Health care industry consolidation: implications for physician executive careers.

This change in work and career within corporations has not bypassed the health care industry. Health care companies are reinventing themselves, developing competitive strategies that mean greater risk and more uncertainty than ever. Medical managers entering this brave new world, particularly those at the middle level, need to understand the landscape and be prepared to deal with it.

In today's business world, there is a competitive advantage to expanding and continuously improving organizations. For health plans, the current principal growth.strategy has been through expansion of patient base. This has been the impetus for enhanced product lines, either through increased commercial growth or enrollment of traditionally fee-for-service Medicare/Medicaid members into HMOs. Health care organizations can thus spread the risk and achieve economies of scale in administrative costs. The hope is that growing numbers of consumers will be attracted by a broader range of participation options that are also more cost-efficient. Many plans seek to increase their market share by widening their geographic reach. Not only does such a strategy attract consumers, but increased size and breadth affords an organization greater influence in the provider community. Such market forces have spurred a rush of mergers among HMOs and other managed care companies, particularly in more mature (vertically integrated) and saturated markets (those with an excess of specialists and hospitals).

In January 1994, Colorado-based QualMed and California-based Health Net combined to form Health Systems International, Inc. It currently serves more than 1.6 million members in seven states. In June 1994, Fountain Valley, California-based FHP International Corporation acquired TakeCare. The new company became the nation's fifth largest HMO with more than 1.7 million members in 11 states and Guam. In April 1995, WellPoint Health Networks, Inc., and Health Systems International, Inc., announced that they had entered into a definitive merger agreement that would create the nation's largest publicly traded managed health care company, with more than 4.4 million members in California and seven other states. This summer, Minnesota-based United Health Care announced plans to acquire Metra-Health, a privately held joint venture health care company created last year by Metropolitan Life Insurance Company, the health care business of Travelers Insurance Company and Reston, Virginia-based Healthspring. Total Metra membership is now about 11 million, with fewer than 1 million managed care subscribers. If this transaction is completed, the number of covered lives for the merged organization could quadruple.

Health plans are not the only entities affected by this trend toward horizontal consolidation, nor is the West Coast the primary geographic area to be targeted. Financial and market pressures are spurring hospitals across the country to develop joint ventures and strategic alliances in order to become part of larger health care delivery systems. For example, Northern Kentucky's two biggest hospitals, St. Luke Hospital and St. Elizabeth Medical Center, linked with separate Kentucky coalitions in recent months, are positioning for business that may come from a purchasing alliance that will negotiate coverage for at least 300,000 commonwealth and local government employees. In Cincinnati, two hospital alliances, Bethesda/Good Samaritan and the Health Alliance of Greater Cincinnati, formed last year. Both systems announced the formation of holding companies whose boards will provide budgetary and strategic oversight. The goal of these alliances is to eliminate duplicative services and jointly plan new ventures with an eye toward efficiency.

Similarly, several specialty carve-outs are joining forces. American Prepaid Professional Services, Inc., a company that sells dental and vision coverage, bought CompDent Corp; Hospice HomeCare, Inc., of Mt. Auburn, was purchased in January by Louisville, Kentucky-based Vencor, Inc.; Wise Home Health was purchased by Good Samaritan Hospital last summer; and Deaconess Hospitals bought Mississippi's largest home health agency earlier this year.

What Does All This Mean?

The projected cost synergies of these mergers, joint ventures, and alliances are expected to be substantial and have been identified in at least two primary areas: medical cost management and administrative cost reduction. It is the latter area that has most profoundly affected the fate of many physician executives. Mergers and acquisitions often mean downsizing, as companies seek to eliminate duplication in overlapping markets and/or simply to achieve efficiencies. Even for those companies that have not experienced merger mania, there is a growing sense that becoming "leaner and meaner" is an appropriate competitive strategy. The result has been a rise in corporate reorganizations with the attendant attrition of managers, either forced or voluntary.

A prominent physician executive in managed care lamented that six months ago he moved 3,000 miles to join a new company, only to find that it is now merging with another organization and that his job will be eliminated. "I was caught by total surprise, especially since I took the position with assurances of stability from the highest level of management," he complained. A physician executive employed by a hospital recently speculated that employment in the hospital industry alone will be reduced by at least 10 percent over the next few years. "It's kind of scary right now," he said. "I don't know if I'll become the CEO of a merged system, or have no job at all. And that's true for everybody down the line."

Virtually no one we interviewed expected the pace of consolidations to slow. The sense is that this will be a major theme for the next two to three years. Hastening private sector change is GOP policymakers' move to reengineer federal health programs. According to analysts quoted in the June 12 issue of American Medical News, "the rapid consolidation of health care's private sector will shift into warp speed if Republicans succeed in retooling Medicare and Medicaid."

The bottom line is that the rate of change sweeping America's health care delivery system has accelerated. Someone recently responded when a colleague expressed longing for the good old days in health care, "The good old days? Do you mean 1992 or 93?" There doesn't seem to be any definite move toward health care reform by the federal government, so the end of instability and rapid change appears indefinite. How do physician managers deal with this new level of uncertainty? In the search for career opportunities, what signs suggest an organization's (or a position's) longevity?

Conduct an Organizational Audit

Wheather considering a new position or concerned that your current company is headed for change, conduct an organizational assessment or audit. Consider everything about the company, from financial issues to corporate organization and culture. When that is complete, determine your own value system and personality, including your tolerance for risk. We've found that physicians, even those with MBA degrees, are often more concerned with their immediate physical surroundings (office space, secretarial support, etc.) or bonus and benefit package than they are with the not-so-obvious, but more important evaluation of the organization itself. When evaluating a new position, failing to do the kind of rigorous analysis essential in today's chaotic health care marketplace could set you up for failure.

