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Building a vertical provider system.

Friendly Hills HealthCare Network (FHHN) is a fully integrated health care system whose basic components are a 160physician, multispecialty medical group and a full-service, acute care community hospital. Recently reorganized in the foundation model, the not-for-profit corporation owns all its own facilities and payer contracts, employs all staff, and has unified management and administration of all outpatient and inpatient services. Contracting through 25 HMOs, it provides care for more than 85,000 commercial plan patients and 15,000 seniors in full-risk contracts. Because 95 percent of its revenue is derived from capitation, it has structured its hospital to be highly efficient for the usual community hospital services, but it does not perform invasive cardiac procedures or neurosurgery, does not deal with high-risk pregnancies or complex cancer surgeries, and does not have a level 3 nursery. Because the hospital, with its many unique cost-effective operational systems designed for a managed care environment, is a centerpiece of FHHN, it has chosen vertical integration as a provider strategy. Horizontal growth, achieved by acquiring practices in dispersed geographic areas, would prevent utilization of its highly integrated hospital systems.

Loma Linda University Medical Center (LLUMC) has a rather typical academic configuration, with 18 separate faculty practice medical groups representing the various clinical specialties. It performs virtually all tertiary care procedures; is associated with its own medical school; and trains interns, residents, and fellows as well as many other categories of health care professionals. It is widely recognized as a high-quality and innovative academic institution. Loma Linda provided valuable assistance to the Friendly Hills HealthCare Foundation in acquiring its tax-exempt 501(c)(3) IRS ruling and is represented on the Foundation Board of Directors. LLUMC is located 50 freeway miles from FHHN.

Advantages of the Alliance

For some years, FHHN had been referring patients to LLUMC in various specialties under per diem arrangements. FHHN felt that there was much to be gained from a closer and more comprehensive financial and administrative arrangement with LLUMC. There were several reasons for this expectation. First, FHHN was searching for a simple and comprehensive way to provide the more costly and sophisticated tertiary medical and surgical services to its managed care patients. Normally these services are a black hole of expense for managed care providers, who must attempt to mitigate their risk by purchasing expensive reinsurance policies. To have them provided at one location at a predictable price is highly desirable. Second, successful and growing group practices must find a source for recruiting certain scarce health care professionals, including physicians, nurses, and technologists. LLUMC could help fill that need. Third, patients would benefit from the knowledge that their more serious problems would be cared for at a high-quality and prestigious institution. This would contribute to better patient care and assist in marketing. A fourth advantage of the academic affiliation would be enhancement of the Friendly Hills Foundation's own involvement in teaching and research activities. Finally, a close arrangement with LLUMC for tertiary care would be consistent with the FHHN vertical integration strategy.

There were also significant factors motivating Loma Linda to participate in the alliance. A major concern of LLUMC was growing fragmentation of its patient base. As increasing numbers of physicians and patients participated in managed care arrangements in its traditional service area, tertiary care referrals, for financial reasons, often were dispersed among several competing institutions. An exclusive contract with a large capitated physician provider, such as FHHN, could help ensure significant referrals over the long term. It could serve as a prototype for similar agreements that might be structured with other primary care providers. Another important goal of LLUMC was to adapt itself to the managed care environment and learn as much as possible from organizations such as FHHN that, for many years, have successfully functioned in that arena. Familiarity with managed care principles and practices could be helpful at many levels throughout all its training programs as well as its management staff.

Considerations to Be Addressed

While it would seem from all this that a close affiliation between the two institutions could be mutually beneficial, there were major concerns. Teaching institutions, by their very nature, perform at higher cost. Could FHHN realize the advantages of an alliance with an academic center within its fixed capitation budget? The philosophy and styles of practice of physicians grounded in managed care and those in academia are vastly different. Academic physicians have customarily preempted the entire management of patients from their primary care referring physicians. Could they now share management of these patients with the primary care organization that is administratively and financially accountable for their care? The mission of an academic medical center is much different from that of a managed care company. Could LLUMC transform itself into a competitive player in the managed care environment without sacrificing its public services of clinical research, charitable care, and training of health care professionals at all levels?

Structure of the Contract

Despite the seriousness of these questions, the leadership of the two organizations proceeded to create a contractual agreement that would essentially put LLUMC at risk for all tertiary care at a fixed and prepaid monthly cost to FHHN. In the beginning, much time was spent getting the physicians of the two institutions to agree on definitions for tertiary care. This resulted in delays in implementation of the program. To eliminate that obstacle, a virtual subcapitation plan was created on the basis of historical experience and, most important, good faith. Under this plan, any procedure or diagnosis that FHHN physicians feel can be performed better or with potentially improved outcome at LLUMC is sent to Loma Linda under the fixed monthly fee. There are no other guidelines.

Simply stated, FHHN leases a number of beds at LLUMC at a negotiated rate. This lease amount is automatically adjusted for very significant over- or underutilization. An additional sum, representing a percentage of the bed lease amount, is paid to include any and all professional expenses. Administration of physician compensation is left to LLUMC. The arrangement is reviewed twice a year. Outpatient consultations are separate and are paid for individually, but for an all-inclusive fixed fee per visit.

