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question answers 442 – 2

  

Question 3

This is a major federal agency that provided health insurance to US citizens aged 65 or older. Thy also have the responsibility of maintaining extensive data on annual Medicare and Medicaid expenditures, as well as the Children’s Health Insurance Programs and national healthcare expenditures. What federal agency is this?

Question 12

What are the roles of the following groups in the health care value improvement process: boards of directors, senior leaders, physicians, employees, and payers?

Question 14

Many elderly patients are being discharged form acute care hospitals after undergoing procedures such as knee and hip replacement surgeries. They need extensive rehabilitation services. Form a strategic planning perspective, investment in what type of facility would be best to pursue, given these circumstances? Explain why?

Question 16

In 1999, The Institute of Medicine (IOM) published To Err Is Human: Building a Safer Health System, to improve patient safety in health care; what are the six IOM aims for quality improvement?

Question 31

Who are the key stakeholders in a healthcare organization? Provide an example of a motivating statement that might engage one of these groups.

2 1 3

Learning Objectives

By a wide margin, the biggest threat to our nation’s balance sheet is the skyrocketing

cost of healthcare.

—President Barack Obama

After you have studied this chapter, you should be able to

➤➤ discuss➤political,➤business,➤and➤ethical➤issues➤related➤to➤the➤growth➤in➤the➤US➤healthcare➤

system;➤

➤➤ discuss➤the➤structures➤and➤governance➤of➤for-profit➤and➤not-for-profit➤healthcare➤systems;➤

➤➤ describe➤the➤key➤factors➤that➤affect➤organizational➤strategy➤and➤performance➤among➤

healthcare➤systems;➤

➤➤ diagnose➤the➤differences➤in➤organizational➤culture➤between➤for-profit➤and➤not-for-profit➤

healthcare➤systems;➤and

➤➤ relate➤the➤concept➤of➤healthcare➤consolidation➤to➤the➤development,➤assessment,➤and➤

redesign➤of➤healthcare➤systems.

C H A P T E R 1 1

STRATEGIC PLANNING IN HEALTH SYSTEMS

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IntroductIon The number of US hospitals operating as part of a health system grew from 2,542 in 2000 to 2,868 in 2008 and to 3,144 in 2014—a 24 percent increase since the year 2000 (AHA 2015). In addition, 55 percent of all US hospitals now are part of a health system. These data indicate that the majority of strategic planners in the healthcare field must consider not just the individual hospital but the overall health system in which the hospital oper- ates. Likewise, independently operated US hospitals, which are now in the minority, must consider future health system affiliation as part of their long-term survival plan.

In 2015, almost 90 percent of US hospitals were considering a merger or an acqui- sition (LeMaster and Aygun 2015). Hospital mergers and acquisitions had reached their highest levels in more than 15 years, and hospital consolidations amounted to more than 130 mergers or acquisitions annually.

Declining reimbursement and provider competition are driving this trend. Many medical groups are joining with hospitals to form affiliations, confederations, or shared economic models such as integrated delivery systems (IDSs). IDSs enable better use of staff and financial resources and can lead to greater operational efficiencies across the continuum of healthcare services. They may also gain a competitive advantage by negotiat- ing better reimbursement rates with insurers. Furthermore, IDSs bring together a wider array of clinical services and deliver them in a more coordinated manner than fragmented hospitals can. This chapter discusses the important role health systems have in positioning an organization in an environment of growing uncertainty.

HospItal mergers and acQuIsItIons In the 1990s, healthcare was characterized by the restructuring of hospitals, medical groups, and long-term care providers. These restructuring initiatives included the development of IDSs formed by a combination of acquisitions, mergers, joint ventures, and other alliances.

A hospital acquisition is the purchase of a hospital by another facility or multi- hospital system.

The number of hospitals has only marginally increased since 1999—up less than 1 percent. However, the number of hospitals affiliated with a system has increased 16

Integrated delivery

system (IDS)

Network➤of➤hospitals➤

that➤enables➤better➤

use➤of➤staff➤and➤

financial➤resources➤

and➤promotes➤greater➤

operational➤efficiencies➤

across➤the➤continuum➤

of➤healthcare➤services.

