HFMA Executive Roundtable
As organizations continue to embrace value-based care, they are feeling the pressure to improve quality and decrease costs. In some cases, this means moving key care functions out of the hospital, such as laboratory, imaging, infusion suites, and rehabilitation. In this roundtable, several hospital leaders discuss the benefits of partnering with external entities that provide clinical services, and they describe how this effort can assist organizations in better meeting the tenets of value-based care.
What industry drivers are compelling hospitals and health systems to shift certain care services outside the hospital?
Dennis Dahlen: The search for value and consumer convenience is leading many healthcare organizations to at least consider decanting particular care functions—including basic surgical procedures, imaging, and laboratory services—from the hospital environment. If done well, moving these services can help organizations deliver cost-effective care without sacrificing quality, positioning organizations to perform well in the new healthcare reimbursement landscape and meeting the competitive challenge posed by niche players in these segments of the care continuum.
Another driver is the desire to affiliate with experts in specialized areas, especially if those areas are not programmatic strengths of a hospital or health system. As we seek to provide certain care functions in non-hospital settings, we want to work with partners that are able to deliver value and bring a degree of expertise to the table. For example, rehabilitation services, ambulatory surgery centers, and imaging centers all require different skill sets than running a large acute care hospital and may make ideal partnership opportunities.
Art Gladstone: Economy of scale is also a compelling factor. Outside organizations that concentrate on a specific type of service or care can often get better prices on supplies, technology, and other resources. Greater access to personnel can be a driving force as well. In this labor market, we find it more and more challenging to find qualified personnel to oversee certain departments. By working with a larger company that specializes in a particular area, we can access a high-level of competent personnel.
Paul Mastrapa: Health care is a place of pressured margins, and as providers start assuming more risk due to changes in care reimbursement, they are looking at how to adjust either their cost structures or care-delivery models to address this new world. Health systems are now paying significant attention to the post-acute environment. Five years ago, when health systems discharged patients, they weren’t that concerned with where the patients went next. Now, they are—watching where the patient goes, what happens to him or her in that setting, and if the patient comes back to the hospital. Having a post-acute partner that’s aligned with the organization’s goals can provide greater transparency into post-discharge dynamics.
What services have you outsourced, are considering outsourcing, or have considered outsourcing but ultimately decided not to?
Gordon Edwards: Earlier this year, Marshfield Clinic Health System announced a partnership with a bundled-payment management company to avoid inpatient hospital admissions through a hospital-at-home program. Certain medical conditions like congestive heart failure and pneumonia that historically lead to hospital admission can now be treated at home or in a skilled nursing facility thanks to new technology and clinical protocols. This has started to lower the cost around episodic care.
One thing our partner brought to our particular deal is a technology platform that lets us bundle services from a variety of providers. As a result, we can contract with a health plan to pay for the care across a 30-day window, as opposed to the traditional fee-for-service arrangement.
Dahlen: Banner has a history of success in using joint ventures as a means of acquiring expertise and scale. Our largest and most mature one is with a national laboratory service provider to operate a large reference laboratory, a network of outpatient service centers, and our Arizona-based hospital labs. That joint venture generates revenue of nearly $300 million on an annual basis and has historically delivered more consistent financial performance than the rest of our delivery system—along with reasonable profits. It has also allowed us to raise the bar on the quality, cost, and convenience of our laboratory services.
The second significant area in which we’ve partnered is insurance. We have two joint ventures in this space, a mature venture with a leading commercial insurer for Medicare Advantage in the Arizona market and another very recent venture with a second commercial insurer that will offer products in the commercial space. We entered both ventures because we didn’t have sufficient insurance expertise to operate reliably.
We’ve contemplated or are currently considering partners in many of the areas we’ve discussed and expect to bring some of them to the market in the near future.
What are the advantages of partnering with external organizations?
Edwards: These kinds of arrangements allow for better resource use, tighter compliance, and higher levels of quality, and they often achieve these objectives more cost effectively. They can even move the needle on the patient experience because the outside organization is able to devote more attention to one type of service.
