Wk 2 Asssignment

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CHAPTER

2 Organized Delivery Systems

Myron D. Fottler, Donna Malvey, and Keila Rooney

Multihospital systems have been rede�ined as multiprovider healthcare systems to incorporate structural changes in organizational arrangements and to re�lect the provision of a wide range of services beyond acute hospital care. The American Hospital Association (AHA) de�ines a multihospital healthcare system as “two or more hospitals owned, leased, sponsored, or contract managed by a central organization.”1 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft1) This chapter will include multihospital systems, as de�ined by AHA's criteria, but will also cover the broader consequences of system development, including horizontal, vertical, and virtual integration, and other diversi�ication activities. The chapter ends with a case study that looks at a large multihospital/organized delivery system.

No healthcare system in the world has undergone as much structural change as has that of the United States over the past three decades. It has been suggested that the extent and the swiftness of structural change in US hospitals are unprecedented in postindustrial society.2 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft2) Some have characterized this change as fundamental and perhaps revolutionary. Nowhere is this more evident than in the transition to multiprovider healthcare systems. The previous cottage industry of individual, freestanding hospitals has become a complex web of systems, alliances, and networks.

The development of hospital systems in the United States initially integrated facilities horizontally, resulting in the creation of multihospital systems that provided similar acute care services in multiple locations. Later, system capability expanded through vertical integration and diversi�ication into activities that may or may not have been related to a hospital's inpatient acute care business. More recently, expansion has re�lected “virtual” integration that involves relationships based on contracts.3 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft3) This system development re�lects the transformation of multiprovider systems from providers of acute care to providers that are capable of addressing a continuum of healthcare needs.

Given this evolution and their varied arrangements and structures, multihospital systems have been rede�ined as organized or integrated healthcare delivery systems, the theme of this book. Thus, the following questions and issues should be addressed:

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• How and why have multiprovider healthcare systems evolved and changed over time, and how are they expected to change in the future?

• How does the performance of systems compare to the performance of nonsystem organizations?

• How does the performance of not-for-pro�it systems compare to the performance of investor-owned systems?

• What factors are expected to contribute to pro�itability and success?

• Do functions such as governance or organizational structure make a difference in performance?

• What has been the impact of horizontal, vertical, and virtual integration?

• What managerial recommendations can be made concerning systems?

Healthcare System Development

A diversity of arrangements characterizes the con�iguration of US hospitals, including alliances, joint ventures, federations, consortiums, networks, and systems. A variety of environmental forces have shaped the delivery of healthcare services and brought about variations in the development of hospital systems. Preeminent among these forces has been the shift in the industry from an emphasis on providing hospital services to an emphasis on providing healthcare services. An aging population, the increasing demand for chronic care, and new technologies that support alternative delivery systems have focused attention on a broader spectrum of healthcare services.4 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft4) ,5

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft5) Subsequent to this shift has been the recognition that the market for healthcare services is local rather than national in nature.6 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft6) ,7

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft7) Indeed, industry performance has indicated that patients tend to feel allegiance to local hospitals and not to national hospital chains.8 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft8) Thus, consumer choice at the local and regional levels has emerged as a powerful in�luence in the delivery of healthcare services.

The expansion of system capacity through horizontal integration, in which hospitals acquire other hospitals, has been declining, and this decline primarily has been attributed to economic forces. Speci�ically, rising healthcare costs, the shift to a risk-based payment system such as the prospective payment system (PPS), and other cost containment efforts and regulations have negatively in�luenced the horizontal growth of hospital systems. Moreover, these forces have precipitated a trend toward economic concentration, consolidation, and vertical and virtual integration in which both the production and distribution stages of health care are included.9 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft9)

Although the economic concentration of hospitals is not a new trend and has its origins in the 1970s with the growth of investor-owned hospital systems, the shift toward a local and regional orientation is relatively new. Risk-based payment has compelled systems to consolidate, downsize, and divest because a large inventory of hospitals is no longer pro�itable.10

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(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft10) Furthermore, government policies that in the past essentially subsidized hospital acquisitions through reimbursement of much of the acquisition cost now discourage horizontal integration by limiting reimbursement of capital expenditures for investments in facilities.11 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft11)

Shortell has argued that most systems have formed as a defense against an increasingly uncertain, complex, and hostile environment.12 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft12) The primary motivations for system formation have been to maintain or gain market share by becoming more competitive, to increase access to needed capital, to gain exposure to new ideas, and to further career development opportunities for system personnel. Another motivation behind industry consolidation has been the search for economies of scale and economic gain.

To understand fully the evolution of healthcare systems, it is necessary to examine both the external and the internal environments of hospitals (Figure 2.1 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_�ig2_1) ). In the mid- 1960s, the number of systems began to increase dramatically in all ownership categories.13 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft13) By 1980, the number had grown substantially to a total of 267 systems. By 2001, 311 health systems existed in the United States (see Table 2.1 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_tab2_1) ).

The success and rapid expansion of horizontally organized delivery systems originated in a cost-based payment system and a price-insensitive environment that encouraged and rewarded system growth. Medicare reimbursement essentially provided coverage of costs and a reasonable return on investments. Consequently, systems could purchase high-cost, inef�icient hospitals in diverse locations with little risk of failure.14 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft14) ,15 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft15) In addition, investor-owned systems gained access to capital markets by being able to issue stock, and they used this �inancial resource to underwrite their acquisitions.16 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft16)

Although both investor-owned and not-for-pro�it systems pursued horizontal integration, their methods of integration differed. Not-for-pro�it systems accumulated fewer hospitals per system and were less geographically dispersed, whereas their investor-owned counterparts tended to be larger, more geographically dispersed, and dominated by a few large systems.17 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft17)

After the advent of prospective payment in the mid-1980s, organizations began to restructure, vertical integration increased, and diversi�ication efforts focused on developing a continuum of care at the local or regional level. The failure of healthcare reform at the national level and the growing impact of managed care characterized the decade of the 1990s. As competition accelerated, organizations responded by documenting the cost and quality of the care that they provided and by creating both parent corporation —owned and virtually integrated delivery systems.18 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft18)

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Figure 2.1 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_�ig2_1) details the evolution of stages in the development of multiprovider systems. In the �irst stage, patient/outpatient care was the “core business,” and typically, two or more hospitals af�iliated, consolidated services, or merged within a given market to achieve economies of scale (i.e., horizontal integration). In the second stage, the core hospital activities branched off into both forward vertical integration activities, such as physician group practices, and backward vertical integration activities, such as ownership of pharmacies and medical equipment companies. In this stage, there was relatively little coordination of activities across the system. The �irst two stages occurred from the mid-1960s to the mid- 1980s.

The third stage involved efforts to coordinate and optimize physician primary care networks, satellite clinics, home healthcare agencies, and components of the continuum of care. However, the core business remained acute inpatient care, and the other activities generally fed or supported the acute care business. In the fourth stage, it was expected that disease prevention and/or health promotion would replace acute inpatient care as the core business for primary care. The goal of the system was to accept the risk for the health status of populations served, with incentives to keep the population well. Shortell, Gillies, and Devers believed most systems were in stage two or three in 1995.19 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft19)

FIGURE 2.1 Environmental Factors Affecting the Healthcare Industry and Strategic Responses

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Table 2.1 Multihospital Healthcare Systems in 2001 and 2006, by Type of Organizational Control

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As noted in Figure 2.1 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_�ig2_1) , Stage 1 (pre- 1965) predated the development of systems. Stage 2 (1965–1983) was a period of development and unbridled expansion of systems. Hospitals began to integrate horizontally by consolidating into organized healthcare delivery systems. Stage 3 (1984–1993) began with the implementation of prospective payment, declining system pro�its, downsizing, and restructuring. Prospective payment essentially reshaped the healthcare landscape by introducing price competition to the healthcare equation. It transformed hospital reimbursement for services, thereby altering �inancial incentives. Stage 4 (1993– 2000) heralded a period of recon�iguration, rebuilding, and redesigning of systems. During this time, healthcare reform and managed care initiatives were the driving forces behind broad and sweeping changes in the healthcare industry. Chaos and creativity were the norms, as traditional boundaries disappeared and competition gave way to collaboration. The focus was on the provision of comprehensive healthcare services at the regional and local levels.

In the new millennium (Stage 5), the environment has shifted again, as managed care has loosened its control over patient access to providers. This increased access comes at a cost, however, as employers have transferred the burden of increased premium costs to their employees. The issue of increasing costs permeates throughout the healthcare environment of this stage. With 70% of healthcare costs generated by 10% of patients, health insurance plans are beginning to recognize the potential savings of fully reimbursing services dealing with preventive care and disease management by including them in their plans.20 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft20) Healthcare systems are seeking alternative service provision mechanisms as low-cost alternatives to traditional healthcare practice methods such as telemedicine and electronic home monitoring of patients. Increased uses for information technology and innovation are essential components to system survival as health care faces a gradual loss of its share of government spending.21 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft21) As political forces continue their quest for increased healthcare affordability, the medical marketplace struggles to meet the current demands of an aging population coupled with increasing rates of chronic illness. The climbing rates of obesity will further strain the nation's resources and require hospitals to strategize increasing their physical capacity while balancing �inancial constraints. Bioterrorism threats also have emerged and require a coordinated response within systems and between systems and other healthcare providers. In response to this changing environment, healthcare organizations have placed increased emphasis on patient satisfaction, consumer choice, and a customer service orientation. Strategies increasingly re�lect a return to basic “core” services in an attempt to attain or sustain pro�itability. Yet some hospitals remain progressive by seeking to specialize in elective procedures and endeavor on pro�itable niches like hospital- led employer-directed programs.22 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft22)

System Characteristics

Between 1992 and 2001, overall growth of systems was modest. In 1992, 309 systems were reported, but this number increased by only 2 systems in 2001 for a total of 311 systems. By 2008, the total number of systems had swelled to 381. Table 2.1 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_tab2_1) identi�ies the number of systems in 2001 and 2006 by type of organizational control. Not-for-pro�its continue to predominate in terms of numbers, representing about 80% of systems in 2001, but observed a small drop to 78.5% in 2006. Although there were no real changes in the overall numbers, there was a dramatic

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decrease in Catholic systems, which declined by 8.5%, from a total of 71 systems in 1992 to 45 systems in 2001 and 41 systems in 2006. Although investor-owned systems reported few changes in terms of numbers, these systems moved ahead of Catholic systems as the second largest category type. In 2001, investor-owned systems represented 17.7% of all systems. By 2006, investor-owned systems had gained more momentum, jumping up to 78 systems.

Table 2.2 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_tab2_2) provides a breakdown of the number of systems that owned, leased, sponsored, or contract-managed hospitals or other providers in 1992, 2001, and 2006. Although there was approximately a 5% decrease in the number of systems that owned, leased, sponsored, and contract-managed healthcare facilities in 2001, there was also a 5% increase in systems that either owned, leased, or sponsored these facilities. As such, there appears to be a trend toward more �lexibility, with systems increasingly opting for “either—or” type arrangements that re�lect impermanent relationships with other healthcare facilities and providers. This notion is further supported by the data collected in 2006.

Table 2.3 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_tab2_3) shows one measure of �inancial performance (operating margin) for both investor-owned and not-for- pro�it systems between 1996–2001 and 2007. For all systems, the operating margins have fallen in more recent years (1998–1998) as compared to earlier years (1996–1997). This is undoubtedly due to both increased competition in local markets and the impact

Table 2.2 Multihospital healthcare systems in 1992, 2001, and 2006 of the Balanced Budget Act passed by Congress in 1997 which reduced reimbursement for healthcare providers.

