Hos­pi­tals vs. in­sur­ers: To com­pete ef­fec­tively, hos­pi­tals must man­age costs

Modern Healthcare - - COMMENT - By Mark Claster

The busi­ness of health­care is be­com­ing in­creas­ingly mud­dled as hos­pi­tals and in­sur­ance com­pa­nies en­gage in a com­pe­ti­tion of sorts. Each side is grap­pling to buy up physi­cian prac­tices to gain con­trol over

a big­ger share of the pre­mium dol­lar while man­ag­ing costs, get­ting a holis­tic view of the con­tin­uum of care and se­cur­ing a stead­ier flow of pa­tients.

At first glance, the ben­e­fits might ap­pear to be sim­i­lar, but tak­ing a closer look, the ra­tio­nale for these ac­qui­si­tions is slightly dif­fer­ent. Hos­pi­tals have a lot to gain but need to take heed of spe­cific ob­sta­cles.

In­sur­ers are pri­mar­ily seek­ing pa­tient-care data and a deeper un­der­stand­ing of what it truly costs to take care of each pa­tient on an an­nual ba­sis. A prime ex­am­ple is In­di­anapo­lis-based in­sur­ance provider Wel­lPoint, which ab­sorbed CareMore Health Group in Cer­ri­tos, Calif., an op­er­a­tor that runs ap­prox­i­mately 26 care clin­ics.

On the other side, as hos­pi­tals ac­quire physi­cian groups and launch in-house in­sur­ance com­pa­nies, they hope to ce­ment their re­la­tion­ship with pa­tients. They con­tinue to pur­sue fee-for-ser­vice, vol­ume-re­lated rev­enue, while evolv­ing their busi­ness mod­els to as­sume risk and man­age pop­u­la­tion health.

By as­so­ci­at­ing their brands with rep­utable physi­cian groups and ex­pand­ing through ac­qui­si­tions, hos­pi­tals are hedg­ing their bets and in­vest­ing in growth. No mat­ter your view on the speed of mar­ket re­forms from vol­ume to value un­der ei­ther sce­nario, physi­cians are the key driv­ers of change. This is of­ten a wise move that can gen­er­ate sig­nif­i­cant value for all par­ties in­volved.

Ac­cord­ing to a 2013 study by Pro­fes­sional Re­search Con­sul­tants, over the past 25 years, an av­er­age of 80% of health­care con­sumers have con­sis­tently laid claim to a hos­pi­tal they would call “their own,” re­gard­less of whether they had lim­ited or abun­dant choices. Un­like in­sur­ers, many hos­pi­tals have a loyal fol­low­ing of pa­tients, many of whom will pro­vide re­fer­rals. There is a strong op­por­tu­nity for hos­pi­tals to en­gage in mar­ket­ing ef­forts and build their brands.

Hos­pi­tals con­tinue to pur­sue a path to­ward more physi­cian em­ploy­ment, with Univer­sity Hos­pi­tal in Au­gusta, Ga., an­nounc­ing the al­lo­ca­tion of $15 mil­lion to­ward prac­tice ac­qui­si­tions. North Shore-Long Is­land Jewish Health Sys­tem’s 2013 agree­ment with Em­blemHealth, which in­volves three large med­i­cal groups (Man­hat­tan’s Physi­cian Group, Queens-Long Is­land Med­i­cal Group and Staten Is­land Physi­cian Prac­tice), has led to the devel­op­ment of one of the largest physi­cian prac­tices in the New York metro area. These groups are now part of Ad­van­tageCare Physi­cians, which houses more than 400 pri­mary-care physi­cians and spe­cial­ists in 39 lo­ca­tions.

To sum it up, the teams in this com­pe­ti­tion have dif­fer­ent play­books and the ben­e­fits, as well as pit­falls, are slightly dif­fer­ent for each.

A crit­i­cal con­cern for hos­pi­tals is man­ag­ing steadily evolv­ing care. When mov­ing from the tra­di­tional feefor-ser­vice model to a cap­i­ta­tion model, hos­pi­tals are tak­ing on sig­nif­i­cantly more risk. As op­posed to re­ceiv­ing pay­ment for each ser­vice ren­dered and test ad­min­is­tered, hos­pi­tal man­age­ment and board mem­bers need to have a line of sight to the cost of care for each physi­cian’s pa­tient at a set fee, which gen­er­ates a crit­i­cal need to be more ef­fi­cient than ever be­fore.

Even with the in­creased risk and po­ten­tial down­side—if they are un­able to meet pa­tients’ needs at set costs—hos­pi­tals are in an ex­cel­lent po­si­tion to en­gage in physi­cian-group ac­qui­si­tions and this trend will con­tinue to ac­cel­er­ate, es­pe­cially as the im­ple­men­ta­tion of the Pa­tient Pro­tec­tion and Af­ford­able Care Act changes the health­care land­scape. But if hos­pi­tals want to be in the physi­cian man­age­ment and in­sur­ance busi­ness, there are po­ten­tial pit­falls. More doc­tors un­der em­ploy­ment means the or­ga­ni­za­tion has to op­er­ate more cost­ef­fec­tively in a cap­i­tated en­vi­ron­ment.

The chal­lenge for hos­pi­tals is to have clear strate­gic ob­jec­tives for their physi­cian ac­qui­si­tions. Of­ten these ac­qui­si­tions are re­ac­tive and are not part of a well-thought-out net­work plan.

Another con­cern is cul­ture. A top­down man­age­ment ap­proach can un­der­mine the ac­cre­tive value of a med­i­cal group ac­qui­si­tion un­less there is an ap­pre­ci­a­tion of the cul­ture of med­i­cal group prac­tice man­age­ment.

There is a tremen­dous op­por­tu­nity for hos­pi­tal sys­tems to make great strides, as long as trans­ac­tions are ex­e­cuted in a strate­gic man­ner and a solid gov­er­nance struc­ture is in place. Work­ing with ex­pe­ri­enced M&A ad­vis­ers who have knowl­edge and ex­per­tise in the mar­ket is also a crit­i­cal com­po­nent.

There is no sin­gle one-size-fits-all for­mula for suc­cess, but in­cor­po­rat­ing these guide­lines into a well-de­signed ap­proach will be key to achiev­ing de­sired re­sults.

Mark Claster is board chair­man of North Shore-LIJ Health Sys­tem, Great Neck, N.Y., and pres­i­dent of Carl Marks & Co., a New York-based con­sult­ing and in­vest­ment bank­ing ad­vi­sory firm.

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