Order 1034594: HSA 403

Lehman Health Care Consulting, LLC

To: All Assigned Consultants Date: January 23, 2017

Fr: Stephen Katz

Managing Partner

Re: New Engagement: Middle County Medical PC

As you know, I have held several meetings with Middle County Medical PC (MCMPC) over the last few weeks to discuss a possible engagement. On January 20, 2017, we concluded our discussions and Lehman Health Care Consulting is under contract with MCMPC. Our task is to assist them with a significant strategic management challenge. The narrative that follows presents the situation that our client faces. Our assignment appears at the conclusion of the narrative.

Middle County Medical PC

Introduction

MCMPC is facing a unique situation in a market that has evolved significantly. With its location in the northwest suburbs of NYC, it faces challenges. How will it compete effectively in a market where health care is dominated by one enterprise, Innovative Medical Group (IMG)? IMG has broad strategic approaches that give it a significant market share and an alignment with the major county hospital, County Regional Medical Center (CRMC). It launched an Accountable Care Organization, taking advantage of the opportunities created by the Affordable Care Act. Its bargaining power, negotiating leverage and financial strength give it significant competitive advantages.

Middle County Medical PC (MCMPC)

MCMPC is a fifty (50) physician group practice with fifteen offices with 350 employees. They have physicians covering twenty (20) different specialties and subspecialties, but not every specialty/subspecialty. The Middletown location is the largest and busiest for this group. The group was formed in 1984 by Dr. Scott Balko. Dr. Balko is a board certified ER physician who had been Chief of Emergency Medicine at Bolton Hospital (Bolton Hospital has merged with Darien Hill Hospital creating CRMC) for ten years. He decided to leave the hospital and create an Urgent Care Center serving the Middletown community. Over the least thirty years, MCMPC grew, providing urgent, primary and many specialty services. For period 1997 to 2013, its annualized visits grew by eight percent (8%). Revenues reached $22 million in 2014 and the group was consistently profitable. In 2014, annualized visits declined and profits fell. Dr. Balko told us that the practice had an operating loss in 2016. The repeal of the ACA exacerbates this situation. MCMPC implemented the Medical Home and ran it profitably. The elimination fo this program and the lost revenue make fiscal situation even worse. Dr. Balko and the group’s Board of Directors realized that MCMPC needed to act quickly.

Using the cash reserves that it had, Dr. Balko began buying medical practices from a variety of locations in the county as well as the neighboring counties to the north and west. These practices were small group practices. The physicians were older and ready to retire; none of them were willing to sell to IMG. Dr. Balko and his team closed some of these offices consolidating the practices at other locations and at the practice’s Middletown location. These actions paid off visits increased and so did revenue. The practice is once again profitable. However, Dr. Balko and the Board are still concerned. Once again visits and revenue seem to have plateaued. They feel that they have not addressed the clinical and financial opportunity associated with the large chronically ill population who are now under MCMPC’s care as a result of the purchasing these practices. A review of the Medical Home Provision of Affordable Care Act and the NYS Patient Centered Medical Home Initiative seems to be warranted since these individuals have two chronic illnesses and are covered by Medicare or are dually eligible. Dr. Balko implemented the Medical Home under the NYS Initiative. This was a reasonable option for our client given the large number of Medicare and dual eligible patients under their umbrella. The cash infusion certainly improved their financial performance even if it was for a short period of time.

Current Situation

In the last thirty years, people from NYC relocated into the County for more affordable housing, reasonable taxes and good schools. Although rooted in the County they still look to the City for employment, entertainment and services. As a result, there is a significant outward migration of County residents to the inner urban center for employment, cultural activities and health care. At a recent County Chamber of Commerce Breakfast, the CRMC CEO identified that fifty percent (50%) of the hospital’s potential patient base are leaving the community to acquire certain hospital related services closer to NYC, or within the NYC itself.

The County is becoming as diverse as NYC creating many potential unique market niches. Most notable is the large Jehovah’s Witness community that is located in the surrounding towns and villages within ten (10) miles of MCMPC’s base of operations. In 2013, the Jehovah’s Witnesses announced that they were selling their headquarters in the Dumbo area of Brooklyn, relocating all their operations to the County. It is likely that many members of this community will relocate to the County as well. What makes this group attractive is that they have some form of private insurance or Medicare. However, their religious beliefs make them a challenge. Expertise in bloodless surgery is an absolute necessity to serve this niche. No one in the County is a provider or linked to a direct provider for bloodless surgery.