Table 2.3 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_tab2_3) also shows that the operating margin of for-pro�it systems consistently exceeds the operating margin of not-for-pro�it systems, although the margin is narrowing. The explanation is that the primary goal of investor-owned systems is to maximize return to stockholders. By contrast, not-for-pro�it systems are responsible to many more key stakeholders, whose goals may con�lict. For example, eliminating unpro�itable services is undoubtedly easier in an investor-owned system with a focus on pro�itability than in a not-for-pro�it system.

It is also interesting to note that the low point for operating margins for all was 1998. Between 1998 and 2001, investor-owned margins climbed signi�icantly whereas margins for not-for-pro�it systems rose

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modestly. The reimbursement relief from the federal government from 1999 to 2001 enhanced the pro�it margins in investor-owned systems to a much greater degree than in not-for-pro�it systems. This may re�lect the greater focus of investor-owned systems on pro�itability, which caused a greater responsiveness to changing reimbursement incentives. In addition to the resolution of Columbia/HCA's problems, greater access to equity capital, greater willingness to cut unpro�itable services, location in areas of high income, renegotiation of managed care contracts, and a focus on the most pro�itable services also may have enhanced pro�itability of investor-owned systems.

Table 2.3 Median Hospital Operating Margin by System Status 1996-2001, 2007

With the majority of hospitals belonging to systems (de�ined as a common corporate ownership) and most of the remaining hospitals being members of alliances of one form or another, the question of the advantages and disadvantages of independent versus freestanding hospitals is no longer relevant.23 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft23) The “market” has spoken and it seems to be saying that independent, freestanding institutions are not competitive with systems (either owned or “virtual”). This appears to be at odds with the existing literature, which provides little evidence on the relative performance of the different arrangements (e.g., system-af�iliated or independent facility), or the types of systems (e.g., those organized by hospitals, insurance corporations, or physician groups). Furthermore, a recent study of Florida hospitals by Tennyson and Fottler indicates that system hospitals have no advantage over freestanding hospitals in terms of their �inancial re-turns.24 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft24) However, according to a Healthcare Financial Management Association (HFMA 2004) survey on hospital capital investment, the industry is advised to allocate a greater level of expenditures on plant modernization and information technology.25 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft25) This costly initiative puts even �inancially sound freestanding hospitals at a distinct disadvantage and forces them to seek af�iliation with multihospital systems to gain access to large sources of funding.26 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft26)

Multiprovider systems of the 1980s, which emphasized administrative economies of scale and engaged in a variety of diversi�ication activities, seemed to add value on almost any dimension of performance.27 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft27) They tended to represent loose collections of hospitals that engaged in relatively unrelated diversi�ication of services. They lacked “systemness” in that they did not behave as a system in which each operating unit understood its strategic

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role relative to other units of the system. Possibly, environmental and market pressures were not severe enough to require more integrative behavior at the time.

As a result, many systems have come to the realization that a system is an integrated, clinical continuum of care for a de�ined population with an ability to provide cost, quality, and outcome data for purposes of accountability. Understanding what a system is and being able to implement that understanding are two different things, however.

The Impact of Managed Care

Managed care has increasingly driven providers toward integration. Healthcare executives who previously were marginally aware of market share have entered into a variety of organizational arrangements that promised continued growth and survival in highly competitive managed care markets. They instituted integrative strategies aimed at improving the market and organizational powers of their system relative to those of their competitors. Montague Brown, a leading healthcare industry expert, has explained that being positioned for survival in a managed care market may represent the crown jewel of purpose of major national alliances. Furthermore, he predicted that regional multiprovider systems would be the best positioned organizations to become providers of choice for managed care or other types of direct contracting arrangements.28 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft28) Early evidence from healthcare studies con�irmed that hospitals joined local systems primarily as a competitive response.29 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft29)

In large part, much of the impact of managed care has resulted from expectations about how managed care would reshape the healthcare industry and how organizations would respond to these changes. For example, it has been reported that in markets dominated by managed care systems, providers have pursued complete vertical integration more rapidly than in other markets because they believed it would help them compete effectively—even though there was no compelling evidence that vertical integration provided a competitive advantage.30 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft30) Similarly, academic medical centers increasingly entered into strategic alliances and other collaborative relationships because they anticipated that integration would make them more competitive in a managed care environment and would assist them in preserving the educational and research missions of their institutions.31 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft31) Boston's Massachusetts General Hospital and Brigham and Women's Hospital, two leading academic medical centers and �ierce competitors, merged with the expectation that the resulting partnership would enable them to be more competitive on cost and quality in managed care markets. A merger typically creates possibilities for ef�iciencies by making it possible to consolidate hospital services such as �inance and human resources, as well as to downsize clinical staffs.32 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft32)

Managed care organizations have continued to revise the mechanisms by which they actually manage costs. They initially relied on price discounts to achieve savings; however, because price discounts did not completely control costs, managed care organizations then moved to include utilization management and capitated payment methods to achieve substantial ef�iciencies.33 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft33) As a result, systems have come to expect managed care organizations to select providers who promise the most ef�icient and cost-

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effective delivery of a comprehensive range of services. Thus, competing in managed care markets requires multiprovider organizations to gain control over such things as physician practice patterns and resource utilization, because these elements play an essential role in determining cost.34 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft34) , 35

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft35)

Effect on Physicians and Hospitals

Managed care has eroded the patient care market for both physicians and hospitals. In addition, physicians view managed care's intervention into day-to-day medical treatment as a threat to their autonomy and incomes.36 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft36) Many independent practitioners have approached hospitals and medical centers, asking to be acquired or to be given employment contracts, because they have recognized that the health services market is becoming increasingly oriented toward managed care.37 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft37) Physicians believe that hospital ownership of medical practices is preferable to managed care because this arrangement can be organized under structures that allow physicians to retain some control over medical practice.38 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft38) In many circumstances, managed care has driven physicians and hospitals to integrate fully into single structures such as physician—hospital organizations or foundations that can gain leverage in negotiating managed care contracts or can contract directly with employers to provide medical services.

Managed care also has in�luenced systems to acquire and/or manage group practices. Previously, physicians actively sought integration with hospitals, although most hospitals, with the exception of larger hospitals, did not aggressively attempt to acquire group practices. When hospitals did enter into formal af�iliation arrangements with physician group practices, it typically was through an employment arrangement rather than a contractual one.39 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft39)

Although many hospitals and physicians have sought more permanent and enduring vertically integrated structures to accommodate their relationships, needs, and joint activities, others expect less permanent and more �lexible relationships in the form of virtual integration. In California, for example, where unmanaged indemnity insurance no longer exists, organizational change is proceeding at an accelerated rate. In this context, complex ownership and contractual relationships with hospitals and outside specialists make up the core of an emerging healthcare delivery system based on capitated care.40 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft40)

Effect on Systems

Many hospital systems have accelerated the development of delivery systems that are capable of providing healthcare services to a large number of people on a capitated basis. They have purchased medical clinics, other hospitals, and even prepaid managed care organizations. Some systems have aligned themselves with insurers in order to expand their markets. However, many systems have had little experience in capitated contract arrangements.41 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft41) In addition, investor-owned

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systems have attempted alliances with not-for-pro�it systems in order to respond to the trend toward managed care.

A 2001 Modern Healthcare survey revealed that greater numbers of investor-owned chains were pro�itable compared to prior years, although losses on investments may have obscured their improvement. Merging institutions of different ownership types is not common, but it has the advantage of increasing patient volume and providing leverage that enhances negotiation for managed care contracts.42 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft42) ,43 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft43)

Clearly, managed care has had a tremendous impact on health care in the United States. It has introduced incentives that call for patients to receive the appropriate type and amount of healthcare service, which generally involves settings outside the hospital.44 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft44) Healthcare executives subsequently have adopted a different perspective regarding their viewpoint of the healthcare delivery system. They have shifted their thinking and outlook toward organizing a delivery system around other facilities, such as outpatient of�ices and sub-and postacute care facilities.45 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft45) Thus, managed care has created incentives for hospitals to look for the most cost-effective means of providing healthcare services. Systems that can provide comprehensive services and can demonstrate high quality and cost-effectiveness will be “winners” in the emerging healthcare environment. Systems or individual providers that are unable or unwilling to move in this direction may well be among the “losers” over the next decade.46 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft46)

System Integration

As systems have developed, they have evolved from horizontal, to vertical, to virtual integration. Integration is horizontal when hospitals buy other hospitals to become multihospital systems. Integration is vertical when hospitals (or other institutions) purchase or sign contracts with other healthcare organizations that are “upstream” or “downstream” from the original institution. For example, a hospital may purchase physician group practices to increase referrals to their inpatient services. Finally, virtual integration refers to horizontally or vertically integrated systems that are based primarily on a series of contracts rather than common ownership.

Corporate Structure

The existence of a corporate structure may be the most obvious characteristic that distinguishes a system hospital from a freestanding institution. Systems have an organizational structure that consists of a corporate or systemwide component and a �ield component of facility managers. At the institutional level, system ownership determines reporting relationships. Within investor-owned systems, the facility's chief executive of�icer (CEO) usually reports to a corporate of�icer. In not-for-pro�it systems, the facility's CEO may report to a hospital board of trustees, a corporate board of directors, or, less typically, to a system corporate executive.47 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft47) With the move toward vertical integration, system organizational structure becomes even more complicated, as the linkages become incorporated into that structure.

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When systems began to form there were no textbook models to follow. The investor-owned systems had already developed a corporate structure, but it was based on ownership of the majority of hospitals in the system. The not-for-pro�it systems learned to create structures largely as they went along.48 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft48) As systems grew, they experienced problems with expanding corporate staffs, bureaucracy, and con�licts of interest between the corporate and �ield components. The potential for con�lict generated is not arithmetic, it is logarithmic.49 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft49) One study of nursing home administrators indicated that those who were a part of a system and reported to corporate of�icers experienced more stress and role con�lict than did their counterparts in freestanding facilities.50 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft50) Systems require managers who have superior mediation skills in order to respond to these challenges.51 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft51)

Governance

Despite the unprecedented, rapid, and dramatic upheaval in the healthcare industry, governance of hospitals remains basically unchanged. For systems, the lack of development in governance is particularly problematic because governance must occur at a variety of levels in order to meet both systemwide and institutional needs. The presence of multiple governing boards to address multiple needs at various levels often causes con�lict, enlarges the bureaucracy, and leads to power struggles. It has been suggested that systems should recognize governance on two levels: (1) the organizational or strategic level of governance where systemwide decisions and policies are considered, and (2) the operational governance level that addresses local operations of institutions and should be advisory to institutional management. The work of system facilities depends on the degree of success achieved through operational governance, so this level should be subsumed under systemwide governance.52 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft52)

Systems have tended to rely on three models of governance. The most popular model, the parent holding company model, is also the most decentralized. Although it has a systemwide governing board, it also has a separate governing board for each institution. The second model is a modi�ied parent holding company model, in which there is one systemwide governing board with advisory boards at the institutional level. Systems that represent large numbers of hospitals tend to use these two models. Systems af�iliated with religious organizations are more likely to adopt the parent holding company model, whereas the investor-owned systems tend to favor the modi�ied parent holding company model. The third model is the corporate model, which consists of one systemwide board with no other boards at any other level. The major advantage of this governance structure is its simplicity and clear lines of authority. Systems that have small numbers of hospitals tend to use this model; often, they are not-for- pro�it or public systems.53 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft53)

The type of governance model in use has not been found to in�luence the strategic decision making for which systemwide boards assume responsibility. In decision making at the institutional level, however, the type of governance model appears to be in�luential. The parent holding company model tends to leave hospital-level decisions to the hospital governing boards, whereas the modi�ied parent holding company model seems to give all boards equal involvement in most hospital-level decisions. The corporate model

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demonstrates greater involvement by the systemwide board in hospital decisions.54 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft54)

The Joint Commission on Accreditation of Healthcare Organizations (JCAHO) has recognized the complexity of system governance and has changed its standards for governing boards accordingly. In 1986, the standards were upgraded to re�lect the complex responsibilities that result from an increase in the number of boards and the dynamic relationships that exist among these boards and all levels of the organization. Speci�ically, if there are multiple levels of governance, the Joint Commission requires mechanisms to ensure communication and participation at all levels. In particular, these mechanisms must ensure that medical staff have the ability to communicate and participate at all levels of governance in matters involving patient care.55 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft55)

Recent political forces have pushed for even greater board accountability to the viability and quality of care delivered by their organizations. Over the past decade boards have been preoccupied with focusing on mergers and acquisitions and on the �inancial and economic aspects of strategic planning. However, the judicial system is further pressuring boards to centralize on quality agendas through verdicts delivered in malpractice cases that “con�irm the medical staff is responsible to the governing board for medical care quality.”56 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft56) Despite the fact that regulation and accreditation standards have changed to re�lect this emphasis, boards have struggled with the task by being largely uninformed and unprepared for the depth of their role. In response, many hospitals have instituted orientation and education programs for their trustees. In 2007, the state of New Jersey escalated the issue a step further; a law was enacted that required hospital trustees to receive at least one full day of formal leadership training. Participation in similar certi�ied training programs is likely to be �inancially favored by payers like Blue Cross and Blue Shield that have already announced their support of educated boards.57 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft57) Thus, this unorthodox precedent could conceivably rede�ine the expectations of boards nationwide in the coming years.

