Integrated Chaos: Health Systems and the Aftermath of Defensive Physician Acquisitions

Some health systems have executed a clinical integration or alignment strategy only to see internal dysfunction as a result.

When hospitals or health systems explain the reasoning for their acquisition of other hospitals or physician groups, the language is richly coated in good intentions.

These deals are presented as monumental solutions to problems, even though those problems may not have been overly apparent to a patient. Health systems say they are extending the care continuum, expanding access to care, reinforcing population health management. Health systems' M&A announcements likely include one of these phrases.

Health systems are careful with their portrayal of transactions — no system will say it is after market power. But it's tough to deny the defensive nature of health systems' external integration strategies. To many executives, physician groups resemble sitting ducks: If they don't buy them, someone else will, because it's unlikely they will remain independent. The bigger question facing many health system executives is not whether they should partake in a defensive deal — it's how can they afford not to?

Some systems acquire practices to lock up volume, especially under capitated contracts, which place even more value on lives covered. The system may also buy the group to redirect referral patterns. But the threat of consolidation is not driven only by hospitals. Physician practice management companies are also ramping up their game: In the first quarter of 2014, management companies accounted for all nine of the reported physician practice deals.

Large physician groups are also actively employing physicians to better compete against hospitals, gain volume and later use hospitals down the road as vendors to take on risk. If physician groups form an accountable care organization — more than half of ACOs are led by physician practices and exclude hospitals entirely — that's a huge threat to hospitals, as well.

In May, a PwC analysis showed a sharp decline in the rate of hospital-physician consolidation in the past couple of years. In 2011, hospitals and health systems accounted for more than half of all physician practice acquisition deals. By 2013, they only made up 14 percent.

Igor Belokrinitsky, partner with Strategy&, says more health systems are turning inward rather than outward and realizing they need reintegrate internally before getting any bigger. Rather than acting as a system, they are finding themselves as random collections of hospitals and physician groups.

"A lot of systems, the large ones with capabilities to do M&A, are saying, 'Hold on. Before I keep getting bigger, am I functioning?'" says Mr. Belokrinitsky. "If you scratched the surface [with] some of the biggest names everyone aspires to be like, when you look at cost-quality indicators — they are not as impressive as you'd think."

The CEO's blind spot
So who is the one to start pumping the breaks on a health system's integration strategy? The answer differs, but it's unlikely the CEO.

The CFO is likely to sound the alarm, as he or she will look at cost indicators and see the organization's acquisition strategy has left it bleeding money. The COO will also chime in, with questions as to why the system isn't operating as an integrated, organized network. And the CMO may find the lack of true, meaningful integration is causing problems for quality of care. Usually, the CEO is the last person to realize the extent of the mess.

"There are a number of things we think of as 'systemness' that a lot of places have not achieved," says Mr. Belokrinitsky. For instance, why does a system have 10 hospitals with each ordering their own rubber gloves? Why are there still significant variations in reimbursement rates between those hospitals? Why are employees at Hospital A talking about "legacy this, legacy that" or "the way we do it" even though the hospital was integrated into the system six years ago? Why do nurses go to Hospital D and say, "That place is horrible" about Hospital A, the one they just left? Why does the system have two fundraising campaigns going on? These are just a few of the many signs that a health system might not be much of a system at all.

Paul Levy, prominent blogger and former president and CEO of Beth Israel Deaconess Medical Center in Boston, says it's the next CEO who inherits this chaos and is left to make sense of a hasty integration strategy years after its execution. "The CEO who did it isn't about to admit that he or she did it wrong," he says. "They start recruiting a new person who says, 'Wait a second, we have to put the breaks on this because it's costing us a lot of money and we don't see the benefits.'"

The empty promise of "integration"
Benefits — what about those? The ones that are flaunted so lavishly in systems' announcements of acquisitions?

"When people talk about integration and efficiencies, they are usually really unspecific about how they are going to measure that," says Mr. Levy. "Then they are very nontransparent about whether they've achieved whatever they're going to measure."

Any organization that wants to grow, merge or acquire has a motivating business case behind its strategy. But this dynamic isn't as visible in healthcare, as health systems dive into in a game of big, bigger, biggest — showing signs of stopping only when their budget sheets look frail or when ears perk up at the Federal Trade Commission. If there is an end in sight — a goal, metric or initiative that must be met or completed before the integration strategy is stayed — it is seemingly kept private.

"In theory, you should therefore have a number of metrics by which you'd judge your success," says Mr. Levy. "Particularly for nonprofits, you'd think they'd make those metrics available to their community to see how it's going, but they generally do not."

And if hospitals and health systems aren't the ones supplying the metrics upon which to gauge the success of their integration, consumers will take it upon themselves to be the judge — with their own criteria, which is much more straightforward.    

This is where Cleveland Clinic makes other "integrated" 'health systems look like infirmaries from the Prohibition era. Cleveland Clinic is known for its accessibility — employees literally answer the phone asking patients if they'd like to be seen within the next 24 hours.

So if a health system calls itself integrated, why can't it function like Cleveland Clinic? Why — even after acquiring several hospitals and medical groups — is it unable to accommodate a patient today, even tomorrow? Health systems must realize five weeks for an appointment is not competitive any more. Some might say it's a shame it ever was.

The horse before the cart
Some healthcare providers are acing integration, but they aren't the usual suspects.

"Urgent care centers came to market with a model," says Anthony D'Eredita, executive vice president of Southwind at The Advisory Board Company. "Walgreens didn't come in and buy up doctors. They worked with doctors to refine their model. They didn't come in aggregating."

Walgreens' Healthcare Clinic, CVS' Minute Clinic and other retail-based sites of care delivery lead with their model. They don't shore up physicians and then get the model together. They're disruptive innovators for many reasons, this being one of them.

Some experts plainly have doubts about health systems' and executives' abilities to really integrate providers. There is the illusion of integration — racking up providers, buying new signage and renaming sites of care — but then there is the gritty and tough work with which many executives have little experience. Not all CEOs are well-versed in due diligence, deal structures and the time-intensive work of bringing multiple sites of care to act as one clinical enterprise.  

"Most people doing those mergers and acquisitions are not familiar with how to run a larger system," says Mr. Levy. This might be one reason C-suites are growing larger. In a recent American Hospital Association survey, 60 percent of health system and hospital executives said their management teams are bigger today than they were three years ago. It might just take more people to make up the necessary experience and skills to bring an integration strategy from concept to completion.  

More Articles on Hospitals, Health Systems and Integration:
Many Employed Physicians Not Fully Integrated: Survey
3 Things Hospital Executives Don't Get About Physician Integration
Are Hospital CEOs Facing Too Many Demanding Distractions?


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