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L e a r n i n g O b j e c t i v e s

I will continue with diligence to keep abreast of advances in medicine. I will treat

without exception all who seek my ministrations, so long as the treatment of others is

not compromised thereby, and I will seek the counsel of particularly skilled physicians

where indicated for the benefit of my patient.

—From The Hippocratic Oath (modern version)

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

➤➤ demonstrate➤an➤understanding➤of➤the➤interparty➤relationships➤associated➤with➤healthcare➤

joint➤ventures➤and➤accountable➤care➤organizations;

➤➤ understand➤some➤of➤the➤dynamics➤and➤controversies➤surrounding➤the➤concept➤of➤

accountable➤care➤organizations➤as➤an➤alternative➤approach➤to➤the➤current➤marketplace;

➤➤ demonstrate➤a➤basic➤understanding➤of➤the➤patient-centered➤medical➤home➤with➤attention➤to➤

how➤it➤supports➤network-based➤delivery➤systems;

➤➤ master➤the➤concept➤of➤physician–hospital➤alignment➤and➤health➤system➤integration,➤

including➤consumer,➤provider,➤and➤regulatory➤developments;➤and

C H A P T E R 9

A C C O U N TA B L E C A R E O R G A N I Z AT I O N S A N D P H Y S I C I A N J O I N T V E N T U R E S

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ri gh ts r es er ve d. M ay n ot b e re pr od uc ed i n an y fo rm w it ho ut p er mi ss io n fr om t he p ub li sh er , ex ce pt f ai r us es p er mi tt ed u nd er U .S . or a pp li ca bl e co py ri gh t la w.

EBSCO : eBook Collection (EBSCOhost) - printed on 4/14/2019 2:44 PM via WESTERN KENTUCKY UNIV AN: 1843079 ; Harrison, Jeffrey P..; Essentials of Strategic Planning in Healthcare Account: s8993066.main.ehost

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➤➤ assess➤the➤emerging➤role➤of➤medical➤groups➤and➤hospital-owned➤group➤practices➤

across➤the➤continuum➤of➤healthcare➤services.

➤➤ Accountable➤care➤organization

➤➤ Clinical➤integration

➤➤ Equity-based➤joint➤venture➤

➤➤ Hospitalist➤model

➤➤ Integrated➤physician➤model

➤➤ Medical➤foundation➤

➤➤ Patient-centered➤medical➤home

K e y t e r m s a n d c o n c e p t s

In t r o d u c t I o n A positive relationship between hospitals and physicians is important to the success of the US healthcare system, because hospitals and physicians can be both collaborators and competitors. Physicians play a key role because they direct clinical services and function as patients’ “agents.” Physicians are responsible for major decisions, including whether to admit patients, whether to perform procedures, and whether to use pharmaceuticals or other supplies. The concept of physician–hospital alignment or integration has been discussed in the healthcare field since the early 1990s (Reiboldt 2013). Many hospitals and healthcare systems have moved to vari- ous models of physician integration since that time, through which hospitals seek to capture market share and physicians pursue security and better financial footing. After the Affordable Care Act (ACA) was passed in 2010, physician–hospital alignment became driven by another factor: cost control and quality outcomes in the accountable care era (Reiboldt 2013).

Physicians work in a wide range of settings. In 2013, 26 percent of physicians were employed by hospitals, 14 percent worked in a practice owned by a hospital or health system, 22 percent had an ownership stake in a practice, 15 percent had a solo practice, 15 percent worked for physician-owned practices with no ownership stake, and 8 percent were independent contractors (Jackson Healthcare 2013).

Physicians also serve in leadership positions and have significant responsibility for the quality of care. Unfortunately, growing economic pressures, advances in technology, and increasing use of outpatient care are straining the relationship between hospitals and physi- cians and forcing them to compete for patients. In addition, managed care organizations routinely bargain with hospitals and physicians separately, which only exacerbates the divide.

cl I n I c a l In t e g r at I o n Through clinical integration, hospitals and physicians can bridge separation and defuse competition. The accountable care organization (ACO) represents the most recent effort

Clinical integration

Coordination➤of➤patient➤

care➤between➤hospitals➤

and➤physicians➤

across➤the➤healthcare➤

continuum.

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to integrate the clinical care delivered to patients across providers and sites of care. Clinical integration provides an opportunity to coordinate services through centralized scheduling, electronic health records, clinical pathways, management of chronic diseases, and innova- tive quality improvement programs.

Clinical integration across the continuum of care is necessary to delivering high- quality, affordable care in the current environment (Jacquin 2014). The ACA created the ACO, which allows primary care providers to coordinate their patients’ care across the continuum of healthcare services. Moving toward evidence-based clinical practice that spans multiple settings and is appropriate for the patient’s illness will likely improve the US healthcare system. This integration is an attempt by Medicare to see healthcare from the patient and payer perspectives. Healthcare is often specialized and operates in separate silos of outpatient care, hospital care, rehabilitation, home care, and so on. Communication, goals of care, and in particular, billing are separate for all the silos. From patient and payer perspectives, however, the experience is one episode of care across a continuum.

By pooling their resources, hospitals and physicians also benefit financially. Clinical integration facilitates access to expensive medical technology, allows for greater economies of scale (see Chapter 1, Highlight 1.1), and enables subsidization of unprofitable services.