The transition from hospitals to multihospital systems, to organized delivery systems, and to community care networks will require profound changes in governance.58 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft58) The structures and processes of governance suited to one type of organization probably will not work equally well in others. Although systems have been doing a great deal of experimentation in their approaches, there are as yet no de�initive models to suggest what governance structures and processes are likely to work best under differing conditions.

It is clear, however, that all board members need to understand their vision for the system, plans for future structural change, and the interactions of other systems with their governance. It is also important to build trust among all the system components by changing their internal incentives to re�lect concern for system performance and by promoting communication/information exchange across all system components and levels of governance. Finally, the system's multiple boards need a clear de�inition of governance roles, responsibilities, and authority.

Horizontal Integration

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Most systems during the 1980s could be characterized as horizontally integrated. Such systems were expected to offer hospitals several advantages:

• Increased access to capital markets

• Reduction in duplication of services

• Economies of scale

• Improved productivity and operating ef�iciencies

• Access to management expertise

• Increased personnel bene�its, including career mobility, recruitment, and retention

• Improved patient access through geographical integration of various levels of care

• Improvement in quality through increased volume of services for specialized personnel

• Increased political power to deal with planning, regulation, and reimbursement issues

The pursuit of horizontal integration by hospitals has been attributed in part to hospitals' attempts to deal with an increasingly complex and often hostile environment that created intense �inancial pressures and risks that threatened institutional survival.59 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft59) System af�iliation offered hospitals opportunities to reduce or diversify certain facility-speci�ic risks. Hospitals could gain management expertise and access to capital and improve their overall performance.

Systems were able to enhance their performance by “using size and scale to drive certain economies or to respond to certain opportunities such as competitive contracting.”60 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft60) Many of the proposed bene�its of economies of scale in systems may actually be limited, as certain diseconomies of scale have been associated with extremely high corporate overhead expenditures.61 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft61) –63

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft63) According to healthcare analysts, hospital systems generally have failed to integrate fully and have been unable to perform as systems rather than as collections of facilities.64 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft64)

The absence of shared or common institutional interests and organizational culture may contribute to systems' inability to integrate completely. Although not-for-pro�it systems have been more likely to select members based on commonality of missions, investor-owned systems have tended to be more sensitive to existing market conditions, the local economy, and the payer mix.65 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft65) ,66

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft66) Furthermore, many hospitals have formed or joined systems to obtain access to expertise on regulatory matters and to enjoy advantages in the political environment. Af�iliated hospitals can establish a political presence through

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name recognition, a coordinated message, and the �inancial ability to retain political advisors.67 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft67) ,68

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft68) However, systems af�iliation cannot be expected to reduce risks related to general economic conditions or the overall health care industry.69 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft69)

Most analyses provide little support for the cost-reducing promises of horizontal integration. In cases reviewed, integration was often incorporated at an administrative level as opposed to a clinical level that may have yielded greater cost savings.70 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft70) After comparing the 1988 performance of independent and system hospitals in California, Dranove and Shanley found that systems are no more able to exploit economies of scale than are independent hospitals.71 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft71) They found that the bene�its of horizontally integrated hospital systems are more in their ability to market themselves than in the economies they achieve.

Horizontal integration strategies dominated system development during the late 1960s, continued through the mid-1980s, and diminished in signi�icance with the implementation of PPS and the cost reduction programs of other payers. In addition, there may actually be a saturation point for system horizontal integration, and hospital acquisition should be selective. Selection factors have been shown to include market characteristics, mission compatibility, and facility management. Thus, the potential for horizontal integration as a strategy will be limited to �inancing mechanisms and selective acquisitions.72 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft72)

Vertical Integration

Diversi�ication through the integration of clinical services transforms a horizontally integrated system into a vertically integrated one. Vertical integration involves incorporating within the organization either stages of production (backward integration) or distribution channels (forward integration) that were formerly handled through arm's-length transactions with other organizations.73 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft73)

A vertically integrated system is described as offering “a broad range of patient care and support services operated in a functionally uni�ied manner. The range of services offered may include preacute, acute, and postacute care organized around an acute hospital. Alternatively, a delivery system might specialize in offering a range of services related solely to long-term care, mental health care, or some other specialized area.”74 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft74) The purpose of vertical integration is to increase the comprehensiveness and continuity of care, while simultaneously controlling the channels or demand for healthcare services. Thus, vertical integration emphasizes connecting patient services with different stages in the healthcare delivery process.75 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft75)

Vertical integration can occur through a variety of arrangements:

• Internal development of new services

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• Acquisitions of another organization or service

• Mergers

• Leases or sales

• Franchises

• Joint ventures

• Contractual agreements

• Informal agreements or af�iliations

• Insurance programs76 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft76)

The advantage of a vertically integrated delivery system or network (IDS/N) is that uni�ied ownership allows for coordinated adaptations to changing environmental circumstances.77 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft77) In principle, vertical integration provides a unity of control and direction that allows the IDS/N to focus all the energies of the subunits on the same goals and strategies. There is a single mission statement, hierarchy of authority, and “bottom line.” The unity of purpose is essential to truly manage care (as it is currently structured) and underlies the drive toward vertically integrated delivery systems that incorporate primary care physicians, specialty panels, hospitals, and managed care organizations.

If vertical integration worked in practice the way it works in principle, then markets and contracts would be rare.78 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft78) The healthcare system could be structured as one large administered bureaucracy with centralized planning, centralized resource allocation, a single purpose, and a single process. Vertically integrated systems suffer from two weaknesses, however; incentive attenuation and in�luence costs. Vertical integration replaces the entrepreneurship of the owner-managed medical practice with administrative hierarchies where managers and clinicians are paid largely by salary. It also greatly increases in�luence costs, de�ined as the effect of internal struggles for control over resources by various incumbent constituencies (e.g., primary care physicians, specialists, managed care organizations, hospitals, system managers). At the extreme, the vertically integrated system or network could resemble public bureaucracies with a civil service mentality.

A careful analysis of the effects of integration shows that big, vertically integrated, investor-owned healthcare organizations are often clumsy and slow to innovate.79 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft79) They are dif�icult to manage, requiring signi�icant cash infusions and massive managerial efforts to keep their components networked. They typically act to suppress competition and are unresponsive to local communities. Consequently, the results of vertically integrated healthcare organizations have been disappointing. According to one survey, only 17% of hospitals that purchased physician practices achieved a positive return.80 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft80) Conrad and Dowling explained the failure of vertical integration as follows: “Because many of the organizations considering vertical integration are acute hospital systems, expertise may be lacking at both the corporate and institutional levels. Yet expertise—in evaluating and negotiating…and in managing new services—is often the single

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most important ingredient in success.”81 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft81)

Diversi�ication

Diversi�ication strategies in the healthcare industry have mirrored the turbulence and uncertainty in the environment; they have involved introducing new services and deleting others on a trial-and-error basis. Some efforts have been more successful than others.82 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft82) It has become apparent that diversi�ication activities related to the hospital's core business, such as ambulatory care and physician joint ventures, tend to be more pro�itable than those that are only partially or totally unrelated to acute care.83 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft83)

Regionalization

Vertical integration is consistent with the trend toward regionalization because it concentrates resources in local markets. The trend toward regionalization re�lected that 99% of healthcare services delivered in the United States take place within the region in which the patient resides. Thus, systems are shifted in their focus to establish predominance in local and regional markets rather than national ones.84 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft84)

Virtual Integration

It is dif�icult to manage a system that provides many different products or services in many different markets. It is impossible for managers of fully integrated systems to understand all the different products and services in their markets. For this reason, tight coupling and high degrees of vertical integration are not increasing in other parts of US industry. In fact, “decoupling” is occurring as corporations struggle to focus on their “core competencies.”

It is true that healthcare providers will need to be part of a larger organization that provides a wide range of consumer and employer choices, economies of scale, cost-effectiveness, clinical quality, and service quality. It is not true that the only way to achieve these goals is through participation in a fully integrated system.

The advantages of virtual integration, that is, integration through contractual relations (more loosely coupled systems) lie in its potential for autonomous adaptation to changing environmental circumstances.85 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft85) Organizational independence preserves the risks and rewards for ef�icient performance. Although coordination may result from negotiated authority, it must involve collaboration (i.e., creating new value), a dense web of interpersonal connections based on trust, and partners willing to nurture the collaborative relationship rather than simply trying to control it.

Because there is practically no hard evidence of the superiority of any one approach to structuring, it is prudent to proceed with caution. Much of the activity seen in the industry today is an imitation of the actions or presumed actions of others. The downside of all of the emphasis on new acquisitions, new enrollment, and restructuring has been that the consumer has been “lost in the shuf�le.” In the future, consumer choice of providers should increase rather than decrease.86

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(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft86) Therefore, systems that do not provide open access to plans and broad networks of providers are at a competitive disadvantage.

In the future, it is likely to be risky for providers to rely on exclusive partnerships because the winners and losers are unknown. Rather, the emphasis should be on patient satisfaction, patient retention, �lexibility, the availability of options for consumers, minimal paperwork, and multiple capitated contracts/partnerships for providers.

No one structure is necessarily the �inal answer. There are multiple possible paths to achieve increased integration and coordination of clinical services under managed care, and individual market dynamics will determine the appropriate level and structure of integration. Multiprovider systems face a trade-off between the advantages of coordinated adaptation through vertical integration and the advantages of autonomous adaptation through contractual networks. The current hyperturbulence and lack of de�initive evidence makes it dif�icult to predict eventual outcomes. It also indicates the potential downside of giving up autonomy and/or making large capital investments in a vertically integrated (owned) system. The trend today, both within and outside of health care, is toward more contractual relationships and less vertical integration.

