Partnerships with a purpose.
Many hospitals have collaborated with neighboring facilities once considered
competitors and have built physician-hospital organizations. In fact, according to the American Hospital Association's 1993 annual survey, 53.3 percent of all hospital respondents indicated the existence of a working relationship with other providers to collect, track, and communicate clinical and health information. And, in a survey of 200 CEOs conducted by National Research Corp., 45 percent thought hospitals made the best partners to position their organizations for the future, and 39 percent said their main focus in preparation for reform was hospital/physician partnerships.
Group practices have handed together to create groups without walls, corporations, and physician organizations to enhance negotiation of managed care contracts and to gain access to information systems and other technologies they cannot afford to purchase. Because asset ownership is not transferred in these arrangements, autonomy and local control are still possible, two pluses for private practice and group physicians who feel their future independence is hanging in the balance.
Managed care companies and insurers are lining up primary care services and offering to handle administrative responsibilities for groups.
Some of the alliances have come under close scrutiny from regulators looking for infractions of antitrust laws, and some alliances have been rejected by the courts as a result. Still, the critics agree that strategic alliances are a positive step toward reducing costs without affecting quality.
A Foray into Insurance
Because Blue Cross/Blue Shield is the dominant insurer in Michigan, Henry Ford Health System, Detroit, decided to link up with the firm to sell a new insurance product, according to Michael E. Somand, MD, Medical Director of the Western Wayne Region of Henry Ford. "Blue Cross would administer and sell the product, and we would provide the delivery system," he says, adding that Ford has captured between 10 and 15 percent of the health care market share in Southeastern Michigan. "We put it together about a year ago, and the goal was to be ready for the automobile negotiations in the fall. The idea was to go from no people in this product to 200,000, but it didn't quite work out that way."
Because the numbers haven't come near that goal, Henry Ford Health System is considering abandoning the venture. Somand says it was a good idea that was ahead of its time. The managed care penetration in the state is estimated to be between 10 percent and 30 percent, he says.
Five years ago, Ford linked with Mercy Hospital as a convenient way to expand its delivery network, and that affiliation has been successful. The alliance is called a "joint operating agreement" (JOA), an arrangement in which asset ownership is retained by one hospital (Mercy), but another hospital (Ford) handles the administrative responsibilities. Somand says Mercy's level of service and profitability have improved dramatically as a result of the arrangement. In return, Ford has benefitted by being able to provide primary care in the inner city, much closer to home for many of its patients and broadening its referral base.
Mercy and Ford recently jointly purchased St. Joseph's Hospital of Mt. Clemens to further expand the delivery network and referral base. Ford also now has cooperative arrangements with a third hospital, St. Joseph Mercy Hospital of Pontiac.
While the Ford System is pleased with its hospital alliances, it lacks a strong medical school alliance and is working to establish one. "We were part of the University of Michigan, which is 40 miles away, but its class size shrank, and it had less need for our help," Somand says. Now Ford is looking to Case-Western Reserve University's medical school in Cleveland for a possible alliance. In this arrangement, Ford would train third- and fourth-year medical students at its Detroit facility through a grant from the Robert Wood Johnson Foundation. Students would exit the program fully schooled in primary care and
board eligible for internal medicine.
"Around here, there is a great feeling that something is about to happen," Somand says. "We're on the verge. And when the change comes, it'll come real fast," he says. "We're seeing around Detroit some degree of merger and consolidation. The little places are gone. There are still seven to eight hospital systems, and nobody is sure if that number will get smaller."
System Holds Long-Term
Lease on Hospital
Memorial Healthcare System and Memorial City Hospital, Houston, Tex., were competitors when the former leased the latter for 10 years. The system holds the management reins, and, as of the first of this year, the two systems have consolidated $12 million worth of their operations, including a merger of cardiovascular surgery services, says V. Hugh Gilmore, MD, Director, Clinical Quality Improvement, Memorial Hospital Southwest, which, along with Memorial Hospital Northwest, comprises the health care system. Prior to the affiliation, Memorial Healthcare System had four acute care hospitals: Memorial Hospital Northwest, Memorial Hospital Southwest, Memorial Hospital Southeast, and Memorial Hospital Woodlands. Memorial Hospital Southwest (500 beds) is the largest hospital in the system.
Memorial City's holdings include a freestanding psychiatric hospital, a rehabilitation hospital, and an extended care facility, in addition to the 500-bed hospital. "The intent is to enhance our geographic presence in the marketplace. Memorial City is operating as a division within the Memorial Healthcare System, similar to other system hospitals," Gilmore says. "I don't think anybody could argue with the fact that you're no longer dealing with a competitor but someone in your own family. This is quickly becoming a win-win situation for the hospitals and for the community."
