11 Evolving Issues in Healthcare and Business

This article briefly discusses eleven different healthcare and business issues. We have divided the article the letter into three key sections. The first focuses on hospital and physician issues. Second, a brief observation on urgent care and sleep labs. Third, a brief discussion of key business issues, focusing largely on a new book by Jim Collins.

I. ACOs, Hospitals, Physicians and Physician-Hospital Relationships

1. Pioneer ACOs. The Pioneer ACO Model is a CMS Innovation Center initiative designed to support organizations with experience operating as accountable care organizations or in similar arrangements. The Pioneer ACO model will test the impact of different payment arrangements in helping these organizations achieve quality and cost goals. After a weak start, 32 provider organizations ultimately enlisted in the Pioneer ACO Project. Many of the ACO participants are very prestigious systems, such as Allina Hospitals and Clinics, Beth Israel Deaconess Physician Organization, and the University of Michigan Health System.

The U.S. Department of Health and Human Services made a wise decision by making the process of testing the ACO model more manageable for health systems. An article entitled “Pioneer ACOs: Promise and Potential Pitfalls,” posted by Steven Lieberman on December 29, 2011 in Health Affairs Blog states:

“The 32 Pioneer ACOs selected by CMS will operate in 18 states for up to 5-year periods. Hospitals are key players in 22 (69 percent) of the Pioneer ACOs, with 16 integrated delivery (or healthcare) systems, 4 hospitals-physician partnerships, and 2 individual practice associations (IPAs) named for hospitals where the physicians have affiliations (or employment). The remaining 10 Pioneer ACOs (31 percent) are predominately IPAs, with one identified as an alliance of 5 multi-specialty medical groups. (The Leavitt Partners survey reported hospitals sponsored 99 (60 percent) of ACOs, with 38 (24 percent) sponsored by IPAs, and 27 (16 percent) sponsored by insurers, a category not relevant for Medicare ACOs.) In addition to urban entities, the selected Pioneer sites include ACOs that serve rural areas.”

Time will tell whether the ACO will endure as a significant part of the healthcare landscape.

2. Exclusive relationships between hospitals and payors. Recently, hospitals and health systems with great market positions are looking again at exclusive relationships with payors. This again threatens to become a substantial issue for independent surgery centers, physician practices and competing hospitals. One of the earliest exclusive agreements was struck between Boston-based PartnersHealthcare and Blue Cross Blue Shield of Massachusetts in 2000. BCBS gave Partners increased reimbursements in exchange for Partners' promise to seek similar pay increases from Blue Cross competitors. Since 2000, Partners has received a 75 percent increase in payments from Blue Cross, but health insurance premiums have also risen by 78 percent since that agreement. There is some evidence that the government is monitoring the anticompetitive effects of such behavior. For instance, in Feb. 2011, the Department of Justice took an aggressive stance against a health system under Section 2 of the Sherman Antitrust Act in United States v. United Regional Health Care System (No. 7:11-cv-00030-O (N.D. Tex., Feb. 25, 2011). In United Regional Health Care System, the DOJ alleged that United Regional Health Care System possessed monopoly power in the sale of both inpatient hospital services and outpatient surgical services to commercial health insurers.

3. Community hospital sales and consolidation. Given the changing healthcare environment, we are seeing frightened looks on the faces of the Boards of community hospitals. This has led to an unprecedented willingness to engage in potential sales of hospitals to national chains or larger systems. On the flip side, buyers may often obtain substantial market benefits from consolidation (see, e.g., "Hospital Monopolies: The Biggest Driver of Health Costs That Nobody Talks About", Forbes, by Avik Roy, August 22, 2011; "Hospital Merger Mania on the Rise Across the U.S.", Next Hospital, by Katherine Rourke, April 30, 2011). The occurrence of hospital mergers and acquisitions increased by 33 percent in 2010 compared with 2009. The dollar volume of transactions also increased substantially in 2011.

