Partnering to Serve Patients and Save Dollars
Hospitals are teaming up—rather than competing—to realize cost savings, efficiencies, and clinical excellence
By Lisa Zamosky | Print the pdf of this story
In an attempt to cut costs and increase efficiencies, hospitals have turned to an unlikely place to find new partners—their competition. Through these partnerships, providers collaborate with each other to realize goals of service expansion, facilities upgrades, supply savings, new IT platforms, and more.
Alliances among providers are not a new phenomenon. But the economic situation is likely to renew a wave of collaborative ventures, as more providers look for alternative ways to secure funding for major capital projects and offset the costs of business ventures and everyday operations.
Better Together Than Not at All
In the Minneapolis area, Fairview Health Services and North Memorial Health Care are fierce competitors. But due to a battle for a new hospital and a lengthy political process, the two systems found themselves partnering.
Fairview and North Memorial initially went up against each other in the quest for the right to build a new hospital in a high-growth, strong socioeconomic area of the Twin Cities. Both organizations purchased land in Maple Grove, Minn., with the intention of expanding. When the opportunity to build a new hospital arose and multiple providers within the community went after it, the state legislature set up a review and approval process to award the license to one party, says Dick Howard, Fairview Health Services’ vice president of business development. Due to Minnesota’s hospital moratorium law, which was enacted in 1984 to control the growth of the state’s hospitals, only one organization would be allowed to build in the area.
To capitalize on the opportunity, as well as one another’s clinical and business strengths, Fairview and North Memorial partnered to build Maple Grove Hospital.
“What started as a political process led us both to recognize early on that it just makes sense for our organizations to collaborate,” Howard explains. The two systems remain competitors. But, according to Howard, Fairview and North Memorial are “fiercely cooperating” on the development of Maple Grove Hospital, which will open in December 2009. “It made economic sense, it made political sense; we’re good organizations to each other,” Howard says.
By partnering, the two hospital systems will realize a capital expense savings. In addition, they are sharing the start-up risk 50/50 until the new Maple Grove facility begins to turn a profit, at which point the relationship will revert to a 25/75 percent arrangement, with the lion’s share being held by North Memorial.
According to Howard, building a successful partnership requires both trust and a well-structured plan. Organizations must be extremely clear with one another about everything from mission and purpose to how values align and how the partnership will be governed, he says. When conducting due diligence, partners need to go beyond the documents and financial statements to consider the operational perspectives of both organizations. For example, the two parties need to clarify what decision-making powers each partner will have in the new arrangement. Together, the organizations hired Andy Cochrane as CEO of Maple Grove Hospital.
In addition to due diligence, building the Fairview/North Memorial relationship also required an understanding of each organization’s culture. When it became clear that Fairview and North Memorial were more likely to win the Maple Grove contract if they joined forces, both organizations knew that, culturally, they were a good fit. The remaining details—profit sharing, legalities, and governance—while challenging, could be worked through. “We’re familiar with each other,” Howard says, “so it just made it easier culturally and management-wise to work together.”
Cochrane agrees. “Our goal is to create a safe environment where we cater to our patients’ every need,” he says. “To accomplish this, we are working to build a culture that thrives on exceptional customer service, flexibility, and open communication. Our culture is what will set us apart.”
A Mighty Band of Small Hospitals
The ability to jointly implement a costly program or make major infrastructure improvements is a common reason for collaboration among providers. That was the impetus behind the development of SISU Medical Systems in Duluth, Minn., a consortium of northern Minnesota medical centers that shares IT resources, information systems staff, hardware, software, and a secure data center.
SISU comprises 16 members, most of which are critical access hospitals. Officially established in 1998 through the vision of former CEO Dan Svendson, SISU was an outgrowth of Y2K concerns and each member hospital’s need to revamp the IT systems it had in place. Members decided to work together to create a critical mass of buying power to achieve economies of scale, explains Dianne Mandernach, FACHE, SISU Medical Systems’ CEO.
