Pulling The Pieces Together: Consolidation and Integration in Health Care Systems

1. Pulling The Pieces Together: Consolidation and Integration in Health Care Systems Gloria J. Bazzoli, Ph.D. Professor of Health Administration Virginia Commonwealth University

2. Consolidation and Integration in the Hospital Industry • The hospital industry continues to become more structurally consolidated over time. • However, service integration and coordination within structurally consolidated organizations has lagged behind. • Some success has been achieved and new market imperatives are making systems rethink the importance of selective service integration.

3. Overview of Presentation • Discuss trends in structural consolidation activities • Examine data on operational/service integration that accompanies consolidation • Discuss barriers and facilitators to operational/service integration • Speculate on what’s on the horizon in terms of structural consolidation and service integration

4. Structural Consolidation Activities in the Hospital Industry

5. Modern Healthcare:Annual Merger and Acquisition Activity* *Defined by MH to include: mergers, system acquisitions, joint ventures, long-term leases and other partnerships involving coordinatedactivity.

6. American Hospital Association:Multi-Hospital Arrangements *approximately 55% of network hospitals are also in systems

7. Changing System Acquisition Strategies • 1980s: • Small, financially weak urban hospitals were most common acquisition targets • 1990s: • Large, technically advanced urban hospitals in good financial position were most common acquisition targets • 2000s: • Rural and small urban hospitals that are financially strong are most common acquisition targets

8. MSA Geographic Dispersion of Health Systems Source: Author analysis of AHA data.

9. Health System Involvement in Physician Arrangements and Insurance Products *includes the old hospital-sponsored IPAs, PHOs, MSOs Source: Author analysis of AHA data.

10. Conclusion: Structural Consolidation in Hospital Industry • Consolidation pace slowed after late 1990s but Modern Healthcare data indicate a recent, small upswing especially in rural or small urban areas. • Multi-hospital arrangements represent a dominant organizational form in most markets • over 60% of US community hospitals involved in a system or network • increasingly focused on horizontal consolidation rather than vertical integration • Multi-hospital systems increasingly localized; urban health systems typically operate hospitals in just one metropolitan area.

11. Operational and Service Integration in Consolidated Hospital Organizations

12. Commonly Identified Objectives of Structural Consolidation • Strengthen combined financial position of involved organizations • Consolidate duplicative administrative and support functions to achieve cost efficiencies • Centralize certain service lines to improve organizational and patient outcomes

13. Operational/Service Integration and Hospital Mergers • Several studies examined organizational change implemented by hospitals that undergo full-asset merger • Types of operational/service integration examined: • Elimination of redundant administrative functions • Consolidation of support functions and departments (i.e., laundry, housekeeping, pharmacy) • Consolidation of selected clinical departments (i.e., cardiac surgery, pediatrics) • Consolidation of all patient care into one physical location and close/convert other institution

14. Operational/Service Integration and Hospital Mergers: 1990s Source: Bazzoli et al. (Health Care Management Review 2002)

15. Service Centralization and Integration in Health Systems • Studies have examined changes in service organization among affiliate hospitals in health systems • Local systems can rearrange services so that particular service lines are concentrated in one or a few facilities rather than dispersed • Many systems identified this as an objective in the early days of IDS development

16. Service Centralization and Integration in Health Systems • In Bazzoli, Shortell, et al. (HSR 1999), we developed an index of hospital service centralization: • low value for a service area indicates dispersion of services throughout a system • higher value for a service area indicates centralization of services in one or a few hospitals in a system • Values of index typically range from a low of 0 to a highest value of .35 to .45.

17. Service Centralization and Integration in Health Systems Source: Author analysis of AHA data.

18. Conclusion: Operational/Service Integration in Consolidated Organizations • Among hospitals undergoing full-asset merger: • very successful in reorganizing and consolidating administrative functions • limited success in consolidating clinical services • Among hospital systems, levels of service centralization are: • low given maximum of service centralization index • but have been increasing in a few select service areas

19. Barriers and Facilitators to Operational/ Service Integration

20. Model of Change: Operational and Service Integration Internal and External Influences Clinical Service Integration Support Function/ Dept Integration Administrative Integration Except for low volume services, agonizingly slow process fraught with barriers Generally, hospital organizations able to achieve quickly due to: • lack of strong stakeholders • hierarchical structure 3+ years

