by Perry R. Hanson, MHA

Over the last 20 years and continuing into the future, the profession of practicing medicine has changed dramatically, with decreasing reimbursement and an emerging consumer demanding a more comprehensive “value proposition” than previous patients have demanded.  This article delves into the fundamental changes happening to patients, physicians, and the community hospital resulting in a community-based integration as an optimal model to service the health care needs of a population.

Emerging Circumstances

A “perfect storm” is developing in our nation’s health delivery system whereby demanding (I want it all), educated (Internet research in hand), and aging baby boomers are becoming the patients.  They are controlling the cash flow through health savings accounts (HSAs) and have increasing responsibility for co-pays, deductibles, and non-covered services.  Digital technologies, especially the Internet, are allowing consumers access to information about a particular health condition and what various symptoms might mean.  In addition, expensive medical technologies are coming to the market from a robust biomedical device industry in the US and abroad.  Now that patients are becoming new customers, they are controlling the money while continuing to seek their own desired health status and a “perfect storm” is requiring the industry to transform itself to these new circumstances.  As a result, we have new players, new products, and new opportunities for either collaboration or competition within the local health delivery system.

Patients as Consumers

The baby boomer generation (born 1945 to 1964) are becoming patients.  Historically, they have never had society successfully say no to their demands, including a desired health status. They are more empowered with financial responsibility through co-pay, deductible, and HSA funding, and have defined a new value proposition:

We can assume these “new” patients will continue their history of controlling their surroundings in society as the group ages (e.g., the classic rabbit bolus through a snake).  In addition, history’s largest wealth transfer is underway from the WWII “greatest generation.”  All of these elements result in more controlling consumers seeking “value” for the money they now control.

Physicians/Clinicians

Physicians continue to be trained in a scientific profession, not a business profession.  They possess a body of knowledge and desire to help others improve their lot in life through application of this knowledge; the classic traditional professional approach.  It is helpful to understand three basic tenets to a physician’s training: to be observant, an independent thinker, and never “fail.”  I wish to acknowledge my good friend/colleague, James Brueggemann, MD, retired VPMA of St. Mary’s Duluth Clinic in Duluth, MN, for enlightening me as to how physicians are trained and the likely behavioral consequences.

Being trained to observe, (s)he acquires medical school text- and literature-knowledge, enhanced by tactile/visual/auditory observations acquired in residency.  The likely result is an independent thinker, sensory driven and trusting no argument unsupported by his/her own perception of adequate data.  When trained to assume independent personal responsibility, a “captain of the ship” mentality (however, more globally), and an intense obligation to service a patient’s desired state of health (first do no harm), we get the orientation to “save” the patient at all costs and difficulty in sharing the requisite continuity of care to deliver 24/7/365 life/practice balance.  It is WHO they are, not just WHAT they do.  Finally, the training to “never fail” reveals the need to know most treatment options available and the increasing difficulty to service complex clinical needs.  The predictable result is a culture of blaming others, requisitioning data, and indecision in the face of “insufficient information” (even though the board or administration believes the case for action has been sufficiently made).

In recent years, declining reimbursement from third-party payers (primarily Medicare and Medicaid) has resulted in increasing difficulty for primary care physicians, and to some extent specialists, to earn market competitive compensation packages from just their professional efforts.  This results in needing to see more patients, as well as searching for ancillary profit margins and other sources of revenues to support cash flow for compensation.  More and more, part-time practitioners are compromising compensation opportunities for satisfactory professional and lifestyle balance.  The other consequence is needing to replace those retiring because the newer graduates are unwilling to put in the hours and maintain the patient panel sizes of their predecessors.  Like any professional, one‘s own preferred practice style is learned in medical school and honed in residency where personal experience tends to drive how patients are collectively organized and managed.  As practitioners group themselves for pro-rata call and shared overhead in a private setting, managing the cost requires a commitment to “one best way” and managing practice style variations to common presenting complaints.  Given their training, this level of group practice clinical model collaboration is most difficult for physicians, yet required to manage overhead with declining reimbursements. 