Hospital acquisition

Purchase➤of➤a➤hospital➤

by➤another➤facility➤or➤

multihospital➤system.

Key terms and concepts

➤➤ For-profit➤health➤system

➤➤ Hospital➤acquisition

➤➤ Hospital➤merger

➤➤ Integrated➤delivery➤system

➤➤ Not-for-profit➤health➤system

➤➤ Virtual➤health➤system

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percent (2,524 to 2,941). This suggests a trend toward health system affiliations most likely increased by preparation for the impact of the Affordable Care Act (ACA) of 2010 (Yanci, Wolford, and Young 2013).

Not-for-profit health systems typically evaluate potential acquisitions on the basis of mission, outreach, services, and geographic location. In addition to these factors, for-profit systems evaluate opportunities to maximize profits—for example, purchasing a hospital when its sale price is below the net present value of its cash flow stream. For for-profit health systems, the advantages of acquiring a hospital include increased market share in the community, greater total revenue, and an improved referral base as a result of greater patient volume. Potential disadvantages include the major capital investment required for the purchase and the possibility of an antitrust violation caused by the increased presence in a local market (i.e., the system comes to monopolize the local market).

A hospital merger is a combining of two or more hospitals, often through a pooling of interests. When it constitutes a pooling of interests, a merger often requires no capital outlay. An organization may choose to merge when low profits and weak markets do not support acquisition. In other words, many hospitals choose to merge with another hospital because neither hospital has sufficient financial resources to acquire an organization. By combining their resources, organizations can pursue business and other strategic opportu- nities together that they could not afford to pursue on their own.

Research shows that hospital mergers tend to be horizontal, meaning the merging hospitals are competitors looking for increased operating efficiency and improved market share. By combining their services, the merged entities can offer more services than each could independently, and with more services comes more revenue. Instead of drawing from one patient base, the combined entity draws from two. Just as more services bring in more revenue, so do more patients bring in more revenue. In addition, managed care organizations (i.e., healthcare insurance companies) tend to favor contracting with larger, more complex hos- pitals, forcing smaller hospitals to become part of a health system (Cutler and Morton 2013).

Additional reasons for merging are to eliminate unnecessary services, reduce over- head through consolidation, and provide a more rational mix of services designed to better meet the community’s needs. For example, many mergers involve hospitals located in the same community. If both hospitals offer some of the same services—say, both hospitals provide obstetrics services—the merged hospitals can close the duplicated services at one site because providing the service at a single location is more efficient. While increased effi- ciency through consolidation benefits the merged organization as a whole, some staff may be adversely affected when, for example, administrative functions such as human resources are combined and streamlined, leading to involuntary reductions in staff.

In a merger, similarity of the mission, vision, and culture between the two organiza- tions is important. In an acquisition situation, organized fit is preferable, but similarity is not necessary because the acquiring organization will have dominance, and the acquired entity’s assets are transferred to the purchasing entity.

Hospital merger

Combining➤of➤two➤or➤

more➤hospitals.

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Integrated delIvery systems In healthcare, mergers and acquisitions are a part of horizontal integration, in which a for- profit hospital system purchases other hospitals to increase its size (Harrison, Spaulding, and Mouhalis 2015). Conversely, vertical integration results in IDSs designed to gain access to scarce resources across the continuum of care by acquiring an organization that controls those resources. During the health reform debate, many health policy experts have called for the country to reorganize healthcare providers and delivery systems through integration. IDSs have garnered considerable interest. Research shows a positive correlation between health system integration and quality of care (Hwang et al. 2013). No clear definition of an IDS yet exists; it could be not-for-profit or for-profit.

