High-Functioning, Integrated Health Systems: Governing a Learning Organization

Transcription

1 High-Functioning, Integrated Health Systems: Governing a Learning Organization a governance institute white paper summer 2012 A service of The Governance Institute The essential resource for governance knowledge and solutions 9685 Via Excelencia Suite 100 San Diego, CA Toll Free (877) Fax (858) GovernanceInstitute.com

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3 About the Authors Daniel K. Zismer, Ph.D. is associate professor and director of the M.H.A. and Executive Studies Program in the Division of Health Policy and Management, School of Public Health, at the University of Minnesota. He is also associate adjunct professor of medicine in the Department of Medicine in the Medical School. His area of interest is in the design and functioning of integrated health systems and he has built a career in both consulting on, and implementing, such systems. Frank B. Cerra, M.D. is professor of surgery and holds a McKnight Presidential Leadership Chair at the University of Minnesota. He is also the former senior vice president for health sciences and dean of the Medical School at the University of Minnesota, and holds a position as adjunct professor in the School of Public Health. The clinical enterprise of the university is partnered with a major health system, while retaining its physician practice plan with the university, within the competitive health market in the State of Minnesota. Acknowledgements The authors give special thanks to Peter E. Person, M.D., CEO of Essentia Health in Duluth, Minnesota, for his contributions of a board balanced scorecard and strategy map from the organization. The Governance Institute The Governance Institute provides trusted, independent information and resources to board members, healthcare executives, and physician leaders in support of their efforts to lead and govern their organizations. The Governance Institute is a membership organization serving not-for-profit hospital and health system boards of directors, executives, and physician leadership. Membership services are provided through research and publications, conferences, and advisory services. In addition to its membership services, The Governance Institute conducts research studies, tracks healthcare industry trends, and showcases governance practices of leading healthcare boards across the country. GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems i

4 A service of The Governance Institute The essential resource for governance knowledge and solutions 9685 Via Excelencia Suite 100 San Diego, CA Toll Free (877) Fax (858) GovernanceInstitute.com G Charles M. Ewell, Ph.D. Founder Jona Raasch Chief Executive Officer Gregg Loughman Vice President Cynthia Ballow Vice President, Operations Kathryn C. Peisert Managing Editor Glenn Kramer Creative Director Kayla Cook Assistant Editor I The Governance Institute is a service of National Research Corporation. Leading in the field of healthcare governance since 1986, The Governance Institute provides education and information services to hospital and health system boards of directors across the country. For more information about our services, please call toll free at (877) , or visit our Web site at GovernanceInstitute.com. The Governance Institute endeavors to ensure the accuracy of the information it provides to its members. This publication contains data obtained from multiple sources, and The Governance Institute cannot guarantee the accuracy of the information or its analysis in all cases. The Governance Institute is not involved in representation of clinical, legal, accounting, or other professional services. Its publications should not be construed as professional advice based on any specific set of facts or circumstances. Ideas or opinions expressed remain the responsibility of the named author(s). In regards to matters that involve clinical practice and direct patient treatment, members are advised to consult with their medical staffs and senior management, or other appropriate professionals, prior to implementing any changes based on this publication. The Governance Institute is not responsible for any claims or losses that may arise from any errors or omissions in our publications whether caused by The Governance Institute or its sources The Governance Institute. All rights reserved. Reproduction of this publication in whole or part is expressly forbidden without prior written consent. ii High-Functioning, Integrated Health Systems SUMMER 2012 Call Toll Free (877) GovernanceInstitute.com

5 Table of Contents d 1 Executive Summary 2 Discussion Questions for Board Members 3 Introduction 5 Contrasting Provider Care Delivery Models: Traditional vs. Employed Integrated Model 5 Design, Strategy, Operations, and Finance, and the Concept of Autonomy 8 Learning Organizations 9 Management Challenges from Physician/Provider Employment in Integrated Systems 9 Definition of Productivity and Financial Incentives Alignment 9 Provider Workforce Planning and Human Resource Deployment 10 Patient Engagement 11 Strategic Transformation into an Integrated Model 11 Approach 11 Leadership Model 12 Operating Economics 13 The Governance Management Partnership and Opportunities for Organizational Learnings 13 The Nature of Governance for the Integrated Health System: Structure, Composition, Function, and Relationship with Management 17 Becoming a Learning Organization 19 Conclusion 21 References GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems iii

