By Robert J. Fraschetti and Michael Sugarman, MD

While the history of hospital-physician integration, even under extreme financial pressure, is spotty, a foundation-model, hospital-physician partnership between St. Jude Medical Center and the St. Jude Heritage Medical Group, Fullerton, Calif., has grown and prospered for the past 15 years. During the same time, several competing systems have collapsed and some of their sponsoring hospitals have closed. In contrast, St. Jude's hospital has consistently generated a positive operating margin in recent years and the 150-member physician foundation has been close to break-even -- in one of the nation's most competitive managed care markets.

Based on our experience, we believe that the key to long-term success is to openly acknowledge and continuously manage the real differences between hospital and physician cultures, incentives and operations. This is, of course, easier said than done, but it can be done if medical group and hospital leaders adhere to a few basic principles.

1. Interdependence is central.
The idea that neither party is in control is a difficult concept for hospitals and physicians to embrace; the cultural chasm is just too wide. Hospitals often believe that, because they supply most of the capital and management resources and have a community service mission, they should control resources and strategy. Physicians will counter that they alone are trained and licensed to practice medicine, giving them great power over system revenue streams and costs and making them the logical ones to exercise that control. These divergent perspectives are reinforced by differing financial needs and business models, which create fundamental strategic and operational incompatibilities - and which don't go away when the hospital and physicians integrate.

Embracing interdependence, the foundation of long-term relationships, requires both sides to accept that they must share control. They must also understand and commit to the idea that success depends on cooperation, and make decisions accordingly. One party cannot be allowed to prosper at the expense of the entire organization. When issues arise over who will operate and possibly profit from services - compensation and other resource issues - the different interests of the parties must be brought into the open for discussion, brain-storming, and mutually beneficial resolution.

As the St. Jude integration matured, intense cost-cutting demands from managed care prompted the foundation and hospital to combine lab operations. This not only removed an operational friction point, it reduced total overhead and cut down on duplicate testing. The success of this collaboration led to combining administrative and financial functions where possible, and closely coordinating billing activities. This greatly improved contract cost management, sped up accounts receivable, and reduced claims denials and lost charges for both parties.

2. Relationships are primary.
Distrust between physicians and hospital administrators is understandable, not just because their interests differ, but because they are often unaware of each other's needs. Personal relationships are required to overcome these obstacles; without them, neither side will risk its short-term interests for the greater good. For example, it took a great deal of trust for our physician group to allow the foundation to postpone a managed care rate increase for a year so it could negotiate in tandem with the hospital and achieve a better outcome.

This kind of trust strengthens the relationship in more ways than one, making it possible to come to consensus quickly and also generating confidence among system leaders that rank-and-file physicians will support their decisions.

3. Trust takes time.
In our case, the ice didn't break for at least five years, which left the foundation venture far short of its early financial and strategic goals. What finally established trust was the hospital sticking with the foundation when it needed a great deal of financial support in the fifth year. This helped convince physicians that the hospital was in it for the long haul. Since then, the relationship has improved each year.

In fact, in an unusual move, the group appointed the hospital CEO to serve as CEO of the foundation, allowing the hospital to manage foundation resources and operations. This gave the hospital increased exposure to the ambulatory environment and enabled it to achieve a greater understanding of its needs and priorities within the integrated system. This display of trust created a framework for building the tightly integrated administrative infrastructure that exists today.

Note that if this had been a five-year venture, it would have failed. Instead, St. Jude's parent organization, St. Joseph Health System, supported the hospital's continuing efforts despite early losses because they realized that a foundation model of integration is truly a long-term, if not permanent, partnership strategy, whose payoff is a sustainable market presence.

4. It is important to recognize and respect cultural differences.
Integrated systems are valuable in part because they are able to cut overhead by consolidating and standardizing operations. However, this does not mean that all differences between hospital and ambulatory operations, or among ambulatory locations, should be eliminated. Fundamental differences in hospital and doctors' office operations must be accommodated for each to function at their best. Indeed, attempts to impose hospital procedures on physician offices are a prime reason many integration efforts fail. Hospital billing processes, inefficient for medical groups, results in reduced physician collections. However, billing operations should be coordinated for efficient administration of global payments and risk contracts.

The same is true for different departments and locations that have different cultures and processes and for individual physicians, who can be expected to stay within productivity and operating guidelines without having to sacrificing their personal style. This is especially important to the development of trust at the start of an integration initiative, when it is helpful to focus resources and management on supporting physicians' everyday needs.

In 15 years, only two of the original 54 physicians in the St. Jude Heritage Medical Group have left for reasons other than scheduled retirement, demonstrating the flexibility of the model to accommodate a wide variety of physicians from different practice backgrounds. Over the same period, more than 120 physicians have been recruited into the group.

5. Accountability and transparency are essential to maintain performance.
One essential lesson the foundation and medical group learned was to create financial incentives to increase physician productivity and encourage innovation. As with other major decisions, the terms of this compensation model were developed in collaboration with group leaders. Clear criteria were established for setting payment rates based on actual performance data. For example, the managed care compensation pool is diminished when capitated patients are referred outside the group, giving primary care physicians an incentive both to treat conditions within their skill sets and refer internally when possible.

Each year the group sets performance goals that are consistent with insurance pay-for-performance incentives. This year, 20 percent of the bonus is based on timely and appropriate use of electronic medical records and 40 percent on clinical parameters. These include specialty-specific clinical goals, such as endocrinologists regularly testing hemoglobin A1c levels in diabetic patients. The bonus is designed to reinforce general organizational guidelines, and results in more than 90 percent of physicians earning a full share.

6. Integrating governance and management institutionalizes gains.
Shared governance made the St. Jude collaboration possible. Hospital leaders are on the foundation board and sit in ex officio on the medical group board; medical group leaders are on the hospital and foundation boards. All group, foundation, and hospital leaders attend all governance meetings involving major decisions.

Having medical group leaders on the hospital board helps them gain valuable insights into the hospital's global strategies, issues, and points of view. This helps reinforce collaboration and appreciation of the entire organization's shared mission, vision, and values. Having foundation physician leaders on the hospital board can also keep non-foundation physician comments in balance, and sometimes helps defuse unproductive discussions.

All this has contributed to a profound change in the tenor of the relationship. Issues that once would have been settled in adversarial confrontations are now routinely and amicably dispatched in regular management and governance meetings. Governance and leadership integration has helped the collaboration remain strong through leadership transitions, including the replacement of the retiring hospital CEO.

7. The medical group must understand that the hospital has other relationships.
While the St. Jude Heritage Medical Group accounts for a significant portion of St. Jude's admissions, the hospital also has relationships with members of the general medical staff and with specialty centers of excellence. This, too, is a situation in which trust matters. The group understands that while it may be the hospital's core strategic partner, these other relationships are essential to the success of not only the hospital, but the system as a whole.

Achieving true integration based on an interdependent culture comes with inherent risk and challenge. It is a journey rather than an event, one that will test the core competencies and motivations of all parties. However, the long-term success of any physician-hospital integration requires it.

Once established, interdependence can improve the effectiveness and efficiency of health care services, and advance community and charitable missions. Organizations that adopt this approach will be well-positioned to succeed as demands for better outcomes and value grow louder and more insistent.

Robert J. Fraschetti, MBA, is a senior consultant at PivotHealth LLC, and former CEO of St. Jude Medical Center (fraschetti@aol.com ). Michael Sugarman, MD, is President, St. Jude Heritage Medical Group and a practicing rheumatologist (Sugarman@stjoe.org ).

Publication Date: Friday, June 26, 2009