The movement of the Jehovah’s Witness Community to the County is consistent with general trends. The County’s population continues to grow, clearly demonstrated in the Table below:

The number of school age children in the county has increased along with an increase in the number of adults 35-64 years of age and seniors over the age of seventy-five (75). The only age cohort that decreased is the 18-34 years of age. The education level of the County’s children has also improved with high school graduation rates reaching over sixty percent (60%) and eighty-three percent (83%) of high school graduates going to college. Poverty rates vary, with the largest concentration of poverty in the County’s three cities including Middletown; the poverty rate exceeds twenty-five percent 25% in these areas.

The health status of the County is reflected in an improved mortality rate over the last ten years and is better than surrounding counties. Also notable is that accidents are the leading cause of death for children. For young adults (18-45) the leading cause of death is accidents followed by cancer. The leading cause of death for adults forty-five (45) and over is cancer and heart disease, accounting for two thirds of the deaths in this cohort. Pediatric diabetes (both types) is on the rise particularly in the areas of the County that have the highest poverty rates. Chronic disease is also on the rise in the seventy-five (75) and over age cohort, with Diabetes, CHF, COPD, and stroke accounting for the majority of illness afflicting this group. Many individuals in this age cohort have more than one chronic disease.

The County health care provider market has seen significant change and consolidation is the last twenty years. It is no longer dominated by small group practices. Instead there has been significant consolidation with one dominant provider, IMG. The consolidation of the acute care segment is well under way with the merger of Bolton and Darien Hill Hospitals creating CRMC. The construction of the new CRMC facility in Middletown now complete and the new modern hospital is operating smoothly. It is notable that the new CRMC is located close to the Middletown locus of operations of IMG. CRMC is closely aligned with IMG.

IMG is a large integrated medical group with twenty-five (25) locations in four (4) NYC metro area counties and Manhattan. IMG has over 200 physicians and 1100 employees. In 2010 and 2011 IMG opened two new facilities including a 120,000 square foot center in the southern portion of the county across the street from the recently closed Darien Hill Hospital. It added twenty physicians and 175 employees for this center alone. IMG opened its own Ambulatory Surgery Center just outside of Middletown, and CRMC is a minority partner in the venture. At the ground breaking of the Ambulatory Surgery Center, Dr. Schwartz, CEO for IMG, commented that the center would help reduce the number of IMG patients who go to the City for a variety to treatments that this Center will provide. Dr. Schwartz in his remarks estimated that approximately one third of Innovative patients are leaving the County for this reason. The new Center is doing just that; very few of its patients are going into the city for the treatment that they can receive at this Center.

IMG has revenues of almost $300 million and is very profitable. Because its financial statements are strong, IMG has had easy access to capital (we do not have their financial statements – just their financial ratios). Its broad strategy and structure, providing almost every specialty and subspecialty services, means that it can hold onto its patients. It has with stood anti-trust challenges by small group practices

It is remarkable how quickly IMG became the dominant health care provider in this area. It’s President and Founder, Dr. Martin Schwartz is a board certified oncologist, who was trained at Memorial Sloan Kettering. IMG was a small Oncology group run by Dr. Schwartz. Sensing changes coming to health care in the 90’s, Dr. Schwartz took a sabbatical from the group. He was accepted to the Harvard Business School and completed an MBA. He returned to the group with a strategic/business plan to create the largest medical group in the county. Using his new found knowledge in both strategy and finance, Dr. Schwartz transformed an oncology practice into the dominant all-inclusive health care provider in the region. Although a sophisticated executive with a gift for strategy, Dr. Schwartz remains a physician deeply committed to quality. IMG physicians are either Board Certified or Board Eligible. Board Eligible physicians’ must become Board Certified within five years of joining the practice. Approximately forty percent (40%) of the medical staff had academic appointments at medical schools before joining the practice. IMG is able to recruit physicians for many areas of the country and around the world.

