A New Era of Hospital-Physician Integration

June 4, 2010 | Corporate | Health Services

With budget cuts and the increasing administrative and regulatory complexities, hospitals are facing unprecedented challenges. This is especially true now with the passage of Health Reform legislation which promotes new payment models that are designed to reduce health care spending by rewarding providers who collaborate across of broad spectrum of disciplines and who achieve “value” for their patients and the payers. This includes a move away from the fee-for-service (FFS) payment model and DRG model to new value-driven payment models specifically designed to reward those who provide value by collaborating. Hospitals will not be able to engage in “value” driven initiatives alone and accordingly will need to modify the way they do business by collaborating with other providers.

Such conclusions are supported by a recent Moody’s Investor Service Report entitled “Transforming Not-for-Profit Healthcare in an Era of Reform” which concludes, in part, that hospitals will need to look to mergers and acquisitions or joint ventures with physicians and other providers to enable them to transform the way they provide care to compete after payment reform. Specifically, the report indicates that the degree of change facing hospitals under healthcare reform and other industry structural shifts is as significant as the change to the DRG payment model in the 1980. Hospitals that fail to achieve clinical integration with their community physicians will not only be unable to effectively compete in the new “value” driven healthcare economy, but their credit will be downgraded as a result.

While many hospitals have pursued alignment strategies with their community physicians to secure referrals, increase market share and negotiate better rates with commercial payors, hospitals are competing to affiliate with independent medical practices like never seen before, including during the hospital-physician acquisition days of the 1990s. The primary reason for this is an understanding by hospitals and health systems that in order for them to prosper in a value-driven health care economy, they must develop integrated delivery systems capable of providing services from “diaper to diaper.” Hospitals are not only facing competition from other hospitals, but also from large physician groups and other physician organizations. The strongest of such are either primary care based or multi-specialty with a strong primary care presence. Many physicians are more comfortable joining a physician practice than a hospital because they feel they are giving-up less autonomy.

Unlike in the 1990s, however, hospitals are typically not “purchasing” practices. Instead, hospitals are merely providing physicians with employment agreements. This may change as the supply of physicians decreases and the demand increases. There are also other alignment strategies that hospitals and health systems have been pursuing, including co-management arrangements, joint ventures and the use of health information technology to clinically integrate with their community physicians. In addition, as indicated above, hospitals are focusing on primary care providers. This is because primary care providers are in the best position to manage quality and value, not just because they control referrals.

Many hospitals and physicians view “integration” initiatives with a skeptical eye because of failed integration efforts of the 1990s. However, there are some significant differences that exist today which will help integration initiatives to be more successful. Specifically, unlike the 1990s, there is a national imperative to achieve payment reform to reduce healthcare spending, which represented almost $1 out of every $5 spent in the United States in 2009 (17.5% of the GNP). As indicated above, one of the ways the government intends to reduce health care spending is with payment reform. Such payment reform will include a reduction in FFS payments and an increase in episodic payments, bundled payments and medical home bonus payments. In order to participate in such new payment models, providers must collaborate with each other in the way they deliver care to their patients. Acting as independent silos will not work any longer. In addition, the federal government is incentivizing providers to collaborate through the creation of opportunities with respect to Accountable Care Organizations and Collaborative Care Networks that allow groups of providers to share in cost savings achieved by the Medicare program resulting from quality initiatives that reduce health care spending. Also, the availability of health IT makes it easier for providers to collaborate. And finally, independent physicians are far worse-off financially today than they were in the 1990s and accordingly are more willing to give-up some autonomy in order to prosper.

While the new health care economy presents many challenges to the existing way physicians practice, we believe that there are excellent opportunities available to those hospitals who embrace such change. Certainly, pretending that change is not upon us is not the answer.

Reprinted with permission. All rights reserved. Further duplication without permission is prohibited.

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