When SISU launched, it had only seven participating hospitals. The start-up costs of implementing a new IT platform amounted to approximately $5 million, a hefty sum for any one hospital to shoulder. Affording the staff needed to maintain a platform would have been equally challenging.
At the time of SISU’s creation, Mandernach was the CEO of Mercy Hospital & Health Care Center in Moose Lake, Minn., one of SISU’s founding hospitals. She explains of her time at the helm of a small hospital trying to upgrade its IT systems: “I could pay for a portion, but I couldn’t pay for it all. I could find a person and entice that individual to move to a community of 1,500 people, but I probably couldn’t afford that person.”
Ten years later, SISU supports 8,000 users across 16 hospitals and does so with a cooperative-type model in which each participating hospital pays a maintenance fee and is apportioned a share of the budget. SISU’s 74 full-time employees—the analysts, the programmers, and the network support—operate out of a centralized office in Duluth.
In the early stages, legal work was the most concerning issue, Mandernach says. She recommends that any provider considering an alliance confront the legal issues right away, particularly when there may be concerns about sharing clinical and financial information.
In the case of SISU, none of the data among the 16 institutions are commingled. Still, Mandernach says, the perception that you are mixing data when sharing IT platforms can sometimes become a reality. “To not pay attention to the legalities from the get-go could get you in a whole lot of hurt,” she says.
In addition, continually reassessing the partnership is a priority, Mandernach says. SISU must continually examine the value-added benefits of remaining a cooperative entity that provides participating hospitals with IT support, she says. “The reality is, we need to examine this constantly to make sure that it’s not more expensive than it would be going it alone.”
Sharing the Costs
In another variation on the partnership-for-innovation theme, four Michigan providers have come together to provide leading-edge cancer treatment. Henry Ford Health System, Barbara Ann Karmanos Cancer Center, Ascension Health, and the University of Michigan Health System joined forces to develop a carbon beam therapy center, which could possibly provide proton therapy as well when it begins functioning in the next two to four years. Had the systems not united, the project might have been impossible due to Michigan’s certificate of need (CON) legislation. The law limits expensive technologies, making it highly likely that the state would have refused to grant licenses to all four providers.
The partnership was spurred when another competing provider in southeastern Michigan announced it was going to provide straight proton therapy, explains Bill Bennett, senior vice president of business development with Barbara Ann Karmanos Cancer Center. “I think it forced the other competitors in the market to really think about what kind of heavy particle treatment was the future and where we wanted to be in the state. The CON process encouraged the other providers to think about it as a group instead of individually.”
Cost was another major reason the four Michigan-based hospital systems came together, says William Schramm, senior vice president of strategic business development for Henry Ford Health System in Detroit. The cost of carbon therapy equipment and a facility to house it is estimated to range between $200 million and $300 million; the cost for proton therapy is approximately one-half to two-thirds that of carbon. “From our perspective, the collaborative made sense because it’s a significant capital expenditure, and we help share that burden to mitigate the risk,” Schramm says.
It’s also likely that each of the four providers would not have received financing had they chosen to go it alone. The risks associated with multiple providers in reasonably close proximity offering the same technology that’s useful for a limited population would be high. “I don’t think that the four of us, if we were intent on doing this separately, could have secured financing for it,” Schramm says. “None of us could afford to do this based upon our own volumes.”
To bring this partnership together, the participants needed to address a variety of issues, with ownership percentages and capital contributions among the most difficult to discuss. Like the Maple Grove Hospital partners found, building trust was key. “A solid level of trust needs to exist,” Bennett says.
The proton/carbon therapy consortium encouraged trust among its members by requiring all to sign an exclusivity and confidentiality agreement that bound them to the deal.
“Once we signed exclusivity and confidentiality agreements, I don’t think anybody has looked over his or her shoulders,” Schramm says.
In addition, by partnering, the four-partner proton/carbon beam therapy program might see additional research funding from the National Institutes of Health (NIH) and others.