Like their predecessors, pursuing one’s own life balance definition is the key and primary driver of professional sustainability.  New physicians are more willing to be employed and accept market pay.  However, (s)he might struggle with the requisite market effort (number of patients seen per day, week, month, and the number of practice sites between the hospital, medical practice, and nursing home responsibilities) especially if the personal/professional balance allows less than a full-time commitment to the medical practice.  As a result, we see many new physicians validating their own personal return on investment (ROI) by adding lifestyle choices to economic requirements.  New physician recruits are typically less entrepreneurial than their predecessors and tend to be more willing to accept varied employment platforms.

Hospitals/Medical Centers

Most hospitals are set up to serve the needs of a defined population area through a strategic orientation by serving market share and incremental growth, accessibility, service quality, patient safety, and continuity of care.  A community-based hospital responds to constituent demands (patients, families, and medical staff) and necessarily differentiates between governance and management.

A service line’s performance management is more institutionalized.  The ROI is not individual but collective and any margin from service lines is returned to the organization to fund future growth and services, not paid out as a dividend and earned cash compensation.  Given the increasing difficulty of physicians operating under their professional model to obtain “fair” reimbursement from third-party payers for their efforts, there is an increasing margin threat from medical staff groups to develop their own imaging, ambulatory surgery centers (ASC), and other ancillary ventures (former hospital-based services).  In the early to mid-90s, primary care physicians were the first to experience this “flight to security” by integrating with local hospitals and other physicians into large organizations that have more market clout and can utilize the business principles, including economies of scale.  In recent years, procedural specialists are now experiencing this by setting up equity-based ventures for those traditional hospital-based service capabilities and producing a margin return for patients referred to those entities.  Although significant state and federal laws need to be considered and incorporated into the actual organizational design, specialists are developing the ancillary capabilities or collaborating with hospitals on ancillary joint ventures in a new definition of specialty “flight to security.”

In response to the changing value-driven consumer, physicians/clinicians serve an economically-driven professional model and hospitals operate a more strategic business model.  As a result, we see an integrated community-based health delivery model emerging as an answer, and likely the most effective answer, to the changing business conditions.  Whether the physician and hospital services are organized under one tax ID number or through contractual relationships, the characteristics of an integrated delivery system are:

• Collaborative access and service delivery
• Patient-centric (not provider-centric) delivery focus
• Seamless movement from function to function
• Efficient, safe clinical applications, all seeking to serve the desired health status of end-user patients (new consumer)
• Sponsoring organization’s assumption of business risk and responsibility of strategic and growth working capital
• Influence by physicians/clinicians over the design and operation of the clinical models within the integrated system (e.g., inpatient, outpatient, medical practice, off site, nursing home, community health clinics)
• Physicians as both business and clinical partners, not just active medical staff servicing selected hospital board-delegated clinic functions (in the more mature integrated settings, the traditional active medical staff may morph into the integrated delivery system if all of the active staff are employed or contracted through the integration).

Thus, a very effective integrated design is one where the community health delivery hospital system serves the science of medicine (structure, outcomes, protocols, guidelines, thru-put, capital, operating systems, staff training, use of technology) controlled by the governance of the sponsoring organization (with physicians being in a minority percentage) – all owned and managed by the sponsoring organization.  The art of medicine is then practiced daily through the professional patient interaction between each physician/mid-level practitioner and each patient visit.  The organization does not make clinical application decisions but supports each practitioner’s decisions as the patient’s primary health advocate.

Trust – The Key Ingredient

One of the most critical elements necessary for a sustainable community-based integration is the development of trust among the board, CEO, and physicians involved.  Although this trust can be defined in many ways, there are three primary elements essential to a successful integration:

1. Enthusiastic engagement, with:
   
   • Seats at board level strategic planning
   • “Open book” on statistics and money
   • Council/committee policy participation
     
     
2. Insightful investments, such as:
   
   • State-of-art technology; well-trained staff with known performance standards
   • Role in capital allocation process
   • Projects linked to patient care and ultimately patient advocacy
     
     
3. Communications, that include:
   
   • Two way; consistent, fair, frequent
   • “No surprises” information flow and philosophy
   • Available Board interaction on critical issues
   • Social events/collegiality to round out the expectations.

Business Drivers of Integration¹

The strategic current and future drivers of integration will likely evolve from one or more of the following conditions:

• The next generation of physicians who are less interested in entrepreneurial opportunities than lifestyle balance and sub-specialization options, with freedom to move along a professional career path unencumbered by owning a business structure, and less interested in investing in the business of medicine (e.g., technology, staff, and facilities).
  