4. Physician independence. Notwithstanding the talk of physician practice acquisitions and physician integration with hospitals, we are hearing from several large independent physician practice groups that they have remained very busy despite the fact that systems they once worked with are acquiring competing practices. In orthopedics, for example, it is commonly discussed that almost 12.5 percent of the healthcare budget is spent on orthopedics in total. This means that many systems must have a large orthopedic presence and compete aggressively to employ orthopedic surgeons. Despite the hospital pressure to accept employment, the independent orthopedists seem to be weathering the changes fairly well.

A 2011 survey conducted by PricewaterhouseCoopers found 56 percent of physicians want to more closely align with a hospital in order to increase their income, yet 20 percent of physicians surveyed said they don't trust hospitals and another 57 percent "sometimes" trust hospitals.

5. Professional services agreement. Once again, a number of systems have been considering professional services agreements with physicians and physician groups. Such arrangements are a middle ground between the acquisition of a physician practice and subsequent employment of its physicians, and other kinds of relationships between health systems and physicians. As such, professional services agreements are growing in popularity as an option for increasing integration with a number of specialties, while enabling the physicians to maintain private practice. In the article, "When PSAs Are the Right Choice,” Health Leader Media, July 13, 2010, author Karen Minich-Pourshadi writes:

“Physician compensation expert Max Reiboldt, president and CEO for The Coker Group, an Alpharetta, GA-based healthcare management consulting firm, refers to these PSA arrangements as "employment lite”—and he says they can offer a good opportunity for both hospitals and physicians. Unlike traditional service agreements, in which a person is hired for a specific function or for limited service, PSAs allow the facility to work with the doctors, allowing them to keep their independence while the hospital can build in quality measures to help create greater alignment for the physician with the hospital’s goal.

"A PSA takes the shape and look of employment, but the physician or practice retains its independence, and if the deal doesn’t go well, then the doctor can go back to private practice,” he says.

In a professional services agreement model, a health system will typically purchase a substantial amount overall of a physician’s time but will not acquire the physician’s practice. We will see whether or not this becomes a sizable part of the physician-hospital universe or, whether instead the popularity of the professional services agreement model is merely a stop gap measure for certain systems. The challenge with the physician services agreement model is that it is much more difficult to fit payments to physicians within various anti-kickback safe harbors and antitrust safety zones than in the practice acquisition and subsequent employment model.

6. Opting out of Medicare. Notwithstanding the difficult economy, we are hearing from more and more physicians that they have decided to opt out of Medicare. This is occurring more frequently in certain specialties in which physicians are not overly reliant on Medicare business or hospital referrals. For instance, the New York Times reports that of the 93 internists affiliated with New York-Presbyterian Hospital, only 37 accept Medicare, according to the hospital’s website. Further, we typically see the decision to opt out of Medicare with physicians who have built tremendous brands and franchises and that can afford to not take Medicare patients. Interestingly, despite opting out of Medicare, many of these physicians nevertheless continue to see Medicare patients on either a pro bono basis or through other means (see, for example, “Doctors are Opting Out of Medicare,” by Julie Connaly, New York Times, April 1, 2009.)

7. Privileges and disputes. We have observed an increase in the number of privilege and peer review disputes involving physicians and hospitals. We are not exactly sure what is driving increased clinical reviews. However, a great article was published in 2011 on the concept that the Health Care Quality Improvement Act has resulted in abuses of the peer review system through the courts. The article, entitled “How Courts are Protecting Unjustified Peer Review Actions Against Physicians by Hospitals,” The Journal of American Physicians and Surgeons, by Nicholas Kadar, Volume 16, Number 1, Spring 2011 states:

“Nevertheless, the courts have disregarded the legislative history of HCQIA in the HCJ, and have interpreted and applied HCQIA in a way that protects unjustified peer review actions against physicians by hospitals against Congress’s expressly stated contrary intent.”

As a result, according to Kadar, the courts improperly review motions for summary judgment based on HCQIA immunity and improperly dismiss cases on summary judgment before a physician has an opportunity to present the merits of his or her case.

