Samuel H. Steinberg
Some hospitals enjoy the economic benefits of joining a health system, but the downsides of these arrangements encourage others to maintain their independence. What should you do?
At a Glance
Three key factors that can help determine whether independent hospitals can maintain their independence are:
- Dominant market share
- Strong financial performance
- A solid medical staff
The growth of healthcare systems has been well documented over the past 20 years—rising sharply in the 1990s with another rapid increase anticipated during the next few years due to key environmental drivers, including, but not limited to, scarce financial resources. Many regions of the country have experienced a significant decline in the number of independent hospitals as providers join local, regional, or national systems in large numbers (see exhibit).
The benefits and economies of being part of a system have been widely touted, and some of those benefits have been realized. But downside aspects have emerged as well, such as loss of control of a local community resource, mergers that prove difficult to implement successfully, and promised improvements in patient care services, physician satisfaction, and cost reduction that are exaggerated and potentially unachievable.
Despite the apparent drawbacks of joining a system, some financially fragile providers and formerly solid financial performers that are being newly challenged are wondering whether they can survive without joining a system. Do they have the staying power and wherewithal to go against the tide of consolidation and remain independent and true to their mission?
Why Are Independent Hospitals Joining Systems, and What Do They Gain?
A number of analysts have looked at the reasons hospitals report for their decisions to affiliate. Reasons include access to capital to replace aging physical plant and technology, a desire for more leverage with managed care organizations, the potential for economies of scale, and a pervasive need for help with physician recruitment and retention.
This last reason—physician recruitment and retention—appears prominently in many evaluations of independent hospitals and seems to motivate a significant number of affiliation activities. Both primary care physicians and select specialists are in short supply in many regions of the country. Finding approaches to recruit them and their families and, more important, to retain them is proving increasingly difficult for independent hospitals.
The benefits reported by hospitals joining systems include the ability to improve access to capital and create a financial safety net, greater management depth, less dependency on the local economy, lower potential susceptibility to local competition, and the ability to improve the coordination of care, especially tertiary care services (see sidebar, below) .
Many hospitals joining systems report some loss of local control and community support, changes in leadership, and often the creation of unrealistic goals and expectations related to affiliation activity. Disruptions to physician practices with an attendant impact on hospital revenue can also occur. The hoped for improvement in physician recruitment and retention can prove elusive as the factors that caused it in the first place may persist despite system membership.
Characteristics of Strong Independent Hospitals: Do You Fit the Profile?
Successful freestanding hospitals tend to take a similar approach to developing and implementing strategic plans, working with and retaining the loyalty of key physicians, and allocating their financial resources. They tend to have the largest market share in their service area and often have the highest quality and most engaged medical staff. They are likely to have greater liquidity and sizeable reserves and even may have an endowment. The age of plant is lower, and little deferred maintenance is evident. Debt has been kept low, and the institution is a low-cost, high-quality provider. These hospitals pay attention to quality measures, and their results are usually in the higher ranges.
These vibrant independent organizations have a strong management team and a committed and dedicated board that truly represents the communities they serve. Administrative succession planning is taken seriously and managed well.
Some suggest that the markets these hospitals serve also tend to be similar, with fewer Medicaid and Medicare patients and lower managed care penetration, although this assertion has not been verified. There also may be fewer acute care beds in the area, with the overall occupancy rates being higher. Many of these traits are essentially the luck of the draw. Although it is certainly easier to be a successful independent hospital in a geography that has these traits, there are many examples of organizations that have not flourished under these circumstances. Clearly, some things are the result of good fortune, some things are manageable, and some things are out of our control. All of these factors must be taken into consideration.
Evaluating Your Organization’s Ability to Remain Independent
Working with many independent hospitals, as well as developing and mature health systems, I have developed an index to assist in evaluating an individual hospital’s ability to remain independent. This tool is a summary of my experiences with hospitals faced with the decision to remain independent or join a system, and may be adapted for use in any marketplace. Some factors are more important to remaining successfully independent than others. No single formula ensures that a hospital’s future as an independent organization is secure, but this index can be a starting point for hospitals that are facing these difficult decisions.
The guidelines incorporated into the index offer direction and a frame of reference for decision making by board members and senior executives as they plan for the future of their organizations.
