Organizational Independence: Mission Impossible?

Adherence to a strict interpretation of the goal of independence can be a critical barrier to positioning the organization for a value-based environment.

This article first appeared in the June 2016 issue of HealthLeaders magazine.

In a vacuum, the idea of independence carries positive connotations. It has a ring of both possibility and responsibility, of being in control of your own destiny. This is true especially in rural and small communities that are sensitive to being dictated to by larger entities. The argument for organizational independence for community hospitals is just that: All healthcare is local, so leadership of the healthcare organization should also be local, allowing the community to maintain control of one of its greatest assets and to deliver what's best for the community based on community members themselves. 

The problem is that making such judgments is anything but easy—or final—given the challenging operating environment for such organizations.

In a time of upheaval, a prudent leadership group considers all options, and under careful consideration, more and more organizations are determining that it doesn't make sense to continue as an independent, given the financial distress that's afflicting some community hospitals as they struggle to deal with a changing business model, lower reimbursements, and the need to invest in both labor and infrastructure.

The reasons independent organizations are experiencing financial issues are myriad, but they add up to an "elevated" level of M&A activity for nonprofit hospitals with less than $500 million in annual revenues, according to a June 2015 report by Moody's Investors Service. Moody's cites increasing consolidation pressure due to declining reimbursement, shifting patient volumes, and necessary IT upgrades, and says it expects many smaller organizations to continue to heed to that pressure through agreements to merge.

In the aggregate, that might be true, but other less draconian partnerships may also be a workable option for many organizations.

For now, a merger is not an option for Winona (Minnesota) Health, where Rachelle Schultz is president and CEO. She says she expects to manage through the issues that are buffeting her health system, which has a 35-staffed-bed hospital, a nursing home, three clinics, and two assisted living communities. She and her board are coping by remaking what was once a hospital-centric entity into a holistic organization focused on the healthcare needs in its community. Its leaders want to offer those services whether they are hospital-based or not. To handle the tertiary functions that need to be referred out of the community, Schultz and her leadership team have created business and clinical partnerships with larger referral centers.

"Things are changing in smaller communities if all you are is a hospital, with things moving to outpatient," Schultz says. "That's a hard thing for a lot of small communities. We've expanded how we think and how we're interacting with patients outside our walls."

Conversely, under different circumstances, Bristol (Connecticut) Hospital would already have been acquired by a larger partner by now, and would be part of a for-profit operator's (Tenet Healthcare) statewide network in partnership with Yale-New Haven Health System. Because that transaction was quashed by the state government early in 2015, Bristol Hospital is still navigating independently.

Although president and CEO Kurt Barwis never says never, it looks like the organization will need to figure out how to survive and thrive that way for the foreseeable future. Not that he necessarily favors either option in a vacuum—he makes no bones about enjoying the freedom that comes with organizational independence—but moreover, Barwis is once bitten, twice shy. He says he doesn't want to spend that kind of time and scarce resources on another possible tie-up only to have all the hard work wasted at the eleventh hour.

"We spent an enormous amount of focus, time, and resources trying to bring that transaction to closure, to be a part of that system," he says. "If you start to think about how much of our system resources we expended in that, you can't help but be extremely cautious going forward." 

Independence a matter of perspective
Both CEOs agree there are options to get to an equilibrium that doesn't involve selling assets even though there are huge variables that may ultimately thwart those plans. Until then, they have some much appreciated flexibility. That's hopeful. And flexibility of options will likely be increasingly valuable as the healthcare reform equation matures and those with poor alignment or processes are shaken out.

If a board is categorically against selling assets, there are options to bridge the chasm—for now at least. One irony is that only through closer cooperation—being bound together with others clinically on the continuum of care—can organizations maintain financial independence, if that is a key goal.

"The board comes from the community. They're businesspeople, their families are here, and to them, an independent health system means a strong community," Schultz says. "A lot of our conversations are around knowing what our community needs and not handing that over to allow someone else to make those decisions."

That doesn't mean they need to be isolated, however. It's clear that financial independence is becoming more difficult, especially for smaller organizations, without clinical dependence. Critically, developing clinical partnerships with larger organizations provides options as well as opportunities to create shared care pathways that are not necessarily predicated on financial benefit to either organization, but instead on seamless care delivered to the patient. Opportunities that are patient-centered, in other words. 

