Kathleen H. McCarthy
Alan M. Zuckerman

In this time of increasing consolidation among healthcare provider organizations, health systems that have developed a strong integration strategy stand to achieve tremendous financial benefits.

At a Glance

True health system integration can produce many direct and indirect financial benefits beyond operating cost savings through functional and service centralization or consolidation. These additional benefits of a strong integration strategy include:

  • Improved market position  
  • Expanded continuum of care  
  • Increased scope of services  
  • Improved healthcare quality and organizational performance  

"There is little debate about whether closer integration among providers is necessary. The imperative to increase quality and lower cost renders arguments to the contrary moot."
-Conclusion reached by participants in HFMA's September 2009 Thought Leadership Retreat as reported in Healthcare Payment Reform: Accelerating Success, HFMA, March 2010

HFMA's thought leadership retreat held in September 2009 identified integration (collaboration among stakeholders across the care continuum, especially between physicians and hospitals) as one of four key competencies for success under healthcare reform. The need to successfully execute an integration strategy comes at time when insurance industry consolidation, capital market constraints, workforce shortages, and other drivers are contributing to a growing trend of consolidation among hospitals and health systems. Although the concept of integrated delivery systems (IDSs) in health care is not new, systems in the post-reform era must develop competencies beyond what is needed to achieve economies of scale-the historical bellwether for affiliations and health system development in the early 1990s.

Hospitals and health systems will need to view affiliation opportunities through a new lens that includes the potential for successful integration, not just consolidation, across a broad spectrum of financial and nonfinancial dimensions. Historically, operating cost savings through functional and service centralization or consolidation have been the primary financial benefit sought and the focus of most merger discussions. However, other direct and indirect financial benefits are possible through true integration. Among these nontraditional financial benefits are improved market position, expanded continuum of care, increased scope of services, and improved healthcare quality and organizational performance.

Improved Market Position

All providers would like to at least hold, and ideally strengthen, their market position. Independent organizations can make some progress toward doing so, but there are advantages of scale resulting from a merger or affiliation that may allow organizations to further improve their competitive position. These advantages include:

  • Improved reimbursement rates from third-party payers
  • The ability to offer greater breadth and depth of services, both to generate incremental revenue and expand the care continuum
  • The ability to distribute fixed costs across a larger patient base/enterprise

The experiences of CareGroup illustrate how further system integration has the potential to improve market position.

CareGroup is the parent company of Beth Israel Deaconess Medical Center, Mount Auburn Hospital, and New England Baptist Hospital in Boston. The Boston market had an early orientation to healthcare reform at the state level, and has an aggressive, dominant competitor in Partners HealthCare. Analysis of the greater Boston market suggested a worsening environment of revenue constraints, expense growth, consolidation, and other challenges. This more challenging environment indicated the need for moderate to high change by providers to include:
• Far greater cost-effectiveness
• Larger systems resulting from increased market consolidation
• More highly integrated systems

View Exhibit 1  


CareGroup recognized the need to evaluate the benefits of further integration among its loosely related members to improve its competitive market position. Exhibit 2 highlights key considerations outlined in a five-year market forecast developed by CareGroup, and their implications.

View Exhibit 2  


In dynamic markets with a dominant provider such as Partners HealthCare, incentives exist for the remaining providers to pursue a consolidation strategy, and history supports such a strategy. The expected rate of change demands timely, coordinated responses, putting loosely organized systems and individual providers at a disadvantage. Although maintaining the status quo was an option for CareGroup, it was not likely to result in competitive advantage. Therefore, as the environment became more difficult for all providers, the central challenge for CareGroup was to build scale as a consolidator to compete effectively in a fragmented market.

In the short term, market factors supported movement toward further integration for CareGroup including two strategic options: clinically integrating a major service line among members to enhance quality and increase volume, and extending a clinical program from one member to another member's campus to expand service locations.

Other near-term integration opportunities identified included a system approach to selected contract negotiations to increase revenue, shared ancillary services to increase efficiency, and capital cost avoidance through joint technology purchases by the members.

Expanded Continuum of Care

Bundled payments, penalties for hospital readmissions, and other pay-for-performance healthcare reform incentives underscore the importance of understanding and addressing gaps in the care continuum. Providers that are able to effectively manage care across multiple settings are likely to achieve financial and quality-related benefits. A merger or affiliation between organizations increases the opportunity to expand the continuum of care.