Mayo Clinic is an example of a large IDS, with a home base in Rochester, Minne- sota; southern tertiary care sites in Florida and Arizona; and Mayo Clinic Health System in the Midwest. Mayo Clinic is a not-for-profit, academic medical institution with a mission focused primarily on patient care supported by education and research. In 2014, Mayo provided care to more than a million people from 50 states and 150 countries at the three tertiary care locations. It provided this care in its clinics and hospitals with 59,509 per- sonnel comprising 4,158 physicians and scientists; 3,155 residents, fellows, and students; and 52,196 allied health staff. It generated $9.7 billion in total revenue, had operating income of $834 million, and received contributions from benefactors of $495 million. It has a medical school and an allied health school and, in 2014, had a research budget of $648 million from internal and external funding (Mayo Clinic 2014). The Mayo Clinic Health System is Mayo Clinic’s network of community hospitals and clinics that formed in 1992 and now has 18 hospitals and more than 40 clinics, hospices, and nursing homes. It serves more than 60 communities in Iowa, Wisconsin, and Minnesota. Care is provided by 1,041 staff physicians and scientists and 14,944 allied health staff (clinic and hospital) for a total of 15,985 staff. As part of Mayo Clinic, a leading caregiver with more than 150 years of patient care, research, and medical education expertise, it offers a full spectrum of healthcare options to local neighborhoods, ranging from primary to highly specialized care (Mayo Clinic Health System 2015). At the same time, those patients have access to the tertiary care Mayo Clinic offers at the other three primary sites.

A not-for-profit health system is organized as a not-for-profit corporation. Based on charitable purpose and frequently affiliated with a religious denomination, not-for-profit systems are a traditional means of delivering medical care in the United States. They are distinct from government-owned public systems and privately owned for-profit systems. Ascension Health, headquartered in St. Louis, Missouri, is the largest not-for-profit health system in the United States. Ascension provides acute care, long-term care, psychiatric care, rehabilitation services, and residential care and grew substantially between 2008 and 2014. Exhibit 11.1 outlines its growth (Ascension 2014).

Geisinger Health System is a not-for-profit health system located in Pennsylvania that consists of tertiary care hospitals, community hospitals, outpatient facilities, and 60

Not-for-profit health

system

Health➤system➤

organized➤as➤a➤not-

for-profit➤corporation.➤

Based➤on➤charitable➤

purpose➤and➤

frequently➤affiliated➤

with➤a➤religious➤

denomination,➤this➤

means➤of➤care➤delivery➤

is➤traditional.

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community practices. The system also includes an insurance company, the Geisinger Health Plan, which provides comprehensive coverage for 290,000 members who receive care from 37,000 credentialed healthcare providers. As of 2011, Geisinger Health System employed 220 primary care physicians and 654 specialty physicians. For these employed physicians, Geisinger uses a compensation plan that uses annually defined performance incentives to provide additional pay, up to 20 percent of physician base pay. Performance incentives are linked to quality, teamwork, and financial performance. These performance payment incen- tives support Geisinger’s overall goal to improve the quality and efficiency of its patient care; in fact, Geisinger’s patient-centered medical home program has shown improved outcomes for Geisinger Health Plan patients. These initiatives have allowed Geisinger to develop a national reputation as an IDS that delivers high-quality, cost-effective healthcare. In addi- tion, Geisinger has increased its clinical services revenue by more than 10 percent annually over the past ten years. This growth is driven by increases in patient volume, number of clinicians, and clinician productivity (Lee, Bothe, and Steele 2012).

For-profit health systems are organizations that comprise hospitals owned by equity-based investors and that have a well-defined organizational goal of profit maximiza- tion, usually through efficiency measures. As a result, the management team of a for-profit hospital answers to the shareholders of the company. These shareholders want a return on their investment; therefore, the hospital must be able to consistently generate a profit. Although for-profit hospitals’ mission is to make a profit, they do provide uncompensated care to the most vulnerable members of the population and thereby improve the health status of their local communities. As of 2013, an analysis of 749 large, for-profit hospitals found that they were 71 percent efficient on average (Harrison, Spaulding, and Mouhalis 2015).

