Keep ‘Em Close

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Physicians and hospital administrators don’t mix. Do they hate each other? That would be going too far—but not by much. And given the often-perverse economic and performance incentives that motivate both factions, it’s not too surprising that such a generalization persists. Doctors and hospital management have historically clashed over a variety of factors, often to the detriment of patient care and organizational success.

That may be changing, however, with the clinical integration model of healthcare, under which old adversaries are collaborating. Never ones to be daunted by the realities of the healthcare payment system, many hospitals and systems have been working for years to find ways to unite doctors and senior leaders. From physician employment to joint ventures, from gainsharing projects to the creation of centers of excellence, and even consideration of the time-honored tradition of the clinic model, hospitals are trying harder than ever to align physicians’ and administrators’ incentives to allow their facilities to compete and thrive in a rapidly shifting healthcare marketplace.

A History of Conflict

Linda Haddad, an Estes Park Institute senior fellow and attorney with Horty, Springer & Mattern in Pittsburgh, traces the disconnect between administrators and physicians to the development of the medical staff model in the early 20th century, with hospitals providing credentialing for physicians to practice at their facilities in return for certain services the physician would provide, usually gratis. “It was invented by the American College of Surgeons because hospitals were proliferating and no one was really responsible for how physicians admitted patients to the hospital,” she says. “It made sense at the time. But that exact same structure still exists, except everything else has changed.”

By “everything else,” Haddad means that in exchange for admitting rights, physicians agreed to perform certain duties at the hospital that would keep it operating smoothly. The arrangement also ensured that physicians were available to patients at the hospital outside of banker’s hours. But as the payment system became more procedure-oriented, she says, physicians got the short shrift at hospitals because the free services they were providing, like covering call, were not reimbursed, while hospitals started “chasing the payment structure” instead of chasing patient care. While the disconnects evolved slowly over a long period of time, they’ve become so perverse as to make enemies of physicians and hospital administration. “The medical staff model has been on life support for 30 years now,” she says.

To ease the strain, hospitals have tried a number of half-steps over the past couple of decades to make physicians economically whole without violating the law, Haddad says, including paying for call, employing doctors, providing income guarantees, acquiring primary-care practices and providing salaried part-time medical directorships to important referring physicians. Collectively, these disconnects between physicians, hospitals and patients, along with the government-dominated payment system, have so distorted the healthcare payment system, she says, that “third-party payers are paying their executives millions of dollars in the face of so many uninsured.”

Meanwhile, the government, healthcare’s largest payer by far, has tried to cut healthcare costs on a by-procedure basis and eliminate conflicts of interest that might compromise patient care. But a multitude of new regulations aimed at achieving those goals over the past 40 years have hindered hospitals in their attempts to cooperate more fully with their physicians.

Some administrators are coming around to Haddad’s way of thinking. “If everyone’s on a fee-for-service treadmill, ratcheting back their payment per unit while costs are escalating, the system will fractionalize even more because docs need to pull services out of the hospital to make ends meet,” says Edward G. Murphy, MD, chief executive officer of Carilion Clinic in Roanoke, VA. “Medicine is too often looked at as an endless stream of billable events, which it shouldn’t be.”

Doing Their Best

In the face of this history of conflict, many hospital CEOs are doing the best they can to align incentives.

Because primary-care doctors have the dominant say in where their patients get their non-routine care, many executives have tried and failed at employing primary-care physicians as a way to have some control over patient volume. In the late 1990s, many hospitals overpaid for practices only to watch productivity decline. More recently, hospitals have taken a new tack to obtaining the primary-care referrals they need through physician recruitment for primary-care practices that they own and manage. But that strategy is rife with difficulties, says Jefferson Regional Medical Center President and CEO Tom Timcho, who nevertheless has employed physicians as an alignment strategy at his Pittsburgh facility. “When you hire primary-care physicians, it may remove their entrepreneurship,” he says. “It’s very difficult to manage physician practices, but one of our biggest problems as a community hospital is that we have no mechanism to align outside the employment model.”

Joint ventures have also become much more common in response to the fact that specialty physicians have moved increasingly well-reimbursed, non-acute procedures out of the hospital and into practice-based care. “Joint ventures are diabolical,” Haddad says. “Hospitals feel like they don’t have a choice. They’re always between the hospitals and the ‘richest’ doctors and generate resistance and resentment among other physicians.”