System Performance

Fear of managed care has been identi�ied as a motivating force behind improvements in system performance. Modern Healthcare conducts annual surveys of multiprovider systems that provide a comprehensive view of system performance. In 1997 nonpro�it systems outpaced investor-owned systems in terms of growth and pro�itability; by 2001 investor-owned systems were the clear winners. In 2001, investor-owned systems attributed outperforming their nonpro�it counterparts primarily to downsizing and consolidation, as well as to returning to their core missions and services.87 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft87)

From 1997 to 2001, investor-owned systems routinely reported increased pro�itability, whereas nonpro�it systems consistently showed losses. However, the picture is more complicated than this statistic shows. For example, in 1999, despite their losses, nonpro�it systems also reported increases in revenues. This meant that their labor and other operational expenses were increasing at a faster rate than revenues. Investor-owned systems, on the other hand, actually experienced a decline in their revenues, most of which resulted from selling off facilities. In addition, because investor-owned systems are responsible to their shareholders, they can be expected to shift quickly out of money-losing ventures. For example, when Medicare cuts in home healthcare payments were fully implemented in 1999, investor-owned systems divested themselves of home health services.88 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft88)

In 2001, the negative stock market and economic problems led to modest increases for investor-owned systems and small gains for nonpro�it systems, primarily because systems were unable to use their investments to cover losses. In past years, investment portfolios had provided a necessary cushion for both types of systems, which faced �inancial pressures from managed care and federal cutbacks. However, �inancial pressures are expected to continue, along with rising medical liability costs and increasing requirements for investment in information systems, technology, and plant replacement. Which type of system will fare best in the coming years? Investor-owned systems are expected to respond successfully to such challenges because of their greater access to capital and their ability to quickly divest themselves of unpro�itable services and service areas. Meanwhile, nonpro�it systems will most likely continue to

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struggle for survival because they are not able to eliminate costly services and because they often furnish the safety net for their communities.89 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft89)

Healthcare analysts believe that, other than ef�iciencies in labor productivity related primarily to having fewer full-time equivalent employees and lower turnover, system hospitals have not demonstrated comparative advantages over nonsystem hospitals.90 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft90) –92

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft92) Furthermore, although system hospitals have greater opportunities to reduce their costs by sharing administrative services such as legal, data processing, and accounting services, the overhead costs involved in managing these and other activities have been extremely high. Even so, the sharing of services among system member institutions situated near each other may reduce costs by avoiding or eliminating the duplication of necessary, but marginally pro�itable (or unpro�itable), services.93 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft93)

Despite certain potential cost-saving bene�its, primarily in the areas of purchasing and reduction of duplicate services, the creation and expansion of a system can also increase costs. As a system increases or anticipates increasing in size, its executives spend a signi�icant amount of time on planning, policy enforcement, and related activities. They have less time available to devote to the day-to-day conduct of the system's business affairs or the delivery of healthcare services. Then the executives either overextend themselves trying to accomplish both present activities and future planning, or they hire new administrators to whom they delegate day-to-day operations. The quality of management may suffer and/or costs may rise. The better performing systems keep a very tight rein on corporate staff costs.94 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft94)

Managed care increased administrative responsibilities, because it requires monitoring and evaluating patient satisfaction, documenting a variety of aspects of quality of care, keeping track of a variety of contractual obligations and their subsequent transaction costs, and managing the use of both clinical and administrative resources.95 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft95) These new responsibilities called for sophisticated information systems, which were expensive. In addition, high costs may have been caused by additional administrative controls needed to manage medical resources across institutions.96 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft96) –98

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft98)

Arista Associates of Fairfax, Virginia, and Modern Healthcare magazine surveyed 141 system CEOs and examined the 17% who reported operating margins of 4% or more.99 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft99) The survey found that these best-performing systems:

• Focus on core competencies

• Focus on quality of clinical outcomes and service, not size

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• Have not become complacent in their success

• Focus on execution of details

• Focus on quality, not quantity, of physician integration

• Reduce duplication of services

• Control future growth

Another study conducted by Arthur Andersen and the National Chronic Care Consortium, based on interviews with executives from seven systems, concluded that (1) communications are vital to the success of integration; (2) a system hoping to succeed must devote suf�icient staff, dollars, time, and energy to planning, preparation, and training for integration; and (3) systems must research and understand community needs, not make assumptions about their needs.100 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft100)

A View from the Real World

Over the past two decades, hospitals, physicians, and nursing homes have rushed to merge or partner with one another, cheered on by consultants, academics, and experts who claimed that such networking was imperative for these organizations to survive in a highly competitive environment. Although each system should be considered in its unique market and contextual situation, the enormous �inancial, human, and clinical resources devoted to integration have not borne much fruit. Evidence of quanti�iable sustained �inancial or clinical value is scant.101 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft101)

Hospitals were reacting to dramatic changes in their environments by linking together into �irst horizontal and then vertical systems in the 1980s and 1990s. These systems took a variety of forms, from fragile and temporary alliances to full-blown mergers. During the same time period, other industries were abandoning the strategy of building large, complex, vertically integrated organizations. Major American corporations such as IBM, General Motors, and General Electric were downsizing, reducing layers, breaking up complex structures, spinning off marginally related businesses, outsourcing necessary but marginal functions, and refocusing on their “core competencies.”

Healthcare organizations have now followed suit in order to keep up with increased competition. The horizontal and vertical shrinkage trend that now de�ines the healthcare culture has been coined as “�lattening,” indicative of eliminating levels of management and increasing the span of control up to threefold with an extended degree of autonomy as a result.102 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft102) The leaner organizational charts allow for more ef�icient communication and faster decision making, as well as more responsive dispersement of company resources.103 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft103)

Integration Successes

Ten years ago hospitals were acquiring physician practices as fast as they could. Then, one after another, they started losing money on them. Many have now decided to dump the groups, forget integration, and

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just run the hospitals.

Others, like Advocate Healthcare, have stayed the course.104 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft104) Advocate made a �inancial turnaround because it did not treat physician groups like hospital departments. Instead, the system brought in people to run them who are dedicated to the building of physician group practices and know how to run that business. They focus on the operations of the of�ice where health services are delivered rather than how many patients are referred to other parts of the system. Advocate, and other systems that have been successful with integrating physician practices, have gone back to basics: billing, training employees appropriately, writing clear policies and procedures, and maintaining basic management systems. The common themes among those who are performing better than average with integration are setting realistic goals, obtaining physician comments to the system, and managing according to a formal plan.

The creation and maintenance of a strong physician culture through adherence to a clear mission, vision, values, physician involvement, and service was another key to Advocate's success.105 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft105) It runs the group of physician practices like a group practice, as if the physicians are private practitioners. The physicians' income is in proportion to how much revenue they bring in. Advocate now has three separate and distinct group practices, each with separate management teams and physician governance. They have tried to create a culture in which the needs of the group practice are more important than the needs of individual physicians. Although the three have somewhat different cultures, the common elements are standardized billing methodologies, one single information system, and one management system consisting of �inancial reporting, risk management, purchasing, and human resources.

Wisconsin's two-hospital ThedaCare health system also views its 100 physician primary care practices as an essential part of the organization's fabric.106 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft106) Decentralized management empowers physicians to make their own business decisions, which has resulted in a �iscally strong physician practice. Physicians are provided with incentives to meet goals for outcomes as well as �inancial performance, because compensation is based on productivity.

Integration Failures

Most of the practitioner literature talks about system successes, but the reality is that there have been many failures. Recent research, in fact, has suggested that hospitals and hospital systems are perilously close to bankruptcy in the not-too-distant future. Market competition and managed care pressures combined with misguided strategies have contributed to the potential for �inancial disasters. There is some evidence that hospitals systems, in particular, may do better at the local market level where they can acquire the necessary leverage for successful negotiations with managed care plans.107 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft107)

However, it is probably more realistic to assume that these failures derive from a variety of problems and factors that have led to failures in nonhealthcare organizations as well. For example, Enron, which in 2002 exploded into the pages of history by almost causing the collapse of the stock market, illustrated the moral and �inancial failings of a weak and corrupted corporate governance structure. In the healthcare

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industry, there is also evidence that organization and governance may have contributed to failures, or at least declining performance of systems.

The push toward integration of healthcare facilities has resulted in the adoption of more corporate forms of governance and management. As with business corporations, corporate governance structures create complexity associated with large bureaucracies. The result is often organizational ambiguity, whereby roles and responsibilities are not clearly speci�ied and due diligence and monitoring go by the wayside. Two real-world healthcare failures provide interesting examples. Allegheny Health Education and Research Foundation (AHERF) is an example of a failure of a nonpro�it system that suffered from severe governance and organizational problems. Allina Health System in Minneapolis presents an example of an investor-owned system that experienced similar problems, but appears to be on the road to recovery thanks to reorganization and the establishment of new governance structures.

The most conspicuous example of system failure is the collapse of AHERF. AHERF was established in 1983 and subsequently became one of the nation's largest nonpro�it multiprovider systems. In 1998 AHERF also became the nation's largest nonpro�it healthcare bankruptcy. Although AHERF's failure has been attributed to a variety of factors, clearly the organization and reorganization that occurred as the system evolved created bureaucratic layers of diffused responsibility and accountability. The end result was minimal �inancial oversight throughout the system.108 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft108) ,109

(http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft109)

Allina Health System, similar to AHERF, experienced tremendous success initially as it forged a system that included integrated hospital systems and a health plan under one corporate umbrella. But an 18- month federal investigation found Allina to be out of control, with excessive spending on such things as corporate travel and entertainment, overpayments to consultants, minimal oversight activities, and con�licts of interest between the system hospitals and the health plan divisions. Allina has subsequently reorganized, spinning off its health plan, and now each organization has a separate governing board.110 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft110)

Catholic Healthcare West, a San Francisco—based system, which is also the nation's third largest Roman Catholic healthcare provider, is implementing an ambitious reorganization plan in an effort to restore pro�itability, having lost almost $900 million since 1997. The reorganization focuses on streamlined governance systems and centralized management, and is expected to save approximately $100 million annually. For example, the reorganization removes middle layers of governance and management and restores control to a system that has experienced many strategic missteps such as acquiring physician groups. It also restores the focus of the organization to its mission and core services.111 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft111)

Human Resources Management

Because healthcare systems are exceedingly complex and diverse organizational arrangements, human resources management may be among their greatest challenges. These systems require signi�icant numbers of highly skilled and specialized personnel at a variety of levels. However, systems also offer opportunities not found in nonsystem hospitals. They can develop staff-sharing programs between hospitals that not only reduce personnel expenses, but also provide the potential for quality improvements. In addition, systems may have name recognition that facilitates recruitment of personnel. A comprehensive personnel data bank can provide system members with a pool of quali�ied applicants.

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Systems also represent variety, mobility, and job security for employees who can move to different jobs within the system.

