11. Dissolving a Long-Standing Affiliation and Moving On
By Khanhuyen Vinh
Partnerships and affiliations may last a long time. However, when they dissolve, animosity and increased competitiveness may result. A renowned medical school had a productive working relationship for decades with a hospital. However, increasing clashes and perceived competitive moves caused the school to sever the decades-old affiliation. As a result, the hospital is urgently seeking to initiate immediate changes through the development of several initiatives. The changes will help attract superstar surgeons and researchers to partner with the hospital in its quest to become a world-class academic healthcare provider, while seriously damaging its former partner.
L Hospital (LH) is an 800-operating bed teaching hospital in an extraordinarily financially strong healthcare system that includes three community hospitals and a home health agency. LH, as the flagship hospital, was affiliated with J School of Medicine (JSM), a local medical school ranked among the top 15 in the country by US News and World Report. LH was accustomed to winning annual accolades for several of its service lines.
However, when the medical school terminated its affiliation with the hospital, LH’s leadership was angry and almost immediately began aggressively pursuing multiple initiatives to combat the loss of the former affiliation and fulfill its goal of becoming a top-tier academic healthcare institution. The new initiatives consisted of employing primary care physicians and establishing a graduate medical education (GME) program, building a research institute, and building a new outpatient clinic—all of which would be located near the hospital and owned primarily by the hospital. LH also sought an affiliation with another medical school. Although perhaps strategically sound, these developments tested the relationships and loyalty of key physicians, required immense financial resources, and taxed administrative and clinical leaders.
LH had experience in employing primary care physicians. In previous years, the hospital simultaneously pursued both foundation and equity models to acquire primary care physician practices throughout the city. The foundation model later dissolved, while a modified framework of the equity model remained. Following the termination of the partnership, LH chose to directly employ primary care physicians and place their office practices physically adjacent to the hospital, thereby establishing its own general medicine service and, to a lesser degree, contribute to the pipeline of patients admitted into LH. Direct employment, as opposed to relocating an acquired practice into the hospital facility, would expedite assimilation into the LH culture, as LH was attempting to build its medical service swiftly.
To be a teaching hospital requires a pipeline of medical residents. LH realized that it either must depend on another medical school to provide this pipeline or build its own source of medical residents. Typical of its “going solo” mentality, LH decided to build its own GME program to be accredited by the American Council for Graduate Medical Education (ACGME). Medical students would apply directly to LH for residency, thereby bypassing the hospital’s dependency on a medical school.
The new research institute served the purpose of attracting researchers at the forefront of their fields by providing a venue for well-funded, cutting-edge research. The combination of preeminent researchers conducting novel investigations that may redirect the course of medicine would elevate the hospital’s image and secure its position as a top-tier academic medical center.
Medical advances have allowed for more procedures to take place in an outpatient setting without requiring an inpatient hospital stay. The hospital’s current outpatient building, located across the street, had reached capacity. A new outpatient building would accommodate additional volume to capture downstream patient revenue, especially as managed care increasingly directed payments to outpatient procedures.
A merger with another medical school would be critical to the hospital’s vision of being a premier teaching hospital and formed the basis for developing these new initiatives. This medical school needed to be reputable, so that LH could attract prominent physicians and researchers.
The dissolution of the hospital and medical school affiliation represented a novel phenomenon. LH and JSM built their 50-year relationship on a foundation of power and prestige. JSM boasted nationally recognized physicians and research programs. LH brought its extensive financial resources to fund the medical school’s academic services and research, a state-of-the art institution, and patients for medical residents to study. The hospital treated celebrities, a former US president, international royalty, and established patients across the city and nation. A world-renowned cardiovascular surgeon claimed affiliation with both institutions. Together, both entities aimed to claim a position on the national and international stage. Because of their top physicians and research programs, JSM believed it contributed increasingly to LH’s profitability. However, LH believed its financial success resulted from its own strategic initiatives and not from its relationship with JSM.
The increasingly tumultuous affiliation between the institutions ultimately crumbled because of the desire for control, as well as the personalities involved. LH had been providing approximately $50 million annually to JSM’s academic services and announced it wanted an accounting of these expenditures. On the other hand, JSM wanted to build its own outpatient clinic to generate revenue. Furthermore, JSM wanted only its academic physicians to make decisions, thereby usurping all authority held by private physicians. LH vehemently refused a JSM-controlled outpatient clinic, fearing competition with its hospital. The affiliation agreement required both parties to concur on such construction. LH insisted that its private physicians be included because they brought in more than 60 percent of hospital revenues.
The personalities of senior leadership from the entities also seemed to constantly clash. Board members from both facilities consisted of individuals with strong roots in the community. The JSM chairperson came from a prominent family with multigenerational philanthropic contributions to the arts and sciences throughout the city. The newly recruited JSM president was touted as an experienced negotiator. The LH chairperson was the former leader of a Fortune 500 company, while the LH system CEO held deep-rooted ties to the hospital and local community for more than 20 years. All four people failed to understand the opposite party’s needs and seemed willing to battle to the end.
