Stick to key strategies in vertical integration

It's a common criticism these days to say that vertical integration has not worked. Depending on your point of view, its chief problems are that physicians, even when they are employees, cannot be led, or that vertical integration simply is a failed strategy to bail out hospitals.

But the critics are selling the system short because the fact is many of these systems can work if they follow some key strategies, says Elizabeth A. Fischer, principal with Moore Fischer Coddington LLC in Denver. The health care research and consulting firm works with hospitals, physicians groups, and health plans on strategy development, mergers, and acquisitions.

"I think what's happened is hospitals have purchased physician practices, and they haven't performed as expected," Fischer explains. "A study in 1996 showed that 17% of hospital-affiliated physician practices make money. But most probably were profitable prior to being acquired."

Fischer, who speaks at national managed care conferences about the future of vertical integration, says there are seven key strategies for making it work. PHOs or vertically-integrated health systems should:

1. Optimize primary care services. If a PHO finds itself losing money on its primary care physicians, it's probably because the PHO has not set up a compensation system to encourage productivity, Fischer says.

"You should have more of the salary at risk, based on the volume of business or volume of visits or revenue generated," she suggests. "I would say it probably should be 30% to 40% at risk to have a meaningful impact, and it easily could be higher than that."

2. Integrate providers and health plans. "They need to make sure staffing is working effectively by increasing the use of midlevel providers, such as physician assistants and nurse practitioners," Fischer says.

Also, it might help if the PHO brings in outside experts to manage the physician practices, rather than rely on hospital administrative structures.

3. Reduce clinical variation. Fischer says there are a variety of good reasons why PHOs and other provider groups should reduce clinical variation. These include the recent growth in capitation, physician involvement in quality improvement measures, the need to stand out from competitors, increased availability of data, and the growth in health care costs.

"If you have 10 people all with similar diagnoses, then look at that group and its cost and outcomes," she advises. "Look for the best way to diagnose and treat the condition, so you don't have one patient who costs only $1,000, and another who costs $5,000."

The quality improvement process can reduce clinical variation through a focus on outcomes and developing clinical guidelines, she says.

Also, PHOs that take these three steps likely will reduce clinical variation and costs:

· Reduce inappropriate and unnecessary care.

· Use less costly resources.

· Deploy resources efficiently.

4. Develop and maintain a common culture. PHOs should improve internal communication first, she says. "They should make more effective use of the Internet and e-mail communications and also use more teleconferencing, especially if it's a dispersed primary care network."

The PHO also could encourage physicians and others to work on different strategies for the organization. "It's important to have physicians in a leadership role," Fischer says. "It's also important to have open communication and to have a strong sense of the vision and strategic direction of the organization."

Effective physician leaders, Fischer says, have the following characteristics:

· They are respected by the medical staff and viewed as top-notch practitioners.

· They are visionaries.

· They have administrative and leadership experience even if in voluntary jobs like a department chairperson.

· If they are specialists, they have high opinions of managed care.

· They are interested in the structural and business aspects of health care.

· They are willing to make time available to attend meetings and deal with management issues.

· They are interested in obtaining an MBA or other management certification.

Some systems with large multispecialty groups have joint planning committees or joint operations committees with hospital and physician representatives.

5. Align incentives. When possible, hospitals should offer employee physicians incentive compensation based on their performances. However, this solution may not be practical for some PHOs.

And aligning incentives is especially tricky when physicians and hospitals are being reimbursed differently, Fischer says.

This sometimes happens in a market where managed care organizations prefer to capitate physicians but pay hospitals on a per diem basis. They might pay providers in different ways so they could reap the benefits of any savings from lower hospital utilization rather than pass it on to physicians as they would under global capitation, she explains. "Then it's harder to align incentives because you're sitting in a situation where people are being reimbursed differently and are not sharing risk equally.".

The solution is for the PHO to know its costs and know how to effectively measure its quality of care, Fischer says. Then make it everyone's goals to improve in both of these areas. Slowly, but surely, the organization will align its incentives because everyone will be focused on the same goals and strategies.

6. Lower costs. By now, most providers know some strategies for lowering costs, including:

· increasing productivity;

· enhancing purchasing power;

· consolidating facilities and services;

· right-sizing operations;

· spreading fixed costs through growth.

"Avoiding duplication of equipment and services and developing clinical guidelines are important ways to lower overall cost," Fischer says.

Providers should work together to move patients through the system without duplicating services, she adds. "If you have three people with pneumonia, make sure they're all treated similarly with similar outcomes."

7. Implement a systemwide financial plan. Some integrated systems fail almost from the start because the hospitals have paid too much for physician practices, particularly if they had gotten into a bidding war with competitors, Fischer says.

"Try not to repeat the mistakes of the past," Fischer advises. "There are ways you can structure an acquisition so that it's based on performance over a number of years instead of paying money upfront."

Also, PHOs should consider different ownership options, such as offering physicians a buy-in or equity through selling shares.

And hospital administrators should remember that their hospital management experience may not translate into effective physician practice management. "Hire somebody with some clinical administrative experience to manage it," Fischer says.

"Hospitals are pretty complex managerial structures so when you try to apply that complexity to a medical group it tends to get too bureaucratic and too cumbersome and doesn't work," he adds.