Marc D. Halley

At a Glance  

  • Because of trends that are driving increased consolidation in the healthcare industry, community healthcare systems in the future will have fewer independent medical practices.
  • Hospitals and physician practices can be structurally or functionally integrated, but those that are structurally integrated only, do not function as integrated health systems.
  • For successful integration, leaders from many disciplines need to engage in a partnership and be willing to create conditions for a functional integration.

Irreversible trends in the healthcare industry are driving increased consolidation among physicians, hospitals, and other providers of healthcare services. Those trends include the following.

Increasing demand from baby boomers, the first wave of whom turned 65 in 2011. By sheer force of numbers, boomers have already had tremendous influence on our economy and our nation. This group will not grow old gracefully and will place tremendous pressure on our healthcare system in terms of volume and service.

Continuous downward pressure on Medicare and Medicaid payment, regardless of who occupies the White House. Commercial payers will follow suit.

Increased visibility of the healthcare industry as healthcare spending tops 18 percent of gross domestic product. Increased visibility means increased regulation with the associated costs of compliance and defense in a guilty-until-proven-innocent regulatory culture.

Increased focus on demonstrating both clinical and service quality, which will be driven by pay for performance. Payers will establish the definition of quality measures because they have the ability to motivate broad implementation of those measures regardless of differing opinions.

Fewer, larger "systems" of providers as physicians, hospitals, and others seek to control market share and the flow of referrals to capital-generating hospitals. Even under risk reimbursement models, the hospital risk pool will still provide the largest opportunity to amass capital for future investment in the community healthcare system.

A significant change in the disposition of physicians toward independent practice, which was the hallmark of their traditional cottage industry. Most young physicians prefer to be employed and have little or no interest in entrepreneurship or in committing the hours required to maintain a traditional successful private practice. Unable to attract new partners or to sell their assets to younger associates, mature physicians are increasingly turning to hospitals to cash out and to protect their declining income levels.

An increasing shift in the mindset of successful hospital CEOs from managing campuses to managing markets. This shift will increase competition for the right patients-or those who can pay. The battle for neighborhoods will continue, as access is a critical decision factor for patients and their referring physicians.

Continued demand for better access for the underserved and underinsured, which is an ethical issue and good business. Otherwise, safety-net providers end up treating much sicker patients in the most expensive settings, causing harm to individuals and communities.

Rising demand, lower payment, and higher costs. Healthcare providers will need to respond by increasing productivity to unprecedented levels, regardless of the payment model. Physicians will need to do what only physicians can do, and delegate everything else.

A continuing focus on technology. From demonstrating quality to managing the health of a population to providing the latest in clinical services, delivery of medical care will continue to be technology-driven-with the associated demand for continuous capital investment in new technology.

Increasing complexity of the business of health care and the business "rigor" necessary to succeed-or even survive. Money-losing components of integration models will not be sustainable. Today, those poorly performing operations (particularly hospital-owned medical practices) often cannot be divested without sacrificing competitive position. At the same time, shrinking hospital bottom lines are forcing hospital and health system boards to increase the pressure on CEOs to fix money-losing operations.

These and similar factors have forever changed the traditional healthcare landscape. The future now includes community healthcare systems with fewer independent medical practices. Employed physicians will dominate medical staffs, and competitive lines will be drawn between increasingly consolidated systems-and rarely crossed. Practices that try to remain neutral will be marginalized by larger integrated systems where patient referrals are directed to generate capital, to share risk, and to coordinate care.

The Need for Functional-Not Just Structural-Integration

Some hospital executives and physician leaders have learned that consolidation does not necessarily mean integration. Although primary care physicians, specialty physicians, and hospitals may be structurally integrated, these component parts often do not function like an integrated health system. Patient referrals continue leaking to competing organizations. Policies and decisions in one part of the organization (usually the hospital) actually damage performance and productivity among the other components (usually the practices). Employed physicians are often disengaged (or disengage themselves) from operational governance of the practices they used to own and operate. Productivity among employed physicians usually declines―sometimes as a result of the very technology installed to improve the integration of patient information.

There are distinct differences between organizations that are integrated in structure only and those that are also functionally integrated. Those differences become apparent in conversations with stakeholders (see the exhibit below).



Conditions for Functional Integration 

Achieving functional integration requires that organizations establish and maintain conditions that promote that integration.

Before participants (e.g., physicians, executives, and support staff) can effectively integrate, they need to be clear about their own individual objectives. Only then can they judge whether pursuing shared objectives will be worth their individual effort. Those who lack an individual sense of purpose (beyond a paycheck) have the most difficult time making decisions and contributing to a shared purpose.