Timcho complains that he struggles most often with how to sustain primary-care physicians who aren’t employed at the hospital. “If we wanted to we could open a freestanding imaging center tomorrow with our radiologists,” he says. But that’s of no help to the primary-care docs, Timcho adds, because while radiologists can earn roughly $500,000 annually, primary-care physicians make about $150,000. “Yet I can’t partner with them. I’d like to be able to, but I can’t because they control referral flow.”

Spectrum Health President and CEO Richard C. Breon has taken a multifaceted approach to dealing with physicians in his seven-hospital system, employing about 200 overall, and sees physician employment in his future even though it hasn’t figured much in his past. “Independent physicians are troubled by lower reimbursement and are trying to identify how best they can hook up with a hospital or multispecialty group,” he says. “Employment has never been one of our primary objectives, but for physicians that are in play that has to be one of the alternatives.”

Indeed, a common weak point for almost all of these so-called “half-step strategies” is that they’re either too restrictive to provide real gains—gainsharing is one example—or they don’t address the bitterness among camps jostling to split a shrinking reimbursement pie. For instance, joint ventures appease some high-dollar-procedure physicians while making others, such as primary-care doctors, resentful. And such ventures often don’t solve the ultimate problem for administrators, who feel they’re negotiating from a point of extreme weakness, says Kelby Krabbenhoft, president and CEO of Sanford Health in Sioux Falls, SD.

“[Joint ventures] are very passive-aggressive, insidious negotiations,” he says. “[Some physicians] talk in terms of clinical service, but what they’re after is money. It’s all bait-and-switch.”

Many hospitals are pouring money into so-called centers of excellence, which promise a group of usually high-dollar physicians that the hospital will spend heavily to invest in state-of-the-art treatment methodologies in return for agreements from these physicians to practice at their facility. Often these take the form of specialty hospitals within a hospital. They may be on the main campus or at a satellite facility, and may combine some elements of a joint venture, with the main hospital owning a controlling share but with the specialists having board representation and a significant—often controlling—voice in how the facility is run.

Such strategies can be effective, but can lead to a damaging medical arms race in areas where stiff competition for patient volume exists, many experts argue. Centers of excellence also don’t resolve the problem of competing interests and still generate resentment from primary-care docs, who feel their compensation is poor compared with their peers.

Everything Old Is New Again

In an effort to curb the rivalries that both hospital leaders and physicians contend is hurting patient care and increasing healthcare costs, many are returning to an old organizational structure: the clinic model of integrated care. Until recently, only a few organizations have successfully implemented such a structure, but those that have done so have a reputation for putting patient care first.

Helping patients is, after all, why most physicians went to medical school in the first place. Financial success, though important, is second. Still, few of the nation’s more than 6,000 hospitals have embraced the clinic model, which counts among its adherents some of the nation’s most famous independent healthcare institutions, such as the Mayo Clinic and the Cleveland Clinic, along with providers like Gundersen Lutheran Health System, which formed 12 years ago in LaCrosse, WI, with the merger of Gundersen Clinic and Lutheran Hospital-LaCrosse. Though both organizations worked closely together until the merger, CEO Jeff Thompson, a pediatrician, says the two organizations recognized that “without an integrated connection between physicians and inpatient care, you will spend more money and make more mistakes than if you had it all in a seamless organization like we have.”

Add to the growing list of clinic integration model adherents southern Virginia’s Carilion Clinic, the new incarnation of Carilion Health System, led by Murphy. Last fall, Murphy and the board of the eight-hospital system shocked many locals and made national news when they announced their intention to convert to the clinic model, which is characterized by a team approach of salaried physicians and other caregivers focusing on the care of the patient to provide a systemwide continuum of care.

The essence of the clinic model is that hospitals stop becoming independent businesses and start becoming ancillary services to the physician practice, says Murphy. On the surface, that attitude can be a humbling comeuppance for hospital administrators. “This is threatening to many hospital leaders. The docs and the nurses take care of the patients. You’re just an ancillary service. The fact that you don’t like it doesn’t make it any less true,” Murphy says.

If hospitals eventually want to provide better and more cost-effective healthcare, he argues, it’s a necessary shift. “We say we’re not taking in enough money, but the community can’t tolerate these escalating health costs. One side cries poverty and so does the other.”