The system and hospital began their alliance with some attempted joint ventures. But, because neither was in control, there was a problem resolving management decisions. "There was an interest on the part of Memorial City to work with us on managed care contracting," says Bert Zimmerli, Vice President, Finance, Memorial Healthcare System. "But that's difficult to do without ownership. There would be complications with price fixing from an antitrust standpoint. And we also worried about what we'd do if we couldn't agree."
Memorial Healthcare considered acquiring Memorial City, but Zimmerli says Memorial City was not ready to sell because the sale would generate substantial capital gains. So the two entities began investigating a lease arrangement. "From our standpoint, a lease made sense," Zimmerli says. "We look at 10 years as a fairly long-term lease. We got control of the operations without spending a lot of capital on brick and mortar."
Memorial City's owner, according to Zimmerli, wanted a fixed cash stream. Officials there realized it was difficult to stand alone in an area that was rapidly consolidating. The lease arrangement gave the owner the fixed cash stream it wanted, and the health care system was able to add to its managed care coverage, add quality physicians, and lower its costs by avoiding duplication of services and consolidating its support services, including its financial operations, which are now in one location.
Zimmerli estimates that consolidation of the financial operations alone will save the system $1 million annually in salary and benefit costs and non-labor costs, such as garnering a better contract with its collection agency and electronic billing company. By converting Memorial City into a not-for-profit operation, there were also the benefits of reduced taxes and increased charity care. In addition, the system is attempting to bench-mark internally from department to department, comparing the operations of like departments at system hospitals to see which is more efficient and assisting department management to achieve the efficiencies of departments with the best practices.
Parent Board Makes Most Decisions
Horizon Healthcare, Milwaukee, Wis., was born when five hospitals decided to allow a parent board the right to make decisions on strategic planning and debt approval and on whether to affiliate further. The board also negotiates managed care contracts, leaving each hospital the freedom to approve its own operating budget and to make administrative decisions concerning its facility. The logic behind this arrangement is to put the emphasis on collaboration rather than the power struggle that often follows a merger. According to Gerald McCarthy, Vice President Medical Affairs at Columbia Hospital and Chief Medical Officer for Horizon, the arrangement was "partially fueled by the community and by an apprehension that, if these five hospitals didn't do it [ally], another system would come to town and try to do it."
McCarthy says there are three significant hospital systems in the Milwaukee area and two or three stand-alone hospitals struggling to hang on. In addition to Horizon, there are Aurora Health Care and Covenant, a Catholic system. The last hospital to join Horizon was St. Mary's Hospital, a Daughters of Charity Catholic system hospital. Although it would seem logical that the religious hospital would want to link with a religious system, McCarthy says St. Mary's felt more comfortable with and was culturally and philosophically a better blend with Horizon. The similarities didn't end there. While the other hospitals in the Horizon system are geographically distant, Columbia and St. Mary's are only about a mile apart. They have approximately the same number of beds and the same sized staff, McCarthy says.
So why not merge the two hospitals or have one acquire the other? McCarthy says there's no reason to rush into either action at this point. "If CIGNA comes to town or HCA starts buying up hospitals, I think each system would quickly restructure in response," he says.
Lutheran General Health Care System includes Lutheran General Hospital (742 beds) and the 230-member Lutheran General Medical Group. It has its own PHO, Lutheran General Health Plan, and is an equal partner with EHS Health Care in Health Direct, a managed care company. Its planned merger with EHS Health Care will result in the second largest system in Illinois, according to Vice President Harold Shafter, MD, FACPE.
Currently, there are between 900 and 1,200 physician/hospital organizations (PHOs) in this country, with another 1,500 in development. A recent study revealed that 67 percent of respondents believe a PHO is crucial. A total of 20 percent of the respondents have an operational PHO, 13 percent have one in the works, 26 percent plan to form a PHO, and 30 percent indicate PHOs are in the discussion stage. These responses reflect hospitals' responses to changes in health care delivery, especially where managed care is concerned.
While PHOs are a growing national trend, they really aren't that new. Shafter says Lutheran General's PHO was established about 10 years ago, and it's still working smoothly. While critics contend that many of today's PHOs are being created by panicked specialists and are nothing more than a fad, Shafter says there was no urgency when Lutheran formed its PHO, and he believes PHOs, in some form, are here to stay. "One of the most distinctive features of our organization is closely aligning medical staff physician groups. We started with almost 250 physicians in 1980," he says. "We're all convinced that more integration of physicians and health care organizations is essential."