Hospitals and physicians are inherently interdependent. Yet the ability to recruit and retain quality physicians is critical to a hospital’s reputation, market share, and long-term profitability. Most patients are admitted to hospitals because of physician referral. Therefore, hospitals seeking to increase their market share would be wise to focus on improving their relationships with physicians (Reiboldt 2013). Conversely, physicians rely on hospitals to provide facilities, state-of-the-art technology, and high-quality clinical staff.

Total healthcare expenditures per typical family have increased from 2008 to 2013 (see Exhibit 9.1). However, spending on physicians as a percentage has decreased. For example, in 2008, hospital inpatient and outpatient services combined represented 46 percent of total healthcare spending, while physician services ranked second at 35 percent of healthcare spending and pharmacy third at 15 percent. By 2013, hospital inpatient and outpatient services combined climbed to 49 percent of total healthcare spending, while physician services dropped to 32 percent of healthcare spending. Pharmacy remained at 15 percent (Milliman 2008, 2013).

pat I e n t-ce n t e r e d me d I c a l Ho m e The patient-centered medical home (PCMH) is a care delivery model whereby a primary care physician coordinates patient treatment to ensure that it is timely, cost-effective, and personalized. The idea started with pediatric groups in the 1960s. Collaboration between several professional organizations expanded the model to primary care for all ages. The term home does not refer to a physical place for patients to live but rather medical care they feel is comfortable (because they know the team), safe (because the team is focused on safety

Patient-centered

medical home (PCMH)

Care➤delivery➤model➤

whereby➤a➤primary➤care➤

physician➤coordinates➤

patient➤treatment➤to➤

ensure➤it➤is➤timely,➤

cost-effective,➤and➤

personalized.

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and quality), and accessible (because it is available on demand). Comfortable, safe, and accessible are terms you could use to describe your own home.

The ACA institutionalized the concept of the PCMH as the model for an ACO that provides primary care for Medicaid patients at a lower cost. As of 2014, 41 states had developed or planned to develop demonstration projects based on this model (Phillips et al. 2014).

The PCMH was designed to focus on individual patients with complex conditions who were disconnected from the healthcare system. The PCMH program breaks down the silos that separate providers and helps patients navigate across the continuum of care (see Exhibit 9.2). The intent of the PCMH model is to shift care increasingly to outpatient settings in which providers can use a team-based approach to make optimal use of non- physician caregivers across the continuum of health services. Team members often include patient navigators, care coordinators, and advanced practice providers (nurse practitioners and physician assistants). See Highlight 9.1 for more information about the PCMH model.

The multidisciplinary approach to care should maximize the clinical outcomes for patients with complex conditions and enhance wellness and prevention. The PCMH model emphasizes ease of access, partnerships between physicians and hospitals, and the use of innova- tive technologies to improve patient care. Adoption has been shown to decrease readmissions, emergency department visits, and length of hospital stays. Components include an individualized (patient-specific) health plan, management of patient healthcare services, and clinical decision making to improve quality as well as reduce costs. Reimbursement penalties for poor readmis- sion rates could reduce Medicare costs by $8.2 billion between 2010 and 2019 (CMS 2010).

exHIbIt 9.1 Trends in Medical- Budget Spending for Average US Family, 2008 and 2013Physician $5,435 35 $6,990 32

Inpatient hospital $4,724 30 $6,855 31

Outpatient facility $2,516 16 $4,037 18

Pharmacy $2,302 15 $3,296 15

Other $633 4 $851 4

Total $15,610 $22,029

2008 2013

SpendingService Percentage Spending Percentage

Source:➤Data➤from➤Milliman➤(2008,➤2013).

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HIGHLIGHT 9.1 Patient-Centered Medical Home

The➤Agency➤for➤Healthcare➤Research➤and➤Quality➤(AHRQ)➤defines➤a➤medical➤home➤not➤as➤

a➤place➤but➤as➤a➤model➤for➤delivering➤the➤core➤functions➤of➤primary➤care➤(AHRQ➤2015).➤

The➤Institute➤of➤Medicine➤(IOM)➤fueled➤the➤early➤shift➤of➤the➤PCMH➤model➤from➤pediatric➤

programs➤to➤primary➤care➤programs.➤In➤its➤report➤Envisioning the National Healthcare

Quality➤Report➤(Hurtado,➤Swift,➤and➤Corrigan➤2001),➤the➤IOM➤challenged➤AHRQ➤to➤de-

velop➤measures➤for➤patient➤centeredness.➤The➤IOM➤definition➤of➤patient➤centeredness

includes➤healthcare➤that➤establishes➤a➤partnership➤among➤practitioners,➤patients,➤and➤

their➤ families➤ (when➤ appropriate)➤ to➤ ensure➤ that➤ decisions➤ respect➤ patients’➤ wants,➤

needs,➤and➤preferences➤and➤that➤patients➤have➤the➤education➤and➤support➤they➤require➤

to➤ make➤ decisions➤ and➤ participate➤ in➤ their➤ own➤ care.➤ AHRQ➤ defines➤ a➤ medical➤ home➤

according➤to➤five➤functions➤and➤attributes:➤comprehensive➤care,➤patient➤centeredness,➤

coordination,➤accessibility➤of➤services,➤and➤quality➤and➤safety➤(AHRQ➤2015).➤

Since➤the➤2001➤IOM➤report,➤many➤researchers➤and➤professional➤organizations➤have➤

proved➤the➤benefits➤of➤enhancing➤primary➤care➤and➤medical➤homes➤(Starfield,➤Shi,➤and➤