Mastrapa: I’d add that these arrangements let you allocate your people and resources to what is most important. You can make sure you’re focusing on those things that will support your core competencies, help you meet your mission and goals, and ensure you achieve financial targets. You can then rely on the partnering organization to oversee areas that maybe aren’t as critical to your core mission but are still necessary. For example, we have a joint venture partnership with a health system in which we have a 50 percent stake in their existing business. Our partner was managing more than 1.9 million patients at max capacity. The organization wished to provide additional access to infusion care and improve clinical continuity. By partnering with us, they were able to expand their infusion service offerings while improving the management of the function. Because our organization has a national network of infusion pharmacies, care management centers, and more than 1,800 clinicians, we were able to provide focused attention on care delivery and coordination. Since we’ve started working with the health system, the business has increased fivefold, and about half now comes from outside of the health system. That has created a tremendous amount of value for the organization, and they don’t have to manage logistics.
Dahlen: Given the rapid changes in revenue models, healthcare organizations, including Banner Health, are trying to accelerate performance improvement. It’s the classic “build or buy” choice, and one of the advantages of buying is speed to market, scale, and performance. We’re facing that challenge in our insurance operations today because we’ve grown rapidly to a level at which failure puts the entire organization at risk. Today, we’re approximately 14 percent premium revenue, but that amounts to more than $1 billion in premium revenue. We don’t have the luxury of learning by trial and error at that scale, so we’ve sought partners to provide us with the necessary sales and other infrastructure needed.
What are the potential risks?
Gladstone: Problems can arise if your partner’s goals aren’t aligned with yours. Financial objectives, for instance, can butt up against each other because health systems are in the business of taking care of patients, whereas contracted companies may be focused on efficiently performing services. As reimbursement shifts to value, these conflicts could intensify.
Also, there can be staffing issues if the two parties aren’t on the same page. Maybe the partner organization hires staff who don’t meet your service quality standards, or maybe they don’t buy into your organization’s culture and goals.
Dahlen: As you might expect from our use of joint ventures, we have some experience here. The most significant risk comes from misaligned objectives and incentives between the partners. Try as we might, we have yet to see a joint venture where both parties’ interests are completely aligned—every day and on every issue. We have been and are very close in many circumstances, but 100 percent alignment is difficult. For instance, our laboratory partner is focused on increasing its revenue and part of the healthcare spend, whereas our interest is in making sure that the lab spend is appropriate as we pursue value in the rest of the continuum.
Another risk is the complexity of engaging in and managing multiple joint ventures. It’s extremely important to populate governing boards and operating committees with the appropriate people to ensure alignment and performance. There are strategic plans, meetings, and other critical yet complex elements to manage these businesses, and the use of a partner likely introduces concepts and processes that are different than core operations. The bottom line is, it takes time to manage partnerships, and that time requires leadership commitment to be successful.
Edwards: If you don’t have the right partner, you could see less-than-acceptable clinical and financial outcomes. In addition, there could be detrimental effects to the patient experience, or you may run into compliance problems. Also, if you don’t have the right contracting arrangement, it may be difficult to get out of the relationship. If your contract is not clear-cut in terms of expected performance, it may make it hard to term early, which can compound the performance problems.
Mastrapa: I agree. Depending on what you outsource, it can be difficult to unwind if you’re dissatisfied, or if the outsource provider stumbles in some way or becomes acquired. It can also be challenging to insource some of the care functions once you’ve made the decision to outsource. To overcome these risks, you’ve got to be clear in your contractual terms and stay close to outsource providers so that you’re aware of any changes in their business strategies that could ultimately affect their interests or abilities to support you as an organization.
Are there certain types of care or services for which defined partnerships make more sense than others?
Edwards: It comes down to what does your partner offer that you can’t or don’t want to provide? Do they have a unique way of approaching a problem, offer tighter logistics, or provide economies of scale? If there isn’t something unique that advances the area, then the relationship often boils down to cost savings. This can be tricky because you may be gaining savings because you’re paying the people providing the service less money and giving them less in terms of benefits. If that’s the case, then you’re not treating the people consistently and in line with your organizational core values.
Dahlen: Clinical complexity is also a factor. Take urgent care, for example. Banner Health recently purchased a chain of urgent care centers to bolster our network access in the Arizona market. As we’re learning, 95 percent of urgent care services are generated from approximately 20 non-complex conditions. The urgent care setting is predominantly designed for customer convenience and greater access, and given the lack of complexity in the care provided, integration with the larger hospital is not as important. Seeking an external partner may be appropriate. However, those services that relate to surgery or inpatient care that require closer clinical integration may make less sense to outsource.
