For post-acute.

TWO STRATEGIES

Based on interviews with Francis L. "Biff" Shea, Chairman and CEO, Flagship Healthcare, Miami Lakes, FL; and Kathryn Melendy, MBA, CEO, The Aurum Network, Burlington, MA

If it wasn't obvious before, it is painfully so now that post-acute care providers must transform their operations to meet the demands of a radically new reimbursement system. Managed care, particularly in its Medicare Prospective Payment System (PPS) format, poses major challenges for providers stumbling out of the cost-based reimbursement world. They're coming to realize the difficulty of trying to go it alone. Fortunately, there are several organizational alternatives developing for them-variations on the theme of improving managed care attractiveness through strength in numbers. Two such newly evolved organizational models are represented by Flagship Healthcare, a Florida-based, privately owned company that owns and operates two affiliated health service providers-Flagship Rehab and Flagship Home Health (themselves assembled from six previously independent healthcare companies) and The Aurum Network, an alliance of seven companies owning 46 facilities at all levels of post-acute care in Massachusetts. Recently, Nursing Homes/Long Term Care asked the top executives of the two organizations to review today's post-acute care environment and how their respective approaches fit into it.

Their comments are summarized:

Francis L. "Biff" Shea, Chairman and CEO, Flagship Healthcare:

"We bought the six companies last year with the idea that prospective payment was going to happen soon. We selected companies that had a low cost-base, compared with national averages, enabling us to maintain costs while improving quality. We also knew that with hospitals under continuing pressure to reduce lengths of stay, home health care would be a critical component of any delivery organization. Furthermore, to make it work efficiently, case management would be critical. This led us to double that part of our staff within the past few months.

"Although Medicare's PPS was not adopted in the form I anticipated, my experience has been that the Federal government initially takes a very aggressive position with a program and then eventually modifies it as the realities take hold. Even so, the impact of PPS will be dramatic - as dramatic, in my view, as the impact of the original Medicare program in 1965.

"But there is a danger connected with it, as well: What is going to happen to the patients who need repeated episodes of care because of chronic conditions? The truth is, they will not be at all attractive to skilled nursing facilities (SNFs) and home healthcare agencies providing post-acute care. As it stands, we have the $1,500 Federal annual cap for rehab therapies, and in our own Broward County, there is a $5,200 per year limit for home health care. What do you do when the repeat-visit patients go over the cap - stop providing care? You can't! Another problem is that the SNFs that increased services significantly to treat the growing number of subacute patients in 1996 and 1997 are going to be disincentivized by the 1995 base year in the PPS reimbursement formula.

"What will happen as a result of all this is that everyone will be competing for the acute, episodic, shorter-stay patients, and our company will be no exception.

"I don't see the new Medicare transfer rules (under which hospital 'discharges' to post-acute settings will be viewed as 'transfers' for reimbursement purposes) being a serious long-term problem. Hospital-based SNFs may want to keep these patients longer under the first year of PPS, which will be 75% facility-based, but as the payment moves more toward a national rate in subsequent years, the hospitals' relatively high overhead will again prove to be a problem, and they'll want to transfer those patients more quickly.

"At the moment our company 'is involved much more in the private-pay managed care market than in the Medicare market. Our Flagship Home Health, for example, provides 17,000 visits a month for private managed care organizations, which have a very significant presence in Florida. Managed care in general, though, finds itself in an awkward position - it has to focus more on quality and on helping providers to control costs, with better results than have been achieved so far. Otherwise Medicare, already the largest purchaser of managed care in the United States, will become an even bigger presence. There's no question that penetration of Medicare HMOs in Florida has become very rapid.

"The advantage to a provider of straight ownership in meeting challenges like these, as opposed to a network arrangement, is that it is a much more practical approach to handling risk when taking on capitation and subcapitation. In a network, it is very difficult to determine which of the members has the balance sheet liability in a given situation, and I have never figured out how to handle risk under a network system.