For-profit health

system

Organization➤that➤

comprises➤hospitals➤

owned➤by➤equity-based➤

investors➤and➤that➤

has➤a➤well-defined➤

organizational➤goal➤of➤

profit➤maximization.

exHIbIt 11.1 Ascension Health Facts

Acute care hospitals 67 131 95

Employees 107,000 150,000 40

Hospital beds 18,012 21,936 22

Assets $17.3 billion $31.2 billion 70

Operative revenue $13.4 billion $20.1 billion 46

Provision of charity care $748 million $1.8 billion 94

2008 2014 % Increase

Sources:➤Data➤from➤Ascension➤(2009,➤2014)➤and➤Page➤(2010).

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A sample for-profit health system organization chart is provided in Exhibit 11.2. It illustrates one CEO or holding company, with many divisions or groups supported by a single corporate structure for departments such as Information Technology, Human Resources, Finance, Outpatient Practice, and Clinical Operations.

One of the largest for-profit health systems in the United States is Hospital Corpo- ration of America (HCA), headquartered in Nashville, Tennessee. The system comprises locally managed facilities that include 168 hospitals and 113 freestanding surgery centers, including 5 hospitals in the United Kingdom (HCA 2015a). Exhibit 11.3 outlines HCA’s growth between 2008 and 2014.

A number of important acquisitions occurred in the early part of the twenty-first century. For example, Tenet Healthcare acquired Vanguard Health Systems in October 2013. Community Health Systems completed its acquisition of Health Management Associates in January 2014 (LeMaster and Aygun 2015).

strategIc plannIng at tHe HealtH system level Strategic planning at the health system level is different from planning at an individual hospital level. Health systems routinely evaluate the acquisition of hospitals or other smaller health systems with values in excess of $1 billion. The magnitude of these projects requires working with Wall Street banks and venture capital firms to negotiate capital financing packages, which are critical to determining whether these new business initiatives will be profitable. Most health systems have a dollar threshold of approximately $1 million for the local approval of new business initiatives. Any new business initiative that will cost in excess of this threshold must be approved by the health system’s headquarters. At the

exHIbIt 11.2 Sample For-Profit

Health System Organization Chart

Information Technology

Outpatient Practice

Corporate Support

Finance Human

Resources Clinical

Operations

Chairman and CEO

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headquarters level, these larger business initiatives compete with other business initiatives across the entire health system and are prioritized in a strategic plan for the overall health system. The number of projects funded by the health system is determined by the level of cash flow generated throughout the health system and the cost and availability of capital from banks or the equity stock markets. Health systems attempting to expand their services also must work closely with state regulatory agencies and the US Department of Justice. These agencies are responsible for ensuring that health systems do not approach monopoly status in a local community, which can have an adverse effect on competition in the marketplace. For these reasons, strategic planning at the system level requires a global perspective and additional technical skills that are not necessary when planning in local markets.

Not all systems are created equal, and many small systems (as well as some larger systems) do not really operate as a consolidated entity. These systems may comprise many facilities and have good public relations programs, but they are fragmented and do not integrate key services and functions. For example, in a small health system of five to eight hospitals distributed across a wide geographic area, there are limited opportunities for economies of scale (see Chapter 1, Highlight 1.1). The same is true for a large system of 20 hospitals located in separate parts of the world. To gain real economies of scale, mul- tiple, large facilities must be concentrated in one geographic area (Cobb and Wry 2015). For example, suppose a small hospital system needs to buy a magnetic resonance imaging (MRI) machine. If the system’s hospitals are in proximity to each other, there is no need to buy a machine for each facility. The system can buy one machine and place it in one of the facilities. If a physician at one of the other facilities orders an MRI for a patient, the patient can easily travel to the facility where the MRI machine is located. If the system’s hospitals were scattered around the country, it would have to buy a machine for each facil- ity—an exorbitant expenditure.

exHIbIt 11.3 HCA Facts

Acute care hospitals 158 166 5

Employees 183,000 225,000 23

Hospital beds 38,504 43,356 12.6

Assets $24 billion $31.2 billion 30

Operative revenue $28 billion $36.9 billion 32

Provision of charity care $2.1 billion $2.5 billion 19

2008 2014 % Increase

Source:➤Data➤from➤HCA➤(2008,➤2011,➤2015b).