The development of career ladders within a system can enhance the system's ability to attract and retain personnel. Promotions and transfers can occur without the employee exiting the system. A corporate of�ice can also provide individual facilities with human resources expertise that they would not be able to afford otherwise. Finally, representing large numbers of employees can facilitate the development of more comprehensive and less expensive bene�its packages that are attractive both to employees and to the system's budget.112 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft112)

During 1992, system downsizing contributed to the increased pro�itability of both investor-owned and not-for-pro�it systems. Downsizing may be easier to manage in a system hospital than in a freestanding facility, because systems have more opportunities to move staff around within the system and, thus, are better able to protect employees' economic security. The stability of employment at one facility within the system can provide job openings for employees displaced by staff reductions at another system facility.113 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft113)

Employees in systems, however, do face the stress of being exposed to the effects of vertical and horizontal integration. Almost no research has investigated the effect of mergers, acquisitions, and other strategies on employees, nor is there a human resources model to deal with the effects of system development on employees. Human resources managers must deal with system changes and ensure that employees are recognized as assets within the system.114 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft114)

Compensation for system executives re�lects the complexity and responsibility of system management. Multihospital system executives earn more than their counterparts in freestanding hospitals and have continued to earn more rapid salary increases along with cash incentives and other perks.115 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft115) Systems also �ind advantages in reduced CEO turnover. CEOs have high-risk relationships with medical staff and boards, and they often lose their jobs because of failing relationships. In a system, the CEO can move to another facility, and the system does not lose an important management resource.116 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft116)

One of the major challenges for a system is to align the interests of physicians with those of the system and promote physician participation.117 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft117) Physicians may have the greatest opportunities to in�luence standards of care in systems. Investor-owned systems, in particular, have promoted physician participation in governance.118 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft118) Yet, physician loyalties often are associated with the individual facility rather than with the larger system. Increasing the numbers of physician administrators within the system, increasing the numbers of physicians on corporate boards, and improving communication with physicians may improve physician loyalty.119 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft119)

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The most pro�itable and ef�icient systems appear to operate with fewer people on their management staffs and pay higher than average salaries to their employees. Financially successful systems have reported spending about one third more on human resources, planning, marketing, and public relations than do their lower performing counterparts.120 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft120) In theory, these advantages should exist for all systems. In practice, many systems restrict themselves to only certain subcategories of personnel. For example, some religious organization-associated systems require or prefer their executives to be practicing members of the religious organization. This obviously restricts the talent pool, as does the practice of paying “below the market” in systems af�iliated with religious organizations.

In addition, the development and enforcement of appropriate standards of professional quali�ications and job performance are crucial to the success of systems. The development and operation of a system are complex and require signi�icant numbers of highly skilled and specialized personnel. The system needs to set and enforce appropriate standards of quali�ication and performance and then recruit individuals who can meet these standards. If this is not done, the anticipated advantages will not be achieved.

Financial Management

Finances have to be centralized in a system. When seeking long-term debt or equity funds, investors are likely to insist on involving all of the related organization's assets. The system needs to approve budget, capital expenditures beyond a given amount, sale or purchase of property, and changes in rate structures.

System hospitals vary in the �inancial responsibilities of CEOs for capital management. Typically, CEOs of individual institutions in investor-owned systems have a reduced role in creating capital; that function normally resides with corporate of�icers. In both investor-owned and not-for-pro�it systems, expenditures that extend beyond yearly budgets routinely require corporate approval. Furthermore, the capital approval process may differ according to system ownership. Investor-owned hospitals tend to rely on authorization from the corporate of�ice, and not-for-pro�it systems usually require approval from both the hospital-level and systemwide governing boards.121 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft121) The success of capital management in�luences the cost and pricing structure and ultimately the ability of the facility to be competitive within its own de�ined market segment;122 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft122) therefore, capital allocation has a prominent position in system management.

Allocating Capital

The traditional capital allocation approaches, which focus on discounted cash �low, net present value, and internal rate of return, may be inappropriate for multihospital healthcare systems. For systems, shaping capital structure involves a systemwide vision and the integration of local and corporate needs in a way that extends beyond the normal capital budget process.123 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft123) The system includes different facilities that have different needs and face different risks. Several facilities can be located in markets with different �inancial performance trends and different future potentials, as well as widely diverse facility, management, and medical staff characteristics.124 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft124) A multifactored model that

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incorporates varying needs and risks, and originates in the capital asset pricing model, can be derived to allocate capital among a variety of member institutions.125 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft125)

Of particular importance to systems is the concept of a system-level mission fund. A member institution whose survival was in jeopardy could receive a signi�icant subsidy from the system to continue its mission. As in a single institution, systems can establish allocations to mission activities based on either an ongoing cash �low subsidy or an endowment model. Often, a combination approach can be employed.126 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft126)

Perhaps the most distinctive and important economic advantage of a system in terms of its capital allocation strategy is the system's ability to minimize the amount of aggregate safety stock that is required to protect the system. Safety stock represents a powerful advantage that re�lects a system's ability to reduce or even eliminate speci�ic risks to individual facilities through diversi�ication of risk across multiple facilities. Thus, as the number of facilities in the system increases, the importance of a single facility's performance declines, and the contribution to safety stock can also be reduced. For systems, this reduction in safety stock requirements frees capital for allocation at other levels within the system and represents a substantial economic bene�it.127 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft127)

Systems should also focus on hospital growth pools that are similar in conceptualization to growth pools at the individual level, but include both system-level and hospital-level risk pools. After making all allocations, systems should assign the remaining capital to this pool in order to provide funding for system-level initiatives such as vertical integration and other diversi�ication activities.128 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft128)

Because the capital allocation process in a system involves both corporate and facility participation, it requires the support of a strong system culture; communication among all participants in the process; an incentive system that associates hospital management's compensation with the overall performance of the system, as well as the individual performance of the facility; appropriate management and �inancial systems; an effective budgeting process; and an implementation plan.129 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft129)

Financial Dif�iculties within a System

Bankruptcy presents special problems for systems and their members. “When dealing with a �inancially troubled hospital that is part of a multihospital system, the problems seem to multiply geometrically.”130 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft130) Legal and practical problems arise from the existence of multiple boards and overlapping memberships on these boards. Fiduciary obligations of board members can con�lict, especially when an action appropriate for one institution may not be bene�icial to the system. Board members with multiple loyalties can be disruptive. Furthermore, statutes and case law of a particular state may support the community or individual hospital interests over the system interests.131 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft131)

Systems have earned higher bond ratings than freestanding institutions and have shown stability in ratings over time, both important considerations for systems. This performance has been attributed to a

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system's ability to diversify risk and size. Rating agencies tend to measure successful system performance by centralized operations and mechanisms for monitoring planning, budgeting, and capital expenditures of system members.132 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft132)

Systems have the potential to increase interest earnings through a cash sweep, a technique designed to eliminate the time lag between receiving and investing funds. It involves a daily electronic withdrawal of funds from all hospital operating accounts and the placement of these funds in one central account where the interest begins accruing immediately. This technique allows the system to eliminate the problem of idle cash in local banks.133 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft133)

Systems also have access to pooled �inancing that permits a member institution to use �inancial resources that would be otherwise unavailable. The �inancial markets have appeared to favor systems as sounder credit risks than independent freestanding facilities. Empirical evidence indicates that systems have generally received higher credit ratings than most independent hospi-tals.134 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft134) There can be disadvantages to this type of �inancing, however. Member institutions may have to submit their assets as collateral, and the system, overall, may �ind that it is subordinating its long-term �inancial goals and depleting its assets in its efforts to strengthen the �inancial position of weaker, less responsible member institutions.135 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft135) The stronger facilities may be forced to pledge or otherwise encumber their assets to support the debt-�inanced operations and activities of the system. The separate long-range plans and goals of stronger member institutions may be subordinated and harmed to shore up other system institutions and to honor pledges and guarantees.136 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft136)

Financially weaker institutions within the system may incur even greater costs if the system functions inef�iciently or becomes overleveraged. High interest, debt service costs, and fees for system corporate services may negatively affect the survival prospects of weaker institutions to a greater degree than the more stable units.

Management Innovation

The upheaval in the healthcare environment has created a variety of pressures for managers, who are now expected to contain costs without jeopardizing quality of care, downsize while simultaneously increasing productivity, and maintain good relationships with medical staffs that have grown increasingly wary of management interference in patient care issues. As expectations for what managers can accomplish increase, so does the demand for managerial innovation. Given the growth of systems and the complexity of these organizations, it is important that these systems promote managerial innovation.

Systems have the organizational resources to encourage managerial innovation. Whereas freestanding hospitals are connected only through ad hoc relationships, systems have the bene�it of group norms and more formal relationships that can be helpful in implementing innovation. Moreover, systems have standardized communication channels that promote the diffusion of innovation. Mature systems, in particular, are likely to foster managerial innovation. As a system matures, it recognizes the importance and value of communication and works to build channels and mechanisms that encourage the sharing of information. Mature systems also usually have a larger resource base from which to implement new programs.137 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft137)

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Technology Assessment

With the rapid increase in technology development and pressures to contain costs without decreasing the quality of healthcare services, institutions are focusing attention on evaluating new technologies. Unlike single facilities, systems must address the needs of multiple facilities that are frequently in multiple locations. Thus, decisions on technologies can occur at the interregional level and involve broader standards of assessment. When the organization extends beyond the local community, community standards may not be appropriate.138 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft138)

The dilemma for systems depends on the extent of decentralization within the organization. A highly centralized system can assist individual hospitals in technology assessment, but the resulting guidelines for adopting or implementing the new technology may be inconsistent with community standards. A decentralized system, on the other hand, can allow local facilities to assess technology within the context of the facility's environment. This approach, however, can lead to expensive duplication.

Risk Management

Systems are positioned to take advantage of legislation that regulates �inancing mechanisms for insurance. Increasingly, systems are obtaining liability and other insurance coverages through alternative methods of �inancing. In particular, risk retention groups, a �inancing mechanism authorized by the Federal Risk Retention Act of 1986, offer systems unique opportunities for a reliable and stable source of liability protection. These groups are essentially insurance companies formed by institutions with similar interests, such as hospitals, to provide any casualty coverage, except workers' compensation. All policyholders must also be stockholders. Unlike traditional insurance companies, which must conform to the regulations of each state in which they operate, risk retention groups are able to operate nationwide once licensed in one state.

Captive insurance companies, another alternative to traditional insurance companies, write coverage for only one employer or one group of employers. Seven states have created tax laws that allow systems to take advantage of this arrangement.139 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft139)

Marketing

Although little is known about the practice of marketing in systems, a study of marketing in multihospital systems revealed minimal differences between investor-owned systems and not-for-pro�it systems.140 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft140) Marketing staffs were larger in investor-owned systems, however, where marketing responsibilities are more likely to be formally speci�ied within the organization chart. The larger staffs tended to be associated with a decentralized approach to marketing. In contrast, not-for-pro�it systems reported smaller marketing staffs and employed a more centralized reporting structure for the marketing function. Overall, investor-owned and not-for-pro�it systems demonstrated remarkable similarities in patterns of in�luence over marketing mix, the status of marketing information systems, and attitudes toward marketing. The move by not-for-pro�it systems to a more aggressive and bottom-line orientation may have made marketing differences of the two systems less distinctive.

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It has become evident in marketing that most hospital markets remain local or regional in nature. Local and regional systems have higher levels of market control in distinct areas than do larger, more geographically dispersed investor-owned systems.141 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft141) The trend toward system strategies that focus on regional and vertical integration is likely to in�luence marketing efforts in systems.

Information Systems

Increasingly, systems are facing new information requirements to accommodate strategies that involve downsizing, reorganization, restructuring, and divestitures, as well as demands by payers for information on the costs of healthcare services. The management of information within systems must facilitate communication between a diversity of operations and across a variety of facilities.142 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft142) In systems, the trend is toward centralizing information systems, with information systems managers reporting either to the CEO or to executive of�icers in charge of operations or �inance. These managers typically face expanded responsibilities that include telephone systems, management engineering, and data communications. In addition, they have increasingly become involved in the implementation of alternative delivery systems through the development of systemwide clinical and managerial information systems. The growth of information systems management within hospital systems re�lects the growing requirements and information needs of diversi�ication and integration strategies.143 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft143)

Healthcare systems linking hospitals, physicians, insurers, employers, and others form the foundation of most healthcare reform proposals. Shared information on health outcomes and costs of care will help identify and encourage the most ef�icient forms of care. This requires the development of a health information network.144 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft144) Such an information network would help to direct patients to the most appropriate settings and reduce redundancies.

In-Depth Case Study: Southeast Medical Center

The following case study involving a large organized delivery system exempli�ies many of the issues described earlier in this chapter.