What to Look For

Company personnel are certainly a source of information about the organization, but when seriously considering a position, do your homework. You must perform the same due diligence you would as a prospective investor or a purchaser of the company. If the organization is a publicly traded corporation, this part may be easier than you think. All annual reports and quarterly financials are public record and readily available. Review them carefully.

Look at the market segment the company serves and its share of the market. Determine its major competitors, its capital position, and the strength of its balance sheet. As a would-be "investor" in the company, be sure there are healthy, sustainable margins and a hefty "free cash flow." Is the organization cash rich, with little or no debt? Or is it highly leveraged and burdened with huge debts to service? Is the company's earnings growth accelerating and, if so, what is the source of that growth? For example, is it due to cost-cutting, denying more services, unsustainable increases in premiums? Or is revenue up due to a growing member base? Are market share gains in areas of low penetration, or is the environment highly competitive, as it is in California? Furthermore, can the rate of growth be maintained? Be aware that a sudden slowdown may necessitate management cut-backs just as you settle into your new position.

How is the organization regarded by its competitors? Where does it stand in the "health care food chain," i.e., is it ripe for takeover, or is it in an acquisitional mode? Check stock advisory services, such as Value Line or Morningstar, to see what industry analysts are saying. Does it have strong contracts and strategic alliances with other synergistic companies? Does the company have the sophisticated infrastructure (MIS systems, technical support, banking and credit relationships) to support any anticipated growth? These are the kinds of questions you need to ask to fully understand the financial picture.

Investigate Organizational Structure 

and Culture, Too

Also consider the structural characteristics of the company and its culture, particularly with respect to job vulnerability. For example, a highly layered, hierarchical structure has more risk of substantial downsizing than a flatter organization that has already reorganized into strategic business units. Hierarchical organizations, which are also very centralized, tend to restrict free flow of information and may be less responsive to the company's need to innovate. An organizational chart a written job description, and, most important, a discussion with a current manager or director of the company can provide insights into the formality of the company, reporting relationships, depth of support, and scope of responsibilities. On the other hand, the absence of such documentation suggests less formality or poor organization and management. It could also mean that the company has undergone a recent reorganization. Ask questions. Find out whether the position is newly created. If so, has the company experienced significant expansion, or is the position based on expected growth? What contingency plans are in place if anticipated goals are not met?

If the position is an existing one, find out who left (perhaps not by name, but by qualifications) and die circumstances (i.e., was it a case of resignation or termination?) If possible, consult objective insiders for an honest explanation. Are there physicians at the senior vice president level or above, and, if so, are they involved in strategic planning? This is an indication of whether the company regards physician executives as key members of the management team. Ask also about the retention rate for physician managers. Long-term employee status implies a stable organization that values its personnel. In the past, physician managers in staff and group models, such as Kaiser, CIGNA, and Group Health, have tended to have more longevity than their counterparts in IPA plans. However, this is also changing as competition increases.

Critical information about the company can be gleaned from the human resources department. For example, how organized is die interview process? Have the interviewers prepared by reading your resume in advance? Do they know your schedule, who you are seeing next, and where you are going? Do they seem relaxed and secure with respect to their own jobs, or do they make back-handed comments about the organization? Ask them to articulate the corporate culture or core values shared by a majority of the members. Conventional wisdom is that a strong culture translates into lower employee turnover. On the other hand, when the environment is undergoing rapid change, as it is in the health care industry, an organization's entrenched culture may not be appropriate.

Know Yourself

The final part of the analysis is acknowledging your own core values and determining how compatible they are with the organization you plan to join. There are some who feel that the rush to consolidation has produced a fundamental paradigm shift within the health care industry. Are these new mega-MCOs focused on the needs of the community, they ask, or have they been designed simply to maximize earnings per share?

Although top executives who favor mergers argue that the two are not mutually exclusive, not ever one agrees. Typical conflicts arise over short-term profits vs. long-term dedication to total quality improvement or, alternatively micro management vs. overdelegation. One physician manager, who chose to Ieave his organization, reflected on the clash of values he felt an impending merger would create for him: "With all the changes and the very focused emphasis on short-term profitability in order to raise shareholder value, the horizon of my company was much shorter than my own. I think that's a typical dilemma many doctor managers will face." Another physician executive considering the same scenario stated that, "With many mergers, there is a kind of cultural mixing that creates friction, an incongruity of priorities and biases. The business dominance doesn't always understand that, in health care, we need to manage care, not just costs. With the emphasis on short-term performance, there is a greater potential for a loss of that vision. Ideally, we would have a culture that manages that interaction. Unfortunately, at least in my company, I don't see that emerging."

Bottom Line

A job change is a major career decision. Traditionally a fairly stable industry, health care is experiencing unprecedented upheaval. As a result, physician executives face less job security and more career uncertainty than ever before. For some, that has meant job-hopping, often crisscrossing the country, and creating what we call "career debris," with resume resembling checkerboards rather than strategically planned career paths. For others, it may mean staying put, waiting out another two-to three-year period of turbulence.

For a fairly small group, industry instability represents opportunity. These physician managers are going the entrepreneurial route, starting their own consulting firms, networks, or even health plans.

The question is: Can a physician manager who wants to work within the corporate managed care world reduce the probability of unwise job decisions; can he or she identify instability within health care organizations before coming on board? The answer is yes, but it requires a careful synthesis of concepts and opinions. Know the market, know the company, know yourself. No decision should be impulsive, nor should it be made without input and buy-in from family members. Only by conducting this kind of thorough analysis can a physician executive match his or her own priorities and career goals to the right job opportunity.