Over the past 10 years there has been a rapid consolidation of health care providers in many markets throughout the country and the related development of integrated health care delivery systems. In an effort to measure the evolution of these health care systems, Arista Associates Inc, Fairfax, Va.,. in cooperation with Modern Healthcare magazine, has surveyed system CEOs for the past six years. There were 144 respondents to the 2001 Integrated Delivery System Survey, which included questions relating to:
* System characteristics and performance
* Physician organization/integration
* Clinical integration
* Disintegration activities, and
* Overall experiences.
Although many are predicting the demise of these systems and, in fact, more than a few have already unraveled, some systems are succeeding. We can all agree that a key measurement of success is financial performance. Of the survey respondents, 21 organizations (17%) reported operating margins of 4% or more. When analyzed, it appears that these best performing organizations found the following seven secrets to success:
* Focus on core competencies
* Bigger is not necessarily better
* Success has not bred complacency
* Execution, execution, execution
* Quality versus quantity of physician integration
* Reduce duplication of services
* Controlled future growth.
Focus on core competencies
While they are diversified, the best performing systems tend not to stray as far from hospital core competencies than all respondents as a whole. Fewer best performers have investments in health plans, physician practices, and specialty hospitals. On the other hand, the best performers had a greater investment in their core competencies areas such as ambulatory care and surgery. Amy Nyberg, Director of Planning at Centura Health in Englewood, Colo., said: 'Given the complexity of the acute care business, systems must focus on their core business to succeed.' Centura Health's operating margin has gone from losses in 1998 to 8% in 2001. The turnaround was accomplished by going back to basics and unraveling acquisitions that were not benefiting the system.
Further, there appears to be a level of investment in senior care and end-of-life care in the form of hospice, chronic disease treatment, and residential care. Nyberg indicated that Centura has a significant mission-driven investment in home care and hospice that are also profitable service lines.
Bigger is not necessarily better
The best performing systems were generally smaller than all respondents as a whole, both in net revenue and number of units by type. The vast majority of the best performing systems (80%) had net revenues in the range of $100 million to $500 million, while only 52% of all respondents fell into that size range. As we previously mentioned, the best performers are diversified; however, their holdings are more limited. The following table compares the system holdings by type of unit for the best performers and all respondents. Of particular interest is the significantly lower median and maximum number of employed physicians in the best performing systems.
Success has not bred complacency
With operating margins above 4%, the best performing systems achieved a respectable financial outcome by today's market standards. Furthermore, over 70% of the best performers indicated at least a modest rise in operating margin over last year as compared to only 47% of all respondents. In addition, over 80% of the best performers indicated at least a modest rise in net revenues over last year as compared to 66% of all respondents. At the same time, 10% of the best performers -- double the percentage for all respondents--indicated a decline in market share.
This combination of data implies a controlled and strategic market approach that may include targeting selected patient populations and payors coupled with improved contracting performance, while controlling expenses at the operating level. According to Frank Sacco, CEO of Memorial Healthcare System in Hollywood, Fla., their financial success was achieved by going back to basics--including watching collections and making sure the managed care companies pay reasonable rates in a timely fashion.
Execution, execution, execution
The best performers determine what is important to their success and then execute--far better than survey respondents as a whole. As the comparison below illustrates, the best performers outperform all respondents in all initiatives (on a 1-9 scale). The most successful initiatives focus primarily in two areas: enhanced positioning for contracting and bottom line performance.
According to Mr. Sacco, Memorial's success was not only attributable to expert implementation of a strong strategic plan, but also included 'placing high performing executives in key positions to execute the plan.' Lowell Krause, president and CEO of Heartland Health in St. Joseph, Mo., said: 'Heartland's success stems from a high level board commitment to being the best. A benefit we have realized from this commitment is the ability to attract and retain top performers to help build and manage the organization.'