Macinko➤2005;➤Phillips➤et➤al.➤2014).➤In➤2010,➤the➤ACA➤further➤solidified➤the➤concept➤of➤

the➤PCMH➤by➤supporting➤primary➤care➤payment➤increases➤through➤Medicare➤and➤Medic-

aid;➤expanding➤insurance➤coverage;➤and➤significantly➤investing➤in➤medical➤home➤pilots,➤

workforce➤development➤and➤training,➤prevention➤and➤wellness,➤community➤health➤cen-

ters,➤and➤additional➤care➤delivery➤innovations➤(PCPCC➤2015).

As➤a➤result➤of➤the➤ACA:

•➤ Primary➤care➤providers➤receive➤a➤10➤percent➤Medicare➤bonus➤payment➤for➤primary➤

care➤services.

•➤ A➤new➤Medicaid➤state➤option➤now➤permits➤certain➤Medicaid➤enrollees➤to➤designate➤

a➤provider➤as➤a➤health➤home,➤and➤states➤taking➤advantage➤of➤the➤option➤receive➤90➤

percent➤federal➤matching➤payments➤for➤two➤years➤for➤health➤home–related➤services.

•➤ Small➤employers➤receive➤grants➤for➤up➤to➤five➤years➤to➤establish➤wellness➤programs.

•➤ The➤Centers➤for➤Medicare➤&➤Medicaid➤Innovation➤has➤launched➤the➤Pioneer➤

ACO➤model➤and➤the➤Advance➤Payment➤ACO➤model,➤which➤offers➤shared➤savings➤

and➤other➤payment➤incentives➤for➤select➤organizations➤that➤provide➤efficient,➤

coordinated,➤patient-centered➤care.

•➤ States➤maintain➤health➤benefit➤exchanges➤and➤Small➤Business➤Health➤Options➤

Program➤exchanges,➤which➤facilitate➤the➤purchase➤of➤insurance➤by➤individuals➤and➤

small➤employers.

•➤ Teaching➤health➤centers➤provide➤payments➤for➤primary➤care➤residency➤programs➤in➤

community-based➤ambulatory➤patient➤care➤centers.

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po t e n t I a l st r u c t u r e s f o r pH y s I c I a n–Ho s p I ta l In t e g r at I o n Many healthcare leaders believe that physician–hospital alignment is one of the greatest challenges facing the US healthcare system. Hospitals and physicians are faced with the task of finding innovative ways to collaborate while taking advantage of their joint economic interests. ACOs, medical foundations, hospital-owned group practices, and joint venture initiatives are all potential solutions. Development of a formal, board-approved physi- cian–hospital alignment plan can help hospitals achieve this goal. At a minimum, physician engagement in strategic planning, development of an organizational culture that supports physicians, improved communication with physicians, increased emphasis on physician retention, and investment in physician leadership development are useful objectives in an alignment plan (Zeis 2013).

a c c o u n ta b l e c a r e o r g a n I z at I o n s

ACOs are groups of doctors, hospitals, and other healthcare providers who come together voluntarily to give coordinated, high-quality care to the Medicare patients they serve. Coordinated care helps ensure that patients, especially the chronically ill, get the right care at the right time, with the goal of avoiding unnecessary duplication of services and preventing medical errors.

Accountable care

organization (ACO)

Group➤of➤doctors,➤

hospitals,➤and➤

other➤healthcare➤

providers➤who➤come➤

together➤voluntarily➤

to➤give➤coordinated,➤

high-quality➤care➤to➤

Medicare➤patients.

exHIbIt 9.2 Continuum of Care

Provide preventive services and wellness

Perform baseline testing and provide individualized medicine

Deliver episodic care

Manage chronic disease

Provide patient navigation

Benefits: Coordinated care vs. episodic care Reduced readmissions Management of chronic illness across the continuum Ensured high quality of care (primary care provider/team who knows the patient)

PCMH—Organizes team members to coordinate care across the continuum and prevents duplication of efforts

Provide comprehensive discharge instructions

Optimize PAC across the continuum of care

Limit readmission rates Maximize home care and adult day care

Monitor quality metrics Use care coordination and discharge follow-up calls

Use evidence-based clinical protocols

Maximize patient care and limit readmission rates

Deliver episodic care

Acute Care (Hospital) SiloPrimary Care Silo Post-acute Care (PAC) Silo

Transition patient to appropriate PAC

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The Centers for Medicare & Medicaid Services (CMS) has established the Medicare Shared Savings Program, which uses a calculated benchmark as a risk-adjusted surrogate measure of what the Medicare fee-for-service (FFS) expenditures would otherwise have been in the absence of the ACO (CMS 2014b). The ACO is paid for the service as calculated, and when it succeeds in both delivering high-quality care and spending healthcare dollars more wisely, the amount paid will be greater than expenses. In other words, if the costs for treating primary care patients assigned to physicians in the ACO are expected to increase 5 percent next year in a specific geographic area, and the ACO keeps that hike to 2 percent, the providers get to keep some portion of the extra 3 percent. All organizations involved will then share in the savings it achieves for the Medicare program (CMS 2015). The fol- lowing link provides a CMS video on ACOs: http://innovation.cms.gov/initiatives/aco/.

