Strategic Planning in Health Systems

Strategic Planning in Health Systems

Jeffrey P. Harrison

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Chapter 11

“By a wide margin, the biggest threat to our nation’s balance sheet is the skyrocketing cost of healthcare.”

—President Barack Obama

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

1

Learning Objectives

Discuss political, business, and ethical issues related to the growth in the US healthcare system.

Discuss the structures and governance of for-profit and not-for-profit healthcare systems.

Describe the key factors that affect organizational strategy and performance among healthcare systems.

Diagnose the differences in organizational culture between for-profit and not-for-profit healthcare systems.

Relate the concept of healthcare consolidation to the development, assessment, and redesign of healthcare systems.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

2

Key Terms and Concepts

For-profit health system

Hospital acquisition

Hospital merger

Integrated delivery system (IDS)

Not-for-profit health system

Virtual health system

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

3

Introduction

The number of US hospitals operating as part of a health system grew from 2,542 in 2000 to 2,868 in 2008 and to 3,144 in 2014—a 24 percent increase since 2000 (AHA 2015).

55 percent of all US hospitals now are part of a health system.

Independently operated US hospitals, which are now in the minority, must consider future health system affiliation as part of their long-term survival plans.

Declining reimbursement and provider competition are driving this trend to form affiliations, confederations, or shared economic models such as integrated delivery systems (IDSs).

IDSs enable better use of staff and financial resources and can lead to greater operational efficiencies across the continuum of healthcare services.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

4

Hospital Mergers and Acquisitions

A hospital acquisition is the purchase of a hospital by another facility or multihospital system.

The number of hospitals has only marginally increased since 1999—up less than 1%. However, the number of hospitals affiliated with a system has increased 16% (Yanci, Wolford, and Young 2013).

Not-for-profit health systems typically evaluate potential acquisitions on the basis of mission, outreach, services, and geographic location.

For-profit systems evaluate opportunities to maximize profits—for example, purchasing a hospital when its sale price is below the net present value of its cash flow stream.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Hospital Mergers and Acquisitions

A hospital merger is a combining of two or more hospitals, often through a pooling of interests.

Hospital mergers tend to be horizontal, meaning that the merging hospitals are competitors looking for increased operating efficiency and improved market share.

Additional reasons for merging are to eliminate unnecessary services, reduce overhead through consolidation, and provide a more rational mix of services designed to better meet the community’s needs.

In a merger, similarity of the mission, vision, and culture between the two organizations is important.

In an acquisition situation, organized fit is preferable, but similarity is not necessary because the acquiring organization will have dominance, and the acquired entity’s assets are transferred to the purchasing entity.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Integrated Delivery System (IDS)

In healthcare, mergers and acquisitions are a part of horizontal integration, in which a for-profit hospital system purchases other hospitals to increase its size (Harrison, Spaulding, and Mouhalis 2015).

Vertical integration results in IDSs designed to gain access to scarce resources across the continuum of care by acquiring an organization that controls those resources.

Many health policy experts have called for the country to reorganize healthcare providers and delivery systems through integration.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Integrated Delivery System

Mayo Clinic is an example of a large IDS, with a home base in Rochester, Minnesota; southern tertiary care sites in Florida and Arizona; and Mayo Clinic Health System in the Midwest.

Mayo Clinic is a not-for-profit, academic medical institution with a mission focused primarily on patient care supported by education and research.

It offers a full spectrum of healthcare options to local neighborhoods, ranging from primary to highly specialized, tertiary care. http://www.mayoclinic.org/

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

8

Integrated Delivery System

A not-for-profit health system is organized as a not-for-profit corporation. Based on charitable purpose and frequently affiliated with a religious denomination, not-for-profit systems are a traditional means of delivering medical care in the United States.

Geisinger Health System is a not-for-profit health system in Pennsylvania that consists of tertiary care hospitals, community hospitals, outpatient facilities, and 60 community practices.

The system also includes an insurance company, the Geisinger Health Plan, which provides comprehensive coverage for 290,000 members who receive care from 37,000 credentialed healthcare providers.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

9

Integrated Delivery System

For-profit health systems are organizations that include hospitals that are owned by equity-based investors and that have a well-defined organizational goal of profit maximization, usually through efficiency measures.

As a result, the management team of for-profit hospitals answers to the shareholders of the company.

A sample for-profit health system organization chart is provided in Exhibit 11.2.

One of the largest for-profit health systems in the United States is Hospital Corporation of America (HCA), headquartered in Nashville, Tennessee.

As of 2013, an analysis of 749 large, for-profit hospitals found that they were 71% efficient on average (Harrison, Spaulding, and Mouhalis 2015).

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

10

Integrated Delivery System

Exhibit 11.2:

Sample For-Profit Health System Organization Chart

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

11

Strategic Planning at Health Systems

Strategic planning at the health system level is different from planning at an individual hospital.

Health systems routinely evaluate the acquisition of hospitals or other smaller health systems with values in excess of $1 billion.

Not all systems are created equal, and many small systems (as well as some larger systems) do not really operate as a consolidated entity.

These systems may comprise many facilities and have good public relations programs, but they are fragmented and do not integrate key services and functions.

Health systems are attempting to lower costs by increasing their economies of scale. In addition to spreading their costs over increasing volumes of services, healthcare organizations are able to negotiate for increased revenue when they negotiate with large insurers.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

12

Integration Across the Continuum of Care

In the future, management of individual patients across the continuum of healthcare services will become increasingly important. US healthcare will continue to move toward further integration of clinical services and consolidation of payers and health systems (Moses et al. 2013).

