Remember When it Was Called a "Hospital System"?
Some of the most well-known health systems and academic medical centers across the country are acting less like the very thing they once built themselves upon: hospitals.
Here's a game you might want to try sometime.
Find a friend or family member, preferably an individual from an earlier generation. Sit them down and describe a large, integrated health system to them, one with a regional or national presence. Refer to some recent contracts the system signed, new services it launched, or partnerships it cemented in the past five years.
But here's the catch: Don't use the words hospital, healthcare, medical center or health system. Instead, replace each of those with the concise term "organization."
What might your description sound like? Well, if the "organization" is anything like those we cover in our day-to-day headlines, it recently launched an insurance plan. It formed a partnership with another organization in China. It inked a contract with Wal-Mart to provide services at a flat rate for employees. Maybe this organization also partnered with a revenue cycle management company or IBM.
Based on these examples, how many tries do you think it would take for someone to guess that your description is that of a hospital?
Some of the most well-known health systems and academic medical centers across the country are acting less like the very thing they once built themselves upon: hospitals. There will always be a need and demand for high-quality acute healthcare, but large, integrated systems know they must now be known for other skills and services to see the most success.
The tricky part is no one knows what these "other skills and services" are, precisely. I spoke with three strategy executives from a large, integrated health system in different markets, and each said what makes their jobs challenging is the lack of a roadmap. This is new territory for even the most sophisticated systems. Take UPMC, previously University of Pittsburgh Medical Center, for example. It is a pioneer for diversification, but only began branching out more aggressively about seven years ago.
"We don't know exactly what the future holds and a lot of organizations are trying multiple strategies," says Julie Carmichael, system vice president and chief strategy officer of St. Vincent Health in Indianapolis. "We're piloting some things and trying to learn more about ourselves. What are we good at?"
This question is leading many organizations to unchartered territory, whether that's acting like an insurer, moving into foreign countries, offering advisory services or leading board room negotiations with multinational technology corporations. What is a health system good at? The answer, of course, varies.
It's no longer about heads in beds
The strategy executives I spoke to said the work they are doing today is not something their predecessors would have expected five or 10 years ago. And while that might be true in many industries, the federal reform law has made it even more prominent in healthcare.
"The skills necessary to be successful in the healthcare world are no longer just putting beds into hospitals and opening your doors," says Howard Gold, executive vice president and chief managed care and business development officer for Great Neck, N.Y.-based North Shore-LIJ Health System. New York officials approved the 16-hospital system's commercial health plan this year. It made its way onto the health insurance exchange in October at one of the lowest price points in the Long Island area.
Chuck Bogosta, executive vice president at UPMC and president of the system's international and commercial services division, said something similar. UPMC knows what it wants and doesn't want to be known for. "We want partners to say we're not like the stereotypical academic medical center," he says. "We're entrepreneurial. We sometimes move faster than even our corporate partners."
UPMC is on a multiyear journey to have a "significant portion," or at least 25 percent, of its revenue come from alternative sources. How is it defining alternative? Any venture that doesn't fall within its primary sources of revenue, which are patient care and health plans.
UPMC has one of the most diversified revenue streams of any health system in the country, with a multitude of international, commercial and advisory relationships, but Mr. Bogosta says these alternative ventures have yet to make a serious dent in its revenue model. U.S. patient care and health insurance products still comprise most all of the organization's $10 billion annual revenue.
Before health systems navigate strategies that take them away from hospitals' traditional acute care, before they expand across time zones and skill sets, they must figure out something that is seemingly simple: Which ideas and partnerships, however appealing, should they actually pursue?
These days, there are many to choose from.
In America, a financially healthy, integrated health system is probably in high demand for various partnerships. "There's not a day that goes by that someone doesn't call and say, 'We want to explore a relationship with you,'" says Mr. Gold from North Shore-LIJ. These potential relationships come in all shapes and sizes, from joint ventures to affiliations, sponsorships to management agreements.
But to really hold North Shore-LIJ's attention, the partner and proposed model has to fit the system's vision of providing high-quality care that's highly accessible to patients. "We don't just do things based on what's opportunistic," says Mr. Gold. "We reject far more offers than we accept."