ACOs were established by the ACA, with final rules published in 2011. CMS designed the program to reward value and care coordination, rather than volume and care duplication. The ACA uses ACOs to encourage doctors, hospitals, and other healthcare providers to work together to coordinate care better, and it stresses preventive services designed to keep people healthy. This emphasis helps to reduce growth in healthcare costs and improve outcomes. ACOs become eligible to share savings with Medicare when they deliver that care more efficiently than others providing the same care while meeting or exceeding performance benchmarks for quality of care (CMS 2014a).

Under fully capitated ACOs, the provider assumes the highest risk and receives global payment for services. A capitated payment is a fixed, prearranged payment received by a physician, clinic, or hospital per patient enrolled in a health plan. This system differs from the traditional FFS model that pays for whatever charges are presented. Under other ACO models, if the provider reduces Medicare charges by 10 percent, Medicare gives back 50 percent of the savings, which represent 5 percent savings to be shared with all partners in the ACO.

CMS sponsored the Pioneer ACO model starting January 1, 2012, and initially included 32 organizations. After some organizations dropped out of the experiment, 19 ACOs remained and were compared to similar populations of Medicare beneficiaries (in terms of age, race, and chronic illness). During Pioneer's first two performance years, total spending for beneficiaries was compared to similar FFS beneficiaries. CMS found that the Pioneer spending increase was approximately $385 million less than the spending of similar FFS beneficiaries. This outcome was primarily because of decreased hospitalization, although there were also greater decreases in primary care evaluation and office visits and smaller increases in the use of tests, procedures, and imaging services. CMS observed no difference in all-cause readmissions within 30 days of discharge, but follow-up visits after hospital discharge increased more for ACO-aligned beneficiaries. Patients registered no difference in satisfaction scores (Nyweide et al. 2015).

ACOs do have potential downsides (Herzberg and Fawson 2012). ACOs cannot require patients to use a particular set of providers. Patients are free to seek care from any Medicare provider, in or out of the network. Patients are retroactively assigned to an orga- nization based on where they received the most primary care from the ACO. Regulators

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http://innovation.cms.gov/initiatives/aco/

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worried that providers would game the system by denying costly care. In reality, providers do not know if they might have overusers or noncompliant patients, nor can they focus additional incentives or resources on participants to influence their health behavior. As a result, providers face added financial risks that may be impossible to control. Regulators were also concerned about the requirement to meet benchmarks for quality measurement, governing structure, and information transmission. The administrative costs could add millions to expenses, and whether the expected savings will offset the additional costs is unclear. An organization must weigh these pros and cons before proceeding with enroll- ment in an ACO (Herzberg and Fawson 2012).

In spite of some concerns, there were 585 ACOs in 2015, up 12 percent from the previous year. In 2015, 5.6 million patients, representing 11 percent of Medicare benefi- ciaries, received care from ACOs. An additional 35 million non-Medicare patients received care from ACOs, up 6 percent from the previous year. Collectively, ACOs serve between 49 million and 59 million Americans, representing 15–17 percent of the US population (Oliver Wyman 2015).

m e d I c a l f o u n d at I o n s

One solution to physician–hospital competition is the implementation of the medical founda- tion model, under which independent physicians sell their practices to a medical foundation and then contract with the foundation to provide professional services at the foundation’s practice sites. This arrangement allows hospitals and health systems to create nonprofit legal entities to employ physicians. Medical foundations provide flexibility for hospitals seeking to employ physicians and other providers directly. The medical foundation model allows physicians to be more independent than hospital-employed physicians and is a strategy for improving physician–hospital relationships.

Some states—for example, California, Texas, and New York—do not allow hospitals to employ physicians to provide outpatient services. These states legislate what is known as the corporate practice of medicine doctrine. The rationale for prohibiting employment of physicians by hospitals is derived from the idea that individual physicians should be licensed to practice medicine, not corporations.

A foundation is typically a not-for-profit corporation affiliated with a hospital. The medical foundation model works well in states that prohibit the corporate practice of medicine because the physicians are not employed by the foundation; they only contract with it. Reimbursement for physician services is paid to the foundation, and the foundation then pays the physicians for their services.

Historically, medical foundations have been successful at recruiting physicians and establishing clinics. More recently, however, opposition to medical foundations is growing among individual physicians, small practices, and loosely affiliated independent practice associations. This opposition is growing because hospitals and physicians can jointly par- ticipate in managed care contracts under this model, thereby gaining greater market share

Medical foundation

Arrangement➤under➤

which➤independent➤

physicians➤sell➤their➤

practices➤to➤a➤medical➤

foundation➤and➤then➤

contract➤with➤the➤

foundation➤to➤provide➤

professional➤services➤

at➤the➤foundation’s➤

practice➤sites.

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and more business. This situation increases competitive pressures on individual physicians in small-group practices because they have a limited presence in the overall marketplace. Despite this resistance, the medical foundation model remains attractive to young family- practice physicians just out of their residency training because it provides them adequate compensation, and they do not have to make significant investments in facilities and technology—the clinics furnish these essentials.

