This article appears in the October 2012 issue of HealthLeaders magazine.
Where are you placing your bets in the new reimbursement game? As the shift to value-based purchasing of healthcare services nears, in fits and starts and at different speeds in different areas, leaders of hospitals, health systems, and physician practices know they need to rethink quality, safety, and reimbursement. Given the uncertainty of an array of carrot-and-stick incentives from federal and state payers, coupled with the vagaries of the regional or local commercial insurance and employer market, it's little wonder that healthcare leaders are discussing their options in the language of gambling. It's not unusual to hear leaders ask each other: What cards can we play to lessen our risk profile?
Unlike gambling, however, the success or failure of these bets will not be revealed in the flip of a card or roll of the dice, but in how well individual decisions can be integrated into a cohesive strategy. Not all these strategic wagers will pay off, but leaders are tying their organization's future to expensive state-of-the art technology, different divisions of labor and acquisition of nontraditional talents, and investment in innovative structures of care that will allow them to compete in a more transparent and coordinated healthcare environment.
The scramble for scale
Marquette General Health System President and CEO Gary Muller and his board faced a critical long-term challenge. As the largest hospital (with 276 staffed beds) in Michigan's mostly rural and geographically isolated Upper Peninsula, Marquette General Hospital would seem to outsiders to be competitively well-situated to endure any number of shocks associated with a generally decreasing reimbursement environment and to be able to weather the nationwide push toward accountable care. But a closer look reveals a worrisome outlook, says Muller.
"Our board is highly educated in healthcare and started to see that the future was not looking good as an individual system, even though we're making money," says Muller. "We were not generating the capital we needed for the future."
The hospital still has mostly semiprivate rooms instead of the private rooms that patients increasingly demand; the system's pension plan, while funded, would have become underfunded in three years; and leaders were facing a daunting array of investments in clinical and financial technology.
"We also have some 63 specialty services despite a population base of 320,000, so by staying independent, we were looking at the specter of reducing services," says Tom Noren, MD, the health system's chief medical officer.
Leadership started looking carefully for a deep-pocketed partner. With the help of a consultant, MGHS came up with attractive candidates from Michigan-based nonprofits and some university health systems. But in the meantime, in February 2011, for-profit operator LifePoint Hospitals, a Brentwood, Tenn.–based system with more than 50 hospital campuses across the United States, put together a joint operating company with Durham, N.C.–based Duke University Health System: Duke LifePoint Healthcare.
MGHS signed an agreement with Duke LifePoint in July that transfers ownership to the joint venture and eliminates the hospital's debt and funds its pension program. "It's what our board wanted in starting with quality," says Muller. While the deal seems like a traditional acquisition, he says it will bring additional processes and expertise that will allow quality and outcomes measures to be more fully integrated into clinical practice at MGHS, allowing it to benchmark against Duke and top hospitals in the country. At the same time, LifePoint specializes in rural operations, Muller says, which means much of its processes, technology, and outcomes measures will be integrated into MGHS operations. Those facets will allow the organization to more easily enter into value-based commercial health plan negotiations that the Michigan's payers are increasingly seeking.
"This all forms a basis for value-based purchasing by improving quality and service and lowering costs," says Muller.
The partnership is unusual, in that the Duke LifePoint joint venture, until now, has largely been concentrated in the South, primarily in North Carolina and Virginia. But Muller says the opportunity in Michigan to create a regional health network in the Upper Peninsula, geographically isolated from the rest of the state, was too enticing to pass up.
"Duke LifePoint did their due diligence, too, and they were looking at a top 50 cardio hospital that has every service that any major medical center has except burns and transplants. They also saw an opportunity to capture business that's leaving the UP," says Noren. The transaction closed at the end of August.
MGHS' dilemma was not unlike the difficult choices facing many leaders of hospitals, health systems, and physician practices surrounding independence, the ability to meet accountable care targets being demanded by both CMS and commercial payers, and the evaluation of strategic alignments with potential partners in the continuum of care. Many are finding they can't do it alone, that scale is a highly limiting factor in their ability to participate in value-based reimbursement structures, and that national scope and a focused philosophy of aligning physicians and labor resources in a battle-tested format will be critical to their success long term.
Some key partnerships that will pave the way for a shared future of value-based care protocols at the local level had already been hammered out.