Conversion to such a system can’t be done without serious consideration and some measure of courage, says Haddad, who contends that anything short of the integrated clinic model is a short-term play for many hospitals. “My pitch is that we should be looking for long-term strategies,” she says. “Dr. Murphy at Carilion is very courageous, and he’s getting sued for it.”

Truth is, he’s not getting sued yet—although he’s fielded many threats. Murphy contends that the predominant way of thinking about strategy is to see the hospital as a loose conglomeration of independent businesses and independent interests “that have to be fed,” rather than a cohesive system of employees whose overriding goal is to coordinate care for the only customer that matters—the patient.

“When you start making it just about the care of patients, the struggles go away,” he theorizes. It’s just theory for Murphy because he has no personal experience working in a clinic-based environment. But he’s studied it from afar. “I’ve been enamored of this model of healthcare delivery for a long time,” he says. A core group of physicians and board members agree with him that converting, despite the initial pain and cost involved in the estimated five-year transition plan, is the best long-term course for the system. A group of 11 board members will manage the clinic under the supervision of the existing board of trustees. Eight members of that board will be physicians, with the balance representing nursing and administration.

Carilion will add a multimillion-dollar clinic facility at its campus and will seek to hire eminent specialists from around the nation to fill out its medical staff. Further, Carilion has formed a 50-50 partnership with Virginia Tech University to establish a clinical research institute and new medical school, a key component of most clinic-based systems. It will also add four to five additional fellowship programs over the next five years.

Despite initial resistance, Murphy says he’s pleased with how the plan has been received. And the reason they’ve done it comes down to an incontrovertible fact, in his mind. “You can’t have highly integrated, patient-focused medicine when everyone is independent.”

Gaining Traction

When a couple of hospitals start the process of converting to the clinic model, it’s a trend. When the major rating agencies put out reports that highlight the model as a new opportunity for stabilization of traditional conflict between administration and physicians, that could be the start of a movement. A March 19, 2007, special report from Standard & Poor’s confirms what hospital CEOs have known in the back of their minds for years—that traditional hospital structures may be at risk from shifting physician loyalties. The report remarks that more hospitals are seeing stability and protection of core services by employing physicians but takes special note of the increasing attractiveness of the clinic model in strategic discussions among hospital administrators. It cites Carilion and another hospital in Virginia as examples of the increased attention hospitals are paying toward employing physicians rather than focusing on the medical staff model.

Murphy says Carilion’s transition will be gradual, emphasizing that the system is not closing its medical staff and that any business contracts or joint venture deals the hospital has with its current medical staff remain in place. Yet Murphy says the announcement last summer is only the official proclamation of something that’s been in the works for years. “The recognition and declaration of what we’re doing is fairly recent, but in a blind way we’ve been building this up for years. We’ve had to do a lot of hiring of docs anyway. We already do 50 percent of all the primary-care services in the area, and about two-thirds of all admissions to the hospitals come from our group.”

Investment Follows

Anecdotal evidence supports the idea that the integrated model already has the support of patients and healthcare inflation fighters who say it provides better quality of care and less waste; the model recently gained at least one high-profile—and wealthy—advocate.

Sanford Health, a 24-hospital system with locations in South Dakota, Nebraska, Minnesota and Iowa, attracted a $400 million gift due in part to its focus on integrated care, says Krabbenhoft. Known until February as Sioux Valley Health System, the organization is not technically a clinic because it owns managed care organizations and long-term care facilities in addition to hospitals. Still, in his 11 years at the helm, Krabbenhoft has molded the system into a model that employs and is co-managed with physicians. When Krabbenhoft arrived in 1996, the seeds of integration were there, with 40 physicians employed. Now that number has grown to 365.

Krabbenhoft defines integration as “achieved” once at least 50 percent of an organization’s volume comes from its own employed physicians. Now, about 85 to 87 percent of Sanford’s volume is generated by its own physicians. “That’s a tremendous opportunity to address issues and problems and much more importantly, to be at the table with allies rather than rivals talking about opportunities, technology or clinical pursuits,” he says.