Distrust by both parties led to stalled discussions. Aggravating the situation, numerous internal leaks to the press revealed that the sides had labeled each other “antagonistic,” “dishonest,” and “not forthright.” The breaking point was reached when JSM publicly announced it had entered into negotiations to affiliate with St. X Hospital, a competitor of LH, which would offer JSM more autonomy but less financial support. LH took this announcement to be a de facto termination of its affiliation with JSM and, subsequently, LH responded by announcing its change initiatives.
LH’s and JSM’s primary stakeholders consisted of academic physicians and private physicians, both of whom counted superstar surgeons among their ranks. The chiefs of service at LH also traditionally assumed department chair positions at the medical school. The severed affiliation between JSM and LH forced the academic physicians to choose sides. They had to assess their roles at each entity and weigh the future of their research programs, which were supported by LH’s deep pockets and stellar facilities and equipment. The private physicians were incensed that JSM wanted to exclude them from negotiations, thereby severely limiting their influence on hospital decisions.
Other primary stakeholders included the boards of both the medical school and hospital. The JSM board wanted more financial autonomy, control, and decision-making authority but stood to lose substantial funding, as few hospitals in the country possessed LH’s financial capability. The LH hospital board desired an affiliation with a brand-name medical school to attract top physicians and lead cutting-edge research to elevate the hospital’s reputation and prominence.
The secondary group of stakeholders consisted of patients, who traveled from across the city, country, and world to receive care. These patients were well insured or cash-paying. Their social prominence augmented the hospital’s reputation.
The system- and hospital-level CEOs at LH, along with the renowned chief of neurosurgery, maintained routine communications with both the large physician practice groups and the individual academic and private physicians. Those communication efforts served to open the flow of information between the leadership and the physicians. The board and senior hospital executives aggressively sought to attract academic and private superstar surgeons, while inviting all physicians who would join forces with LH. To this end, they announced an initial commitment of approximately $100 million for the research institute and $70 million for the outpatient center.
The LH CEO established committees for each initiative change (physician employment, GME, research institute, and outpatient center), which were cochaired by a hospital vice president and a chief of service (or an influential physician designee, in cases where the service chief had remained loyal to JSM). Other physicians participated in the committee work groups by providing input to create a successful implementation plan. Each work group met weekly or biweekly to flesh out details, provide updates, and identify next steps. The chair of the board, system and hospital CEOs, consultants, and legal experts handled approaching another medical school with which to pursue an affiliation.
At the same time, LH implemented policy changes. A new policy required its chiefs of service to admit the majority of their patients to LH. As a result, chiefs of service could not concurrently maintain their department chair positions at the medical school and admit the majority of their patients to a competing hospital. This measure forced the academicians to identify their affiliation with either entity explicitly. In addition, office leases for academic physicians in the LH buildings were to soon expire. LH hinted at either eviction or a rate increase for its nonaffiliate physicians. The hospital justified rate increases to meet fair market value, as rates had not been comparably adjusted for about a decade.
Established academicians with deep ties to both entities sought for reconciliation through letters to both boards and multiple meetings. Once it was clear no reconciliation would result, physicians who supported LH welcomed the new direction. The private physicians, in particular, rejoiced in the absence of JSM. However, many academic physicians were both concerned and upset about the division.
LH proceeded with its changes, ultimately resulting in completion of all the planned initiatives. A hospital physician organization was created to employ general medicine doctors, thereby establishing a medicine service at LH. The GME program was established for medical and surgical services. Approximately a decade after the dissolution, LH offers 36 GME programs accredited by ACGME. The hospital purchased land within walking distance, demolished the existing building, and built a research institute. As of 2015, the research institute supports 277 principal investigators and scientists performing more than 840 ongoing clinical studies conducted in 540,000 square feet of space, and has received $70 million in grant funding.
To build an outpatient center connected to its existing buildings, the hospital purchased an adjacent lot from a local university, constructed a building for the university at another location, demolished the former university building on the lot, and then constructed the outpatient center. These land purchases represented a significant feat because the hospital was landlocked, and real estate in that vicinity commanded premium prices as a result of high demand. As of 2015, the outpatient center consists of 14 operating rooms, 36 pre-op beds, and 30 postanesthesia care unit beds located in a 1.6-million-square-foot building. While a few prominent chiefs of service remained with the medical school, a greater number of chiefs of service pledged their loyalty to the hospital. Finally, LH announced a $100 million merger with an Ivy League medical school as its primary academic affiliate; at that time, US News and World Report ranked this medical school higher than its former partner. Physicians from LH were to be granted academic privileges at the Ivy League medical school. Over the years, the LH System added community hospitals and physician practices. The 2013 consolidated financial statement for the LH System reported gross revenue of $2.6 billion and net revenue of $683 million.
What caused the long-standing affiliation between LH and JSM to dissolve? What could or should have been done to rectify the problems that led to the dissolution?
Was LH ultimately better off without JSM? Why or why not?
What factors do you think contributed to the success of LH’s change initiatives?
How did LH involve primary stakeholders in its decision-making processes?
How did participation by physicians in the various work groups affect the outcome?
