October 2017

During the first decade of this millennium, healthcare entered a new era.

The US economic climate, unsustainable spending on healthcare, an evolving insurance market, technological advances, and increased healthcare decision making by Internet-empowered consumers accelerated the emergence of a new business model.

Under this new model, healthcare providers would achieve success not through increased volume but rather through successful patient outcomes related to quality, access, and cost for a defined population across the continuum of care. Success would require transformational change of hospitals and health systems.

The new model captured the attention of innovative retail competitors (e.g., Walgreens, CVS Health), for-profit companies (e.g., DaVita, Steward Health Care), and technology providers (e.g., Teladoc, HealthSpot, IBM Watson Health), among others, which started to disrupt markets where traditional healthcare organizations had previously competed solely with each other.

Kaufman Hall, too, recognized that the model was a game changer. In early 2009, independent of the Affordable Care Act of 2010, we started working with proactive senior executives at provider organizations nationwide to assess their organizations’ readiness for the new business model and to recommend repositioning strategies suitable to their situations and service areas. We identified nine competencies (detailed in the sidebar) that hospitals and systems would need to develop or acquire to make the necessary transformation.

Whether achieved through ownership or partnership arrangements, these competencies included high levels of hospital–physician alignment through various arrangements; sophisticated information technology (IT); a well-developed network that could provide the best care practices in the lowest-cost settings; a coordinated care delivery process; and the ability to assume clinical and financial risk for covered populations. Our sense was that early movers toward these competencies would be rewarded with growth of their networks through high-quality partnerships and expansion of their covered populations.

Stepping Up
As evidenced by the feature articles in this issue of Frontiers of Health Services Management, organizations such as INTEGRIS and Navicent Health stepped up to the new model and started the serious work involved in gaining these competencies.

Achieving new expertise and abilities through collaborative affiliations with other community providers was, and is, not new to many organizations. However, even the best-prepared providers have come to understand the magnitude of strategic change that is required. As Lawrence at INTEGRIS notes, extending “beyond the hospital’s walls” through creative partnerships to address the underlying health of a population requires adaptability, agility, and innovation. To stay competitive, Saunders at Navicent Health adds, a system must give a partnership the ability to “pivot toward relevance and sustainability” while continuing to provide a “value proposition for the entities involved.”

So, as Congress works to reshape healthcare, where are the nation’s hospitals and health systems on this transformative journey? For all the reasons cited earlier, the answer to this question is critical, whatever legislative changes may occur. Of the nine competencies that Kaufman Hall identified as important to transformation, three have proven to be key to the progress that hospitals and health systems have made under the new model during the past decade: services distribution, network development, and risk management.

Services Distribution
Organizations are making gradual progress in determining what services they should be offering and where they should be offering them. Leaders are recognizing that they do not need to own or provide all services if they can find a best-in-class partner and figure out how to work together.

For example, Providence Health Care, with six hospitals and an 800-provider medical group in its network in eastern Washington, and Kootenai Health, an independent community hospital serving patients in northern Idaho and the Inland Northwest, have been collaborating for decades. Their various initiatives include a shared electronic health record system, a joint venture for radiation oncology, community health education and promotion programs, and medical staff support from Providence in Kootenai’s cardiac surgery program.

In May 2017, the two organizations created the Kootenai Providence Health Alliance (KPHA) to more formally manage these collaborations. The KPHA would also be a vehicle for exploring expanded partnerships with one another—for example, in women and children’s services—and with other like-minded partners (Providence Health & Services 2017). The KPHA called for no change of ownership, but instead simply established a mutual agreement to work together to share each other’s expertise and avoid duplicative services.

To deliver the best value for their communities, many organizations are looking to specialized entities, such as cancer centers and children’s hospitals, to help run programs or provide services to their patients under various collaborative arrangements. A health system’s commitment to a strategic partnership may require it to make tough decisions about its own facilities and services.

The process starts with a top-to-bottom review of demand and performance for every facility and service. In some instances, one or more of the system’s own clinical programs or outpatient facilities may not be as strong as those at another organization. Leaders must be willing to sell, convert, or close facilities that do not have sufficient volume or are otherwise unable to perform up to necessary financial or clinical standards. They must be willing to consolidate services that are performed at multiple locations in close proximity and to divest service lines that are not delivering value for the organization and community (Kaufman 2017).

Leadership teams are recognizing that, instead of doing battle with one another, they should define their value propositions and areas of operational excellence and examine those of potential partners – including new and nontraditional competitors. Leveraging what each partner has been able to build increases the quality and efficiency of care within and across service areas.

Network Development
Beyond service distribution, the ability to effectively and efficiently manage a population’s health and care needs depends on the design and continued operation of a high-performance delivery network (Exhibit 1)— one that delivers care across the continuum under an optimized contracting strategy.

EXHIBIT 1: Network Development for Population Health Management

Source: Kaufman, Hall & Associates, LLC. Used with permission.

Increasingly, insurers are restricting networks to the most efficient providers. To be considered essential, a network must provide the breadth and depth of care desired by the purchaser, and it must be able to handle the projected volume of patients cost-effectively.

Sophisticated organizations, like INTEGRIS, have been developing such a network to span the continuum. Lawrence describes INTEGRIS’s partnership with a telemedicine provider for virtual care services, an urgent care provider to meet nonemergent ambulatory needs, and an operator of microhospitals for acute care needs in local neighborhoods. Rather than duplicate services or build new facilities, he notes, partnerships made sense.