Although UPMC began to diversify its revenue streams about 13 or 14 years ago, the system really grew more aggressive about it six or seven years ago. During this time, Mr. Bogosta says the phone rang every week with an interested partner on the other end. As one of healthcare's pioneers for alternative revenue, UPMC was less discriminating in the early days. "We were going after everything," he says.
The organization considered many partners and potential relationships, roughly 200 over five years, but not all were meant to be. "In the end, we probably did 15," says Mr. Bogosta. UPMC took some lessons from this, and the system narrowed its focus to two or three types of relationships. Mr. Bogosta says he's still "pretty sure we're on the short list of most companies' potential partners," even though UPMC has become much more selective.
This type of discernment is crucial, not only for system's long-term strategic plan, but for executives' focus. Ms. Carmichael with St. Vincent Health, says the pace of healthcare strategy is nothing short of frenetic. "If you're not clear about what you aspire to be, you might run the risk of getting involved in too many things that take you off point," she says. "If an organization isn't clear about who you are and what you aspire to be, it makes any kind of strategy, especially one that is unchartered, very difficult."
Opportunities to expand, partner or diversify can present themselves so frequently that executives come to think of them as temptations. It's critical for leaders to evaluate each opportunity with a series of questions to determine if the deal's short-term benefits are linked to the system's long-term goals. Ms. Carmichael always brings opportunities back to what she calls her "touchstone" question: Does this relationship allow us to do more for our customers, and deliver the services to them at the location, cost and quality they deserve and demand?
North Shore-LIJ and UPMC didn't decide to pursue their advisory services and health plan with a phone call. Rather, the respective developments were reactive to market trends. A series of events and interactions led each organization to conclude each business development was simply the next link in their strategic chain of events.
Lessons from launching a health plan
North Shore-LIJ's new health insurer capabilities were hardly an overnight development. The system's roots in care management stem back to 2008, when it launched a health plan for about 20,000 non-union employees and their families, in which workers were kept in-network with North Shore-LIJ's providers.
The plan's costs never grew beyond 2 percent annually, year over year. At the same time it saw success with its employee health plan, North Shore-LIJ saw some pinches on its budget sheets. "We were getting downward pressure on revenue from payers when, at the same time, we saw we could manage our own employees in a reasonable way," says Mr. Gold. "We said, 'Why don't we take this plan and sell it in the general marketplace?'"
North Shore-LIJ applied for its insurance license from New York regulatory officials and received the green light about five months later, in August. Its CareConnect, the first provider-owned commercial health plan in New York, went on the state's health insurance exchange Oct. 1 for small groups and individuals. The system hopes to enroll up to 15,000 people in the plan's first year of operation. "There's a lot of buzz out there that North Shore-LIJ is a name brand, and we think that we may get a good deal of business," says Mr. Gold.
He says developing the health plan is "very, very hard to do" and it has already forced North Shore-LIJ to change the way it delivers care, as it makes administrators more cognizant of which sites of service, physicians and programs are most effective. It's also changing the way the 15-hospital system interacts with other commercial insurers — but not necessarily for the worst.
"This does not mean, in any stretch of the imagination, that we'll only do business with our own insurance company," says Mr. Gold. "We want to deal with every single payer, and we think the future is using the infrastructure and [insurer] capabilities we have to add value to our relationships with those large payers."
Getting commercial, going global
UPMC formally launched its advisory services in May 2013, in which the system will provide consulting services of sorts to healthcare providers in the U.S. and abroad. It is working with the government of Kazakhstan to create a national oncology treatment and research center, it's partnering with the Asian American Medical Group in Singapore to help develop a comprehensive transplant center, and it's worked with Citizens Hospital in India to create a sophisticated clinical pathology laboratory in Hyderabad. During our conversation, Mr. Bogosta said the system had just struck another advisory services agreement with a partner in Japan.
UPMC's international efforts started more than 15 years ago when it struck a deal with the government of Italy to operate a transplant hospital in Sicily. It has since opened a cancer center in Rome and runs a hospital and two cancer centers in Ireland.
The Pittsburgh health giant isn't the only system to get a hand in the global medical market. Mayo Clinic has extended its reach to Abu Dhabi, but it has earned more attention lately for its aggressive efforts to transform its headquarters in Rochester, Minn., into a clinical tourism destination. It's doing so through a multi-billion-dollar, five-year economic development plan for what it calls Destination Medical Center.