History and Evolution

Southeast Medical Center (SMC; a pseudonym) was established as a public hospital in the 1920s, just before the Depression. Located in the Southeast, a $1 million bond �inanced the 250-bed facility. Major expansion projects in the 1950s increased the hospital's size to 600 beds. Formal af�iliation with the local university's College of Medicine residency program in the 1970s further expanded capacity. Thus, SMC became a public academic health center and subsequently assumed multiple missions of patient care, teaching, and research. Capital improvement programs were conducted during the 1970s, and in 1982, a massive renovation and construction project ($160 million) added 550 beds to the facility. In the 1980s, a 59-bed freestanding rehabilitation center was opened adjacent to the hospital, and a physicians' of�ice building was constructed next to the hospital. Medical helicopters were also acquired in 1989, expanding SMC's trauma services. In addition to serving as a regional provider for trauma, SMC also furnishes burn, neonatal, and transplant care for the region.

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Responsibility for governance of SMC has shifted over the years. In the early years of operation, a hospital board ran SMC. In the 1940s, the city was given direct control over the hospital. In the 1980s, the state legislature created a public hospital authority (to be appointed by the county commission) to govern the hospital. In the 1990s, the hospital's board of trustees voted to turn operations of the hospital over to a private, not-for-pro�it corporation (501c-3), the SMC Corporation. However, oversight for charity care remained with the county's hospital authority. The SMC Corporation is directed by a 15-member board of directors and essentially manages the organized delivery system through a lease arrangement with the county hospital authority.

Today, SMC is a private, not-for-pro�it academic health center that is accredited by JCAHO. It also serves as the primary teaching hospital for the local university. Approximately 1100 private and university- af�iliated attending physicians and more than 400 resident physicians in the university's College of Medicine residency program serve the community's medical needs. SMC also serves as the clinical site for associate, baccalaureate, and graduate nursing programs for the university and community colleges.

SMC serves as a regional and international referral service with more than 800 acute care beds. SMC has established community centers in a variety of locations, which has created increased access. In addition to specialized medical services, SMC is committed to providing community resources for education, information, and programs aimed at helping residents stay �it and healthy. Four out of ten patients that passed through the SMC's door came from outside the county.

SMC also operates an HMO health plan for charity care patients. In 1991, the County Commission established the SMC Health Plan to operate as a Medicaid HMO or insurance healthcare plan for the poor. The plan reimburses SMC on a case-by-case basis for medical services, but it also negotiates discounted rates and costs with the hospital. During the early 1990s SMC's payment from the health plan dropped substantially. In 1996, the program was under a freeze by the state and could not enroll participants for more than a year.

Thus, SMC is not just the hospital—it is a comprehensive organized delivery system that also includes facilities distinct from the hospital (i.e., SMC Health Plan). In addition, SMC ambulatory care centers are located throughout the county. SMC was the only public hospital in a metropolitan area with a population of one million or more that received no public subsidy. Most citizens believe that SMC was subsidized by their taxes. In 1971, the County Commission agreed to supplement hospital revenues with property taxes. In 1985, the county commissioners passed a quarter-percent sales tax to fund indigent care. The tax was repealed in 1987. In 1991, the county instituted a one-half percent sales tax to fund indigent care at all hospitals in the county, including SMC.

In sum, while SMC receives no public subsidy, it does receive a portion of the half-cent sales tax which depends on the preferences of the county commissioners each year. Unlike a direct subsidy, no public money is ever guaranteed.

As an academic health center (AHC) SMC has multiple, conjoined missions of teaching, research, and patient care. While providing patient care for approximately 40% of the nation's poor, AHCs are struggling to �ind a competitive position in today's rapidly changing healthcare environment. Until recently, they have enjoyed a privileged position atop the healthcare pyramid as a niche provider of tertiary services. With the growth of managed care and reductions in government funding, the ability of AHCs to compete is being drastically undercut.

It is widely recognized that multiple missions of teaching, research, and patient care contribute to the production of costly clinical services that are inconsistent with the demand for less expensive services in

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today's healthcare environment. The majority of the services that AHCs provide are now available elsewhere, such as local community hospitals and specialty private medical practices. Furthermore, it is estimated that roughly 70% of their clinical services can be provided elsewhere at a lower cost. It is believed, for example, that AHCs are approximately 30% more expensive, on a case-mix-adjusted basis, than their nonteach-ing competitors.

As a result, AHCs are losing ground to other hospitals and medical practices. They have become providers of a small number of expensive high-tech services involving unique and complex care. However, they continue to be the predominant providers of the nation's charitable care. As an AHC, SMC re�lects these trends. For example, SMC's organ transplant center and burn unit are unique high-cost services that account for fewer than 2% of the patients treated at SMC each year.

SMC Leadership

In October 1994, the CEO of SMC abruptly resigned. A former county administrator assumed management of SMC on an interim basis. In 1996, SMC selected a new CEO and president. The new CEO left his current job as director of one of the largest public hospital systems in the United States because he had opposed privatization of that city's hospitals. Nonetheless, shortly after coming to SMC, the new CEO began laying out plans for privatization, and at a forum on the future of public hospitals, he publicly announced that privatization was the best path for many public hospitals, including his own, SMC.

Public hospitals deliver a disproportionate share of charity care compared with their private counterparts. Because the number of public hospitals is decreasing, either by conversion or closure, there is concern about where care to the poor will be provided. From 1985 to 1995, the number of public hospitals in SMC's state dropped from 57 to 29. Eight of these hospitals closed and 20 converted to private institutions.

In 1997, the new CEO explained that SMC could only decide its ownership status after it decided who its partners would be and whether it wanted primarily to be a community hospital, a teaching hospital, or a county charity hospital, and “we don't know that yet.” One month later, he would become an advocate for privatization without identifying partners or articulating what it was SMC primarily wanted to be.

The following potential bene�its of privatization were identi�ied prior to conversion:

• Economic freedom—Private, not-for-pro�it hospitals can borrow and spend money more easily than public ones, which need government approval. Conversion could make SMC more competitive in the local market.

• Reduced tax burden—In theory, a more competitive hospital would require less help from state and local taxpayers to stay in the black.

• Reduced regulatory burden—Freedom from state public record laws would assist in strategic planning.

• Less political turmoil—Public hospital boards often get bogged down in politics. Private boards, which operate out of the limelight, generally can make decisions without such intense political pressure.

• Enhanced ability to enter into joint ventures—Essentially, it will become legal for the private institution, SMC, to partner with others, such as a group of doctors, to jointly develop and own

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ambulatory clinics and other outpatient facilities.

• Economic bene�its—SMC could receive much lower interest rates from the bond market.

• Enhanced ability to raise private funds—SMC would be more appealing to potential donors as a private, not-for-pro�it hospital than as an arm of local government.

Potential disadvantages included the following:

• Change in mission—A private SMC might not meet the community's needs the same way a public one must. The hospital could reduce its commitment to needed services such as its burn center and trauma unit, which lose money.

• Reduced charity care—SMC provides millions of dollars in free care to poor and uninsured residents. Some indigent patients might �ind medical care tougher to get if the hospital went private.

• Less public scrutiny—Private hospitals do not necessarily have to comply with the state's open government laws, making it tougher for the community to keep tabs on their successes and failures.

Table 2.4 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_tab2_4) contains the results of a public opinion poll regarding the privatization of SMC. Respondents favored keeping the hospital publicly owned by a 3 to 1 ratio. However, the poll did not attempt to learn whether respondents understood the differences between public and private ownership.

The Strategic Plan: Move and Rebuild, 1997-2002

The strategic plan for SMC centered on privatization; that is, converting SMC to a private, not-for-pro�it corporation, Newco Health Sciences Center, Inc. All other strategic initiatives were based on SMC's conversion to private ownership. The strategic initiatives of the plan were:

• The 1.5 million square foot facility downtown will be demolished.

• A new 450-bed hospital and research complex will be built near the university.

Approximately $100 million will be raised from private donations to fund the new construction. This would address problems of SMC's aging physical plant. Also, the location near the university is preferable because downtown is vulnerable to severe weather disasters such as storms and hurricanes.

• The move near the university will require an estimated $100 million in private funds as well as approval from state healthcare of�icials to transfer the Certi�icate of Need (CON) to the new facility. It should be noted that other growing academic health centers (Portland, Oregon; Birmingham, Alabama; and University of Florida) were unable to raise this much money in private funds.

Table 2.4 Results of a Local Newspaper Poll, conducted March 23, 1997

Opinion on Going Private Should remain public 74% Favor privatization 13% Don't know 13% Support for Remaining Public Non-white 88%

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White 74% African American 96% Concern about Privatization Somewhat concerned 34% Very concerned 28% A little concerned 18% Not concerned 17% • Pro�its from the sale of the current SMC site downtown will be used to create and/or expand satellite

clinics around the county.

The new CEO predicted that SMC would go out of business by the year 2005 unless this plan was adopted. Furthermore, he projected a $14.3 million pro�it by 2005 if the plan were implemented. The former SMC president asked the new CEO to explain what would be a fallback plan in the event things didn't go as planned. The new CEO responded that none existed. Alternatives to privatization had been considered, but none were acceptable.

The unacceptable alternatives to privatization included:

• selling the hospital to a private for-pro�it corporation

• closing the hospital

• asking for a public bailout in the form of a tax subsidy

In addition, the “Shands Model” was held out as a possible future for SMC as a private hospital. The Shands Model refers to Florida's Shands Hospital, which hit bottom in the late 1970s. As a public academic health center, Shands couldn't afford to make needed safety improvements or hire enough talented workers. Because lawmakers never provided the money executives believed was needed to run a top health center, Shands Hospital converted to a private, not-for-pro�it corporation in 1980. Shands ran a budget surplus that year and experienced 17 consecutive years of “record-breaking” �inancial performance. Privatization was credited with turning things around because it freed the hospital from political and �inancial constraints. SMC of�icials and board members who supported converting SMC to private status used the Shands Model as a reference. However, Shands, unlike SMC, receives a substantial state subsidy of approximately $10 million annually.

Financial Pressures and Charity Care

Much of the impetus for SMC's conversion was �inancial. According to the new CEO, SMC was not likely to survive �inancially as a public institution. He predicted a $31 million loss by 2001 if the hospital's governing board failed to make the hospital private. The auditors, who were retained to verify accuracy of these �igures, put the number closer to $44 million. Under a worst-case scenario, the auditors said losses could reach $70 million. Clearly, the new CEO was not exaggerating the precarious �inancial future facing SMC.

SMC lost market share in the county every year since 1992 (dropping from 23.4% to 15.7%). More than half of SMC's beds were empty each night, and SMC continued to see fewer indigent, Medicare, and Medicaid patients than its competitors. Although SMC's revenues grew by $7 million between 1992 and 1996, expenses increased by $31 million, and annual net income dropped from $14 million to a loss of $46 million. Cash reserves also dropped substantially.

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One of the most contentious issues that surfaced in the debate over privatization was the impact on the indigent care mission. Many worried that SMC, as a private entity, would not retain the same commitment to care for the poor and uninsured. Similar fears had sunk previous attempts to privatize SMC in 1990. This time, assurances were made by SMC's president, of�icials, and others that the hospital's mission would not change because of ownership. SMC's commitment to indigent care would remain a core mission and top priority. Furthermore, the County Hospital Authority would legally retain oversight authority for charitable care. Yet questions were raised about the public hospital authority's ability to carry out the state-mandated mission to serve the poor if SMC went bankrupt. The lease arrangement was also questioned because it did not specify how good, accessible, or extensive the charity care must be.