"We think that there is great opportunity for growth with our approach. Right now Flagship Home Health, with some 9,000 patients, has revenues of about $40 million, while Flagship Rehab has grown to $18.5 million in revenues. We look to double the size of the company with further acquisitions within the next few months. And, while we plan to concentrate on South Florida for a while to make sure this model works well, we plan to expand into Massachusetts next year and then, with Massachusetts and Florida serving as 'anchors,' create a company covering the entire Eastern seaboard."

Francis L. "Biff" Shea, chairman and CEO of Flagship Healthcare since 1996, founded the Boston-based Frontier Group in 1993, which has since grown into a $140 million/year company encompassing 2,100 skilled nursing beds, a 500,000-visits/year home health agency and multistate rehab company. Shea has also held positions with the Prism Health Group and The Mediplex Group.

Kathryn Melendy, MBA, CEO, The Aurum Network:

"At the moment our network encompasses seven companies that own 46 facilities offering the full range of post-acute services, including SNFs, transitional medical/rehab services, long-term medical management, adult day care, home health care, respite care, Alzheimer's care and hospice. All the companies are independently owned, sometimes going back two or three generations, and are strong presences in their communities. However, they realize the difficulty of going it alone in today's market. They're not interested in joining a large chain, though, and want to keep their basic cultural identities. They see a need to balance this with integrated elements that are important to managed care.

"This requires a strategic plan that everyone buys into, but the plan has to be implemented one step at a time for members to get a feeling for working together. Our seven-member Board of Directors, consisting of the top executives of these founding companies, has been able to agree to such a plan and agree upon a method for realizing it. Thus, we started with joint purchasing, which is relatively easy and something to which everyone can relate. Next, we will reorganize our rehab and pharmacy services system-wide, with central policies, procedures and outcomes monitoring. We already have a central 800 phone line (as well as a Web site that gives information about the facilities according to geographic location). This system will evolve into a centralized admissions process and centralized case management. We also will be developing a business plan for an information management system that will serve the network's needs - a major project.

"In short, we are developing projects that will bring savings to the members' complex systems and organizations. We realize that there will be issues we will have to 'hammer at,' but so far we've been able to negotiate, arbitrate and develop consensus - in some cases more quickly than I expected. That's because the motivation is there to make it work.

"Because we are structured in this way, everything has to be done by consensus, instead of by edict as it would be under an individually owned system. The advantage to the network, though, is that each member organization is able to maintain its strong local identification and reputation, as opposed to a big chain imposing change from the outside that may or may not benefit the community. Each of our members is excited about the possibility this has opened up for them in preparing for the future.

"This will help us with PPS, because our members are now operating from a broader information base - there's a greater possibility of generating good ideas to share - and they're able to share each organization's efficiencies and training resources. PPS is all about reducing costs and maintaining at least equal quality, and now we have more resources to bring to this challenge.

"We do see managed care in our future. Though our members currently range from 3 to 12% in terms of managed care business, Medicare HMOs are signing up Massachusetts residents at an enormous rate. The key for us is to develop an identity as a network, a reputation as a reliable provider organization to which managed care can turn. Although individual members have managed care contracts, we want to further develop our systems - for example, centralized access and case management-before we go after managed care contracts as a network. Since our formation last July we have made significant progress toward our objectives.

"We do have plans to expand statewide. We are in the process of selecting and inviting other providers to join us. Eventually we would like to expand throughout New England. My job, as CEO, is to create sufficient value to attract excellent new providers."

Kathryn Melendy, MBA, CEO of The Aurum Network, has been a top hospital executive in Massachusetts for several years, specializing in financial turnarounds and reorganization of facilities. Aurum's founding board members include: Richard Bane, principal owner of Bane Family Nursing Centers, Lynn, MA; Peter Gordon, Gordon Health Care Management, Dorchester, MA; Robert Salter, Salter Healthcare Group, Winchester, MA; Paul Casale, Welch Healthcare and Retirement Group, Norwell, MA; Sidney Insoft, CMI Senior Housing & Healthcare, Inc., Wellesley, MA; Dan Salmon, The Salmon Family of Services, Northbridge, MA; and Mark Tobin, The Pointe Group, Brockton, MA.