But UPMC remains unique in many ways, one being that it decided to be more aggressive in its overseas expansions rather than focusing entirely on bringing patients to Pittsburgh. "There are only a couple of organizations that have entered into this market," says Mr. Bogosta. "Nobody else is really jumping in the way we did. Rather than putting people on the ground [abroad], they're still looking at this as a branding opportunity to bring people to the U.S."
The idea to provide advisory services stems from a trend Mr. Bogosta and his colleagues noticed a few years back, when organizations called to express interest in a partnership. During these phone calls, after executives affirmed the potential partnership fit with UPMC's strategy, the caller would insist that the interest was solely in UPMC's clinical or management expertise — not its money.
Then UPMC would enter negotiations for up to a year. When a relationship seemed within reach, Mr. Bogosta and his colleagues would sometimes learn the partner was "just as much interested in us being a financial investor as [having] our talent and expertise," he says.
Mr. Bogosta is clear that UPMC is not inclined to make financial investments in most oversea operations. It's especially unlikely that the system will make financial investments upon expanding to a new country for the first time. Consequentially, UPMC parted ways with organizations seeking mainly its capital, ultimately ending up with little to show for its efforts.
"We said maybe we should look at something more incremental in nature than the type of long-term, operational agreements we've made in Italy and Ireland," he says. "Advisory services positions us to provide value to our partners in a smaller-scale engagement that may still lead to bigger management contracts."
In addition to its advisory arm, UPMC has also struck commercial contracts with some big names. It partnered with General Electric to develop a new digital pathology company in Pittsburgh. It also paired with the Advisory Board to create Evolent, a company that teaches other healthcare providers how to create insurance units and take on financial risk for patients. The system doesn't simply go after clinical research arrangements. "We want to put our money on the table, and we want a partnership where both organizations benefit," says Mr. Bogosta.
Resisting an identity crisis
No one wants to be known as a jack of all trades and a master of none, and the moniker can be especially lethal for an integrated health system. Despite the strategic focus on partnerships and expansions, high-quality healthcare remains a service in perennial demand. How do health systems extend talent, capital and investments to the health insurance exchanges and Kazakhstan, for instance, while maintaining their quality, brand and mission? Can a hospital system also become payer and consultant without distorting itself?
To Mr. Gold, diversifying is necessary for healthcare organizations to succeed. Every other successful business has found a way to diversify the methods and mechanisms it has to deliver its products or services, he says. For NorthShore-LIJ, this not only includes its health plan, but also expanding into CVS Caremark's MinuteClinics and other retail settings, opening more urgent care sites, developing a medical complex without beds in New York's Greenwich Village and partnering with the once-troubled Lenox Hill Hospital in Manhattan in 2010.
"I don't buy the idea that we're diluting ourselves," says Mr. Gold. "I think we're strengthening ourselves from the business point-of-view and learning skills necessary for the future."
UPMC doesn't present itself as the final solution for international providers' challenges. The system has narrowed its focus to only a handful of areas in which it believes it can provide the most value: oncology, transplants and health information technology. And wherever UPMC makes its next footprint, Mr. Bogosta says western Pennsylvania remains its anchor. Management teams overseas — from hospital CEOs to human resource directors and marketing directors — all continue reporting to people in Pittsburgh.
Mr. Bogosta says demand UPMC's expertise worldwide is vast. "If, in the end, we can improve patient care for our partner in their country while bringing knowledge and resources back home, we feel like we've been successful," says Mr. Bogosta. "There are six billion people in the world. The problems are infinite."
It's an exciting time to watch how the traditional perception of a hospital or health system evolves. By broadening their approach to a health system's form and function, some of the country's more integrated systems are repositioning themselves and devoting more resources to non-acute-care strategies. Health plans, advisory services and global partnerships are just a few of the many "alternative" strategies a health system may pursue.
Those that have done so successfully say it's important for hospitals to "resist temptation" and not fall prey to every marketplace trend or follow the steps of their competitors. This is especially important, as sources in this piece indicated they receive calls about potential deals weekly, if not more often. Systems can run the risk missing the mark if they do not establish their priorities, the value they provide to patients or potential partners, and a clear case for return on investments.
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