Despite these unanswered questions, the county of�icials approved SMC's request to become a private, not-for-pro�it corporation on the strength of the argument of SMC's CEO that such a move would preserve the hospital's commitment to charity care.

Less than two years after the vote to privatize SMC, the new CEO testi�ied under oath that caring for the poor was no longer SMC's top priority. County of�icials now admit that they should have done more than rely on his promise—they should have (1) created an effective method for overseeing the hospital's contractual obligation to treat the poor, and (2) determined what sanctions or punishment would be used if SMC violated the lease agreement. A private SMC, without a commitment to serving the indigent, would place an additional burden on the county, which is required by state law to provide health care for poor people.

The Aftermath of Privatization

Ironically, in its �inal year as a public institution, SMC showed a pro�it of more than $4 million. As a private hospital, its losses have increased dramatically from 1997 to 2000. Unexpected losses were not part of the strategic plan to “move and rebuild.” The CEO predicted a $7.2 million pro�it for SMC in its �irst year as a private hospital, but the hospital lost nearly $6 million in the �irst two months. SMC and its parent company lost $12.7 million that �irst year—$11.5 million on the hospital and $1.2 million on the health plan. Confronted with these losses, the CEO continued to argue that SMC was on the right course. In addition, he and his staff attributed the losses to forces outside the hospital's control, including the Federal Balanced Budget Act, which reduced hospital funding, and an increase in the number of patients served by managed care in the region.

However, it turns out that the hospital's most signi�icant losses were the result of the hospital's inability as a private corporation to retain “lien authority” and essentially be �irst in line to collect money from the accident victims it treated. Lien authority did not automatically transfer to the hospital when it converted to a private corporation. The county attorney, who now represents the public hospital authority, warned that the loss of lien authority could signi�icantly cost SMC in incollectable revenue—as much as $20 million annually. The lien authority matter was raised prior to conversion, but had been dismissed by the new CEO, his staff, and consultants as not being a potential problem.

SMC was now mired in �inancial, political, and legal problems. Employee layoffs were anticipated, but multimillion-dollar losses were not. Many critical issues remain unresolved following SMC's conversion. For example, in order to sell the land on which the current hospital stands, the county would have to pay for demolition as well as removal of asbestos and hazardous waste cleanup. In addition, it has become clear that many important issues had been overlooked in estimating the impact of privatization. The hospital's loss of lien authority as a collection tool has led to unexpected poor �inancial performance and projections of major future losses (i.e., $20 million annually) for SMC. In addition, because the hospital had

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used lien money to help cover the cost of emergency care for trauma victims, some worried that SMC would be forced to reduce its trauma services. SMC of�icials now say the lien authority is crucial to �iscal turnaround.

In addition, when SMC went private it lost the �inancial protection that government agencies enjoy from lawsuits (litigation damage cap). Although legislative remedies are being pursued in an attempt to restore lien authority for SMC, the resolution of this issue appears elusive for the time being. The County Commission appears unlikely to grant SMC lien authority.

Indigent care clearly slipped as a top priority for SMC and became merely one of many priorities. In addition, the move near the university is on hold. SMC also explored buying other hospitals, the price of which could reach $200 million. How the purchase of these hospitals �it with the strategic plan was never explained.

Finally, SMC was not able to keep its meetings secret despite conversion. There has been intense media scrutiny, and local newspapers are suing SMC in order to open the hospital's records. Furthermore, the State Supreme Court recently ruled that (1) privately leased hospitals cannot meet in secret and cannot keep records from the public, and (2) it is illegal to transfer authority from a public to a private board in an effort to avoid the sunshine laws—essentially what SMC did.

The College of Medicine began to be concerned about how it would train medical students and resident physicians if its main teaching hospital could not survive. The patient census was dropping, employees were being laid off, and morale was deteriorating. The hospital began to look like a dinosaur on the brink of extinction in a hostile healthcare environment. Could a multiprovider teaching hospital and trauma center survive in this region?

The New Plan and New Leadership

In 1999, the physician leadership met to lay out a plan to show the community why the hospital was so essential. Local political leaders and members of the media were invited to view the hospital and its various programs one at a time. These individuals came, listened, wrote, and called their colleagues. The community became aware of the value of a robust and healthy mul-tiprovider system. The Chamber of Commerce, the County Commission, and the County Legislative Delegation worked together to save SMC.

After a consultant's review, these groups spearheaded legislation that ultimately improved reimbursement for indigent care for hospitals across the state, including SMC. During that time, the SMC governing board selected another CEO with a mandate to turn the hospital around. This “turnaround” CEO went to work repairing morale, bringing in a new administration team, and assigning a broad range of tasks to existing and talented administrators. He met with employees on all three shifts, listened, and dealt with issues. Business practices improved dramatically. Managed care contracts were renegotiated. Patient- and physician-friendly operations became the mantra.

As operations improved, more physicians and patients came and the census increased. Admissions, ER visits, and surgeries all increased dramatically. Most of the increased occupancy has been in tertiary care. The improved �iscal viability allowed for the development of new programs (i.e., lung transplants and liver transplants). New state-of-the-art equipment was installed and the physical plant repaired. Finally, the hospital has not diminished its safety net healthcare services for the medically indigent.

Lessons Learned

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This organized delivery system has experienced many ups and downs over the years as SMC's priorities have shifted. The leadership team in the mid-1990s tried to totally privatize the system and focused on legal and organizational restructuring rather than the core mission of patient care. This restructuring was in response to pressure from politically oriented board members who brought in a CEO speci�ically to privatize the hospital. The privatization has been a mixed blessing, with many unanticipated negative consequences. One of the major consequences of privatization, which negatively impacted revenue, was SMC's inability (as a private corporation) to retain lien authority to collect money from accident victims.

When the new leadership team arrived in 1999, it began to focus on meeting the needs of both physicians and patients. The physicians became integral members of the leadership team. The focus shifted to providing high-quality clinical care with high-quality service rather than handling legal and organizational structure issues. The new CEO had been given the authority by the board to focus on the core mission and has done so successfully.

A second major factor in the turnaround was the successful political efforts of the new administration to generate additional state revenue for indigent care, which bene�ited all hospitals in the state. This was accomplished through a political coalition spearheaded by SMC with support from many political and community groups.

The following lessons can be derived from this case study:

• The organizational structure, legal structure, and size of an organized delivery system may be less important in determining organizational performance than previously thought.

• The quality of the leadership team and its ability to communicate a common mission and vision to key stakeholders may be far more important than organizational structure in enhancing organizational performance.

• Political decision making to bene�it a small group is antithetical to organizational performance.

• A focus on internal operations to serve physicians and customers is a fundamental necessity for achieving high levels of organizational performance.

Managerial Implications and Recommendations

The jury is still out on the future of organized delivery systems. It is unclear whether the many problems and issues identi�ied here and elsewhere are due to a �lawed strategy, �lawed implementation (leadership), or both. Clearly, multiprovider integration has not worked well either in American industry or in health care. The point is not to lay blame when systems struggle or collapse. Rather, we need to identify managerial processes or methods that will enhance the probability that systems will survive and prosper. The overriding goal of systems should be to provide maximum value to the healthcare customer.145 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft145)

The fundamental question is, What types of systems, networks, and alliances are best able to compete effectively and deliver cost-effective care? At this time, however, there is no de�initive answer to this question, because there is almost no evidence associating different types of organized arrangements with successful performance or failure.

The future of healthcare systems is highly speculative, given the volatility of markets and future initiatives for healthcare reform. As the government's role in health care expands, these systems become

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more vulnerable to shifts in government policy.

It seems likely that most multiprovider healthcare systems will emerge successfully from their “growing pains” and continue to solidify their position in the healthcare market as long as they are virtually integrated rather than vertically integrated.

Health care will be purchased primarily on a local or regional basis. Quality and value will be increasingly important to patients who once again have a choice of provider. Fewer resources will be available to deliver care, and the delivery of health care will continue to shift from acute care to ambulatory settings. Barry noted the importance of a system CEO being a “change agent” in this future environment:

Those who can understand and embrace change; those who can transform traditional but key values to tomorrow's environment; those who can educate their boards of trustees, medical communities, and the community at large; and those who can “right size” the production activities of their organizations, and provide both high quality and cost-effective services will be the winners of tomorrow.146 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_ft146)

Recommendations

• Healthcare executives in multiprovider healthcare systems need to allow �lexibility for member institutions to respond to speci�ic local markets while providing a clearly articulated and well- understood vision for the system.

• Each system should develop a detailed mission statement and set of behavioral norms (i.e., culture) shared by each facility within the system in order to enhance cohesiveness.

• Each system should develop a formal strategic plan for the system with input and a high degree of interaction among the corporate of�ice and institutions in all geographic regions.

• Each system should develop and implement explicit measures for quality of care, patient satisfaction, ef�iciency, and community bene�it, and then provide these data to purchasers and other key stakeholders.

• Each system should develop an organizational structure that is simple, lean, �lat, responsive, customer-driven, risk-taking, and focused.

• Governance at the corporate level should be strategic in nature, whereas governance at the institutional level should be operational in nature and focused on local community/region needs and concerns.

• Systems should provide formal and informal education for those responsible for governance at all levels in the system.

• Systems should provide a clear de�inition of governance roles, responsibilities, and authority among the system and institutional boards of its component parts.

• Systems should provide the leadership required for the individual units of a system to think in terms of overall system performance rather than just in terms of the particular unit's performance.

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• Only institutions that �it a particular culture and strategy should be invited to join or remain a member of the system.

• Systems should align physician incentives and achieve clinical integration.

• Systems should develop information systems to support the integration of clinical and managerial information.

• Systems should use their mission and values as a guide in making dif�icult trade-off decisions.

• Systems should change their incentive structures to re�lect concern for performance of the system as a whole, not just the individual components.

• Systems should own fewer facilities and contract for most services so that they are virtually integrated rather than vertically integrated.

• Systems should buy or contract for services only if the additions will add value to the systems' customers and are compatible with the existing mission, values, goals, and culture.

• Systems should allow the individual operating units within the system to have suf�icient autonomy to be responsive to the needs of their local customers.

• Systems should focus on core competencies rather than trying to be all things to all system components.

• Systems should not allow success to breed complacency. Each integrative step must be evaluated for systemwide effects.

• Systems should focus on quality rather than the size of the program or system being integrated.

• Systems should focus on quality rather than quantity of physician integration.

• Systems should place high-performing executives in key positions to implement their integration plan.

• Systems should target selected patient populations and payers.

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14 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn14) . Risk. Multihospital systems: the turning point. 46–46.

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16 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn16) . Smith, Virgil. Multihospital systems. 54–54.

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27 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn27) . Shortell et al. Reinventing the American hospital.

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29 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn29) . Luke, et al. Local markets and systems. 571.

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33 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn33) . Shortell, et al. Reinventing the American hospital. 133.

34 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn34) . Brown. Mergers, not working, and vertical integration.

35 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn35) . Shortell, et al. Reinventing the American hospital.

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38 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn38) . Unland J. Group practices and hospital af�iliation of medical practices. Health Care Strategic Management. 1993;11(3):15–15.

39 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn39) . Burda D. Most hospitals slow to join with group practices. Modern Healthcare. 23(34):33.

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41 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn41) . Kenkel, PJ. Filling up beds no longer the name of the system game. Modern Healthcare. 1993;23(37):39–39.

42 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn42) . Greene J, Lutz, S…A down year at not-for-pro�its; for-pro�its soar. Modern Healthcare. 1995;25(25):43–43.

43 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn43) . Nemes J. For-pro�it hospitals waving goodbye to era of high prices. Modern Healthcare. 1993;23(12):33–33, 37.

44 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn44) . Shortell, et al. Reinventing the American hospital. 133.

45 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn45) . Robinson, Casalino. Vertical integration.