"A lot of our conversations are around knowing what our community needs and not handing that over to allow someone else to make those decisions."

"We try to have multiple relationships with referral centers to provide patients with choices," says Schultz. "As long as the referral center is willing to return patients, it's worked really well. When we've concentrated on the financial engineering and money part, we've lost sight of what we're about."

Winona Health is in position to develop such relationships through the Centers for Medicare & Medicaid Services' work to expand the ACO model into rural communities. Winona was accepted into the program by CMS with two other rural communities in Minnesota, and received some funding to build the infrastructure for the ACO, which is limited to between 5,000 and 10,000 lives.

"We're all independent, and we're similar in how we approach our communities," she says of her partners, Lake Region Healthcare and Madison Healthcare Services. "If funding streams are going to change, we need support to get through these transitions. Through this model we can stay in sync, but none of us own each other."

While Schultz says she is not sure the ACO model will stick long term, she says that breaking free of the old FFS paradigm is extremely important. With avenues to reinvent, she says, there are possibilities. One thing she is pretty sure of is that Winona doesn't want to go down the merger path.

"Things get stripped out. We see it all the time," she says. "Services get stripped out and jobs are lost and you're dictated to. I've not seen a system that sees the rural or small community connection, and the board feels it's contrary to what's in the best interest of the community."

At the same time, she doesn't close off any avenues in strategic planning, she says.

"As we go through our strategic planning, it's not about what we can do to maintain our independence. It's not protectionist—it's a multipronged approach, but thinking about our role in health and well-being, and getting that into the community. This isn't the first time there's been huge shifts in healthcare so you reinvent yourself. It's all that we're doing."

Planning for contingencies
Similarly, despite his recent experience, Barwis remains open to partnership possibilities of all stripes.

"It would be really hard for any independent hospital to not continually reevaluate the merits of independence," he says.

Bristol retains what Barwis calls "an active partnership committee," which is constantly evaluating how the health system is going to meet its mission. His point is that independent organizations have to sustain the organization as it is now, but if that seems in jeopardy long term, you have to be prudent. 

"You can't wait until the last minute and jump out there and say, 'I can't do it anymore,' " he maintains. "It's a very planful, healthy discussion, and we have it frequently."

In many ways, the exercises that went along with the unsuccessful Tenet acquisition were not completely futile, says Barwis, because they forced the organization to go through detailed planning and answer tough questions it otherwise probably wouldn't have.

"We did learn a lot on the way by asking really pointed questions, explaining the strategies and how we were going to run the organization going forward as part of our due diligence," he says. "So we grew stronger through that process."

Following the failed acquisition, Bristol started executing on some of those plans, such as retooling its ambulatory strategy. In the initial period right after the transaction ended, Barwis says his leadership team and employees felt pretty good about independence. Through the process, the health system ended up with access to capital on its own through banking partners. Leadership had thought that was a lost cause with their inability to get the organization rated from the major agencies, thus curtailing a major financing option for most nonprofit organizations.

"We actually ended up with access to capital on our own and didn't need to be part of a system, especially since we had a clear idea of what our capital needs were," Barwis says. "We couldn't get rated, but plenty of banks were interested in lending because of our performance track record the previous four to five years, so that positioned us pretty well."

But real fiscal challenges continue. With Connecticut still suffering from the nation's financial downturn, corporate headquarters relocation announcements, and the impact of Medicaid expansion, says Barwis, the state plans to retain in its general fund the 6% revenue tax hospitals paid in a complicated past scheme to harvest federal matching funds. 

"No matter the amount of cash on hand, the harsh reality is that we're sitting with a 6% net revenue tax, or about $8 million, when our margin has been about $2 million, so sustainability is always a fragile thing," says Barwis. "Competition is intense. I have three teaching institutions in the same county, so there's a sense of reality, and that is, in the current environment, we have to constantly reevaluate not just where we are today but all these factors that can hit you at a moment's notice. You can't stop thinking about whether you need to partner or not."