The integration rush: some second thoughts.

Integration is not a new strategy for health care organizations. Kaiser, Henry Ford Hospital, and a number of teaching institutions around the U.S. developed integrated systems back in the 1930s, and were met with disdain from the prevailing medical structure. In the late 19th century, manufacturing and retail organizations found success with horizontal and vertical integration and realigned themselves into a position of power within their respective industries. In the 1970s, integration caught on in health care as investor-owned hospitals began snapping up small hospitals, forcing not-for-profit system formation. But it wasn't until the Clinton Administration proposed some serious health care reforms, and the pressure to cut costs and improve quality intensified, that the integration rush began in earnest.

Futurist Jeff C. Goldsmith, PhD, President of Health Futures Inc., has some second thoughts on the rush to integrate. "I think it was an incorrect reading of the Clinton reforms that you had to be an integrated health organization in order to be paid under health care reform," says Goldsmith. "I don't think providers took the time to examine the organizational performance issues of this approach."

Organizations followed the integration rush because they perceived tomorrow's health care system as one defined by "closed panel systems," Goldsmith says. Consumers select a system and receive all their care there. "That is clearly not what employers and consumers are telling the insurance system they want," he maintains. "What I think employers and consumers are telling the health insurance system they want is a choice of providers and an economically accountable open panel. There's no measurable economic or qualitative advantage to choosing a closed system. There's no reason why a closed panel world is going to emerge."

Goldsmith also attributes the popularity of integrated health care systems to health care executives and, to a lesser extent, physicians, who view integration as a way to stifle the tension between insurance, physician services, and hospital care. "If you owned all the entities, then the thought was that you could eliminate tire tension and produce value."

But Goldsmith claims ownership raises a new-problem: accountability.

"If shifting economic risk is what people are responding to, then you need to create an organizational template to assume and manage economic risk," he asserts. "And my point has been that owning all of the pieces of the integrated system concentrates the risk at the very top of the organization. It relies on bureaucratic mechanisms and on culture, which are potentially powerful but also very diffuse, to control how physicians behave."

New trend toward "disintegration"

Two years ago, Goldsmith predicted that many integrated systems would prove ungovernable and unprofitable in the late 1990s. He envisioned the first few years of the next century being spent unwinding mergers, reducing administrative costs, and spinning off health-related businesses and employed physicians into self-governing organizations that operate under pooled risk capitation contracts. It's already happening.

"There have been a couple examples of 'disintegration,' and they're both, interestingly, in Southern California, one of the nation's most advanced managed care markets," Goldsmith explained. "During 1995, FHP made a historic decision to spin off i$s staff model health centers and hospitals into a separate company. The company has concluded an arrangement to sell its Southern California hospitals to Memorial Health System of Long Beach. It set its physicians up in a freestanding, at-risk business where they're going to continue to render care to FHP patients, but they're also going to contract with other health plans. I think they'll be stronger and more responsive as a result."

Another example he cites is the Scripps Clinic, which separated its management from Scripps Health, which will continue to run its hospital, the Green Hospital. The clinic will continue to work with Scripps Health in contracting activities in the San Diego area but will also be scouting out equity partners and will be virtually independent economically.

"So, there's another example where, after the better part of five years, people looked at the organizational structure that they created, concluded it didn't work, and began trying to recreate some responsibility centers," says Goldsmith. "I think we're going to see a lot more of that in '96, '97, and '98."

The role of physicians in integrated health care systems

Many physicians have sold their practices to hospitals or to investor-owned companies to avoid the risks involved in operating their practices in a health care climate they find alien.

"I think what physicians selling their practice are really doing is retiring, looking for a nice, sane place to work 40 hours a week instead of working 70 or 75 hours a week for themselves," Goldsmith says. "I think this is a short-term, rational response by physicians to the uncertainties they are facing, but one that creates an extraordinary problem for the acquiring organization: It becomes very difficult to change their behavior, to improve their productivity or commitment. It's hard to get them to participate in the vital, but largely extracurricular, activity of defining appropriate standards of treatment. That's different from actually taking care of patients, and it's a job for which physicians are not always being paid."

Goldsmith considers physicians assuming responsibility for the overall cost of treating a population "the most exciting thing happening in American medicine." It is in accepting that risk, that challenge, that he believes physicians will reclaim a "significant faction of their centrality and importance in this health care system."

He believes physicians who fail to rise to the challenge will be among the casualties when health care reform shakes out. However, Goldsmith questions the logic behind physicians who create integrated systems and take on the added responsibilities associated with being insurers. "What providers are really looking for here are additional revenues for themselves. But there's a lot of overhead and economic risk associated with the insurance role," he points out.

"You can say in the abstract that you don't think that making contact with all these employers and dealing with the constant stream of customer service complaints and billing problems is worth, say ten percent of the premium dollar. You can say that in the abstract until you actually have to do it."

There are few examples of physician-driven systems that have the resources to pool insurance dollars in sufficiently large amounts to cushion variability from year to year and from case to case, he stresses.

