealthLeaders magazine.

One long-held belief is that it's easier to find the truth of any story by following the money. That axiom might be the most appropriate for determining the winners and losers in healthcare reform writ large. While some leaders practice watchful waiting, many others are taking big risks by affiliating, partnering, and acquiring outside their own organization's areas of expertise. They argue that such a dramatic change in reimbursement patterns and accountability demand big strategic changes in their organizations. The future, they argue, belongs to those who seek to build their capabilities far beyond the hospital and beyond even outpatient services. They seek to be the healthcare destination for their patients—envisioning a future dominated by cooperation among healthcare services, payment for those services, and reducing waste.

Yes, traditional consolidation defined as hospitals acquiring hospitals is still viable and, indeed, pressure to consolidate is unrelenting. But some organizations are going outside of that narrow hospital-focused model to develop expertise and capabilities that go far beyond providing healthcare services to patients for a fee. Instead, they're building networks that can handle—to varying degrees—payment, patient management, and services. Payers and providers are recognizing that hospitals are being asked to do things payers have done for years: handling actuarial work, building networks, monitoring quality, and managing utilization and claims.

Of course, that logic has failed before, as hundreds of health systems started health plans in the early 1990s. Later, many of them proved financially unviable. In a similar way, today's innovative partnerships and acquisitions might be tomorrow's folly.

While many larger systems are acquiring other hospitals and smaller systems, which could be an attractive strategy, that's a business most executives know. What's really risky, and what might bring associated reward, are nontraditional alignments that combine all of what healthcare providers are being asked to do by employers, the government, and commercial payers.

Dealing with declining reimbursements
Such groundbreaking structures have worked before. In putting together two disparate parts of the healthcare system, Stephen Rosenthal had a head start. He is president and chief operating officer for CMO—The Care Management Company LLC, a wholly owned subsidiary of Montefiore Medical Center, a four-hospital system based in the Bronx, N.Y. The CMO idea was strategically ahead of its time in that its developers were seeking a way to be accountable to results of care and, ultimately, a way to deal with declining reimbursements from both government and managed care sources by delivering proof of efficacy. That foresight is paying off in other areas now, and others are emulating Montefiore's organizational structure. That wasn't the case at the beginning. Rosenthal says the creation of CMO in the late '90s was simply a response to the rise of managed care, specifically the practice of cutting reimbursement rates as a blunt way to control costs. Montefiore executives thought they could do better if it were allowed to take on some risk. "Given the market constraints at the time, the payers—both government and private insurance—were so dramatically cutting rates that on a transaction basis it would be difficult to go forward and survive," he says. "If they gave us full responsibility for the patient, we theorized, overall we would save money in the system and could use the dollars saved to sustain the infrastructure."

Bringing that idea to fruition was hard to do at the beginning, he says, but it's gotten easier because technology, which plays a major role in monitoring patients, is better and more user friendly. And, he adds, "It's an easier sell now because technology is in the national consciousness."

CMO, in fact, is one of the key reasons Montefiore was chosen as one of 32 Pioneer ACOs by CMS' Center for Medicare & Medicaid Innovation: Montefiore can already do much of the risk management that the Pioneer standards demand, but at the beginning, it's no exaggeration to say that Montefiore bet its future on it.

The Montefiore Integrated Provider Association is the risk-bearing entity. It's made up of providers of all stripes who have a relationship with Montefiore that includes community representatives. Each entity, Montefiore and the providers, has one vote on the board "so we would always have to build consensus for our activities," Rosenthal says.

The IPA can assume financial risk for patients assigned to it, which, says Rosenthal, "is the beginning of managing a population." The care management operation, owned by Montefiore, provides all the infrastructure support that an integrated delivery system needs to manage a population.

"We do all the data analytics and the contracting between insurance companies, the government, and providers, and establish network opportunities," Rosenthal says. Additionally, CMO educates providers, whether employed by Montefiore or not, and develops all care management strategies so the sickest patients get truly managed care, he says. CMO employees, often nurses, make sure each of these patients has a clear individual care plan that works for the patient, their  family, and their physician, he says.

"What this means is we offer a tremendous amount of support for the physician," he says. "We're available to the patient all the time. Our goal is to be proactive ... to prevent costly services to the patient and the system."

He stresses that hospitals can be disadvantaged in such a program, where much of the savings shared among participants comes from preventing admissions there, adding that Montefiore itself is fortunate because physicians in the community have come together in the IPA, under which transparency of information is critical, he says.

"That's critical because you have to join together in real cultural and behavioral changes that need to occur with a provider population. When managing a population, you're looking holistically, and that fosters creativity," he says, adding that the exchange of clinical data and claims data from insurance companies and the ability to manipulate it makes it possible to proactively identify the individuals to apply the right interventions at the right time.

