The transition to value-based business models in an era of reform requires a framework for delivering higher-quality care and service at lower cost.

At a Glance

Keys to success in developing the right framework for delivering greater value in an era of reform include the following:

  • Have a compelling vision.
  • In evaluating potential partnerships, carefully consider the extent to which the organizations’ cultures are aligned.
  • Ensure that initiatives stay on course.
  • Develop sustainable energy among leaders and staff through early wins.
  • Measure patient, physician, and employee satisfaction before and after initiatives are implemented and respond accordingly.

The healthcare sector’s long-discussed shift toward payment based on value rather than volume has begun. But the road to improved value in health care—defined as the relationship between quality and the cost of care to the purchaser—has varied widely for hospitals and health systems.

Changes initiated to improve the value of care have varied as widely as the types of hospitals and health providers across the nation. Providers’ actions also are shaped by the ability and desire of their local markets to transition to more value based payment. But a number of innovative approaches have emerged that may help providers develop the right framework for improving value in their organizations, regardless of type or size, in an era of reform.

“A single path will not help everyone,” says Joseph J. Fifer, FHFMA, CPA, president and CEO of HFMA. “These approaches center on ways to enhance operational efficiency, better coordinate care delivery, and engage in partnerships and affiliations that support the transition to a value-based payment environment.”

During HFMA’s Thought Leadership Retreat this past October, 100 thought leaders in healthcare finance shared ideas on ways that providers of varying types and sizes can develop a structure for providing enhanced value. Although strategies varied among the organizations, the lessons learned may provide valuable insight to other providers in their quest for value.

New Models of Collaboration

The recent resurgence of hospital and health system mergers and acquisitions is at least partly an outgrowth of the pursuit of value. For example, consolidation can lead to quality and cost-efficiency gains if organizations are able to reshape their merged assets into a fully integrated system. It can also better enable rural hospitals, stand-alone hospitals, and smaller systems to achieve economies of scale and prepare for a future of population health management. 

In an audience poll taken during the Thought Leadership Retreat, 41 percent of attendees stated that they believe the goals of a higher-value healthcare system—better care coordination, higher-quality outcomes, and greater cost efficiencies—can be achieved only through further provider consolidation; 32 percent believe the goals of a higher-value system can be achieved without consolidation, and 27 percent were unsure. When asked to name the biggest driver of acquisition and affiliation activity in their markets, 44 percent cited the desire to sustain or improve market position, while 21 percent cited the need to better align care across the continuum and another 21 percent cited the need to achieve greater cost efficiencies. 

Exhibits 1 & 2


Although size does not equal accountability, “some scale” is necessary to perform well under the coming payment models, according to Douglas A. Hastings, an attorney and chair of the board of directors of Epstein, Becker & Green.“Every provider organization today is thinking about an affiliation strategy,” Hastings says.

Recent provider reorganizations generally fall under the categories of member substitutions, sales of assets, or true mergers or consolidations. For-profit systems tend to focus on control of assets, while not-for-profit systems lean toward member substitution. There also has been a recent proliferation of affiliation transactions not involving a change of control, according to Hastings. Systems judge where they want to fall within the spectrum of partnerships and affiliations based at least in part on what components they need for a transition to a value-based payment environment. 

“There aren’t rigid advantages or disadvantages to specific approaches,” Hastings says. “The question is whether the approach that is chosen is the right transaction for the parties involved. For a period of time, most hospitals and health systems will be managing the difficult balance of being paid a mixture of fee-for-service and value-based payments. Their ability to influence the pace of change and stay balanced while investing for the future will determine their success.”

Provider alliances that reflect continued ownership independence include the BJC Collaborative in St. Louis, an alliance that began with four not-for-profit health systems in the Missouri market, the southern Illinois market, and parts of eastern Kansas. Since being established, two additional not-for-profit health systems in southern Illinois have joined the BJC Collaborative.

The BJC Collaborative, which was launched in October 2012 and includes markets with a combined population of approximately 11 million individuals, is among the first of a growing number of recent health system alliances that aim to utilize the combined resources of the health systems to improve healthcare efficiencies while maintaining distinct ownership structures. Unlike many mergers and acquisitions, the collaborative is an initiative of similarly sized systems—each the largest not-for-profit in their markets—and each with financial stability.

“This was not about one or two large players coming to the rescue,” says Sandra Van Trease, a group president for BJC HealthCare in St. Louis.

The separate health systems maintain independent boards and executive leadership teams as well as their unique services, missions, and brands. Members formed a limited liability corporation (LLC) with equal representation on its board and a rotating model of board and committee leadership. 

The LLC is helping to facilitate shared savings from several standardization initiatives including supply chain, contracted services, clinical engineering, IT, legal services, and compliance. It is also focused on enabling member organizations to coordinate the development of clinical programs and services to improve access to and the quality of health care provided by the collaborative’s members. Early wins for the BJC Collaborative included millions of dollars in savings in the area of clinical engineering, as well as discussions among member organizations to expand pediatric, cardiology, and bariatric services.