H o s p I ta l -o w n e d g r o u p p r a c t I c e s

Hospital acquisition of medical group practices began in the 1990s as healthcare organi- zations created integrated delivery systems. A primary motivator for acquiring medical practices was to gain market share in the local community. Because primary care practices could drive a large number of referrals to a hospital, these practices were the first type of physician group that hospitals sought to purchase. Today, hospitals may purchase a variety of practices, including cardiology groups, orthopedic groups, and neurosurgery groups. Hospitals that purchase medical groups can improve integration, expand patients’ access to care, and foster long-term relationships with their physicians. Medical groups might wish to sell their practices as a result of the growing complexity of medical group management and increasing operating costs.

In 2015, 63 percent of physicians said they were employed by hospital-owned medical groups, and less than a third (32 percent) were in private practice. These figures illustrate the growing trend toward employment in hospital-owned groups. Employment can be a good deal for physicians—compensation includes salary, bonus, and profit-sharing contributions. For physicians in private practice, compensation includes earnings after taxes and deductible business expenses.

In 2015, the average compensation for a primary care physician was $195,000 and the compensation for a specialist was $284,000. Among specialists, the top four earners were orthopedists ($421,000), cardiologists ($376,000), gastroenterologists ($370,000), and anesthesiologists ($358,000). The lowest earners were pediatricians ($189,000), family physicians ($195,000), and endocrinologists and internists (both at $196,000) (Peckham 2015). If employing physicians is part of the business plan, strategic planners must take into account their salaries.

H o s p I ta l I s t s

Another possibility for closer cooperation between physicians and hospitals is the hospitalist model, in which a patient’s regular outpatient physician transfers complete responsibility for the patient’s care to a dedicated inpatient physician when the patient is hospitalized. This physician supervises all of the patient’s inpatient care until discharge. Hospitalist physicians can be hospital employees or members of an independent hospitalist physician

Hospitalist model

Arrangement➤under➤

which➤an➤inpatient➤

physician➤assumes➤

primary➤responsibility➤

for➤managing➤a➤

patient➤on➤admission➤

to➤the➤hospital➤

and➤supervising➤all➤

inpatient➤care➤until➤the➤

patient➤is➤discharged➤

from➤the➤hospital.➤

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group. In 2012, there were approximately 30,000 hospitalists in the United States, an increase from 20,000 in 2008, making hospitalists members of the fastest-growing medical specialty (AAMC 2012).

Use of the hospitalist model has had a positive impact on hospitals’ profitability. Hospitals using the hospitalist model had a return on assets of 3.1 percent, whereas those not using the hospitalist model took a loss, with a return on assets of −1 percent (Harrison and Ogniewski 2004). One study done in public teaching hospitals showed the hospitalist model decreased length of stay, decreased payment denial by 2 percent in spite of increased admissions, and increased average reimbursement per patient day by 22 percent (Lundberg et al. 2010). The rapid growth in hospitalist physicians shows that organizations that have implemented a hospitalist program believe it enhances the quality of care they provide.

While choosing a physician model, strategic planners need to consider hospital size to determine whether a given model is appropriate or feasible. Hospitalists are more prevalent in large, complex hospitals that offer a wide range of clinical services. In this setting, hospitalist physicians may be critical to the coordination of care across multiple clinical service areas. Smaller hospitals offering fewer services may have a smaller need for hospitalists and may best operate under a different physician model. On the other hand, hospitalists can help manage inpatient workload when a limited number of specialists are available, as may be the case in a smaller hospital.

J o I n t v e n t u r e I n I t I at I v e s

As discussed in Chapter 1, joint ventures are created when two organizations create a legal entity to participate in an economic activity. Each party contributes money to the venture and shares in its profits. The combining organizations share control of the joint entity, and the joint entity gains a larger customer base through the combination of each organiza- tion’s customers (patients in the case of healthcare), giving the joint venture a competitive advantage in the marketplace.

By supporting vertical integration, the ACA has created an environment in which hospital and physician joint ventures will continue to grow. The new generation of physi- cians will likely be receptive to business initiatives that provide incentives and measures of success designed to reward improved patient care (Moses et al. 2013). The value of their clinical judgment and their ability to engage patients in the decision-making process have the potential to improve both patient satisfaction and the value of healthcare services. As a result, physicians, nurses, and other clinical providers could become the main sources for clinical innovation. This shift will provide opportunities for joint ventures that more effectively use people, information, and technology.

Increased innovation combined with new hospital–physician enterprises allows synergistic benefits such as shared technology, collaborative research, shared expertise, and increased market share. By combining resources and patient populations, organizations can

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also expand their product lines to increase the availability of healthcare services in the local community. Exhibit 9.3 shows potential joint ventures between healthcare services, includ- ing ambulatory surgery centers, labs, clinics, and hospitals. The legal processes required to establish joint ventures fall on a continuum ranging from merger to affiliation. In the exhibit, the boxes above the arrow reflect the common characteristics required between the joint venture partners for optimum success. On the left side of the continuum, for mergers and acquisitions, these characteristics are less important because one party is usually the controlling party. However, the characteristics’ similarity should be considered in the course of change management if they are not congruent. On the right side of the continuum, there must be similarity in those characteristics (from strategy and vision to operational and financial goals), or the chance of eventual breakdown or failure of the joint venture increases.

Equity-Based Joint Ventures

Equity-based joint ventures, which are based on a new model of business cooperation, move beyond the traditional win–lose business mentality and focus on complementary relationships among physicians, hospitals, and suppliers. The philosophy of such ventures is to absorb new individuals into an organization for purposes of defusing the threat of challenging groups.