View Exhibit 3  


This example, drawn from an analysis of two organizations, TriHealth and Health Alliance (now UC Health), located in Cincinnati, examines an affiliation that ultimately did not come to fruition. TriHealth is a two-hospital healthcare system, with approximately $900 million in annual net revenue in 2008, that offers a broad scope of services in more than 50 locations, including ambulatory care, home health, hospice, corporate health, fitness and wellness programs, and a growing primary care network. UC Health is anchored by University Hospital, the major teaching hospital for the University of Cincinnati College of Medicine, and also includes a local community hospital, a network of employed primary care physicians, and a freestanding behavioral health and medical rehabilitation hospital.

Synergy in primary care was one of the benefits identified in the affiliation discussions between the two organizations: At that time, Health Alliance had more than 100 primary care physicians and TriHealth had a 200-physician network of primary/specialty care physicians combined. Near-term financial benefits of a strong primary care base included increased ability to retain patients within the network and volume growth of specialty services. In addition, it was believed that an organized primary care physician network should facilitate physician recruitment and provide opportunities to more effectively manage patient care, wellness, and care transitions across the continuum, ultimately leading to improved quality outcomes and reduced overall cost of care provided.

Toward these ends, one of the TriHealth affiliated primary care practices is now participating in a patient-centered medical home (PCMH) pilot for its commercial and Medicare Advantage lines of business to evaluate the impact of increased use of IT in care coordination on clinical, cost, and patient-centered outcomes.

The potential affiliation presented an opportunity to fill the gaps in the care continuum through integration. TriHealth would provide strength in home care services in parts of Ohio, Indiana, and Kentucky, and Health Alliance would provide strength in post-acute care services, specifically a nationally recognized medical rehabilitation program. This complementary mix of services had the potential for cost savings and quality improvement through the development of clinical pathways and protocols to manage care transitions, payments, and utilization across the continuum. Despite the obvious advantages of a TriHealth-Health Alliance affiliation, inner turmoil within Health Alliance and leadership turnover, including the departure of several significant leaders, prevented talks from proceeding.

Increased Scope of Services

Examples of growth opportunities that can result in incremental financial benefit through integration include joint service development and existing service expansion and enhancement. Success largely depends on choosing a limited number of programs for collaborative development and prioritizing investments in these programs based on predetermined criteria that are consistent with the vision for the integrating organizations. Integrated organizations may also realize benefits from extending select services or product lines from one organization to the other when one organization possesses particular strengths and/or an outstanding reputation. Successfully expanding the scope of services through integration has the potential to enhance quality and increase volume and revenue. Organizations with service line synergy, where the organizations' service lines complement each other, are generally strong candidates for growth and quality improvement.

St. Elizabeth Healthcare, the product of a merger in 2008 between St. Elizabeth Medical Center and St. Luke Hospitals-both located in Northern Kentucky-successfully increased its scope of services through integration. St. Elizabeth and St. Luke each had a history of a failed system affiliation that resulted in the organization exiting the system.

The newly formed St. Elizabeth Healthcare, with estimated annual net revenues of approximately $700 million in 2009, includes a comprehensive array of inpatient and ambulatory services with four acute care hospitals, an ambulatory care center with emergency services, and 210 employed physicians. The system has been consistently recognized by external industry organizations for achievements in quality and as a great place to work.

Prior to the merger, the two organizations had served essentially the same market, and St. Elizabeth's leaders recognized the need to prioritize and develop strategic service line plans for the newly merged entity. A primary goal of this planning effort was to reduce the 15 to 20 percent outmigration to hospitals in the adjacent market of Cincinnati. The result of this effort has been new program development, program enhancements, and some consolidation. The system identified two important opportunities for increased scope of services in orthopedics and obstetrics.

View Exhibit 4  


View Exhibit 5  


In orthopedics, integration enabled St. Elizabeth to improve the quality of service, as evidenced by reduced wait times for patient appointments and better service to referring physicians, particularly those in primary care and emergency medicine. Leadership also developed a co-management agreement with the orthopedic physicians that has improved the collaboration and trust between the parties. As a result of these changes, St. Elizabeth's volume and market share for this service has increased. A major marketing campaign highlighting the strong working relationship between St. Elizabeth and the main orthopedic physician practice has been well received and has further raised the level of trust. Program enhancements, through the development of a spine institute and joint replacement program, are also planned for this service line.

