By Maggie Van Dyke
An HFMA Healthcare Financial Pulse Resource
There are several ways to perceive the proposed integration of two Michigan health systems. One of the systems—Northern Michigan Regional Health System (NMRHS)—serves 22 counties in rural, northern Michigan. The other—Spectrum Health—is a large, seven-hospital system with more than 140 service sites in the more urban, Grand Rapids region.
Some staunchly independent hospital leaders may see this as the demise of yet another one of their peers, says NMRHS president and CEO of Tom Mroczkowski.
But Mroczkowski only sees good things resulting from NMRHS becoming part of Spectrum Health. “There’s nothing bad about becoming part of a larger system if it is ultimately beneficial for your patients. NMRHS is doing fine financially, and there is nothing to indicate that we would not be doing fine in the future. But we believe we can do better and provide higher quality patient care by becoming part of a fully-integrated health system. When we look down the road, we envision creating the health care of the future.”
Spectrum Health CEO Rick Breon also believes integration among providers is necessary to achieve true value-driven healthcare reform. “Because of the way we are going to be reimbursed and because of the expectations being put on organizations, I believe we are going to see a lot more affiliations down the road,” he says. “I cannot see any other way to really wring out the big-time inefficiencies. Hospitals and health systems are going to have to find ways to work more together.”
A Growing Trend?
A recent survey from the Noblis Center for Health Innovation backs up Breon’s prediction. The survey reveals an increased interest in consolidation and affiliations among healthcare leaders. One-third of respondents reported being “much more interested” in affiliation now than they were a year ago.
The Noblis survey also suggests that organizations with existing affiliations have better operating margins than those with no affiliations.
This is old news to NMRHS leaders and board members who saw the writing on the wall about three years ago when they initiated a disciplined strategic planning process to help turn the organization around after several challenging operational years, including a four-year nursing strike. “We decided to become a first-class organization and to basically rebuild the entire organization,” says Mroczkowski. “As part of that, we were looking ahead and looking at the research data, and it seemed clear that very large health systems have the capability of delivering the best health care and achieving quality, financial, and other successes.”
After making the decision to explore an affiliation with a larger health system, NMRHS leaders and board members went through some exercises to compare NMRHS’ strategic needs with those of other health systems. Spectrum Health rose to the top of the partner list, based on similar values, organizational size and scope, and the potential for growth.
The next step: Mroczkowski picked up the phone to “cold call” Rick Breon of Spectrum Health.
For All the Right Reasons
As the CEO of an AA-rated health system, Breon is not surprised when he is approached by financially stressed organizations looking to benefit from a business arrangement with a stronger partner. What does impress Breon are those occasional inquiries from organizations like NMRHS that stress a strong strategic rationale for integration.
“One of the obvious questions we always ask is, ‘Why are they seeking us out? What are they looking to do?’” says Breon. “NMRHS has an answer that is very impressive. It is not just, “We want your money,’ They came from a much more strategic perspective in which they have analyzed what they need to do and where they need to be going, and they strongly feel they needed to partner with someone going forward. In my 35 years in this business, I find about 5 percent to 6 percent of organizations want to integrate in that way.”
This isn’t to say that NMRHS won’t enjoy the financial benefits of joining up with Spectrum Health. NMRHS could use some added clout to pursue needed capital for facility upgrades and other investments.
But the most appealing benefit of joining Spectrum Health is the potential to reduce inefficiencies and improve the quality of patient care delivery, says Mroczkowski. “We can tap into Spectrum Health’s quality operations to improve our processes and get waste out of the system. Then we will gain financially as well as gain in quality.”
Clinicians at NMRHS are looking forward to hooking into Spectrum Health’s proprietary software that houses evidence-based practice guidelines and tracks clinical outcomes for a number of diseases and conditions. Mroczkowski estimates that patient care-related costs across NMRHS could be reduced by least 20 percent by employing evidence-based medicine and reducing variation in practices among physicians.
NMRHS patients also stand to gain access to the diverse range of medical specialists via a closer relationship with Spectrum Health.
For Spectrum Health, the main benefit is potential growth. “For us, it’s really about breaking into a geography in which we do not have a presence at this point,” says Breon. There may also be some IT efficiencies that both health systems can benefit from. Both organizations currently use the same vendor for their electronic health records.
Advice from the Dugout
The proposed NMRHS-Spectrum Health deal is currently in due diligence. If it all plays out as planned, NMRHS will convert to a membership corporation with Spectrum Health as the sole member. This form of integration enables NMRHS’ board to remain in place, and enables local decision-making oversight, says Mroczkowski. (Spectrum and NMRHS are about three hours apart, which dictates that NMHRS must remain somewhat independent.)
As they wait for the deal to finalize, Breon and Mroczkowski share some advice about affiliating or integrating with other providers:
Be opening minded about integration—even if you’re dead set on remaining independent. “If you’re not part of a big system, starting thinking about it,” says Mroczkowski “It doesn’t hurt anything to think about joining a larger system, and the mental exercise can be helpful in identifying options.”
The deal has to make strategic sense. “Integration shouldn’t be about growth for growth’s sake,” says Breon. “It is really about trying to come together with like-minded institutions. We are not scouring the neighborhood looking for these kinds of things. We are interested in those that make strategic sense.”
Commit to a disciplined planning process. “Any major partnership like this must begin with the basics, says Mroczkowski. “You really need to understand your organization, your market, and whether your organization can achieve what it needs to achieve.”
NMRHS leaders did their homework before approaching Spectrum Health—and it paid off. Mroczkowski also thinks NMRHS’ balanced scorecard approach to planning—which creates a shared commitment to strategic objectives—may have helped generate staff support for the proposed integration. By the time the Spectrum Health deal was proposed, many NMRHS staff were already used to the idea of becoming part of a larger health system because this vision was part and parcel of the organization’s strategic plan.
As a result, Mroczkowski has encountered very little, if any, fear or negative reactions in the small group meetings he has held with employees and physicians about joining Spectrum Health. “They are saying, ‘If we were part of the system, then maybe we could do this or that.’ So it is releasing some creativity among staff about what they might do if they had more resources to draw on and more people to consult with.”
Loose affiliations mean loose commitments. Mroczkowski warns against forming “loose” affiliations. “You cannot really take advantage of the large system benefits, such as access to capital, enhanced quality processes, leverage with suppliers and payers, etc. You are kind of delaying things, creating the illusion that there is a system there, when there really is not.”
That’s not to say hospitals should not pursue cooperative ventures, says Mroczkowski. “Those types of arrangements should be ongoing. But to declare yourself loosely affiliated with “X” really doesn’t accomplish much. It also blocks thinking on both sides about what is possible because there are some major limitations on what you can legally do unless you are part of the same organization.”
Compare cultures early on. “There are the usual customary things to look at during due diligence, such as risk,” says Breon. “But the thing that is probably as important as anything else is culture. Is the culture compatible? Can we fit together? Do both organizations have a similar attitude? If not, then other things do not matter.”
Culture can be measured by assessing how the potential partner conducts itself, says Breon. For example, how does the other organization make decisions? What are the organization’s main priorities? How does the organization view its role in the community?
So far, both Breon and Mroczkowski feel their two organizations are a match culturally given the dual emphasis on providing high-quality, cost-efficient care. Due diligence will determine if the proposed courtship actually ends up a marriage.
Maggie Van Dyke is an editor at HFMA.
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