What Helps It Work?

Several factors contribute to the success of the plan other than the simplicity of the rate structure and the pragmatic definition of tertiary care. First, because LLUMC and FHHN are in different geographic markets, there is no competition for patients between them. Second, for the same reason, it is inconvenient for physicians to be on the staff of both hospitals, eliminating the potential for conflict between groups of specialists. Third, the distance in time and miles between the two institutions, and its potential adverse impact on patient relations, acts as a brake on unnecessary FHHN patient referrals and LLUMC overutilization. FHHN physicians also are monitored by a committee to ensure that referrals are appropriate.

The plan is facilitated by a genuine sensitivity to patient needs. That has motivated both organizations to provide a van service between the two hospitals to ease transit for patients and families. Additionally, FHHN provides various clinical nurse specialists who furnish case management services and help coordinate patient care at LLUMC with the referral physicians. And patients are educated and informed regarding the referral process.

What Problems Remain?

Perhaps the thorniest issues for academic centers derive from the fact that teaching hospitals are not integrated delivery systems. Academic faculties often have an administrative structure separate from that of their medical center. Compounding the problem is division of the professional component into 18 or 20 individual faculty practice groups, each differently organized and with varying politics. For these reasons, academic centers have had difficulty dividing the financial proceeds of their contracts between the medical centers and the physicians, and among the various faculty practice groups themselves.

Not all physicians on academic faculties wish to be involved in managed care prepayment arrangements. Some see managed care as overly focused on cost rather than on teaching. Others, previously shielded from the managed care environment, feel that reimbursement is inadequate compared tO their customary fee-forservice compensation. Whole specialties have voiced a preference to opt out of the arrangement, an action that would cast a grave shadow on continuation of the entire program. Additionally, faculty practice plans sometimes fail to designate authority for negotiating and signing contracts. Does administration of the medical center have authority to sign for the physicians? If not, who does? Senior management at Loma Linda, for example, is attempting, with some success, to gather the interested physicians into a single contracting group. That move would help greatly in solving many of these issues.

Beyond the problem of division of income, there is the teaching mission of academic medical centers. What role, if any, should interns and residents play in the care of referred capitated patients? Is it appropriate, for example, for a specialist at a referring managed care entity to send a patient requiring highly sophisticated care to a physician in training? Should the cost of the various teaching programs be considered in determining the rate structure? Managed care organizations tend to regard academic centers as relatively inefficient and unnecessarily expensive. They feel that the training and research programs impair the rapid movement of patients through the system. And in their highly competitive world, they see no immediate value in paying extra for teaching. In fact, no one seems willing or able to assume the financial burdens of the medical education programs.

Another generic problem within academic centers is ensuring good utilization management and avoiding delays in care, such as in scheduling of tests, consultations, and procedures as well as in transfer or discharge planning. Although LLUMC, under this arrangement, is at risk for these delays, the potential added costs could provide issues that must be considered at future negotiating sessions.

Issues for FHHN to resolve include ensuring appropriateness of referrals and of the transfer process itself. With no defined rules, overutilization of the LLUMC referral option always looms. Similarly, overly delayed transfer of cases can delay care and increase patient morbidity. Adequate work-up of cases and completed transfer notes, x-rays, and copies of studies also often have been lacking.

Perhaps the greatest difficulty is in translating the vision and commitment to the program of upper level management into implementation by middle managers and rank and file physicians. Each party sees particular issues in the context of their own immediate problems, rather than as part of a beneficial overall strategy. Greater communication is necessary at all levels between the two organizations and within the management and medical staff hierarchy of each organization.

The Future

To facilitate this strategic alliance, many objectives must still be accomplished-more staff education, joint policies and procedures for utilization management, case review and quality improvement, as well as mutually acceptable practice guidelines for selected cases. The final outcome of this experiment in vertically integrating an academic tertiary care center with a primary managed care provider organization is still in doubt. The potential benefits are many, but powerful obstacles remain to be overcome. Much communication, hard work, and goodwill are still required to ensure a positive outcome.

Further Reading

Ellwood, P. "Managed Care in an Academic Setting: Does It Fit?" Academic Practice Assembly Presentation, April 1720, 1988, Boston, Mass.

Barnett, A. "Linking a Physician-Directed Primary Care Organization with a University Medical Center in a Managed Care Environment." Integrated Health Care Symposium Presentation, Sept. 2225, 1993, Aspen Colo.

Barnett, A. "Networking Academic Medicine and Prepaid Primary Health Care." California Hospitals 1993; 7(2):11, March-April 1993.

Graves, H. "Academic Medical Centers and Managed Care Plans: Can an Association Be Mutually Beneficial?" Medical Group Management Journal 40(4):26-8,30-2,34, July-Aug. 1993.

Albert E. Barnett, MD, is Chairman and CEO, Friendly Hills HealthCare Network, La Habra, Calif.6584
COPYRIGHT 1993 American College of Physician Executives
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Author:Barnett, Albert E.
Publication:Physician Executive
Date:Nov 1, 1993
Previous Article:The coming alliance revolution in health care.
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