IMG has offices that are located along Route 37, the major road that cuts across the county. They now have offices in other counties that are conveniently located near the major population centers. They now have office at several locations in Manhattan. Their bargaining power and geographic locations give them favorable rates with MCOs and insurers, and influence with the local hospitals. Dr. Schwartz does not hesitate to exercise the bargaining power that IMG possess. In 2006, IMG stopped admitting to one of the Wickers Hospital in the neighboring County because of poor clinical outcomes. The hospital had to move quickly to address the issues IMG raised, and ultimately signed a management contract with CRMC. After six months, IMG returned to this hospital, but a ripple went through the health care community. Not only did IMG have clout, they were willing to use it. IMG is trying to exercise is clout in the south eastern portion of the County.

There is a perceived opportunity in the south eastern corner of the County with the closure of the Darien Hill Hospital Division of CRMC. Several health care providers see this departure as an opportunity to gain market share in this community. These include new providers who are either trying to establish a presence (Urgent Ex Cell opening Urgent Care Centers) or increase their market share in the southern portion of the County (Good Sisters Health System). Whatever opportunity may exist is tempered by IMG’s major complex just across the street from the closed Darien Hill Hospital. Phase one included offices for primary and specialty physicians along with the necessary diagnostic services. Phase two will include a second ambulatory surgery center; no word on the status of this project. Good sister entry into this region create a possible relationship with our client.

MCMPC is experimenting in a limited venture with Good Sisters Health System in this part of the County. Good Sister operates in the north western corner of the neighboring county and also has small hospitals in the Southern tier of the County. MCMPC has opened an office in this area and has a cardiologist who is affiliated with Good Sister located at this site. Dr. Balko is using this venture to evaluate whether an alliance with this system makes sense. There will be more discussion on this issue in the section entitled; Strategic Partnerships. This is an example of Dr. Balko’s inconsistent leadership ability.

Leadership is a significant issue for MCMPC. Dr. Balko is an excellent physician who is deeply committed to his patients. He often works sixty (60) hour weeks and if he is scheduled to work until closing, he will see patients who arrive in the parking lot, even though he has locked the doors to the office and is in his car ready to go home. It is important to note that while he does this, none of the other physicians emulate this behavior. Dr. Balko dislikes the administrative side of his position. Although he recently hired an experienced health care executive as the COO, it is not clear if this individual will have any real authority. Dr. Balko does not attend staff meetings or have any formalize structure for managerial decisions. He can and does act decisively; the purchases of physician practices and the experiment with Good Sisters are examples of such behaviors. He routinely gives Tuesday and Friday afternoons, after 3:30 PM for administrative matters. Lately it seems that Dr. Balko may have lost his enthusiasm for the business aspects of the practice. The new COO for the practice may help address this issue

The new COO, Maxine Smith, could make a significant difference to this practice if she is empowered with decision making authority. Ms. Smith has over fifteen years’ senior management experience with medical group management. She inherits a management staff that is mixed at best. Although the group has a CFO, Director of HR, Director of IT/Physician Recruitment and a Director of Operations, none of these individuals possess any significant decision making authority. The Director of Operations was Dr. Balko’s secretary when he was Chief of Emergency Medicine at Bolton Hospital. Although deeply committed and extremely loyal to Dr. Balko, her decision making is questionable and she tends to screen Dr. Balko from issues that need to be resolved. Ms. Smith is trying to address this reality. The Director of Operations is struggling with her new reporting relationship to Ms. Smith. Recently Ms. Smith shared with me in confidence that she is also concerned about the culture of the practice and the decision making process in general. Planning for the long term is non- existent. The practice is reactive rather than proactive, the practice does not view debt as a tool to build and grow. Ms. Smith also had many comments about the operations and clinical deficits in general.

MCMPC staff members are generally caring, responsive and accommodating. However, the informality of the organization has not been perceived positively by many in the community. Staff members do not have a uniform and people often work in their jeans and sport shirts. No one seems to take charge other than Dr. Balko. Physicians work in their areas and are not seen looking beyond their own silo. This aspect of the practice will be a significant issue if the Practice is serious about the Medical Home. The main office can be sloppy at times; when Dr. Balko or Ms. Smith makes rounds, the office is quickly cleaned.