Quality versus quantity of physician integration
Most would agree that physician integration is a critical success factor for integrated delivery systems. Furthermore, a large percentage of systems that employ physicians also lose money on system-owned practices. What distinguishes the best performing systems is the fact that as a group they utilize fewer physician integration models. This is particularly true of the employed physician with incentives model, with 67% of the best performers as opposed to 82% of all respondents indicating use of this integration model. However, there is less consensus among the best performers as to the most and least effective models.
With respect to system-owned physician practices, the best performers fare much better financially. The percentage of best performers and all respondents that lost money on owned practices was 57% and 83%, respectively. Also, of those that lost money, the best performers did a better job of minimizing their losses, with 36% of those that lost money losing less than $25,000 per physician (as compared to only 25% for all respondents).
Nyberg of Centura said, 'It is important to get beyond the mistakes of the past and we need to focus on quality and efficiency in the future.' In the past 2 years, Centura has divested itself of 120 physician practices.
Reduce duplication of services
Reduced duplication of services throughout the system translates into reduced expense structure. Eliminating services from selected locations should not negatively impact volume if it is strategically coordinated and marketed with patient convenience and satisfaction in mind. The best performers assigned a higher level of importance to reducing duplication of services. The strategic importance of reducing duplication translated into higher levels of implementation success for the best performers compared to all respondents (6.4 versus 5.7).
The focus on reduced duplication of services can be seen in the area of clinical integration. A slightly higher percentage of best performers indicated introduction or expansion of a case manager program (78% versus 71%), which through better coordination of patient services reduces duplicate procedures. Consolidating procedures to one site requires a willingness to make some tough and politically charged decisions. The best performers have shown such a willingness. Of the best performers, 56% indicated consolidation of procedures at one site versus only 46% of all respondents.
Nyberg says Centura continues to work on finding the right balance between reduced duplication and decentralization and efficiency and responsiveness to stakeholders.
Controlled future growth
It appears that best performing systems have grown more slowly, and as a result, maybe more carefully. This was indicated by the smaller median size of the best performing organizations. Just as important, the best performers appear to have experienced less disintegration activity, 33% versus 41% of all respondents. Those that experienced disintegration focused on divesting primarily two things--health plans and physician practices.
Looking to the future, there was no consensus among all the respondents when asked what benefits they expect in the next three years resulting from system integration. However, there was some consensus among the best performers who listed three benefits: managed care contracting leverage, enhanced geographic coverage, and enhanced market share. The best performers intend to continue to focus on controlled growth. Nyberg offers that Centura's focus in the next couple of years will be: growth from within markets that indicate a clear need for health care services, process improvement, and 'selectively implementing technology that can enable process improvement.' The high performing systems have decided on a focused strategic approach and will align their future efforts to that end. If the past is an indication of the future, execution will separate the winners from the losers.
Units Number Within of Units/ Best All a System System Performers Respondents Median Max Median Max Hospitals 4 34 5 70 Employed physicians (excl hosp-based) 53 800 85 4,000 Health plan 1 2 1 3 Ambulatory care centers 10 69 8 342 Ambulatory surgery centers 2 2 2 200 Home health care 1 23 1 23 Skilled care facilities 1 15 2 32 Diagnostic centers 1 4 3 20 Assisted living centers 1 7 2 25 Implementation Success of Factors Supporting Overall Integration Best All Performers Respondents Access to capital 7.7 7.0 Enhanced geographic coverage 7.5 7.2 Managed care contract leverage 7.3 6.9 Enhanced market share 7.2 6.9 Operating cost savings 7.1 6.3 Greater range of svcs/ continuum of care 7.0 6.8 Access to infrastructure resources (e.g., IT) 6.8 6.5 Market awareness and/or brand identity 6.6 6.5 Reduced duplication 6.4 5.7 Recruitment/retention of non-physician staff 6.3 5.9 Average 7.0 6.6
Ulana Bilynsky, MBA, is a principal in the consulting firm of Arista Associates (www.aristaassociates.com), Fairfax, Va. 703-273-7555.