I arbitrarily assigned a 100-point scale, and as in education, a score of 60 percent is just passing. Because 60 percent equates to a grade of D, higher scores indicate a greater likelihood of success, and unlike most examinations, organizations can either improve through careful planning, decision making, and execution of their strategies, or see their scores decline as a result of a poor performance in these areas.
Several key factors indicate a hospital’s ability to remain independent (see sidebar below).Three factors that dominate the quest for independence are market share, financial performance, and medical staff.
Market share. Institutions that expect to remain freestanding must have the dominant market share in their primary service area and must have had it for several years. Moreover, no competitor may have significant (25 percent 1/2) share in the region. This approach is greatly oversimplified as breadth and depth of clinical services is an important issue here as well; however, it is assumed that having the dominant market share is a result of having services that are satisfactorily serving the population in the area. It is further assumed that the needed clinical services are present and that high-quality care is being delivered. Some deficits in care delivery are likely, but it is expected that overall high performance and/or lack of competition has resulted in the organization achieving regional dominance.
Dominant market share (75 percent 1) is worth up to 40 points.
Financial performance. Steady profitability for at least five years and superior liquidity of 150 days or more both provide the resources needed to maintain the physical plant and add and replace clinical technology, and allow for development of sufficient reserves needed to weather any difficult periods that always occur. It is also assumed here that excellent financial performance indicates a diverse, well-insured payer mix and that management is making fiscally prudent decisions.
Financial success is worth up to 20 points.
Medical staff. To remain independent and successful, hospitals need to have a dedicated, comprehensive, self-replicating group of physicians in place. All needed specialties should be present, and the staff should be generally collegial and effective at managing their affairs. Replacements should be recruited on a timely basis, and physician turnover should be modest or even nonexistent. Although the hospital may have some employed physicians, the medical staff generally should be in private practice and desire to remain that way. Large numbers of employed physicians can be a major drain on hospital resources. Relationships with hospital executives should be positive, and they should work together well to maintain the successful medical staff.
A dedicated, growing medical staff is worth up to 25 points.
Additional factors. Several additional factors play a significant role in maintaining the successful freestanding hospital. These factors include nonphysician staff recruitment and retention, strong community support, and a seasoned management team. Each of these factors has an impact on independence, and each can affect the hospital’s potential for success; yet none appear to be as important as the first three issues presented above.
Each additional factor is worth up to 5 points.
Dominant market share, strong financial performance, and a solid medical staff far outweigh any other factors for determining the likelihood of a hospital remaining independent. Experience indicates that it is unlikely that a freestanding hospital can remain so without stellar performance in those categories. Certainly, other factors play a role in the analysis; however, it is much less likely that organizations can thrive as independent entities if they are not strong performers in these areas. Moreover, these results should have been achieved steadily over several years, and the hospitals should be able to demonstrate eternal vigilance regarding their future performance. Little remains constant in the healthcare industry for long, and previously successful organizations may stumble after a catastrophic event or the introduction of a major new competitor in their region.
Remaining independent is never guaranteed, but taking a closer look at your performance based upon this index should prompt the thorough analysis and deep discussions that need to occur when evaluating your decision to remain independent.
Samuel H. Steinberg, PhD, is a senior strategist, Health Strategies & Solutions, Inc., Philadelphia (ssteinberg@hss-inc.com).
sidebar 1
Benefits and Pitfalls of Joining a Health System
Benefits
- Financial safety net and access to capital
- Greater management depth
- Less dependence on local economy
- Less susceptible to individual negative events or competition
- Improved access and coordination of care
- Potential economies of scale
Pitfalls
- Loss of local control
- Unrealistic expectations and goals
- Disruptions to physicians’ referral patterns
- Possible changes in leadership
- Potential loss of community support
- Difficulty achieving successful hospital mergers
sidebar 2
Factors Associated with Financially Successful Freestanding Hospitals
- Greater market share
- High-quality, active, and engaged physicians
- Fewer acute beds in the market
- Fewer unoccupied beds
- Lower staffing levels
- High reserves and endowment
- Greater liquidity
- Less debt on hand
- Lower age of plant
- Fewer Medicare and Medicaid patients
- Lower managed care penetration
- Strong management teams able to market and staff their services effectively