MCMPC still gets disgruntled former patients from IMG. These individuals report that IMG is a cold organization. Many people feel like a number, without a personal relationship with any individual in the practice. The “rules are the rules,” with little latitude for diversion from the policy and procedure is alienating to these individual. However, with IMG creating a practice that offers everything under the sun, it is likely that this small migration of patients may disappear.

MCMPC’s current strategy appears to be the creation of a broad based clinical entity. They continue to want to compete with IMG head-on, which may have been an effective strategy twenty years ago when IMG was less dominant in the market. MCMPC has identified that it lacks specialist and subspecialist necessary to assure it can offer the broad services that will allow it to hold onto its patients. However, it is no longer able to recruit local specialist or subspecialist since they are either affiliated with IMG or are winding down their practice and preparing to retire (some of them say that making a deal with Dr. Balko is difficult – you can’t seem to get him to close the deal anymore). MCMPC is now considering health care entities outside of the County for affiliations with the hope that they will provide specialist and subspecialist physicians. MCMPC also seems stuck in some of its thinking; Dr. Balko still has not absorbed the current reality when considering potential hospital partners. People in the County will travel to specialist and hospitals in other nearby counties and NYC. Even CRMC is adapting to this reality as it explores possible relationships with hospital based systems from NYC. A partnering with a hospital could make sense. It might support the development of a unique market niche and increase market penetration. However, the issue is which one or whether either of the two suitors is appropriate.

Strategic partnerships are very possible since in this situation both parties (MCMPC and the potential hospital partner) can realize gains. In exchange for their location and access to their patients, MCMPC may be able to gain access to resources, competencies, most notably specialist and subspecialists. There are two active suitors: Good Sisters and Riverside Hospital and Medical Center

Good Sisters has begun a relationship with MCMPC. The joint office in the southern part of the County is a chance to evaluate with a relationship is beneficial. However, when evaluating this system, MCMPC should consider the financial weakness, customer perceptions and the turnover in the CEO position. Jim Gallagher came to Good Sisters after spending ten years as the COO at East Side Medical Center in the city. He built a solid reputation around excellence and strong relationships with the medical staff. Over his career, he demonstrated innovation, a deep understanding of customer service, an ability to work well politically even with rival hospitals and a genuine sense of mission. He came to Good Sisters at a crossroads. The morale at the hospitals was low and the medical staff was indifferent to the hospital. Although Gallagher has met with Dr. Balko twice and there was good chemistry between them, it is not clear how, when or whether Good Sister might take the MCMPC co-venture to the next level. Gallagher has resigned and the hospital is in disarray. While the hospital Board of Directors seems interested in collaborating with MCMPC, it is not able to focus on this relationship given other issues that have to be addressed. What is clear to Dr. Balko is that the southern portion of the County is a market that Good Sisters covets and Gallagher aims to claim. The financial information for Good Sisters Health System will be forward to you soon.

Riverside Hospital and Medical Center is very interested in MCMPC because of its location and a particular market niche. Riverside Hospital and Medical Center located in NJ and the NYC metropolitan area, has expressed interest in collaborating with MCMPC. Riverside is known for its Bloodless Surgery Program, among other services. It serves a significant number of Jehovah’s Witnesses. On any given day, approximately fourteen (14%) percent of the hospitals inpatient beds are filled with Jehovah’s Witnesses. The hospital believes that a presence in the Middletown community will help increase this patient population.

Riverside is the only hospital in the area the currently offers bloodless surgery. They are willing to connect MCMPC to an Orthopedics and Urology Group (two important specialties that MCMPC currently lacks) to help improve service at MCMPC. Dr. Balko has some concern about this relationship since this hospital is a one-hour drive from the MCMPC office. Riverside just completed a major renovation and has a state of the art physical plant. It does face major competition from NJ University Medical Center, which is the dominant tertiary care provider in its region. NJ University is successfully competing with the academic medical centers in the urban center and is extremely successful. Although they are fully integrated and offer every possible specialty and subspecialty, they do not perform bloodless surgery nor appear to have any interest in this area. It is clear that Riverside is making this market niche an important part of their strategy. The Riverside financials are also attached

Comparative clinical data is included for the evaluation of potential partners.