21. Barriers to Service Integration • Lack of buy-in among physicians and other key staff • Lack of patience in undertaking a long, slow process • Lack of good data to establish measurable objectives in implementing change a priori and assessing progress ex post • Community resistance • Distractive influence of short-term gains

22. Facilitators to Successful Service Integration • Important management dimensions: • Creation of a centralized decision-making authority spanning the involved organizations • Clear, sensible description of value to be derived through the activity – both short-term and long-term • Commitment of staff and budget to implementation process • Development of information systems that allow sharing of data across system hospitals • Development of budgeting policy and practices that promote coordination across service lines

23. Facilitators to Successful Service Integration • Important management dimensions (continued): • Investment in core capabilities and supporting infrastructure • Pacing is everything – balancing swift, deliberative action and slow, deliberative action • Clear, strategic communication

24. Facilitators to Successful Service Integration • Unrelenting environmental pressures: • Several studies found that as hospitals gained market power relative to payers in early 2000s, they backed away from service integration • Why go through “the pain” if you already achieved some of “the gain”?

25. Changes on the Horizon

26. Changes on the Horizon • Many hospital systems are currently involved in renovation or new construction: • this provides opportunity to think about organization of services not only within a hospital but across hospitals • does it make sense to rearrange services so that certain service lines are focused in certain hospitals? • key focus should be on the most effective use of space and creating throughput efficiencies

27. Changes on the Horizon • Hospitals are also responding to specialty facility threat in many markets: • one response is building centers of excellence and hospital-within-hospitals focused on threatened service lines • in some instances, these actions give physicians ownership or new revenue opportunities • given evidence that patients and their families like the amenities and atmosphere of specialty hospitals, how do we design these features into centers of excellence and hospital-within-hospitals?

28. Changes on the Horizon • Overall, rethinking service organization makes sense given current market imperatives and opportunities: • future actions to reorganize services should be informed by what was learned in the past • further, the realities of new market imperatives needs to be explained to key stakeholders because they are quite different from those of the past.

29. Suggested Readings • Alexander, JA, Halpern, MT, Lee, SY, “The Short-Term Effects of Merger on Hospital Operations,” Health Services Research 30(February 1996): 827-848. • Bazzoli, GJ; LoSasso, A; Arnould, RJ; and Shalowitz, M. “Hospital Reorganization and Restructuring Achieved Through Merger,” Health Care Management Review 27(Winter 2002): 7-20. • Bogue, RJ; Shortell, SM; Sohn, MW; Manheim, LM; Bazzoli, GJ; and Chan, C; "Hospital Reorganization After Merger," Medical Care 33(July 1995): 676-686. • Burns, LR et al. “The Fall Of The House of AHERF: The Allegheny Bankruptcy,” Health Affairs 19(January-February 2000):7-41

30. Suggested Readings (continued) • Cuellar, AE and Gertler, PJ, “Trends In Hospital Consolidation: The Formation Of Local Systems,” Health Affairs 22(6): 77-87. • Cuellar, AEand Gertler, PJ, “How The Expansion Of Hospital Systems Has Affected Consumers”Health Affairs, January/February 2005; 24(1): 213-219. • Lesser, CS and Brewster, LR, “Hospital Mergers and Their Impact on Local Communities,” in Ginsburg, PB and Lesser, CS (eds.), Understanding Health System Change, Chicago: Health Administration Press, 2001, pages 19-36. • Kastor, JA, Mergers of Teaching Hospitals in Boston, New York, and Northern California, The University of Michigan Press: Ann Arbor, 2001.

31. Suggested Readings (continued) • Shih-Jen KH; Chan, L; and Kidwell, RE; “The Implementation of Business Process Reengineering in American and Canadian Hospitals”, Health Care Management Review, 1999, 24(2): 19-31. • Walston, SL; Burns, LR; and Kimberley, JR, “Does Reengineering Really Work? An Examination of the Context and Outcomes of Hospital Reengineering Initiatives” Health Services Research 34(February 2000): 1363-1388. • Wicks, EK; Meyer, JA; and Carlyn, M; “Assessing The Early Impacts of Hospital Mergers: An Analysis of the St. Louis and Philadelphia Markets,” working paper/monograph of the Economic and Social Research Institute, Washington, DC, January 1998. • Woodard, B; Fottler, MD; and Kilpatrick, AO; “Transformation of an Academic Medical Center: Lessons Learned from Restructuring and Downsizing,” Health Care Management Review 1999 24(1): 81-94