  
• Payers, especially the federal government, understanding some outpatient procedures and imaging may be over reimbursed.  Couple that with a law requiring Part B annual reimbursement be essentially budget neutral, requiring a reduction in per unit reimbursement as utilization goes up year after year. 
  
  
• Infrastructure costs becoming barriers to entry, such as electronic medical records (EMR), specialized facilities, high-cost technology with an accelerated depreciation curve, and the increasing yet unrealized potential of medical applications of the human genome.  Payers will likely continue to pressure price in order to help manage the overall cost impact of increased utilization from this demanding new patient “baby boomer” consumer.
  
  
• Primary care physicians who are reoriented away from an acute-care episodic clinical model to a chronic disease management model and are reimbursed accordingly.  Significant front-end loaded investments requiring capital-intensive and technology-focused infrastructures are necessary in a disease management model; however, the private practitioner may or may not seek to invest here. 
  
  
• Selection of providers and provider systems will be driven by the totality of the value equation: outcomes plus customer experience plus follow-up care strategy all divided by cost. 
  
  
• Consumers will be demanding provider quality and cost transparency, including online reporting.  The buzzwords of 2006 will likely be the 2007 policy standards applied to pricing, quality, safety, service, and clinical outcomes.  Public access to information will allow even moderately sophisticated consumers, payers, and others to create a “value proposition” that is quantitatively-based rather than anecdotal.  This trend toward transparency is fueled by website sponsors that publish price and outcomes data.  In fact, many hospitals now publish price and quality information; payers are requiring more for optimal reimbursement.  Consumers with high-deductible health plan coverage or HSAs are price sensitive, and will likely engage in comparison shopping for rates and outcomes, and create their own value equation based on data.
  
  
• Physicians will wish to associate with those hospitals and health systems best positioned to afford the latest technologies, facilities, and clinical support systems, including EMR, and, in tertiary and quaternary settings, research and development efforts. 
  
  
• The need to develop physician compensation designs that reflect the new health care model of disease management and access (not just the naked market economics).  Essentially the physician compensation plan is designed to be consistent with the comprehensive organizational economic strategy of the larger health system and internally recognize and reward performance. 
  
  
• Large purchasers of health services will likely prefer well-executed integrated physician hospitals with clinical protocols and known costs per clinical outcome. These large purchasers will shift market share to those systems offering better value consistent with what the new customer desires.
  
  
• The new consumer will drive a higher level of performance by all (s)he encounters. The experience is defined very broadly by each patient/consumer as a customer.  As defined by Modern Healthcare, 1995, a customer:
  
  • Is the most important person in any business
  • Is not dependent on us. We are dependent on him
  • Is not an interruption of our work. He is the purpose of it
  • Does us a favor when he calls. We are not doing him a favor by serving him
  • Is a part of our business, not an outsider
  • Is not a cold statistic. He is a flesh-and-blood human being with feelings and emotions like our own
  • Is not someone to argue or match wits with
  • Is a person who brings us his wants. It is our job to fill those wants
  • Is deserving of the most courteous and attentive treatment we can give him
  • Is the life blood of this and every other business.
  • Is the person that makes it possible to pay our salaries.
    

In summary, health care providers, leaders, and managers may prefer the traditions of the past health care delivery model and hope the existing model will last.  Most indications are that it will not.  The laws of economics interacting with the new expectations of physicians and consumers, as well as the increasing cost to our society for health care, are all driving the need for different operating platforms and structures.  These platforms will be built on a foundation of substantial integration of hospital business and physician professional interests.  Characteristics of integrations might range from financial incentives around revenues, expenses, or operating margins, to shared interest in growth and market share expansion, to include the benefits of branding and image and sharing a unified brand, and the ability to reliably demonstrate quality, efficiency, and serviceability.  Sharing scarce capital effectively and efficiently to support a shared vision and mission and focusing on the longer-term financial health of all interests in an integrated delivery system will likely be the sustainable model.  Physicians are not typically interested in becoming employees; they will do so, but are typically more interested in becoming co-leaders, co-managers, and co-governors of new clinical care, patient service, and the resulting business models.  Physicians will not easily accept a back seat to hospital managers as these new models inevitably emerge.  Remember, they believe (often correctly) that they attracted the patient…first!