As part of the Pioneer ACO, CMO now manages about 23,000 Medicare fee-for-service beneficiaries, of which less than 10% account for more than 50% of medical costs.

"You can drill down into those individuals and be very proactive," says Rosenthal. "Of the individuals with the most needs, more than 900 people are being actively case-managed with the goal of improving their health and the quality of their care while also lowering costs."

Population health and long-term contracts
Most hospitals and health systems haven't had the head start on managing populations that at Montefiore was essential to its continued existence, but that doesn't mean they can't catch up with something similar, as most healthcare organizations will need to adapt to the increased accountability.

There are other blueprints toward managing population health, though many are in their infancy.  Texas Health Resources' CEO Douglas Hawthorne, FACHE, recognizes that, and as a longtime veteran of the healthcare industry, he wants to lead the transition, partially through innovative structural deal-making that broadens the Dallas/Fort Worth Metroplex–based health system's business footprint. Part of that transition includes being able to manage the health of populations. He thinks Texas Health will achieve that goal at least in part through a contract, not an acquisition. He says even very large organizations must bet their future, at least in part, on the performance of partners who can aid in achieving quality and cost-of-care targets. In Texas Health's case, that contract is with Healthways, a disease management company that seeks such big, geographically exclusive partnerships as its main growth strategy.

"Most of what we've done in our existence is diagnose and treat those who appear at our doorstep, and we've done a good job at that," Hawthorne says. "As we evaluate that population, we might admit the same patient for the same reason multiple times, so we're seeing a revolving door from acute stage to chronic stage."

However, future reimbursement, and thus, the margin case for his business, rests on the premise of providing accountable care essentially from birth to end of life. The 10-year contract, terms for which are undisclosed, and the value of which can vary greatly depending on the achievement of performance targets for Healthways, focuses on prevention and patient and family involvement in a patient's care. Practically, that means that Healthways will provide the following services to Texas Health-affiliated physicians:

• Analytical tools that identify at-risk patients to create individual personalized plans
• Smoking cessation, coaching, and weight-loss programs
• Cell phone reminders encouraging healthy behaviors
• Prescription refill tracking and intervention
• Emergency room admissions data and follow-up needs to reduce readmission rates

Those interventions might sound simple and practical, but perhaps not revolutionary. The practical truth is, however, that given the astronomical cost of an inpatient admission, preventing one can pay off substantially. But doesn't that mean, at least in many cases, that Texas Health will be preventing itself from much-needed revenue that admissions bring?

As if anticipating the question, Hawthorne, who has invested in a health system merger and large physician group practice acquisition as well as an organic build-out of ambulatory care locations during his tenure, admits the twitchy nature of the conversion in payment methodologies, as payers, including the government, haltingly make changes to the way they pay for care.

"We're working against traditional models, and as we transition, we want someone who's aligned with us through the long term," he says. But best utilizing the evidence-based information and data capability that Healthways brings to the equation won't happen overnight, he concedes.

"That's why transforming communities will take more work than adding a new service to the hospital."

In fact, the goal has become to keep the patient out of the hospital through a combination of careful maintenance and a more hands-on approach to treating patients after their hospital stay is over, or with an eye on managing their condition such that they don't have to visit the hospital at all. The idea is that's where Healthways and its capabilities come in.

Texas Health is betting that disease management pioneer Healthways, led by CEO Ben R. Leedle Jr., can serve as a similar pivot point for the health system to make needed interventions on a targeted set of high-cost patients—very similar to what Montefiore developed years ago with its CMO—The Care Management Company.

"We'll be working with them to strengthen and expand—on a service line basis—support for people with chronic disease," Leedle says. "We'll intensify care transitions postacute to reduce readmissions likelihood and partner with them on direct-to-employer marketing of these capabilities."

Hawthorne says the speed of the transition is one reason such partnerships have become so important.

"We know what we do well. We've had remarkable outcomes caring for people at the tertiary level, but as we get into areas of moving the model to more of a health model than a sickness one, to create from scratch all the pieces that are now readily available in an organization like Healthways was not attractive," he says. "Speed and agility and confidence in a partner were important. We didn't have the expertise or time to create this ourselves."

Leedle says other health systems will be looking to answer the same value question as they take on risk, and Healthways hopes to develop similar long-term contracts with geographically diverse health systems with size and scale. That geographic exclusivity, however, would preclude it from doing similar deals with close competitors in the same areas, for example, that Texas Health serves.

Leedle envisions a partnership that can demonstrate differentiated value over the competition, and even speculates that health systems that prove they can deliver better quality at a lower price have a significant opportunity to offer large employers. "This work is filled with potential channel conflict and tension, but in the end, we're headed to a marketplace where large employers will demand the very best value, and we think they'll sort out where that best value proposition is coming from."

Reprint HLR0213-5