"Where do you get the capital to deal with what is essentially a cyclical business?" Goldsmith asks. "Provider organizations forges that it's possible to drown in a river that is on the average only a foot deep. Right now, health insurance costs are probably rising more rapidly than premiums, and we have the equivalent of the airline fare wars going on right now in health insurance premiums. The last time the cycle bottomed, health insurers lost billions of dollars underwriting health insurance."

Goldsmith predicts the next market cycle is going to be a "lulu" and warns that it's a poor time to get into the health risk underwriting business.

As for the tension between insurance, physician services, end hospital care, Goldsmith believes it can be beneficial if properly framed.

"In a virtual enterprise, where the integration is not created by ownership but rather by shared contractual obligations, there is much more pressure on each component of the system to perform in an optimal way. The prospect of a contract not being renewed concentrates the mind wonderfully," adds Goldsmith.

Integration downsides

Goldsmith's favorite Trivial Pursuit question is: "What is the largest integrated health care enterprise in the United States?" The answer? The Veteran's Administration.

"They're bigger than Kaiser by six billion dollars," he points out. "And what is the VA struggling with? How do you get hospitals that are cost centers to feel like something other than the post office? Or an AmTrak station? And how do you prevent employee physicians from behaving like civil servants, who go home at four o'clock and let the boss worry about whether the patient's needs are being met? I think, to an extent, that every integrated organization is struggling with the same problem the VA is: How do you overcome the bureaucratization of medical practice and produce a responsive system?"

Goldsmith says Kaiser and Group Health Cooperative are classic models of vertical integration and the reason they grew so dramatically was because they produced comprehensive health services for considerably less. But he believes that as time passed, many of the integrated health plans that owned hospitals and employed physicians became more expensive and offered a narrower range of providers, who provided less care than many of the health insurance alternatives. As a result, these systems had to overhaul their cultures and operating philosophies, Goldsmith asserts.

The role of physician executives

Managing health care in this chaotic era of change requires charismatic leadership, Goldsmith says.

"I think the physician executive, in the traditional integrated enterprise, is over a barrel because the risk resides often with him and not with the rank and file physician," he maintains. "Many physician executives are groping for mechanisms to push that risk down into the group of physicians with whom they are working. The physician executive is exposed because the organization's economic risk resides at the top of the organization."

"It's an obvious leadership challenge, but one that's made worse by the fact that physicians may view the institution and its resources as a buffer against market forces and view the physician executive's job as getting them the resources they need to do their jobs," continues Goldsmith. "I think there are a lot of physician execs in very difficult positions because they're being asked to do something that the economic structure of the organization is actually not encouraging."

Goldsmith predicts the successful physician enterprise will be self-governed and led by physician executives. Further, the physician executives inside many integrated systems will reach the point where they want their system to spin them off and contract with them for physician services. That's not a popular message to deliver right now.

"I think that employment of physicians is going to be a problematic strategy for the next five to ten years," he says. "The freestanding physician enterprise, the freestanding IPA, the freestanding multi-site primary care groups are going to become objects of envy among physician executives who are trying to manage physicians within a billion dollar enterprise that has a lot of other businesses."

Goldsmith believes physicians will respond intelligently to business risk, but "as long as that risk is lodged at the CEO or medical director level, physicians aren't going to make the changes in behavior that are going to be needed for them to be truly responsive in an era of shifting risk."

He believes physicians are in a position to be architects of the evolving hearth care system.

"I think they're the central actors in the rearrangement of the health care system," stresses Goldsmith. "The decisions physicians make about how they organize an the framework in which they practice is going to determine ultimately the structure of health care delivery."

The future?

"I'm a lot less confident about what the health care system is going to look like in ten years than I was back in 1980 when I forecast that the trend toward integration in industry would be replicated in health care," he admits. "It's not clear to me how the industry is going to adapt to a reduced rate of growth and revenues. I certainly don't see the health care system shrinking. I don't even see it shrinking in real dollars."

Goldsmith will say that he sees more than a doubling of people enrolled in HMO health plans over the next ten years and a quantitative increase in the sophistication with which the HMOs manage care. He also foresees a fundamental reshaping of the managed care business with the emergence of a lot of really sick people into HMOs.

"I don't care who gets elected President in 1996 or in the year 2000, the federal government has nowhere else to go in trying to contain Medicare and Medicaid spending than to convert these programs so they will pay a fixed dollar amount per enrollee. And where, in 1994, only one-fifth of the growth in HMO enrollment was from the poor and elderly, I see that number being two-thirds over the next ten years."

He also believes there will be a painful shake-out in the health plan world in the next decade, and he says the beginning of that shake-out is taking shape in the economic pressure that's being placed on traditional staff model plans such as Kaiser, which was forced to re-engineer itself to remain competitive.

Inpatient care will fall by another 20 to 30 percent, Goldsmith predicts, and specialty physician incomes will take a nose dive during that time. However, physicians that organize into risk-bearing organizations may experience an increase in income, he says.