Hospital and System Form
Mease Hospitals, with 378 beds on two sites, and Morton Plant Health System, with a 717-bed hospital, a rehabilitation center, an outpatient center, and several ambulatory care and imaging sites, are located in Clearwater, Fla., and are the two largest hospitals in North Pinellas County. The two hospitals decided to merge in hopes of saving $80 million over a five-year period, but their plans were dashed after the Florida Attorney General's Office and the U.S. Department of Justice investigated the merger independently and agreed that it was in violation of antitrust laws. The two agencies maintained that the merger would eliminate competition in North Pinellas County and ultimately result in higher costs and lower quality of care for consumers.
Mease and Morton Plant agreed to abandon their merger plans and to instead form a partnership. Within the partnership, they would be permitted to jointly operate certain patient and administrative services, but they will have to market and price all services separately, even the consolidated services. Meanwhile, the consolidated services will be owned and operated by the partnership the hospitals establish. The partnership will sell its services to Mease and Morton Plant at cost.
"We are operating with a law from the '30s that the Justice Department has to enforce, one that is not totally relevant today," says John C. Babka, MD, FACPE, Senior Vice President/Director, Medical Affairs, at Morton Plant. "Hospitals have to come together to save money for the community. We believe we can do that by merger or partnership. The Justice Department was able to negotiate a way to remain competitive but to pool our resources."
Babka estimates that it will take between six and eight months to merge the medical staffs at the three hospitals. Currently, bylaws are being studied to find areas of difference that need to be aligned. Babka admits that there are some "contentious areas," but he says that "people of goodwill want to work together." Because the two hospitals are still separate entities, they will continue to be competitors, and each will continue to market, price, and negotiate its own managed care contracts.
"The interesting thing about this partnership is that, although the three hospitals will have separate marketing and pricing, every service they deliver will be combined - medical, nursing, administration," Babka notes. "The only people who don't work for the partnership are the chief administrative officers of the hospitals and the staff involved in marketing and pricing." Babka says the big downside of the partnership is dealing with "really painful people issues" involved in paring down the staff.
Liz Leeds, Florida Assistant Attorney General, Antitrust Division, says the services the partnership will operate were spelled out in "excruciating detail," but pricing is left up to the individual hospitals to maintain competition between them. As an example of pricing, Leeds cites open-heart surgery. The service would be provided by the partnership to the hospitals at cost, and they would have to determine the mark-up on the service.
But Leeds stresses that not all services are affected. The partnership will own and operate the outpatient, mental health, laboratory, radiology, and a few inpatient tertiary services. It can also own and operate rehabilitative services, skilled nursing, retirement and long-term care facilities, home health care, home infusion services, and durable medical equipment.
In the administrative area, the partnership will operate human resources, with the exception of those positions having to do with marketing, pricing, or managed care contracting. Only about 10 percent of the savings the hospitals hoped for with the merger are estimated to be lost as a result of the shift to a partnership.
Under the agreement, the partners may appoint members to a board made up of each hospital's board. Executives at both hospitals may also serve as executives of the partnership and on the boards of their hospitals and of the partnership. But the partnership board and its executives are prohibited from discussing independent services, managed care contracting details, or the marketing or pricing of any services, including those that are included in the partnership's domain.
The best aspect of the partnership is that Morton Plant officials say they still are able to realize the $80 million savings over five years that was projected with the merger.
"It was an enlightened approach by all concerned," says Liz Leeds, Assistant Florida Attorney General. "It [a situation like this] doesn't have to be all or nothing. An arrangement like this is an alternative to a complete merger and the litigation that would have occurred between the two [hospitals]." The unknown factor in this unusual partnership is whether the partners will remain competitive. Can a partnership like this succeed? Leeds says she hopes so. She also predicts that more of these partnerships will be created where circumstances permit.
Primary Care Network
to Be Formed
A year ago, Baptist Medical Center, Jacksonville, Fla., purchased two small community hospitals in the area, and it has just announced an alliance with St. Vincent's Health System to jointly develop and sponsor a community-based health care delivery network. Key initiatives of the agreement include enhanced charitable activities by both hospitals, development of a primary care network, and joint managed care contracting. A new organization will be formed to sponsor and managed the operations of both hospitals.
While investigating the various linkage possibilities, a merger was considered. Baptist officials were aware of the mandated partnership between Mease and Morton Plant hospitals on the other coast, so they reviewed the consent judgment, according to William Z. McLear III, MD, FACPE, Senior Vice President, Medical Affairs, at Baptist. "We don't take it [the ruling] as a wet blanket, only as an indication," says McLear, adding that the message Baptist officials get from it is that hospitals may first have to prove themselves as partners before regulators allow them to merge. But he also says that asking hospitals to cooperate but remain competitive simultaneously is "almost an oxymoron."