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Health systems are attempting to lower costs by increasing their economies of scale. In addition to spreading their costs over increasing volumes of services, healthcare organiza- tions are able to negotiate for increased revenue when they negotiate with large insurers. To date, consolidation has been primarily horizontal, meaning mergers and acquisitions in the same sector of services. These horizontal mergers allow for greater efficiencies, particularly in reducing fixed costs in areas such as facilities and health information technology. Most recently, hospitals have been limited by the Federal Trade Commission to about 30 percent of hospital beds in their market area (Moses et al. 2013).

Driven in part by the ACA, vertical integration has increased since 2010. Hospital systems that are providing insurance products recognize the need to coordinate care for their enrolled populations. This vertical integration enables better-quality care at a lower cost and can provide a competitive advantage in fragmented geographic markets. Most important, vertical integration has been explicitly sanctioned by the ACA, which supports integration by transferring some risk and management functions to individual hospitals. In addition, this vertical integration increasingly has led to the employment of physicians by health systems. By failing to leverage the economies of scale made possible by consoli- dated systems, fragmented systems are not in much better shape than small, stand-alone rural hospitals because the systems lack the technical expertise and facility infrastructure to operate in an increasingly complex healthcare environment (Moses et al. 2013).

IntegratIon across tHe contInuum of care

In the future, management of individual patients across the continuum of healthcare services will become increasingly important. US healthcare will continue to move toward further integration of clinical services and consolidation of payers and health systems (Moses et al. 2013). This consolidation is a result of the high level of complexity associated with health- care and requires individual institutions to become part of a regional and national strategy. Affiliation and the integration of care are also strategies for achieving quality improvement goals. Health systems are in a position to manage variation across their facilities in both administrative and clinical areas. For example, the health system HCA once had a billing office and a payroll department in each of its hospitals. Each hospital also had a purchas- ing agent and central supply warehouse to meet its ongoing needs. This individualization led to a wide variation in performance. To reduce this range, HCA regionalized its billing and supply chain operations. These regional centers leveraged consistency across the health system, improving quality and efficiency as a result.

HCA uses the same approach to clinical quality improvement, calling on the best talent in the organization to transfer best practices across the enterprise. When protocols of care are standardized and implemented across a health system, quality scores improve, patient satisfaction increases, and fewer malpractice claims are filed.

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vIrtual HealtH systems

Virtual health systems—networks of organizations created through the use of health information technology—allow independent healthcare providers to link together without having to merge with or acquire other facilities. Participation in a virtual health system may appeal to some independent hospitals because they can gain many of the advantages of health system membership without giving up operational control to the health system. Independent rural hospitals that have a long history of financial losses, old facilities, or antiquated equipment might also find participation in a virtual health system advanta- geous. Strategic planners of health systems often consider these hospitals “losers” and, as a result, not viable candidates for merger or acquisition. In such cases, the only possibility of affiliation for these hospitals is participation in a virtual health system.

Using affiliations to provide integrated services, rather than mergers and acquisitions, can be important (LeMaster and Aygun 2015). These clinical affiliations allow organiza- tions to access the clinical expertise and resources of much larger systems without giving up organizational control. Virtual health systems provide particularly good opportunities to implement evidenced-based care, share resources and business services, develop coordinated information technology systems, reduce supply chain costs, and leverage telemedicine. In addition, virtual health systems can help expand an organization’s geographic referral base, create …

,

Strategic Planning and the Healthcare Business Plan

Chapter 7

“The way to get started is to quit talking and begin doing.”

—Walt Disney

“Think ahead. Don't let day-to-day operations drive out planning.”

—Donald Rumsfeld

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

1

Learning Objectives

Analyze and address challenges in strategic planning for healthcare organizations through the use of financial information.

Create a business plan for a new service line in a healthcare organization.

Assess the appropriate organizational structure for a new business initiative, including corporate structure and scope of leadership.

Understand the management of costs, quality, and access.

Demonstrate the ability to make financial decisions and develop a strategy for change.

Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale.

2

Key Terms and Concepts

• Cost of capital

• Financial planning

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