From holding company to operating company: 4 experts on health system economies of scale

At the Becker's Hospital Review 8th Annual Meeting, four experts discussed their observations and experiences working with health systems to gain operational efficiency, reduce costs and lower expenses.

The diverse collection of panelists included the COO of a major Midwest health system, a former health system CEO-turned-consultant who works with health systems across the U.S., the CEO of a large regional laboratory and the CEO of a company devoted to healthcare transportation and intra-company logistics. This article captures a portion of the 40-minute discussion.

What hospitals are up against
Most hospitals and health systems today are working on broad initiatives to reduce their operating expenses by 15 to 30 percent in 3 to 5 years. The intensifying margin pressure they face is prompting even more health systems to fall on the aggressive end of that spectrum, i.e., closer to 30 percent.

As health systems redesign their traditional networks to better leverage economies of scale, they face a range of initiatives — some are deemed "low-hanging fruit" with short-term return on investment, whereas others are emotionally or politically charged, which can prove demanding for leadership and the system as a whole.

The journey to scale has several levels
Bill Santulli, executive vice president and COO of Downers Grove, Ill.-based Advocate Health Care, said his system is achieving economies of scale in several distinct ways. One is by standardizing nonclinical functions for Advocate's medical group, which is rapidly expanding at the 1,500-physician system. "The medical group is the fastest growing part of Advocate — over the last 5 years, we have acquired more than 500 physicians," he said. Upon joining Advocate, new physician practices are integrated into the system's central supply chain, scheduling system, payroll and other core functions.

Standardizing nonclinical or purely administrative functions represents the most attainable opportunity for health systems, Mr. Santulli noted. It can be characterized as "beginner level" standardization. Advocate is now advancing to the secondary level, wherein it will integrate all support services.

"There are a lot of hotel and restaurant functions inside hospitals — how you clean, how you maintain facilities, how you transport product, how inventory is managed," he said. "We are moving from the infant to adolescent stage in terms of really harvesting the value." For instance, since 2010, Advocate has reduced the cost of facility maintenance per-square-foot by 27 percent. It has also centralized a lot of expertise that its medium and smaller hospitals previously contracted or purchased individually.

Standardization grows more difficult the closer it gets to clinicians and patients, panelists agreed. Standardization on this level can range from closing or reducing services to implementing care redesign, clinical protocols or care pathways.

"The hard stuff — it's hard, especially when it comes to reducing clinical programs," said Mark Dixon, RPh, MHA, FACHE, former health system president and now president of consulting firm, The Mark Dixon Group. "It's difficult for physicians to get on board, for employees in those organizations who are so proud of the work they are doing — they are not trying to do anything other than their best. Reducing clinical variation, protocols — your systems are hard at work at that. It's easy to lay it out; it's really difficult to change the care. You still have to get it into the workflow of the doctor and patient relationship."

Khosrow R. Shotorbani, president and CEO of TriCore Reference Laboratories, brought a different perspective to the discussion. He likened the lab to "the control tower of a major airport that in real time has to know exactly where the planes are and how they are ascending and descending at any given time, responsible for the safety of all their passengers."

Mr. Shotorbani's laboratory network, based in Albuquerque, aims to make care more efficient for healthcare providers by focusing on patients' pre-disease state and sharing actionable information with care teams to reduce the likelihood of a patient's ER visit, hospitalization or readmission. To "identify a patient no matter where they present," TriCore needed an expansive amount of data. The accumulation and adjudication of this data proved to be the most difficult form of scaling Mr. Shotorbani has encountered to date.

The core need for centralization
Before broaching the advanced levels of clinical standardization to leverage scale, leaders are well served to aggressively pursue efficiency in ways that need not change workflow, decision-making or experiences for patients or staff. In any experience where scalability proves tough, "the enemy is human nature," noted Jake Crampton, founder and CEO of Elmhurst, Ill.-based MedSpeed. "Changes to what have been historical processes — that's the tough part. We look for ways where the behind-the-scenes processes can be changed to drive scale and advantage at the back end."

For example, Mr. Crampton noted the cost of transportation is embedded in the price of virtually every item a health system buys. Although this may represent a minor expense to health systems compared to other line items, intra-company logistics still touch every facility and can improve efficiency throughout an entire enterprise.

"Centralization is about the idea of leveraging scale in such a way that a system has system assets versus the assets of Hospital A or B. We play our role in moving things around to make centralization happen — pulling away from territorialism and instead looking out broadly at the system level. You can do amazing things when you shift that vantage point," Mr. Crampton said.

Mr. Crampton's comment relates to the nationwide trend of health systems moving from a holding company model to an operating company model, a change that was brought up several times throughout the 40-minute discussion. In a holding company model, all decisions were made locally. In an operating company model, decision-making is centralized and redundancy is then reduced or eliminated across the system. "Many of us over last decade or so have shifted from holding company to operating company model, and I only see that accelerating," said Mr. Santulli.

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