“We will each continue to separately seek out cancer research funds, but we will also be going to NIH with collective research proposals,” Schramm says. “I think that will put us in a slightly different category than when each of us goes up separately against 200 other contenders.”
Purchasing Power—In Numbers
Straightforward cost cutting was the impetus behind the establishment of the Ohio Valley Hospital Consortium (OVHC). Composed of four rural Ohio-based hospital systems representing seven facilities, the group organized in the late 1990s to capitalize on its joint purchasing power for products and services—everything from software and bed linens to insurance brokers and accountants.
Collectively, OVHC purchases exceed $100 million each year, which has opened doors to volume discounts on products and services that consortium members would not be able to negotiate on their own.
OVHC works with a single group purchasing organization (GPO) to obtain discounted arrangements. The GPO identifies sources for products and services needed by OVHC hospitals, and handles the actual negotiations and purchasing. If the GPO does not have an applicable contract with a vendor, it assists OVHC in direct negotiations.
According to the OVHC’s web site, the four participating organizations have saved a combined $6 million since 2001 through the consortium’s cooperative purchasing program.
“I don’t see anybody who thinks value hasn’t been derived from the programs,” says Jim Phillippe, FACHE, president, Holzer Health Systems in Gallipolis, Ohio.
The consortium’s leadership is made up of the CEOs and materials managers of the four participating hospital systems. OVHC is a shareholder and board member of the GPO that the consortium contracts with.
So far, no dues for participation have been required. “To date, the shareback fees paid to us based on utilization have kept us from having to pay dues,” explains Mina Ubbing, CEO of Fairfield Medical Center in Lancaster, Ohio.
Ubbing says shareback fees amount to more than $280,000 per hospital per year, which is in addition to the savings each facility receives from the combined volume of purchases made by OVHC.
According to Ubbing, much of the satisfaction OVHC members have with their purchasing agreement goes beyond cost savings. The contract has been written to allow each hospital the freedom to join in or go its own way.
For example, a member hospital will go its own way in situations in which physician preference requires that hospital to use a different product than the one the GPO purchases.
“I think that’s a whole lot of what makes the consortium work,” Ubbing says. “We all understand that not everybody can agree all the time, and that’s okay.”
In addition to deciding when to participate and when to abstain, partners in the group also continually reassess the arrangement to ensure their initial purpose still makes good business sense.
“We periodically evaluate if we want to stay with the same GPO,” Phillippe says. “Every once in a while we have to revisit that. Historically, the members of OVHC have always agreed that they were better off together than apart, but that will continue to be evaluated.”
There are other benefits besides cost containment to consider. Each participant organization also profits from joint education and information sharing that can greatly improve a provider’s operations. For example, the consortium has created a number of councils in which representatives from the four organizations get together to discuss matters of mutual interest. Nurses, physicians, and CFOs alike gather periodically to share ideas and provide support.
In addition, best practice presentations are regular agenda items at board meetings. The consortium has also developed a process for a mock Joint Commission survey to keep each member facility up to date with accreditation requirements.
Value for One; Value for All
Strategic partnerships are likely to become increasingly attractive to providers given today’s economic climate. But the need to access capital or save costs isn’t enough to justify launching a new partnership, say those who have been there. An in-depth clinical, operational, and business review, along with legal due diligence, becomes a very telling process at the outset of a partnership.
“We would start by asking, ‘Why do we want to do this? What’s the value of doing it, not only to our organization, but to the other entities that are a part of the venture?’” explains Greg Lane, chief administrative officer for McLaren Health Care Corp. The Flint, Mich. corporation has established numerous partnerships, including a successful joint venture with two competing hospitals to copurchase a freestanding, mobile MRI.
With all potential partnerships, McLaren conducts a solid financial pro forma and then maintains the willingness to question the assumptions, no matter how strong the venture appears at first blush.
“We have a rule,” Lane says. “Don’t fall in love with the deal. If it doesn’t pro forma out, you’ve got to be able to say, ‘This is a great idea, but the numbers just aren’t there.’”