More recently, Baptist acquired a 20-plus member psychology group that has "a significant corner on mental health services in managed care in Northern Florida. They are exclusive providers for about 130,000 people." Wolfson Children's Hospital at Baptist and the Child Guidance Center have established an affiliation agreement to centralize resources through Wolfson's inpatient adolescent psychiatric unit and the Center's outpatient mental health services to provide seamless care. In addition, the Center has agreed to provide Wolfson with a medical director for the adolescent psychiatric unit to coordinate clinical behavioral health education and research activities.
HMO and Group Link
Group Health Cooperative of Puget Sound and Virginia Mason Medical Center, Seattle, Wash., have formed an alliance through which they are involved in several joint projects, according to Howard L. Kirz, MD, MBA, FACPE, Executive Director of Group Health's Northwest Center for Medical Leadership. One of the projects is a new insurance product called Alliant Health Plan, which was jointly developed after 18 months of "working around values and common interests. Out of that grew some language describing a strategic affiliation. Now we're in the stage of developing real projects, such as Alliant," he says.
Under the new insurance plan, consumers will be offered the services of a network comprising both organizations as a delivery system. "We both look to this product to grow individually and mutually increase our market share and increase use of our delivery systems," Kirz says.
The strategic alliance's second project, which is independent of the insurance product, is to "examine coordination of a number of existing services and also develop several jointly owned primary care clinics in the suburban areas of Puget Sound," Kirz says. "We'll be referring patients back and forth. For example, Group Health's eastside hospital may be used by Virginia Mason physicians to hospitalize patients in obstetrics and other areas." Meanwhile, Virginia Mason will benefit because its cardiac surgery team will be performing some of Group Health's cardiac surgery that was traditionally referred elsewhere.
Finally, the alliance is looking at establishing an institute to study the scientific basis of medical practices and medical quality management. A consultant has been hired to evaluate the possibilities for future ventures and future forms for the relationship.
As hospitals continue the shift toward mergers, acquisitions, partnerships, and network development, physicians are also becoming more involved. Except in areas where managed care is barely present, solo practitioners are scrambling to link up with other physicians and with hospitals and HMOs to position themselves for the future. Some are even investing in and forming statewide, physician-driven managed care operations, as they have in Connecticut and New Jersey.
An independent practice association (IPA) is one way physicians can band together without sacrificing autonomy. They are able to provide convenience, access, marketability, and a full range of physicians from which to choose. Recently, there has been a trend toward IPAs' merging with medical groups. Groups offer efficiency, system-development, clinical practice guidelines, outcomes management, and quality improvement programs. Other models include foundations, PHOs, public companies, and independent companies.
HealthCare Partners Medical Group, Los Angeles, Calif., comprises 250 primary care physicians and 1,200 physicians (in addition to IPA physicians) who operate from 30 offices with a total of 1,400 employees and offers coverage to 220,000 enrollees in Los Angeles County. It also includes 12 medical groups. The huge network has market dominance, strong assets that allow access to capital, more information systems, combined management resources, increased leverage in negotiating with managed care companies, lower overhead expenses, and many shared costs. "It was a reaction to the need, which is intense in Southern California, to provide efficient, high-quality managed care to large populations and to do managed care business in large blocks with employers in HMOs," says Robert Margolis, MD, Managing Partner and CEO of HealthCare Partners.
Despite the fact that HealthCare is the largest health care delivery system in Southern California, Margolis says it will never stop growing, affiliating, or merging. "You could call it chaos out here," Margolis says. "For whatever reason, California tends to be a trendsetter, with traditionally high medical costs, high specialty and procedural care, and more large hospitals than are probably necessary. Over time, with the advent of HMOs led by Kaiser, the bulk of commercial insurance has been converted to prepaid. The state is planning to move all its patients into managed care. The economy has driven us to be more efficient, to have economies of scale, and to have consolidations. There are tense battles among hospitals, HMOs, and providers as to who should organize the system." Compounding the problems, Margolis says, are the state purchasing cooperatives, which are demanding 5 to 20 percent decreases in premiums during a period of decreasing revenues.
The Bottom Line
Strategic alliances are win-win situations for all parties concerned. There are a wide variety of these arrangements in the planning stages, and many have come to fruition. Deciding upon the best alliance is probably the trickiest part. "There are risks to the organizations and to the doctors," says Kirz. "You have to weave your way between the risks and downsides to pluck the best opportunities for each organization. That's the art of a strategic alliance."
[1.] Bates, S., and others. "Data Watch." Hospitals & Health Networks 68(15):195, Aug. 5,1994. [2.] Jensen, J. "CEOs Confirm Importance of Partnerships." Modern Healthcare 24(32):148, Aug. 8, 1994. [3.] Watson, K "Are PHOs Just a Passing Fad?" Managed Care 3(8):23-6,3 1, Aug. 1994. [4.] Cerne, F. "Redefining the Hospital" Trustee 47(8):10-2, Aug. 1994.