Members of the collaborative expect to realize benefits from working with physicians across the collaborative to standardize the vast majority of the hardware. The collaborative has achieved savings in clinical engineering equipment by working with nine common vendors, which have agreed to provide high-quality services while achieving lower prices through the bundled spend. Collaborative members also will share unused server space, eliminating the need to build new data storage capacity. 

The health systems also share best practices in benefits management, public policy, compliance, marketing, and other support functions. For example, government-relations staff members across the collaborative have identified common public policy goals they can work on together to advance at the federal and state levels. “It’s amazing how people listen a little differently when you’re too big to ignore,” Van Trease says. 

Achieving Scale Through Mergers and Acquisition

Hospitals and health systems continue to use various iterations of the traditional merger-and-acquisition model to find more savings and quality improvement and achieve economies of scale. 

“It’s phenomenal in terms of the kinds of discussions going on at every level,” Hastings says.

But some health systems are tweaking the traditional merger-and-acquisition models to increase their value by taking advantage of the positive attributes that newly acquired entities bring.

Jenny Barnett, executive vice president and interim CFO and treasurer of CHE Trinity, credits much of the success of the recent merger of Trinity Health and Catholic Health East (CHE) to premerger efforts to ensure the organizations had compatible cultures. “In fact, when we spoke with rating agencies, that was one of the first questions they asked: ‘How well aligned are your cultures?’” Barnett says.

To determine the ease with which the organizations’ cultures would align, an outside firm was hired as part of the CHE Trinity merger process to gauge compatibility before the merger using a representative group of employees at all levels. After the merger, the firm checked in with the same group of employees to identify postmerger friction. The focus on gaining input from personnel before and after the merger was credited with helping to drive $300 million in expected savings and $150 million in added revenue. 

The next phase of savings from the merger of the two large health systems is expected to include up to $40 million from clinical excellence and quality initiatives. By the end of the third year of integration, the new health system, which spans 21 states, expects to achieve more than $300 million in annual run-rate savings. 

Baptist Health System’s 2003 merger with Vanguard Health System (now part of Tenet Healthcare Corporation) came after the system’s unsuccessful efforts to turn around its finances. After hiring a turnaround firm and outsourcing many of its nonclinical functions, the health system remained at a competitive disadvantage with payers and physicians.

“We were in a potential death spiral,” says Jeff Eppinette, former CFO for Northeast Baptist Hospital in San Antonio (and now CFO, Remington Medical Resorts).

The merger led to the arrival of experienced CFOs at all Baptist hospitals, an increase in financial discipline, and access to much-needed capital, with Vanguard committing to invest $200 million in Baptist facilities over the first six years of the merger. Changes included a focus on appropriate staffing levels, “Which are the types of things that drive your bottom line,” Eppinette says. Those changes and a Vanguard push for payers and suppliers to give former Baptist Health hospitals more competitive market rates paid off, Eppinette says.

“It was a successful bottom-line turnaround—even after adding millions of dollars in sales tax and property taxes as part of the move from not-for-profit to for-profit status,” Eppinette says.

But the faith-based not-for-profit’s merger with a public, for-profit chain presented some unique challenges. To address concerns that the merger would have an adverse impact on Baptist Health’s strong faith-based mission, Vanguard hired a new vice president of mission and ministry and guaranteed an increase in charity care proportionate to growth.

“We were glad that Vanguard supported our faith-based mission,” Eppinette says. “There was never any disparity in what the goal of our efforts should be.”

Another type of provider combination was the 2011 merger of Central DuPage Hospital and Delnor Hospital to form the new two-hospital Cadence Health system. The merger of two independent hospitals in the competitive Chicago market aimed to better serve the city’s western suburbs, with a specific focus on improving access to high-end, clinically integrated care in an area that can be 40 miles or more from tertiary or quaternary care.

This unique transaction stemmed from the desire of leaders from both organizations to prioritize local control.

“The thought was, ‘Let’s do this now and still keep our options open to join a larger entity in the future, so that we could do that from a position of strength,’” says John Orsini, executive vice president and CFO for Cadence Health. 

The goals of the merger included attracting more specialists interested in focusing on clinical care to help drive top-decile performance in clinical quality. Health system leaders tracked the effectiveness of the merger through both patient and physician satisfaction as well as through the use of employee satisfaction and retention metrics.

Although all three mergers were unique types of transactions, they shared common priorities designed to improve overall value. For instance, officials from all three organizations agree that cultural fits need to be closely examined before the merger proceeds to help ease the inevitable problems encountered during integration and to accelerate the merger’s intended outcomes.