46 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn46) . Brown. Mergers, not working, and vertical integration.

47 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn47) . Smith, Virgil. Multihospital systems. 59–59.

48 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn48) . Kaiser LR. The future of multihospital systems. Topics in Health Care Financing. 1992; 18(4):36.

49 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn49) . Ibid. 50 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn50) . McGee GM, et al.

The impact of corporatization on administrator stress in nursing homes. Health Services Management Research. 1992;5(1):54–54.

51 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn51) . Kaiser. The future of multihospital systems. 43.

52 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn52) . Toomey RE, Toomey RK. The role of governing boards in multihospital systems. Health Care Management Review. 1993;18(1):21–21.

53 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn53) . Morlock LL, Alexander JA. Models of governance in multihospital systems: implications for hospitals and system-level decision-making. Medical Care. 1986;24(12):1118–1118.

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54 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn54) . Morlock, Alexander. Models of governance. 1122–1122, 1125–1125.

55 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn55) . Ibid, 1134. 56 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn56) . Gautam KS. A call

for board leadership on quality in hospitals. Q Manage Health Care. 2005;14(1):18–18. 57 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn57) . Becker C. Getting

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evolution of multihospital systems. 180. 60 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn60) . Risk. Multihospital

systems: the turning point. 47. 61 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn61) . Cleverly WO.

Financial and operating performance of systems: voluntary versus investor-owned. Topics in Health Care Financing. 1992;18(4):63–63.

62. Ramirez TL. Introduction to multihospital systems. Topics in Health Care Financing. 1992;18(4):9–9. 63 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn63) . Shortell. The

evolution of multihospital systems. 181. 64 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn64) . Friedman L, Goes,

J. Why integrated health networks have failed. Frontiers of Health Services Management. 2001;17(4):3–3. 65 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn65) . McCue, et al. An

assessment of hospital acquisition prices. 294–294. 66 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn66) . Shortell. The

evolution of multihospital systems. 178. 67 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn67) . White. The

“corporatization” of US hospitals. 105. 68 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn68) . Ramirez.

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TR. Capital allocation techniques. Topics in Health Care Financing. 1992;19(1):68–68. 70 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn70) . Thaldorf C,

Liberman A. 2007. Integration of Health Care Organizations: Using the Power Strategies of Horizontal and Vertical Integration in Public and Private Health Systems. 2007; 26(2):116–116.

71 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn71) . Dranove D, Shanley M. Cost reduction or reputational enhancement as motive for mergers: The logic of multihospital systems. Strategic Management Journal. 1995;16(1):72.

72 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn72) . Alexander JA, Morrisey MA. Hospital selection into multihospital systems: the effect of market, management, and mission. Medical Care. 1988;26(2):159–159.

73 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn73) . Shortell. The evolution of multihospital systems. 207.

74 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn74) . Conrad, Dowling. Vertical integration in health services. 10.

75 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn75) . Ibid. 76 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn76) . Ibid, 11. 77 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn77) . Robinson, Casalino.

Vertical integration. 78 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn78) . Ibid. 79 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn79) . Herzlinger R.

Market Driven Health Care. Boston, MA: Addison-Wesley Publishing Co; 1997. 80 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn80) . Jaklevic MC.

Buying doctor's practices often leads to red ink. Modern Healthcare. 1996;26(25):39.

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81 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn81) . Conrad, Dowling. Vertical integration in health services. 21.

82 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn82) . Alexander JA. Diversi�ication behavior of multihospital systems: patterns of change, 1983–1983. Hospital and Health Services Administration. 1990;35(1):83–83.

83 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn83) . Shortell SM. Diversi�ication strategy bene�its innovative leader. Modern Healthcare. 1990;20(10):38.

84 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn84) . Brown M, McCool B. Health Care Systems: Predictions for the Future. Health Care Management Review. 1990;15(3):87–87.

85 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn85) . Robinson, Casalino. Vertical integration.

86 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn86) . Health Care Advisory Board. Emerging from Shadows: Resurgence to Prosperity. Washington, DC: Health Care Advisory Board; 1995.

87 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn87) . Galloro V, Piotrowski, J. A Successful Operation. Modern Healthcare. 2002;22(21):28–28.

88 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn88) . Bellandi D, Kirchheimer B, Saphir A. Pro�itability a matter of ownership status. Modern Healthcare. 2000;20(22):24–24.

89 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn89) . Galloro and Piotrowski, “A Successful Operation.”

90 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn90) . Tucker LR, Zaremba RA. Organizational control and the status of marketing in multihospital systems. Health Care Management Review. 1991;16(1):41–41.

91. Shortell. The evolution of multihospital systems. 183. 92 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn92) . Dranove D, et al.

Are multihospital systems more ef�icient? Health Affairs. 1996;15(1): 100–100. 93 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn93) . Ramirez.

Introduction to multihospital systems. 1–1. 94 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn94) . Greene J. 1992.

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95 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn95) . Robinson, Casalino. Vertical integration.

96 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn96) . Ramirez. Introduction to multihospital systems. 5.

97. Cleverly. Financial and operating performance of systems. 68. 98 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn98) . Dranove, et al. Are

multihospital systems more ef�icient? 102. 99 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn99) . Bilynsky U.

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100 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn100) . Egger E. Integration the right strategy despite health executives' increasing apprehension. Health Care Strategic Management. 1999;17(6):10–10.

101 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn101) . Friedman L, Goes J. Why integrated health networks have failed. Frontiers of Health Services Management. 2001;17(4):3–3.

102 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn102) . McConnell CR. Larger, Smaller, Flatter: The Evolution of the Modern Health Care Organization. 2005;24(2):177–177.

103 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn103) . Galloro V. Reorganized, re-energized: Some for-pro�it chains are shaking up their organization charts as well as their strategic plans to better cope with competition. Modern Healthcare. 2006;36(22):6–6.

104 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn104) . Lauer CS. Physician practice turnaround in an integrated system. Modern Healthcare. 2000; 32(12):39–39.

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105 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn105) . Ibid. 106 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn106) . Tierman J. A

pro�itable practice. Modern Healthcare. 2001;31(38):46–46. 107 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn107) . Burns LR,

Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Affairs. 2000;19(1):7–7.

108 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn108) . Ibid. 109 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn109) . Topping S,

Malvey D. Management of academic health centers: the past, present, and future. In: Savage GT, Blair JD, Fottler MD, eds. Advances in Health Care Management, Vol. 3. Amsterdam: JAI/Elsevier Science; 2002:265– 265.

110 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn110) . Galloro V. Report grounds Allina. Modern Healthcare. 2001;31(40):14–14.

111 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn111) . Bellandi D. CHW pulls in the reins. Modern Healthcare. 2001;31(7):4–4.

112 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn112) . Ramirez. Introduction to multihospital systems. 5–5, 11.

113 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn113) . McLaughlin T. Finding jobs for 1200 laid-off employees: Health One's goal. Hospitals. 1992;66(1):43–43.

114 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn114) . Kaye GH. Multis, mergers, acquisitions, and the healthcare provider. Nursing Management. 1989;20(4):54–54.

115 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn115) . Evans M. Competition still driving compensation. Modern Healthcare. 2007;37(30):S1–1.

116 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn116) . Smith, Virgil. Multihospital systems. 66–66.

117 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn117) . Gregory D. Strategic alliances between physicians and hospitals in multihospital systems. Hospital and Health Services Administration. 1992;37(2):247–247.

118 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn118) . Burns L, et al. The impact of corporate structures on physician inclusion and participation. Medical Care. 1989;27(10):967– 967.

119 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn119) . Koska MT. Systems �ight uphill battle to gain physician loyalty. Hospitals. 1990;64(6):60, 62.

120 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn120) . Greene. Healthcare systems' newest balancing act. 56, 58.

121 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn121) . Smith, Virgil. Multihospital systems. 64.

122 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn122) . Schwartz GF, Stone CT. Strategic acquisitions by academic medical centers: the Jefferson experience as operational paradigm. Health Care Management Review. 1991;16(2):39–39.

123 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn123) . Albertina RM, Bakewell TF. Allocating capital systemwide. Health Progress. 1989;70(4):26–26.

124 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn124) . Federa, Miller. Capital allocation techniques. 72.

125 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn125) . Albertina, Bakewell. Allocating capital systemwide. 21, 26.

126 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn126) . Federa, Miller. Capital allocation techniques. 68–68, 73–73.

127 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn127) . Ibid, 74–74. 128 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn128) . Ibid, 75. 129 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn129) . Ibid, 77–77. 130 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn130) . Gerber L,

Feinstein FI. When the system can't save the hospital: a practical overview of workouts and bankruptcy

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alternatives. Topics in Health Care Financing. 1992;18(4):46–46. 131 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn131) . Ibid, 50–50. 132 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn132) . Anderson HJ.

Sizing up systems: researchers to test performance measures. Hospitals. 1991;65(20):33–33. 133 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn133) . Solovy AT. Multis

sweep cash, boost investment income. Hospitals. 1988;62(5):74–74. 134 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn134) . Ramirez.

Introduction to multihospital systems. 6. 135 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn135) . Ibid, 6–6. 136 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn136) . Ibid, 12. 137 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn137) . McKinney MM, et

al. Paths and pacemakers: innovation diffusion networks in multihospital systems and alliances. Health Care Management Review. 1991;16(1):17–17.

138 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn138) . McGuire P. Kaiser Permanente's New Technologies Committee: an approach to assessing technology. Quality Review Bulletin. 1990;16(6):240–240.

139 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn139) . Taravella S. Risk management: frustrated healthcare systems seek alternatives to traditional insurance. Modern Healthcare. 1988;18(20):30–30, 36, 41.

140 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn140) . Tucker, Zaremba. Organizational control and the status of marketing. 47, 53–53.

141 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn141) . White. The “corporatization” of US hospitals. 103.

142 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn142) . Werner TL. A new approach to decision support at Adventist Hospital System/Sunbelt. Computers in Healthcare. 1990;11(3):49–49.

143 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn143) . Hurwitz M. Multis move to centralize IS decisions. Hospitals. 1988;62(5):75.

144 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn144) . Lumsdon K. Holding networks together: shared information will be glue for reformed health system. Hospitals. 1993;7(4):26–26.

145 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn145) . Fottler MD, Ford RC, Heaton CP. Achieving Service Excellence: Strategies for Healthcare. Chicago, IL: Health Administration Press; 2002.

146 (http://content.thuzelearning.com/books/Wolper.3070.17.1/sections/navpoint10#chap2_fn146) . Barry DR. Commentary: are hospitals and their boards up to these challenges? Health Care Management Review. 1995;20(1):40–40.

Biographical Information

Myron D. Fottler, PhD, is a Professor and Director of Programs in Health Services Administration at the University of Central Florida. He has authored or coauthored 14 books, 30 book chapters, and more than 100 journal articles in most of the major management and health service journals. His most recent book is Achieving Service Excellence: Strategies for Healthcare (Health Administration Press, 2002). He received his MBA from Boston University and his PhD in business from Columbia University. He serves on many editorial review boards and is coeditor of the JAI Press/Elsevier series Advances on Health Care Management.

Donna Malvey, PhD, is an Assistant Professor of Health Administration in the College of Public Health at the University of South Florida in Tampa. Her area of expertise is the strategic management of health services organizations. Past experience includes teaching courses in labor relations and healthcare organizations and management. In addition, she has served as the executive director of a national trade

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association representing health professionals and also as a congressional aide. She has coauthored articles on a variety of healthcare-related topics and is currently a visiting assistant professor of Health Administration at the University of Central Florida. Dr. Malvey received her PhD in health services administration at the University of Alabama at Birmingham and her master's degree in health services administration from George Washington University.