Indeed, without that focus on integrated care, Krabbenhoft doubts that billionaire T. Denny Sanford would have given $400 million to spread the gospel of integrated care through a health system that now bears Sanford’s name. The gift “stands for perpetuating the integrated model we’ve constructed,” he says. “Mr. Sanford is intrigued by the model.”

Like Carilion’s Murphy, Krabbenhoft hasn’t closed the system to independent physicians, but he says the movement toward clinical integration in his swath of the country is gaining steam. He’s currently in discussions with other institutions about mergers and alliances and characterizes those discussions as “happily stressful.” Further, he thinks other hospitals will join the movement as integration’s benefits become clearer. And not having to deal with joint ventures anymore “has to be like police officers living with the Bloods and Crips,” he says.

Indeed, even Spectrum’s Breon and Jefferson Regional’s Timcho, whose organizations are growing admissions and have a strong financial profile, say they’ve had discussions about converting to the clinic model, but their organizations aren’t ready to make the leap. Krabbenhoft contends that conversion may be inevitable for most hospitals. “We’d better start working together and demonstrate what we’re doing, how much it costs, and the outcomes,” he says, adding that integration is the best way to improve quality and demonstrate results. The time is rapidly approaching, he says, “where someone is going to say, ‘unless you can prove it, I’m not going to pay you anymore.’”

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at

How to Deal with Competitor Tactics

If your hospital decides to convert to the integrated clinic model, you can be sure you’ll not only face intense criticism from some powerful factions internally, but your competitors will be happy to try to take advantage as well, say two veterans of such battles.

A Sanford competitor attacked the integration concept “because it was new and was ripe with controversy because a lot of the independent physicians wanted nothing to do with it,” says Kelby Krabbenhoft, president and CEO of Sanford Health.

Be ready for an all-out assault from your competitors who may try to attract your top physicians to bring business their way through disinformation campaigns—some public, some not. In southwestern Virginia, says Edward Murphy, CEO of Carilion Clinic, “a group started having meetings and took out some billboards in a political campaign against us. Bad stuff kept popping up,” he says. Further, there were rumors of a group of independent doctors threatening lawsuits to stop the transition.

Murphy says the most vocal opposition calmed down considerably after about 90 days, once the system made clear it wasn’t closing the medical staff.

“They’re still not thrilled, but they’re not an active group,” he says. “I would be reaching to say they’ve become happy, but the antagonism has waned considerably.”

Krabbenhoft noted a similar shift in the opposition in his service area after a short time, once the plan was fully understood and many physicians saw the plan as more attractive. “Our competitor really enjoyed what they perceived to be a vulnerability because of our change from our historic position. They flew in experts to rail against vertical integration in healthcare,” he says.

But a funny thing happened on the way. “As we persevered, the competitor has adopted the ideal that they’re integrated too.”

—Philip Betbeze

How to Compensate Competitively

Many physicians and physician groups learned long ago that they can pit one hospital against another to get what they want, whether it’s a bump in salary if they are employed, preferred OR times, expensive diagnostic equipment or concessions on joint ventures.

Kelby Krabbenhoft won’t play that game anymore. Instead, the president and CEO of Sanford Health focuses the South Dakota system’s time and money on integration—a process, he warns, that isn’t cheap in its own right.

“We don’t engage in one-upsmanship. To go through ‘integration’ is painful personally and for your balance sheet. It’s an expensive undertaking but it’s worth every penny.”

But most of his expenses boil down to physician costs in the end. The first expense, he says, is to create the organizational infrastructure that can support just ahead of the volume your organization currently has. “Growth is part of the agenda, so you have to build extra,” he says. “You have to be ready when the physicians want to join you.”

At Sanford, for the first two years physicians join under an income guarantee that’s approximated by “real-market volume and real-market reimbursement that we can expect a physician to have.”

“It’s a mixed bag on how quickly they overcome the guarantee,” he says. Specialists generally do so in much less than a year. Primary-care physicians usually take the full two years to get their practice routine and economics consistent with the guarantee.

Sanford is somewhere between the 70th and 90th percentile on compensation.

“The solution is in leadership in compensation,” he says. Physician compensation is determined by a board made up of physicians. The 21-member group includes only one nonphysician—Krabbenhoft. “And I’ve never been to a meeting, intentionally. They are the ones who determine the recruitment strategy for the coming three years.”

—Philip Betbeze




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