Health systems are in a position to manage variation across their facilities in both administrative and clinical areas.

When protocols of care are standardized and implemented across a health system, quality scores improve, patient satisfaction increases, and fewer malpractice claims are filed.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

Virtual Health Systems

Virtual health systems are networks of organizations created through the use of health information technology that allow independent healthcare providers to link together without having to merge with or acquire other facilities.

Participation in a virtual health system may appeal to some independent hospitals because they can gain many of the advantages of health system membership without giving up operational control to the health system.

These clinical affiliations allow organizations to access the clinical expertise and resources of much larger systems without giving up organizational control.

Virtual health systems can also link hospitals with physician groups or long-term care providers to enable smooth transitions for patients from facility to facility.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

14

International Health Systems

In recognition of the global market, many health systems are considering international healthcare.

When considering expansion into an international market, strategic planners of health systems must ensure that a market for a new healthcare provider exists.

Once the market demand has been validated, the international strategic planner should determine whether a commercial health insurance program exists in the country to pay for services or if segments of the population have sufficient financial resources to pay for premium healthcare services.

For more information about international health, go to commonwealthfund.org/2013/International profiles.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

15

Summary

IDSs and ACOs are able to gain a competitive advantage in the market by negotiating higher reimbursement rates, offering a wider array of clinical services, and delivering these services in a more coordinated manner.

Also contributing to the growth of IDSs is the development of virtual health systems, a new model that allows organizations, through health information technology, to participate in a loosely structured system without having to give up operational control or commit financial resources.

In addition, some US health systems are participating in international healthcare initiatives as a way to expand their market.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

16

Questions

17

References

American Hospital Association (AHA). 2015. “Fast Facts on US Hospitals.” Updated January. www.aha.org/research/rc/stat-studies/fast-facts.shtml.

Ascension. 2014. 2014 Financial and Statistical Report. Accessed March 19, 2015. http://ascension.org/~/media/files/community_investor-relations-pdfs/annual-report-2014_financials.pdf.

———. 2009. “Consolidated Financial Statements.” Accessed October 1, 2015. www.ascensionhealth.org/assets/docs/AH_2009_AFS.pdf.

Cobb, A., and T. Wry. 2015. “Resource-Dependence Theory.” Oxford Bibliographies in Management. Last reviewed June 18. doi: 10.1093/obo/9780199846740-0072.

Cutler, D. M., and F. S. Morton. 2013. “Hospitals, Market Share, and Consolidation.” Journal of the American Medical Association 310 (18): 1964–70.

Harrison, J. P., A. Spaulding, and P. Mouhalis. 2015. “The Efficiency Frontier of For-Profit Hospitals.” Journal of Health Care Finance 41 (4): 1–23. HCA. 2015a. “HCA Facts.” Published July 7. http://hcahealthcare.com/util/documents/ HCA-presskit-fact-sheet.pdf.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

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References

———. 2015b. “HCA Reports Fourth Quarter 2014 Results.” Published February 15. http:// investor.hcahealthcare.com/press-release/hca-reports-fourth-quarter-2014-results.

———. 2011. “2011 Annual Report to Stockholders.” Accessed September 26, 2015. http://investor.hcahealthcare.com/sites/hcahealthcare.investorhq.businesswire.com/files/report/file/HCA_2011_Annual_Report.pdf.

———. 2008. “HCA Fact Sheet.” Accessed April 30, 2009. http://hcagulfcoast.com/util/documents/CurrentFactSheet1.pdf.

Hwang, W., J. Chang, M. LaClair, and H. Paz. 2013. “Effects of Integrated Delivery System on Cost and Quality.” The American Journal of Managed Care 19 (5): e175–e184.

Lee, T. H., A. Bothe, and G. D. Steele. 2012. “How Geisinger Structures Its Physicians’ Compensation to Support Improvements in Quality, Efficiency, and Volume.” Health Affairs 31 (9): 2068–73.

LeMaster, E., and J. Aygun. 2015. “Is Hospital M&A Waning?” Healthcare Financial Management Association. Published January. www.hfma.org/Content.aspx?id=27401&utmsource=Realpercentage20Magnet&utm medium=Email&utm campaign=64414373.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

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References

Mayo Clinic. 2014. “Mayo Clinic Facts.” Published December. www.mayoclinic.org/ about-mayo-clinic/facts-statistics.

Mayo Clinic Health System. 2015. “About Mayo Clinic Health System.” Accessed September 26. http://mayoclinichealthsystem.org/about-us.

Moses, H., D. H. M. Matheson, E. R. Dorsey, B. P. George, D. Sadoff, and S. Yoshimura. 2013. “The Anatomy of Health Care in the United States.” Journal of the American Medical Association 310 (18): 1947–64.

Page, L. 2010. “52 Not-for-Profit Hospital Systems to Know.” Becker’s Hospital Review. Published March 1. www.beckershospitalreview.com/lists-and-statistics/50-not-forprofit- hospital-systems-to-know.html.

Yanci, J., M. Wolford, and P. Young. 2013. What Hospital Executives Should Be Considering in Hospital Mergers and Acquisitions. Dixon Hughes Goodman LLP. Published January 1. www2.dhgllp.com/res_pubs/Hospital-Mergers-and-Acquisitions.pdf.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

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