Mid-sized systems are taking proactive steps to prepare for value-based business models and strengthen market share in an environment of reform.

At a Glance

To maintain their creditworthiness in a volatile market and prepare for changes ahead, middle-market hospitals are:

  • Cutting costs beyond the low-hanging fruit
  • Preparing for population health management
  • Integrating with physicians and growing their primary care networks
  • Expanding outpatient services
  • Reviewing their merger and acquisition options and affiliating when it makes sense
  • Investing in IT

Strategy was the hot topic at HFMA’s recent Capital Conference in Chicago, where more than 20 middle-market health systems were invited to share their tactics for managing the continued squeeze on provider margins.

“Providers have done very well in recent years by being proactive,” said conference panelist Martin Arrick, managing director, public finance, Standard & Poor’s Rating Services, which gives the healthcare sector a stable outlook for 2013. Arrick cited aggressive cost cutting, service consolidation, and merger and acquisition (M&A) activity as ways that proactive healthcare organizations are positioning themselves for the shift in emphasis from volume to value and the emergence of new care delivery approaches in an era of reform.

At the conference, middle-market hospitals and health systems shared how they are preparing for new payment models and an evolving healthcare delivery system. Here are six of the most common strategies presented at the meeting and a look at some of the hospitals using them.

Strategy 1: Aggressive Cost Cutting

Cook County Health and Hospitals in Chicago is struggling more than many health systems around the country are. The organization serves a 60 percent self-pay population; each month, its finance leaders write off $20 million to $25 million in charity care. “This is true free care, meaning we don’t expect to receive payment when the patients present for care and we don’t turn them over to a collection agency,” said John Cookinham, system CFO.

After a new CEO came on board in September 2011, the health system closed inpatient care at one of its facilities, Oak Forest Hospital, where acute care volume had been low. At another facility, Provident Hospital, the health system reduced critical care services and cut the number of open beds from 115 to 25. These actions contributed to systemwide savings of nearly $64 million from 2010 to 2012, Cookinham said. 

Cook County Health and Hospitals will reduce supply chain expenses by $25 million by the end of fiscal 2013 by contracting with a group purchasing organization, implementing an electronic system that helps to ensure the health system is paying the correct price for goods and services, increasing the use of standard supplies across the system, establishing departmental budget controls to prevent over-ordering and waste, designing perpetual inventories in departments such as the operating room and sterile processing, and using a just-in-time supply purchase model. The health system also has eliminated costly glitches in billing and collections for improved revenue cycle performance, in large part by implementing professional billing for employed physicians in 2011, moving the patient accounting system from three IT platforms to one platform, forming a central business office, developing a revenue integrity team to help improve charge capture throughout the system, and hiring an employee to focus on chargemaster maintenance.

Hurley Medical Center, a 432-bed municipal hospital owned by Flint, Mich., is another organization that has focused on aggressive cost cutting. Located in one of the state’s least healthy counties, Hurley serves a patient population that is 42 percent Medicaid and 7 percent uninsured.

In recent years, this safety-net hospital has responded to intense cost pressures by flattening the organization and implementing a culture of cost containment. Hospital leaders have employed zero-based budgeting, Six Sigma and LEAN strategies, and most recently, a tighter focus on hiring.

In 2012, Hurley established a position control committee to approve any new positions. “We believe all managers need to justify why they want to add or replace a position,” said Cass Wisniewski, CPA, MBA, senior vice president and CFO. Although the committee has not denied many requests, it has encouraged managers to hire more part-time employees to save on benefits and allow for greater flexibility in staffing.

In addition, the hospital is subcontracting more services where it makes sense to do so. For example, hospital leaders chose to contract for laundry services rather than spend $2 million to replace old washers and dryers.

Strategy 2: Population Health Management

Investors and rating agencies are interested in how health systems are preparing for population health management, a model of care management designed to enhance coordination of care and services for specific patient populations and more actively engage consumers in improving and maintaining their health. This model has the potential to significantly reduce costs for healthcare purchasers and consumers and will be a primary strategy for improving value in an era of reform, industry thought leaders agree.

Michigan’s Hurley Medical Center has developed a Center for Health Outcomes, an umbrella for population health management. Known to the public as “The Wellness Connection,” the center allows the hospital to repackage existing services, such as diabetes education and weight management, to make them more appealing and accessible to patients, according to Mike Burnett, MBA, MSW, vice president of service line development. “Population health is really like a virtual service line that encompasses services throughout the organization,” Burnett said.

However, a major challenge for population health management initiatives is that few purchasers are investing resources in them yet. “We’re in the gap now between fee-for-service and value-based payment, and the question is, how do we survive that gap?” Burnett said.

Some health systems, such as Rockville, Md.-based Adventist HealthCare, are testing population health management in their employee populations first. Four years ago, the five-hospital system piloted a medical home model to manage the “sickest of the sick” among its self-insured employees. Health system leaders focused on a subset of 46 employees who took multiple medications and saw at least 10 physicians. More than half were considered high risk. Leaders at Adventist paired each of these employees with a primary care physician who developed a care plan, as well as a nurse who followed up with these patients to drive compliance.

Exhibit 1


Through these efforts, Adventist lowered the percentage of employees considered high risk from 59 percent in 2009 to less than 25 percent in 2012. And its cost per member per month dropped 35 percent in the pilot group in the first year.

“What’s clear is that even though our overall costs are going up slightly, the costs for the patients in the medical home model are going up at a lower rate,” said James Lee, FHFMA, FACHE, executive vice president and CFO. Based on this success, leaders at Adventist plan to offer the medical home model to all of the system’s 7,000 self-insured employees—not just those who are considered high risk.