Equity-based joint

venture

Organization➤whose➤

ownership➤is➤divided➤

between➤a➤hospital➤and➤

physicians➤on➤the➤basis➤

of➤their➤contributions➤

to➤the➤enterprise.

exHIbIt 9.3 Hospital–Physician

Joint Ventures

ASC*

Strategy and Vision

Values

Trust

Operational Goals

Financial Goals

Labs

Joint Venture Continuum

Clinic Hospital

Merge Acquire Partner Affiliate

*➤Ambulatory➤surgery➤center

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In equity-based joint ventures, ownership is divided between the hospital and the participating physicians. The hospital and physicians create a new organization and con- tribute funds, facilities, or services equal to their ownership proportion. For an equity- based joint venture to succeed, there must be positive relationships among the owners and mutual benefits. For physicians, joint ventures present an opportunity to gain ownership in an organization, have a positive impact on the community, and sustain their practice over the long term.

From a hospital’s perspective, a joint venture does not always have to generate a profit because other benefits may accrue to the organization. For example, the joint venture may enhance recruitment of physicians, increase hospital admissions, or improve access to managed care contracts. Even for-profit hospitals sometimes are willing to participate in unprofitable joint ventures because they may increase revenue farther down the continuum of care or increase hospitals’ percentage of market share, which then becomes a barrier to potential new competitors.

Equity-based joint ventures between hospitals and physicians have demonstrated that they improve clinical treatment and enhance communication between hospitals and physi- cians. However, potential roadblocks are abundant. Where hospital–physician joint ventures have not succeeded, the greatest problems were lack of trust, unequal contribution of capital, and disagreement on overall control (Zasa 2011). To prevent such problems, all parties must agree on the goal, strategic direction, and anticipated financial performance of the joint venture before embarking on it. Board regulation and hospital policy also deter such issues.

Joint Ventures and Profitability

Hospitals engaging in joint ventures with physicians had occupancy rates of 55 percent, compared with 53 percent for hospitals not engaged in physician joint ventures. In terms of scope, hospital–physician joint ventures offered an average of 32 clinical services, whereas hospitals without physician joint ventures averaged 26 clinical services. In financial terms, hospitals with physician joint ventures had a return on assets of 2.5 percent, compared with 1.9 percent for those not participating (Harrison 2006).

p H y s I c I a n e m p l o y m e n t

Instead of pursuing joint ventures or implementing one of the models discussed earlier, hospital strategists may opt to directly hire physicians. As employees, physicians are exempt from the Stark laws (see Chapter 7, Highlight 7.2) and can therefore refer patients for other services in the same hospital. Physician employees are more likely than independent physi- cians to stay with their employer hospital over the long term, which provides the hospital with a consistent workforce possessing critical clinical skills. Employed physicians’ referral patterns are also more predictable. The disadvantages of physician employment include the high cost of recruitment and increased ongoing costs for salary and benefits.

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I n t e g r at e d p H y s I c I a n m o d e l

An integrated physician model is the result of a series of partnerships between hospitals and physicians developed over time. Essentially, it is a joint venture that has become many joint ventures, and all of these joint ventures are connected through congruent goals. For example, an organization following an integrated physician model could include acute care hospitals, nursing homes, affiliated medical groups, primary care clinics, employed physicians, and independent medical groups.

pH y s I c I a n en g a g e m e n t I n st r at e g I c pl a n n I n g When physicians are involved in a hospital’s decision-making process, the hospital and physicians can more easily reach agreement on the values, ethics, and culture of a new business initiative. Physician empowerment is key to increasing physicians’ engagement in the hospital’s future. Empowerment begins with physician participation on the hospital board of directors and on key board committees. The president of the medical staff should be a voting member of the board, and physicians should be members of the strategic plan- ning and finance committees. By soliciting their input, including them in focus groups about new business initiatives, involving them in the creation of the strategic plan and work schedules, and granting them the opportunity to become co-owners of the organiza- tion, hospitals can inspire physicians to commit to new business ventures. For example, if physicians are involved in the development of metrics to be used to evaluate the quality of care the organization provides, they will respond in a positive manner and be less likely to feel resentment if the data show a need for improvement.

Hospital–physician➤integration➤can➤take➤many➤forms.➤Hospitals➤can➤contract➤with➤physician➤ group➤practices➤and➤gain➤greater➤market➤share➤through➤managed➤care➤networks.➤Such➤rela- tionships➤can➤lead➤to➤joint➤ventures➤in➤which➤hospitals➤share➤ownership➤of➤the➤enterprise➤with➤ physicians.➤Finally,➤employment➤of➤physicians➤by➤hospitals➤and➤health➤systems➤is➤a➤growing➤ trend.➤This➤arrangement➤frees➤physicians➤from➤the➤frustrations➤associated➤with➤managing➤a➤ practice➤and➤allows➤them➤to➤focus➤on➤providing➤clinical➤care.