What elements in this scenario were beyond the control of hospital management? How could or should these be mitigated?
12. Value in Capitation for Hospitalists?
By Khanhuyen Vinh
A business opportunity arose for a hospitalist physician practice (MCHA) to partner with an insurance payer (Healthsprings) to manage the insurance company’s dual-eligible patients admitted to the hospital where it currently treats patients. Healthsprings currently has a contract with a competing hospitalist physician group but is dissatisfied with its performance. This partnership would position MCHA to manage this patient group at the hospital exclusively. Although an exciting option, partners have questioned whether this capitation contract with Healthsprings will add value for the group of hospitalists.
MCHA is a 20-physician hospitalist group practicing at a large, prestigious, teaching hospital in the Southwest with just under 900 beds. The hospital recently transitioned to a closed panel for hospital medicine physicians, which gave hospitalist groups exclusive care for all medicine patients. Currently, the hospital has contracted with six hospitalist groups that manage approximately 1,300 patient cases monthly.
MCHA is the largest group and manages the highest volume of patient cases. It performs competitively on hospital key performance indicators consisting of length of stay (LOS) index, mortality index, 30-day all-cause readmission, patient satisfaction, and core measures. In particular, MCHA usually leads on the LOS index measure and reported the lowest LOS index of all groups from January through May 2015. MCHA operates on a fee-for-service model with no capitation contracts. Its payer mix consists of 44 percent Medicare or Medicaid, 54 percent private insurance, and 2 percent self-pay.
Referrals by specialists and other primary care physicians (PCPs) provide the primary source of patient volume for all six hospitalist groups, thereby increasing competition. Referrals from these two sources are largely based on professional relationships and physician preference for practice styles. Although MCHA manages twice as many patient cases on average as the second-largest hospitalist group, it continues to compete for patient volume.
The group’s goal is to continue to increase patient volume from various sources. The group is also one of two groups that have expanded their practice to cover emergency department (ED) services. MCHA physicians also manage patients at Long-Term Acute Care Hospital (LTACH), which serves as another source of patient volume for the group. MCHA believes that expansion opportunities include caring for patients at LTACH and taking on capitation contracts.
To understand more thoroughly where the hospitalists groups compete, MCHA’s director created the following figure, which displays sources of patient volume as compared to level of competition among the six hospitalist groups. The strategy canvas illustrates three hospitalist physician groupings. Four hospitalist practices (groups 1–4) together represent one category because they demonstrate the same patient volume characteristics. Group 5 constitutes the second category because it currently has the dual-eligible capitation contract with Healthsprings, and MCHA is the third category. Only group 5 and MCHA manage the ED’s “no-doctor” admissions. Admitted to the hospital from the ED, these patients either do not have a PCP who has hospital privileges, have a doctor who does not want to make rounds at the hospital, or simply do not have a PCP.
The hospital exclusively approached MCHA to provide patient care at the LTACH located on the west side of the city. This exclusive partnership has benefited both parties with more efficient care for the hospital and greater billings for MCHA.
Although managed care and capitation payments have not yet taken hold in its metropolitan area, MCHA wants to look beyond the traditional referral sources to augment its patient volume. Because few other providers currently have managed care contracts, the business opportunity with Healthsprings provides MCHA an entry to a potential first-mover advantage. MCHA believes that with this contract it could capture another immediate source of patient volume and position itself for a future in which capitation becomes the norm. The capitation contract with Healthsprings would also allow MCHA to manage the dual-eligible patient population exclusively. Given the group’s ability to provide quality patient care while managing LOS, the contract could yield a net profit depending on the negotiated reimbursement amount per patient case and number of patients expected from this specific payer. The additional costs could be marginal unless Healthsprings were to increase its high patient volume dramatically—given MCHA’s current physicians and existing capacity, it would not need to add physicians initially.
While MCHA feels it needs new sources of patient volume, the profitability from this new patient base remains uncertain. Medicare patients, on average, have more comorbidities and require a higher level of medical care, and they form the majority of Healthsprings patients. Healthsprings also tends to transfer its patients from community hospitals to the teaching hospital at which MCHA practices. These patient transfers translate to Healthsprings’ enrollment of sicker patients who require more specialized medical services and often prolonged treatment in the intensive care unit. As a result, Healthsprings patients have longer LOS. Initially, the insurance company offered a capitation contract of $550 per patient per admission for an anticipated 15 patients per month. Healthsprings also would require MCHA physicians to meet with the Healthsprings’ case managers twice a week. This patient volume would constitute only a small percentage of MCHA’s total volume, but the longer LOS and additional meetings would result in more work per patient for MCHA physicians.
The group was discussing the positives and negatives of this possible arrangement. The members did not know whether Healthsprings would provide a larger patient volume or an increase in their capitated amount.
What are the advantages and disadvantages of this offer?
What are the specific risks MCHA will take under capitation?
What could it do or negotiate to modify the risks?
What would be MCHA’s marginal cost and opportunity costs of this proposal?
What other information would you want from Healthsprings?
Given the information you have, what would you recommend to the group?