Strategy Challenge 

Alan M. Zuckerman

The Problem

Safety Net Hospital (SNH), the publicly supported hospital for a populous county, is failing financially. Leadership understands it must more formally affiliate with one of the emerging systems in its region. Which system should it link up with, and how should this be done?  

The Situation

SNH is a 500-bed teaching hospital centrally located in the most populous county of a large metropolitan area. SNH has a broad range of programs and services, including a number of geographically dispersed ambulatory care centers. It has a full-time faculty of about 200, sponsors residencies in many specialties, and receives medical student rotations from the state university medical school.

The metropolitan area in which SNH is located is undergoing rapid consolidation. There are two large health systems that include the overwhelming majority of hospitals in the county (and beyond) and a third emerging system sponsored by the area's state-supported medical school. Concurrently, medical practices are aligning with each of the systems. The largest system appears to be moving toward a closed medical staff, while the state-related hospital and medical school has full-time faculty organized in a faculty practice.

SNH was operated by the county until about 2000, when it was spun off as a separate not-for-profit entity, although still with some direct county subsidy and attendant control/influence. The hospital has struggled financially and projects significant losses, averaging about $10 million per year for the next four years, as shown in the exhibit below. Despite its financial condition, its facility is relatively modern and IT is in good shape; its clinical technology, however, needs a substantial capital infusion.

Exhibit 1

sc_exh1

The hospital was able to muddle along until recently, but three cataclysmic events threaten its viability:

  • The economic downturn and its effects on the real estate market (and the millage SNH receives) and municipal finances in general
  • Healthcare reform and especially the potential for some of SNH's patients to become insured and newly attractive to other providers, the likelihood of ACOs and new payment methods, and eventual loss of disproportionate share payments
  • The consolidation of the regional market and the likely resulting power of the systems to channel insured patients and effectively freeze out unaligned providers

Although SNH has a loose relationship with the largest system in the region and an academic affiliation with the state-sponsored medical school, neither affiliation is believed to be
sufficient to weather the impending storms.

Alternatives Considered

All three of the nearby systems were considered as potential candidates for a tight affiliation with SNH. Additionally, a fourth system, sponsored by a highly regarded academic institution about 45 minutes away, was suggested for consideration. Each of the organizations was invited to present its credentials to a steering committee of the SNH leadership, and staff conducted concurrent analysis of each system candidate. (See a sample invitation letter.)

Five factors were judged by the steering committee to be paramount in determining which system best matched SNH's needs. Ability to assist in quality/safety improvement and financial improvement were rated highest, but enhancement of academic programs, program and service improvements generally, and inclusion in a well-functioning integrated delivery system were also important priorities. After meeting with each organization and receiving supplemental written materials, each member of the steering committee evaluated the four organizations on the five criteria. Composite scoring appears in the exhibit below.

Exhibit 2

sc_exh2

In the discussion that ensued following the presentations and scoring, several steering committee members expressed concern that System A, as the largest and increasingly dominant force in the county, really didn't need SNH and would, over time, strip out its valuable assets and reduce it to a shell of itself. Others argued, equally passionately, that System A was the best and most logical choice, and protections could be built into the affiliation agreement to avoid these negative effects. How do you think the steering committee can come to a consensus on how to proceed?

The Decision

Like other similar organizations, the steering committee decided to pursue a two-phase approach to what could ultimately be a merger (actually a long-term lease and contractual control of the operation) into System A. In phase 1, for a period of three years, a tight relationship would be formed, but not a full merger. System A would supply a CEO, a number of areas would be clinically integrated, and significant supporting services would be provided-all specified in the overall affiliation agreement. After two years, a formal evaluation of progress to date would occur and, if the relationship is deemed successful, the transition to the second phase would begin.


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


 

Publication Date: Wednesday, February 01, 2012

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