Gladstone: When a hospital has a low-volume, high-risk procedure, engaging in a partnership can be a good idea. Because the outside company routinely performs the function, organizations can rely on it to provide the safest care. For us, perfusion would be an example. Although we don’t frequently provide this kind of care, we have enough cases in our operating room to warrant having it available. However, we would never be able to build up that expertise ourselves. So, contracting with an organization that provides perfusion services to a number of different hospitals makes sense.
Mastrapa: Another way of looking at it is how does the outsourced capability fit your core competencies based on your organizational strategy? Having a specialized organization do what they do and do it well creates more value than trying to be everything to everybody.
Does engaging with this type of partner help hospitals and health systems better navigate value-based care?
Mastrapa: Absolutely. We deal with some high-acuity and high-cost patients who are frequent flyers with the health system. Because we fully assess these individuals and treat them in the home when appropriate, we can keep them from being admitted or readmitted. I think that’s a critical element in value-based care.
Gladstone: If you’re working with a partner, you would expect that they would have the necessary expertise to ensure you reach high levels of quality and lower costs. Even if local leadership doesn’t have the knowledge, they can tap into their resources across the United States to get a better understanding of best practices.
What are key considerations organizations should keep in mind when partnering with an outside entity?
Dahlen: As we have discussed, objectives must be aligned, or nearly so. Even though that may seem obvious, it doesn’t always happen. For instance, there are certainly players in the surgery center space whose operating models focus on volume and rate growth. Although that’s perfectly appropriate for that individual vertical, it may not be a great fit for a health system or hospital trying to build a high-value network.
When evaluating whether you and a potential partner might work well together, we’ve found it very helpful to rely on reputation. Network with other healthcare leaders and you can get the names of great partners from your colleagues. After the introduction, the details matter. There needs to be a good deal of discussion about what your plans are versus how the potential partner runs their business, how they would add value, what their operating metrics are, and so on. We’ve gotten deep in discussions with external organizations and then left the negotiating table because we could not come to an agreement.
Mastrapa: Solid governance is also essential, and there has to be leadership engagement in that governance. Within our joint ventures, leadership roles are clear because they are 50/50. There are senior leaders from the health system, as well as within our organization, that work together. However, even if you have a more informal partnership, making sure that you have the right executive buy-in to make the arrangement successful is critical—and that comes from both sides of the table.
Gladstone: The key is to make sure the partner organization is treated as part of the total entity. As an example, one of our partners has a well-defined program for their employees on how they interact with patients. This program is used throughout their company both nationally and internationally. However, they also make sure that they translate their program into the language that we use so that we’re all working toward the same goals. We know that their employees are being trained the same way as ours, and everyone’s speaking the same language. Not only does this support a seamless patient experience, it mitigates the risks of poor communication, which can lead to errors.
Mastrapa: Well-defined outcome measures that quantitatively assess how the outsourced entity is performing are also critical. If you determine these measures up front when you are aligning goals, then you can be certain that good performance dovetails with your objectives.
Edwards: Another thing to keep in mind is if you’re transitioning your employees to your new partner, make sure you understand what the impact is going to be on those individuals. What is the retirement plan and what are the salary ranges? Do people get health benefits, and do those benefits allow them to see providers in your network? You don’t want to transition an employee whose spouse has a chronic condition to a plan where they no longer can see their primary physician. I think understanding the people side of the arrangement is incredibly important because it demonstrates not only how you treat the individuals that you’re transitioning, but how you view your existing workforce and what they mean to your organization. Most of us like to say employee engagement is important. You’ve got to demonstrate it in your actions.
Gladstone: On the economic side, a partner has to understand what’s going on in health care—specifically the changing reimbursement environment—and be prepared to adapt. In a fee-for-service model, we can have a contract based on services rendered. As we move into the world of capitation, we need to shift to a more outcomes-based mentality. The partner has to be able to respond to that. I think a lot of these contracts are based on where we’ve been, and everyone must be aware of and accept where we’re going.
Participants in the HFMA Executive Roundtable
Dennis Dahlen is CFO for Banner Health in Phoenix.
Gordon Edwards is CFO of Marshfield Clinic Health System in Marshfield, Wis.
Art Gladstone is CEO for Pali Momi Medical Center in West Oʻahu, Hawaii, and Straub Medical Center in Honolulu.
Paul Mastrapa is CEO of Option Care in Deerfield, Ill.
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