Controlling Cost Growth

The extent to which organizational changes taking place at hospitals and health systems across the country support the structure of value is not yet clear.

Michael Chernew, professor of healthcare policy at the Harvard Medical School, says the recent multiyear slowdown in the growth of healthcare costs likely stems from a broad cultural change among healthcare providers. Such culture change is driving structural changes in healthcare organizations that are decreasing the rate of increase in healthcare spending—at least temporarily.

“Unlike the 1990s, when provider systems rebelled against the limits imposed by HMOs, providers now are trying to live within less growth,” Chernew says.

But it not clear whether the new value-conscious mentality will persist. Future cost growth will be controlled, Chernew says, if both payment systems and benefit design are changed to move away from fee for service, incentivize patients to seek higher-value care, and reward healthcare organizations that provide such care.

“Risks increasingly are being borne not by insurers, but by providers,” Chernew says.

Research has indicated that healthcare costs can be reduced and excess spending controlled through various payment and benefit initiatives. But some changes have come with unintended consequences, which shows better approaches are needed. More nuanced approaches, such as reference-based pricing, have produced both savings and quality improvements.

“We’re going to have to find some combination of payment and benefit changes to get people to change their behaviors and seek higher-value care,” Chernew says.

Additionally, healthcare spending growth will slow down as the healthcare industry changes its own practices and as healthcare organizations are rewarded for providing greater value, Chernew says.

“The pursuit of accountable care has partially driven some of the merger activity throughout the industry,” says Jim Morrison, senior vice president for revenue cycle solutions at McKesson Enterprise Information Solutions. Many health systems view mergers as a way to access a broader patient mix and prepare for risk-sharing accountable care payment models. 

During HFMA’s Thought Leadership Retreat, hospital leaders cited access to a broader patient population as the biggest benefit that can be realized from increasing the scale of a hospital or health system, with improved operational efficiencies as a close second.

Larger patient populations accumulated through consolidations can conversely support a greater focus on the needs of individual patients. Additionally, a common benefit from provider consolidation is additional resources for IT analytics, which in turn can provide the capability for targeted interventions. For example, through IT analysis of patient data, health systems can identify high-cost patients who refuse to change their behavior in ways that improve their health and focus interventional resources on high-cost patients who are open to change.

In the move toward value-based payment systems, access to claims data, which can drive many patient care improvements, will be critical, HFMA’s Fifer says—and so will the ability to analyze these data, which will tell health systems how care is being delivered in their facilities.

“That’s why it’s an absolute requirement to invest in data analysts in your organizations,” Fifer says. “There is a need for really smart—and, I think, really curious—data analysts in hospitals and health systems today.”

Engaging Physicians in the Quest for Value

A key component for increasing healthcare value is ensuring that physicians lead the effort at the patient level. 

For instance, research has shown that clinical variation is a major cost driver for many hospitals. And the focus on limiting clinical variation has taken on increased importance as health systems become better able to identify their at-risk patient populations, Morrison says.

At Cadence Health, which is targeting top-decile performance in clinical quality, improvements in physician engagement and quality of care have positioned the health system to begin developing the capability to move from fee for service to a risk-based or capitated lifetime payment model, Orsini says.

Meanwhile, CHE Trinity is confident that its merger will succeed in delivering higher value to the communities it serves because of its focus on increasing clinical integration as the standard arrangement at its facilities, Barnett says.

A lesser-discussed component of mergers and acquisitions is the challenge of garnering physician support for the change. For instance, 5 percent of the physicians at Central DuPage and Delnor hospitals opted out of the merger between those facilities, Orsini says. 

Strategies to mitigate physician pushback should include a focus on details, such as ensuring that key physicians are offered the opportunity to participate on various task forces created as part of the merger, Barnett says.

One downside that has emerged in the move toward greater merger-and-acquisition activity is the increasing competition within markets for various specialists. Such competition has driven up the salaries demanded by high-demand specialists in many markets with competing health systems, hospital leaders say.

Value Unknowns Remain

The extent to which market consolidation will continue and whether it will bring overall cost and quality benefits remains to be determined.

Although some industry observers have cautioned that consolidation could lead to higher prices, thought leaders also have said consolidation can enhance value. Benefits of recent mergers identified by Thought Leadership Retreat presenters include economies of scale, technological advancements that allow analytics-driven quality improvement, and an increase in size that better positions organizations to take on risk-based payments.

Whether organizations are able to utilize the various opportunities presented to them through collaboration, affiliation, or mergers will determine the extent to which they are able to improve the value of the care they provide.

“There are some hard decisions you have to make move forward,” says Barnett of CHE Trinity. “But when the right people are brought together, synergies are created.”

Rich Daly is senior writer/editor, HFMA’s Washington, D.C., office. Follow Rich on Twitter.


Publication Date: Wednesday, January 01, 2014

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