In the area of obstetrics, St. Elizabeth's system has focused on consolidating three programs into one. Meanwhile, the two prior organizations' combined volume of 5,100 births annually has justified the development of a level III nursery. This increased scope of services is expected to result in fewer women with high-risk pregnancies leaving Northern Kentucky to seek care at hospitals in the adjacent Cincinnati market. Full integration of the program, including facility enhancements, is expected to be completed by summer 2011.

Improved Quality and Performance

With payment or nonpayment for services increasingly being tied to quality outcomes, IDSs face a growing imperative to build competencies in quality and performance. An IDS has the opportunity to increase the value provided to patients, payers, and the communities served by offering higher quality services at a lower cost than could be achieved independently.

Integration contributes to improved quality and performance in many ways. For example, it increases access to and exchange of the skills, knowledge, or other resources that facilitate the delivery of high-quality services. Specific benefits include:

  • Extension of research capabilities to improve medical care and innovation in care delivery
  • Development and standardization of best practice care protocols to improve clinical outcomes and resource utilization (i.e., reduced length of stay, improved patient throughput, and increased bed capacity)
  • Improved quality for patients through access to a broader array of services in the case of service expansion or enhancements

Integration also promotes more rapid adoption of advanced information and management systems (electronic medical record, computerized physician order entry) through economies of scale to improve quality, patient safety, and care coordination among providers.

Sentara Healthcare in Virginia has used IT to improve the quality of care provided to patients through integration. Sentara developed through a series of community hospital and related entity mergers over the past four decades and is now a $2.8 billion IDS comprising eight hospitals, 10 long-term care centers, a 400-person employed medical group, and a health plan. Sentara operates under the principle that integration will lead to better and more comprehensive care for patients. Sentara is implementing an electronic health record (EHR) across all parts of the care continuum in an initiative that began in 2005 with an evaluation of all major care processes using the Lean Six Sigma approach.

The initiative is viewed as changing the culture, not just implementing a system. Successful implementation of the EHR has been attributed, in large part, to active physician and staff engagement, as physicians and staff members have developed scenarios to illustrate "a day in the life of a patient" for vendors to use in designing the processes and systems, planning committee leadership, and mentoring to transform skeptics into super users.

To date, the EHR has been implemented at eight Sentara hospitals and more than 100 Sentara medical group practices. A system scorecard is used to track both quality and efficiency benefits. Significant improvement has been demonstrated since implementation of the system in readmissions, medication errors and administration time, patient flow, length of stay, document management, and reduced transcription and supply expenses. These achievements have had a positive impact on clinical quality, patient satisfaction, and finances.

Sentara also has established a portal that allows patients to review test results, renew prescriptions, schedule appointments, ask questions, and/or find information. About $35 million in annualized benefits are expected in the next year, increasing to about $45 million annually by 2015, when the initial system investment is expected to be paid off.
Sentara exemplifies many of the characteristics necessary to achieve the quality and performance improvement benefits of integration. These characteristics include:

  • Significant physician involvement in quality initiatives
  • Development and consistent use of best practices
  • Use of formal process redesign tools (e.g., Six Sigma, Lean)
  • Transparency of quality and safety data and initiatives
  • Purposeful integration of health IT

Positioning for the Future

A successful integration strategy should yield more than simple economies of scale and cost savings. Forward-thinking organizations have achieved tangible financial and nonfinancial benefits for their organizations and communities by improving market position, expanding the continuum of care, increasing the scope of services, and improving quality and overall performance. In the short term, these integration benefits yield both direct and indirect financial gains. In the medium- and long-term, these integration outcomes position healthcare organizations to be successful under new and emerging reimbursement methodologies and to thrive, not just survive, in the post-reform era.

Kathleen H. McCarthy is a vice president, Health Strategies & Solutions, Inc., Clifton Park, N.Y. (kmccarthy@hss-inc.com).

Alan M. Zuckerman, FACHE, FAAHC, is president, Health Strategies & Solutions, Inc., Philadelphia (azuckerman@hss.inc.com). 

Publication Date: Monday, November 01, 2010

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