Historically,➤the➤US➤healthcare➤system➤has➤been➤fragmented,➤reducing➤the➤quality➤of➤ healthcare➤services➤provided.➤Innovations➤such➤as➤PCMHs➤and➤ACOs➤illustrate➤Medicare’s➤ commitment➤to➤managing➤across➤the➤continuum➤of➤care.➤Outside➤of➤the➤government➤sector,➤ many➤healthcare➤leaders➤believe➤that➤increasing➤clinical➤integration➤and➤coordinating➤strate- gic➤planning➤between➤hospitals➤and➤physicians➤is➤necessary➤to➤improving➤healthcare.➤Large,➤ integrated➤healthcare➤delivery➤systems➤will➤be➤better➤able➤to➤deal➤with➤future➤healthcare➤ needs➤because➤they➤have➤greater➤access➤to➤capital➤and➤deliver➤clinically➤integrated➤care.

Integrated physician

model

Series➤of➤partnerships➤

between➤hospitals➤and➤

physicians➤developed➤

over➤time.➤

s u m m a r y

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r e v I e w Q u e s t I o n s

1.➤ How➤does➤involving➤physicians➤in➤the➤strategic➤planning➤process➤help➤a➤hospital➤ reach➤its➤goals?

2.➤ Why➤is➤clinical➤integration➤important➤in➤the➤current➤healthcare➤environment? 3.➤ Choose➤one➤of➤the➤models➤for➤hospital–physician➤integration➤discussed➤in➤the➤chap-

ter➤and➤list➤the➤advantages➤and➤disadvantages➤for➤hospitals➤and➤physicians➤under➤ this➤model.

c o a s ta l m e d I c a l c e n t e r e x e r c I s e

According➤to➤Chapter➤9➤and➤the➤Coastal➤Medical➤Center➤(CMC)➤case➤study,➤is➤adoption➤of➤the➤ ACO➤model➤a➤viable➤strategy➤for➤CMC?

c o a s ta l m e d I c a l c e n t e r Q u e s t I o n s

1.➤ How➤would➤you➤assess➤physician➤engagement➤at➤CMC? 2.➤ How➤should➤physicians➤be➤involved➤in➤strategic➤planning➤at➤CMC,➤and➤at➤what➤point➤

should➤you➤involve➤them?➤ 3.➤ What➤do➤you➤see➤as➤the➤future➤of➤physician➤involvement➤at➤CMC?

I n d I v I d u a l e x e r c I s e : s o l o p H y s I c I a n m e d I c a l p r a c t I c e a n d I t s e x pa n s I o n t o a m u lt I p H y s I c I a n g r o u p p r a c t I c e

After➤graduation,➤Dr.➤Debra➤Johnson➤founded➤a➤solo➤medical➤practice➤that➤she➤incorporated➤ under➤the➤name➤Primary➤Care➤Medical➤Specialists.➤Now,➤five➤years➤after➤her➤graduation➤from➤ medical➤school,➤she➤is➤experiencing➤significant➤growth➤in➤her➤patient➤volume.➤During➤this➤ time,➤she➤has➤been➤a➤primary➤care➤physician➤and➤has➤admitting➤privileges➤at➤CMC.➤

Dr.➤Johnson’s➤practice➤is➤located➤in➤Ocean➤County,➤which➤is➤anticipating➤an➤18➤percent➤ population➤growth➤rate➤over➤the➤next➤five➤years.➤Her➤schedule➤is➤already➤fully➤booked,➤and➤ she➤has➤stopped➤taking➤new➤patients.➤She➤is➤considering➤expansion.➤Because➤Dr.➤Johnson➤ has➤no➤formal➤business➤education,➤she➤has➤approached➤CMC➤leadership➤to➤assist➤her➤with➤ some➤strategic➤planning.➤As➤part➤of➤the➤planning➤process,➤Dr.➤Johnson➤shared➤her➤most➤recent➤ business➤tax➤return,➤which➤includes➤the➤following➤income➤statement.

e x e r c I s e s

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Income Statement, 2014

Revenue ($)

➤ Medicare/Medicaid 351,022

➤ Commercial➤insurance 310,949

➤ Other➤patient➤service➤revenue 301,179

➤ Ancillary➤revenue 10,577

➤ Investment➤income 10,000

➤ Contributions➤and➤grants 6,185

➤ ➤ Total➤ 989,912

Expenses ($)

➤ Salaries 500,000

➤ Operating➤expenses 244,165

➤ Benefits 125,000

➤ Facility➤expenses 84,000

➤ Supplies➤ 54,000

➤ Insurance 7,410

➤ Professional➤fees 1,190

➤ ➤ Total 1,015,765

Net➤income –25,853

According➤to➤her➤appointment➤system,➤Dr.➤Johnson➤currently➤sees➤an➤average➤of➤20➤ patients➤per➤day,➤which➤over➤a➤250-day➤annual➤work➤schedule➤represents➤5,000➤patient➤ visits.➤Based➤on➤the➤18➤percent➤population➤growth➤in➤Ocean➤County,➤Dr.➤Johnson’s➤primary➤ care➤practice➤could➤grow➤to➤10➤providers➤over➤the➤next➤five➤years.➤

During➤the➤strategic➤planning➤process,➤CMC➤evaluated➤potential➤downstream➤revenue➤ that➤could➤be➤generated➤from➤Dr.➤Johnson’s➤referrals➤(see➤the➤following➤data).➤