Once participants can articulate their individual purpose and related objectives, they also need to understand their combined potential―what they can accomplish together. Identifying the synergies potentially available through functional integration (cooperation) prepares these potential "stakeholders" to clarify their shared purpose and vision for the future.

The stakeholders come together to define and document a shared future that is compelling enough to attract and engage most of them in its pursuit. Some may appropriately decide not to participate and should make other choices, rather than becoming a drag on progress.

Once their future is clear, the stakeholders should develop a sustainable structure to house their compelling vision. All participants need to "win"; the organization should avoid scenarios in which the physicians win and the hospital loses, or vice versa. Structures or deals that violate this correct principle never last because one or more stakeholders feel and are slighted (despite "downstream revenues").

Ultimately, the stakeholders need to agree on the tactics necessary to achieve their vision. Such tactical discussions commonly lead to discord among the parties due to a diversity of training, personalities, and experience. Often, even in the midst of heated discussion, a return to the compelling vision promotes a willingness to cooperate and subordinate private agendas and personal views. Once stakeholders agree on the vision and the tactics, they can make performance commitments around:

  • Clinical quality as defined by evidence-based practice
  • Service quality as defined by patients and their referring physicians
  • Individual productivity
  • Operational sustainability (process improvement)
  • Financial viability

Such commitments are made to other stakeholders, as well as to those whom the functionally integrated organization serves. Performance commitments are documented, and become the basis for personal and joint accountability. Personal commitments define "how" the integrated organization will operate internally to achieve shared objectives.

As with performance commitments, the stakeholders need to agree on certain strategic targets and timelines, which tend to be external, and often involve positioning the functionally integrated organization for the future, within the context of industry trends and local market realities. Strategic targets often become the basis for manager (implementer) accountability to the integrated stakeholders.

A critical component of any sustainable structure is an investment in effective management, to implement the stakeholders' compelling vision and tactics. Consistent "sponsorship" or support of the compelling vision and tactics needs to come from the stakeholders to implementers, especially as implementation leads to the inevitable challenges.

Functional integration requires a willingness of all the stakeholders to be individually and jointly accountable for meeting the performance commitments.a Unlike traditional medical care delivery, functional integration is a team sport. Personal responsibility and accountability to achieve the performance commitments is critical, as is individual participation in the success of the integrated group. The mental model is, "Everyone dives for the loose ball!"

There is no accountability without rigorous measurement for performance. Selecting those measures that will promote critical behaviors, useful action, and desired outcomes is essential to functional integration. The popularity of "dashboards" and the push-button availability of data make the judicious selection of measures essential. Otherwise, the dashboard becomes the target rather than the behaviors and desired outcomes. Measurement for performance requires constant stakeholder evaluation of selected measures to ensure they are promoting the right behaviors and outcomes―rather than activity that distracts from the real issues.

Functional integration includes a heavy dose of process and performance improvement to ensure the success of every willing stakeholder and of the organization as a whole. As with performance measures, the improvement "process" should be applied judiciously so it supports the organization's current work. With correct motivation (e.g., the engaging and compelling vision), effective performance measures, and a simple performance improvement process that is widely understood, much can be accomplished without everyone being tied up in performance improvement meetings. Obviously, one of management's key roles is to identify and share best practices across the functionally integrated system.

A critical component of functional integration is the courage of all stakeholders to acknowledge and remove "C" players. "C" players are those who lack the ability and/or the willingness to meet the performance commitments and to engage as part of the integrated team. "C" players (even highly skilled "C" players) not only create far too much distraction for "A" players, who have to cover for or make excuses for their recalcitrant or less capable colleagues, but also take far too much energy from managers/implementers.

Optimal Integration

Political party machinations notwithstanding, a variety of factors are forcing healthcare provider consolidation, and that consolidation will remain either solely structural (and suboptimal) or functional, depending on a variety of conditions. Those conditions cannot be left to chance, but should be acknowledged and purposely managed and implemented to ensure optimal function and sustainability. Integration is a team sport, and those who participate should become team players.

Individual objectives, contributions, and accountability are essential, as are joint objectives, synergy, and accountability. Although a hospital CEO (the board-appointed fiduciary) is in a position to serve as a key integrator, a command-and-control mental model will not work. Successful integration includes leaders from many disciplines engaged as a "partnership" in the pursuit of a compelling purpose/vision. That partnership should promote the conditions for functional integration. That partnership should also embody the courage to hold all team members accountable to ensure the sustainability of their functionally integrated delivery system.

Marc D. Halley is president and CEO, The Halley Consulting Group, Westerville, Ohio, and a member of HFMA's Northwest Ohio Chapter (


a) Conners, Roger, and others. The Oz Principle, New York: The Penguin Group, Inc., 2004, p. 49.


Publication Date: Friday, June 01, 2012

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