Lee said Adventist’s growing expertise in population health management could give the health system a competitive advantage over other systems in the market looking to partner with key employers and payers, such as the Blues plans. It could also be useful if Maryland changes its unique, all-payer rate setting system down the road. “In the next two to three years, Maryland could significantly change reimbursement to be more aligned with managing population health than our current fee-for-service model is,” he said.

Strategy 3: Physician Alignment

In addition to experimenting with population health management, many health systems are focused on physician alignment, particularly with primary care providers. Although employment is one way to align with physicians, it’s not the right solution for every market. Maryland is a good example. “Many physicians in our market are solo practitioners, or they have a smaller practice and are not interested in being employed,” said Lee of Adventist. But if that changes, leaders at Adventist want physicians to think of the system as a partner in their clinical and business practices. For this reason, Adventist is creating “electronic bridges” that link independent physicians to the organization.

Today, nearly 400 physicians—338 of whom are not employed by Adventist—have adopted the ambulatory version of the system’s electronic health record (EHR). Adventist provides a two-year subsidy to physicians if they sign up for the program, which costs the system less than $3,000 per year per physician.

Houston Healthcare, a small healthcare system located in Houston County, Ga., with $237 million in operating revenues, also is strengthening its primary care network. Although the market has not driven much physician integration in the past, system leaders recognize that strategic employment of physicians will be critical to maintaining their organization’s 70 percent market share and ensuring a strong referral base. To that end, leaders have been exploring physician employment models.

Houston Healthcare also has created a family practice residency program to help attract—and keep—primary care physicians in the area. Affiliated with the Philadelphia College of Osteopathic Medicine, the residency program now has 15 residents, with the first three residents scheduled to graduate next summer. Hospital leaders believe the residency program will help them combat the projected physician shortage, which is expected to be particularly acute in the area of primary care.

Exhibit 2


“The idea is that as these residents graduate, we will work to keep the best of them in our market, because trends show that physicians like to stay within 50 miles of where they do their residency,” said Sean Whilden, CPA, vice president and CFO.

Strategy 4: Expansion of Outpatient Services

In addition to building its primary care network, Houston Healthcare plans to expand outpatient services to protect its dominant market position. 

In August 2012, the system purchased a mostly vacant mall with approximately 300,000 square feet of space, located about one mile from Houston Medical Center. System leaders plan to transform the building into a “medical mall” that would include outpatient services, physician practices, and other healthcare services.

Public hospitals like Cook County Health and Hospitals in Chicago also are expanding their ambulatory services. Cook County Health and Hospitals plans to offer more outpatient clinics as well as laboratory, imaging, and ancillary services so that residents can receive more convenient care, which system leaders hope will be more cost-effective in the long run.

Exhibit 3


Strategy 5: Affiliation When It Makes Sense

The capital markets and rating agencies have been keeping a close eye on M&A activity in the healthcare sector. And although affiliations are one way many stand-alone, community hospitals are staying afloat, others with stronger financials are taking more of a wait-and-see approach. One example is Overlake Medical Center, a 350-bed hospital in Bellevue, Wash.

In a market where nine out of 10 hospitals are affiliated with another organization, Overlake is the lone independent. But it can afford to be: The hospital has one of the strongest balance sheets in the area, with nearly 300 days cash on hand and operating margins that range from 4 to nearly 10 percent. “Because we don’t have a burning platform around access to capital or our cost structure, we can weather the pluses and minuses that occur in the market,” said Gary McLaughlin, executive vice president of finance and CFO.

“During the past decade, Overlake has explored several M&A opportunities but has chosen to stand alone to ensure that the cash reserves that we have worked so hard to build up remain dedicated to our community,” McLaughlin said. However, hospital leaders might consider affiliating if another system offered an advantage in terms of economies of scale, patient flow, or pursuit of care coordination and population health models, he said.

Strategy 6: Investment in IT

Like many hospitals and health systems, Overlake also is heavily investing in technology to strengthen its vertical integration and, eventually, provide more coordinated care. This year, Overlake launched an EHR throughout its hospital and network clinics that allows providers to share patient information across the continuum.

Overlake also grants patients access to the EHR through a portal. It’s a move that makes sense for the hospital, which is located six miles from Seattle, where patients tend to be tech savvy. Since February, 14,000 Overlake patients have signed up to access their medical information online.

This year, Moody’s upgraded the hospital’s rating, and Standard & Poor’s changed its outlook on Overlake to positive. McLaughlin believes that the hospital’s investments in IT improved its creditworthiness by taking a large, unfunded potential liability off the books. “The fact that we were able to keep up with the technology of the big systems and finance it internally was probably viewed as an asset,” McLaughlin said.

Other organizations, like Michigan’s Hurley Medical Center, have invested in IT to achieve stage one meaningful use and qualify to receive payments from the federal government. Hurley’s EHR went live in March 2012, and the hospital will receive about $11 million in meaningful use payments during the next five years.

However, IT continues to be an investment that presents more uncertainty than answers for many hospitals. As Hurley’s Burnett said, “Our challenge with the EHR is, what is the ROI, and how do you measure it?”

Exhibit 4


Steps Toward Increased Value—and Trust

Over the next few years, middle-market hospitals will face more challenging questions about their investments and strategies. And as they consider their options, they will have to face one additional source of pressure: knowing that they are facing scrutiny from investors, rating agencies, payers, and even patients. Experimenting with ways to enhance value will go a long way toward gaining the trust of key stakeholders while improving quality of care and service and reducing total costs of care. 

Laura Ramos Hegwer is a freelance healthcare writer based in Lake Bluff, Ill. and a member of HFMA’s First Illinois Chapter.

Publication Date: Thursday, August 01, 2013

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