II. Urgent Care and Sleep Labs.

1. Urgent care. The number of urgent care sites is growing tremendously. For instance, the number of facilities has now grown to 9,200, including approximately 600 new facilities this year. The development in the urgent care arena includes traditional urgent care clinics as well as clinics inside of retailers such as Wal-Mart, Walgreens, and CVS. The growth in urgent care sites has occurred in response to a direct consumer desire to be able to see physicians at the consumer’s convenience (see, e.g., “Health Law May Accelerate Growth in Urgent Care Centers,” Kaiser Health News, Phil Galewitz, December 7, 2011). Interestingly enough, in response to the increase in urgent care, many large practices and systems have substantially improved their own customer care and their speed at which they are able to see patients.

2. Sleep labs. We continue to see the evolution of sleep labs and sleep lab relationships. Various structures for sleep labs include independent diagnostic testing facilities, extensions of a physician’s practice, hospital-based sleep labs, hospital-owned freestanding sleep labs, and joint ventures, to name a few. We often query the method by which sleep labs are structured. As of late 2010, there were about 2,100 accredited sleep labs with an approximate growth of 10 percent per year.

III. Great Business Issues.

1. Great leaders. We continue to be cognizant of the import of great (and poor) leadership on organizations. In health systems as well as in great companies and charitable foundations, there seems to be nothing more important than strong leadership that is truly concerned about the organization (see, e.g, “4 Great CEOS and 1 Who Missed the Boat,” Motley-Fool, by Molly McCluskey, November 11, 2011).

In her article, "The Best Performing CEOs in the World,” Harvard Business Review, January 2010, authors by Morten T. Hansen, Herminia Ibarra and Urs Peyer write: “Our data highlights the great extent to which CEOs account for variations in company performance beyond those due to industry, country and economic swings”

As we read articles about the overpayment or compensation to leadership we come away with the conclusion that it is not so much that great leaders are overpaid, it is rather all the other people inhabiting leadership spots that are CEOs that are not worth what they are paid. In essence, it is hard to place a value on a great CEO but many organizations that do not have great CEOs have been paying as though they do.

2. Great Business Book – “Great by Choice”. In reading the most recent book by Jim Collins, “Great by Choice,” we continue to believe that he has more clarity on what it takes to be a great organization than almost anybody else. His core philosophy is the concept that putting great people in place (i.e., the “who” issue) remains the most important issue in creating successful organizations. We agree strongly with this sentiment. Collins also has several other great concepts in the book. For example, he speaks of testing concepts (bullets vs. cannonballs), consistent discipline, and a core set of business concepts or a blueprint to guide the organization.

On testing Collins states:

“Amgen’s early days illustrate a key pattern we observed in this study: fire bullets, then fire cannonballs. First, you fire bullets to figure out what’ll work. Then once you have empirical confidence based on the bullets, you concentrate your resources and fire a cannonball. After the cannonball hits, you keep 20 Mile Marching to make the most of your big success.”

On people he notes:
“Microsoft used extreme standards to select the right people for Microsoft, with Gate’s summing up in 1992,“Take away our 20 best people and I tell you that Microsoft would become an unimportant company.” Biomet paid fastidious attention to getting the right people in every seat, using stock options at all levels to attract and retain the best talent. All the 10X companies cultivate cult-like cultures wherein the right people would flourish and equally, where the wrong people would quickly self-eject. The 10X study is predicated on the premise of unending uncertainty, which increases the importance of First Who; if you cannot predict what’s going to happen, you need people on the bus who can respond and adapt successfully to whatever unforeseen events might hit.”

Finally, on the concept of constant performance he spoke of the consistent achievement of goals rather than sporadic phenomenal growth:
“John Brown understood that if you want to achieve consistent performance, you need both parts of a 20 Mile March: a lower bound and an upper bound, a hurdle that you jump over and a ceiling that you will not rise above, the ambition to achieve and the self-control to hold back. The 20 Mile March is more than a philosophy. It’s about having concrete, clear, intelligence, and rigorously pursued performance mechanisms that keep you on track. The 20 Mile March creates two types of self-imposed discomfort: (1) the discomfort of unwavering commitment to high performance in difficult conditions, and (2) the discomfort of holding back in good conditions.”

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