Many organizations are developing portions of the network through partnerships, such as a large primary care clinic, an urgent care provider, a home health agency, and the like. For example, Northwell Health, Dignity Health, and Hartford Healthcare— all large health systems—have partnered with GoHealth Urgent Care to provide consumer-friendly urgent care centers in their regions under cobranding arrangements (Cision PR Newswire 2017).

Participation in bundled-payment programs and other risk-bearing insurance programs such as Medicare and Medicaid Advantage incentivizes collaboration between hospitals and skilled nursing facilities and home health care to reduce readmissions. These post-acute care services are of significant interest to hospitals and health systems that are working to improve quality and the patient experience and to reduce unnecessary and costly readmissions.

Many hospitals are looking at ways to gain access to skilled nursing facilities and home health care capacity while not necessarily owning it. Alignment options include IT integration support; space leasing for inpatient hospice services; preferred-provider agreements with entities that achieve specified quality, service, cost, and other metrics; and joint ventures through an equity or other type of investment. Health systems can pursue multiple post-acute care options simultaneously, but owning all types of entities, which also include long-term acute care facilities, inpatient rehabilitation, and palliative care, typically is not the desired option.

Laboratory–hospital and other arrangements with ancillary services represent another growth area for creative partnerships. Inpatient and outpatient hospital laboratories are big business, accounting for approximately 38 percent of total laboratory volume, with another 21 percent coming from physician practices, nursing homes, and other providers through hospital “outreach” use (Cohen 2016; Kaufman, Hall & Associates 2017). The historically stable hospital laboratory environment is now changing dramatically because of lower expected payment rates for laboratory tests, fierce competition from national laboratories that are able to make exclusive deals with payers, and laboratory shopping by consumers with high-deductible plans who see tests as a commodity and choose facilities based on price.

Health systems can look to unique partners and structures to satisfy their laboratory-related goals and objectives. For example, Western Connecticut Health Network (2017) entered into a joint-venture partnership with laboratory operator Sonic Healthcare USA for enhanced laboratory services throughout Connecticut and management of the network’s laboratory business. Alternatively, the four-hospital West Tennessee Healthcare, which operated a full-suite testing laboratory at less than full capacity, recently entered into an arrangement with Quest Diagnostics, which had a gap in that geographic area (Kaufman, Hall & Associates 2016). The health system provides local testing services, while Quest provides IT/connectivity solutions and billing, courier, and client services. This arrangement lowers the system’s costs and gives it growth potential through the laboratory’s outreach efforts.

Risk Management
Hospitals and health systems are aligning clinical and economic incentives and putting in place various operating models, such as accountable care organizations and clinically integrated networks, to do so. Assumption of risk contracts is advancing slowly, but the ability to take on risk is becoming a business imperative. There are two types:

1. Provider risk is undertaken by the entities delivering healthcare services and includes clinical or performance risk, which is the ability to deliver patient care that exceeds the targets for safety, quality, compliance, and other measures defined in the risk contract with the payer. Provider risk also includes utilization or financial risk, which is incurred through acceptance of a fixed payment in exchange for the provision of care at an expected level of utilization and cost.

2. Insurance or plan risk is assumed by hospitals and health systems that partner with another provider or a health plan to have their own insurance plans. They are responsible for attracting and retaining members and for the overall costs of plan administration and care delivery.

Many creative partnership models are being developed between providers and payers to deliver clinical and quality components of population health management along with the financing mechanism or contracts to support this clinical integration. In one such “payvider” partnership, Presbyterian of New Mexico, which has three decades of experience in integrating financing and healthcare delivery through its own health plan, was selected by a coalition of 11

North Carolina hospitals (Cone Health, Duke University Health System, Carolinas HealthCare System, Novant Health, and others) to provide Medicaid managed care services to North Carolina residents under a joint venture named Provider-Led, Patient-Centered Care, LLC (Covington 2016). The North Carolina providers recognized Presbyterian’s track record in managing care for Medicaid patients and its ability to scale up to provide administrative and analytic support to manage a population in North Carolina.

Seventeen-hospital Centura Health developed a joint venture with DaVita HealthCare Partners, which has extensive experience in healthcare delivery under capitated arrangements. The two organizations created FullWell, which equips providers in Colorado with access to data analytics to identify patients at high risk for chronic conditions and supports care coordination under aligned financial incentives (Draper 2014).

In 2015, Granite Health, a partnership of five of New Hampshire’s largest health systems, and Tufts Health Plan, a health insurer with more than 1 million members, announced a joint venture to form an insurance company named Tufts Health Freedom Plan. The goal is to provide residents of New Hampshire with coordinated, high-quality, and cost-effective healthcare coverage through insurance products and provider networks that focus on population health management. A variety of health plans will be available to employers and their employees (Wells and Rowe 2016).

Conclusion
Partnerships in healthcare have accelerated, and the traditional lines and roles of what were once distinct verticals are now blurring. All types of innovative transactions are occurring. As larger players combine in unique ways, the pace of change will quicken in geographic areas nationwide. How the business of healthcare is conducted could be redefined in fundamental and dramatic ways.

Leadership teams of all hospitals and health systems must now consider partnerships that—through the advancement of core competencies required for the new business model—will enable them to be essential providers in their communities in the new healthcare era.