Clinical Data (Source: www.medicare.gov ; Hospital Compare update 12/2013)

30-Day Death Rate from a heart attack at the hospital, risk adjusted – US National rate is 16.1 %

Riverside Hospital and Medical Center is better than Average

Good Sisters is at the National Average

% of Surgery patients given an antibiotic at the right time before surgery

US Average 85%

Riverside 94%

Good Sisters 84%

% of Surgery Patients given the right kind of antibiotic

US Average 92%

Riverside 76%

Good Sisters 97%

% of Surgery patients whose antibiotics were stopped at the right time

US Average 83%

Riverside 88%

Good Sisters 90%

% of all Heart Surgery patients whose blood glucose is kept under good control after surgery

US Average 86%

Riverside 90%

Good Sisters 92%

% of Surgery patients who had hair removed from surgical area, but not with a razor

US Average 95%

Riverside 87%

Good Sisters 99%

% of Surgery patients whose MD ordered treatments to pr3vent blood clots

US Average 82%

Riverside 91%

Good Sisters 77%

% of patients who got treatment at the right time to help prevent blood clots

US Average 79%

Riverside 72%

Good Sisters 82%

Other information for Consideration:

Length of Stay

Riverside is better than or at the National LOS average

Good Sisters is worse than the National LOS average, perhaps by as much as 2 day

Statistics:

Additional Considerations

EMR

· Riverside has implemented its EMR and all the “bugs” have been addressed

· Good Sister’s EMR in finally implementing its EMR

Affiliations

Riverside is freestanding although is part of network affiliated with one of NYC’s academic medical centers.

Good Sister’s is part of the Mid-Atlantic Catholic Health System, which includes health care providers in NY, NJ, Pa, Delaware and Maryland, with Revenues of over $1.0 Billion. The entire system is struggling from a financial perspective. Health care experts assume there will be closures of some facilities and/or reductions in beds at some of their hospitals.

Affordable Care Act and It Repeal

The Affordable Care Act offered potential opportunities for growth as well. IMG took advantage of the Account Care Organization provision. With the large number of patients and financial resources, this action made sense for them. Other provisions of the law create new revenue streams for medical practices willing to take responsibility for chronically ill individuals. The Medical Home provisions seemed relevant for MCMPC. Nearly two thirds of the Medicare patients that the practice treats have two chronic illnesses. The Medical Home payment system includes a patient per day (PPD) fee and a traditional fee for service reimbursement methodology. The PPD’s focus is on care coordination and other interventions designed to reduce hospitalizations. Dr. Balko was very interested in this option.

MCMPC implemented Medical Home successfully. They increased early intervention and prevention programs. Patients enrolled in this program were hospitalized less often compared to when said patients were not in this kind of program. Medical Home was profitable initially; as the PPD was reduced, profitability fell. With the potential elimination of this program, the fiscal.

The task at hand is to develop a strategy for MCMPC. Should it continue to try competing head on with IMG? Should it consider carving out market niches and focus on them? Some members of the Board have suggested that MCMPC sell itself to IMG. Dr. Balko will not accept this alternative. He becomes very angry when this becomes an item for discussion and refuses to consider this option. It is likely that there is bad blood between him and Dr. Schwartz. Staff will neither confirm or deny this, and refuses to discuss this all together.

Lehman Health Care Consulting (LHCC) task is so develop a strategic plan for MCMPC – a road map to growth in this unique service area. As part of this assignment, LHCC groups will write several briefing memos to the managing partner, who is working directly with the Doctor Balko. You will use the Situation Analysis model for several parts of your analysis, do a review of potential partners and consider the potential positive impact of Value Based Competition (Porter 3 & 4) and The Affordable Care Act for our client. Mr. Katz will give you and your group specific assignments.

A Twenty (20) page report will be delivered to the Managing Partner and the Senior Partners on a date to be determined. The report will incorporate all the memos, fully integrated into a well-organized report. The last part of the report is for you to recommend what MCMPC should do to grow. Please present options considered and why you rejected them. Please note that the Managing Partner shared the Michael Porter article with Doctor Balko. Doctor Balko likes the concept of Value Based Competition (which will be presented to you in a few weeks) and providing care across the continuum. He wants our work to include this concept. Dr. Balko wants to go into 2016 with a fresh direction, so we have some time to assess the situation and develop a plan that makes sense.