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CMC Downstream Revenue

Service Line Service Volume×Fee Revenue

Inpatient➤ admissions

(5,000➤patients×.025➤admission➤rate)×$1,000➤profit➤ per➤admission➤

$125,000

Laboratory (5,000➤patients×.25➤laboratory➤rate)×$50➤per➤labora- tory➤test

$65,000

Radiology (5,000➤patients×.10➤radiology➤rate)×$75➤per➤radiology➤ image

$37,500

Pharmacy (5,000➤patients×.50➤pharmacy➤rate)×$100➤per➤ prescription➤

$250,000

Total➤revenue $815,000

Based➤on➤this➤information,➤answer➤the➤following➤questions:

1.➤ Is➤Dr.➤Johnson’s➤solo➤practice➤viable➤for➤the➤future? 2.➤ Should➤Dr.➤Johnson➤recruit➤new➤providers➤or➤merge➤with➤another➤practice? 3.➤ Should➤Dr.➤Johnson➤do➤just➤primary➤care➤or➤consider➤a➤multispecialty➤group?➤Identify➤

pros➤and➤cons.➤ 4.➤ Can➤expanding➤practice➤size➤reduce➤expenses,➤increase➤net➤income,➤maintain➤inde-

pendence,➤and➤increase➤contracting➤power? 5.➤ Should➤Dr.➤Johnson➤sell➤her➤practice➤to➤CMC➤and➤become➤an➤employee? 6.➤ How➤many➤years➤should➤the➤contract➤be➤guaranteed➤if➤she➤sells➤to➤CMC? 7.➤ What➤compensation➤model➤is➤appropriate,➤including➤base➤salary➤and➤increases➤

based➤on➤productivity➤or➤downstream➤revenue?➤

Assume➤Dr.➤Johnson➤decides➤to➤expand➤her➤practice➤by➤two➤providers➤annually➤for➤ the➤next➤five➤years.

•➤ Complete➤a➤five-year➤pro➤forma➤income➤statement➤for➤Primary➤Care➤Medical➤Special- ists➤by➤including➤the➤additional➤providers.➤Plan➤on➤two➤providers➤total➤in➤year➤1,➤four➤ providers➤in➤year➤2,➤six➤providers➤in➤year➤3,➤eight➤providers➤in➤year➤4,➤and➤ten➤provid- ers➤in➤year➤5.➤Also,➤budget➤for➤a➤second➤office➤location➤in➤years➤4➤and➤5.➤

•➤ Complete➤a➤five-year➤pro➤forma➤income➤statement➤for➤CMC’s➤downstream➤revenue➤by➤ including➤the➤additional➤primary➤care➤providers➤in➤Primary➤Care➤Medical➤Specialists.

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Agency➤for➤Healthcare➤Research➤and➤Quality➤(AHRQ).➤2015.➤“Defining➤the➤PCMH.”➤Accessed➤

September➤7.➤https://pcmh.ahrq.gov/page/defining-pcmh.

Association➤of➤American➤Medical➤Colleges➤(AAMC).➤2012.➤“Estimating➤the➤Number➤and➤Char-

acteristics➤of➤Hospitalist➤Physicians➤in➤the➤United➤States➤and➤Their➤Possible➤Workforce➤

Implications.”➤Association of American Medical Colleges➤12➤(3):➤1–2.➤

Centers➤for➤Medicare➤&➤Medicaid➤Services➤(CMS).➤2015.➤“Accountable➤Care➤Organizations➤

(ACOs):➤General➤Information.”➤Updated➤August➤31.➤http://innovation.cms.gov/initiatives/

aco/.

———.➤ 2014a.➤ “CMS➤ Releases➤ New➤ Proposal➤ to➤ Improve➤ Accountable➤ Care➤ Organiza-

tions.”➤Published➤December➤1.➤www.cms.gov/Newsroom/MediaReleaseDatabase/Press-

releases/2014-Press-releases-items/2014-12-01.html.

———.➤ 2014b.➤ “Methodology➤ for➤ Determining➤ Shared➤ Savings➤ and➤ Losses➤ Under➤ the➤

Medicare➤Shared➤Savings➤Program.”➤Published➤April.➤www.cms.gov/Medicare/Medicare-➤

Fee-for-Service-Payment/sharedsavingsprogram/Downloads/ACO_Methodology_➤

Factsheet_ICN907405.pdf.

———.➤ 2010.➤ “Affordable➤ Care➤ Act➤ Update:➤ Implementing➤ Medicare➤ Cost➤ Savings.”➤

Accessed➤ September➤ 7,➤ 2015.➤ www.cms.gov/apps/docs/aca-update-implementing-

medicare-costs-savings.pdf.

Harrison,➤J.➤2006.➤“The➤Impact➤of➤Joint➤Ventures➤on➤US➤Hospitals.”➤Journal of Health Care

Finance 32➤(3):➤28–38.

Harrison,➤J.,➤and➤R.➤Ogniewski.➤2004.➤“The➤Hospitalist➤Model:➤A➤Strategy➤for➤Success➤in➤US➤

Hospitals?”➤Health Care Manager 23➤(3):➤310–17.

Herzberg,➤ R.,➤ and➤ C.➤ Fawson.➤ 2012.➤ “Accountable➤ Care➤ Organizations:➤ Panacea➤ or➤ Train➤

Wreck?”➤National➤Center➤for➤Policy➤Analysis.➤Published➤August➤14.➤www.ncpa.org/pub/

ba769.

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http://innovation.cms.gov/initiatives/

http://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2014-Press-releases-items/2014-12-01.html

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