6 iv High-Functioning, Integrated Health Systems SUMMER 2012 Call Toll Free (877) GovernanceInstitute.com

7 Executive Summary d This paper argues a need for a fundamental redesign of community health system governance based upon existing and expected dynamics that are reshaping the fundamentals of clinical care and business models. Health reform (in any form) coupled with continuing downward pressures on healthcare costs and utilization trends, as well as increasing demands for enhanced value will cause accelerating consolidation and provider integration. More specifically, it is likely that community health systems will reach points where most, if not all, physicians and other licensed providers are employees of integrated health systems (IHSs). The IHS model of community health services delivery is fundamentally different from the historic and conventional models composed of single or multi-hospital systems with affiliated, independent physicians making up the medical staff. With the integrated model everything changes: organizational design, legal structures, operating models, leadership models, methods of organizing and aligning operating and financial incentives, as well as, for some, visions and missions. With such substantial change, it seems reasonable that the integrated model would implicate governance structures as well as operating principles and function. However, while much has been written regarding the nature and function of integrated health system strategy, operations, and finance, comparatively little exists regarding the effects on governance structure, the governing board, operations, and related governance success factors for community health systems. Consequently, this white paper argues in favor of a transformation of structure and function of governance for community health systems destined for higher levels of clinical and business model integration. A principal goal of these recommended transformations is enhancing the performance of integrated health systems as learning organizations that are able to acquire knowledge and innovate fast enough to survive in a rapidly changing environment. 1 For integrated health systems to become effective learning organizations, a new partnership between governance and management is required; a structural and functional transformation is required to create this partnership. This white paper addresses this new partnership recommendation from the perspectives of structure, function, and expected performance. It should become clear how restructured, high-functioning, integrated health systems will behave in a reforming U.S. healthcare marketplace. The approach to this white paper is set within a framework of six defining themes. Theme #1: Creating a New Potential The integrated model creates a new (or at least enhanced) potential for operating performance, financial performance, and value performance. Because of the nature of the integrated design, the health system can actually perform as a system of care. The integrated model controls all the care delivery and operational moving parts. This design differs markedly from the more traditional models of community healthcare delivery where hospitals are organized and controlled independently of physicians who operate from business entities they own, which can (and almost always does) put them in competition with affiliated hospitals, and with other independent physicians on the medical staff. With the integrated model, this inherently inefficient competition is eliminated (or at least minimized) and internal operating and financial incentives are more easily aligned. Theme #2: Ability to Deliver on an Innovative Contracting Opportunity with Payers With the integrated model, an organizational leadership team can, with a single signature, deliver a unified and integrated system of care to third-party payers (including government payers) under a range of contracting models and methods, including those that transfer financial risk from the payer to the health system in exchange for opportunities to improve financial performance by improving care efficiency and utilization for populations delivered by contract. Theme #3: Organized Physician Enterprise With the more traditional models cited above, the hospital(s) don t control the size, specialty mix, business models, or application of professional resources made available through the medical staff. These abilities compose the principal advantage of the integrated model (i.e., virtually all of the providers required to care for patients and populations are, by design, resident within the model by employment). The integrated health system 1 See GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems 1

8 is unfettered by the challenges inherent in the independent medical staff model. The integrated health system minimizes (or eliminates) the need for multiple, time-limited, uniquely designed business partnerships, joint ventures, or service agreements with independent physicians or medical groups. Consequently, the integrated system relies upon a unified, wellorganized, physician-led enterprise that works from the same mission, vision, values, strategic plan, and incentives. Physicians are members of an integrated team. The integrated model does not tolerate hundreds of physicians working independently under the same roof. Theme #4: Nature and Design of the Care Model and Related Economic Changes Integrated health systems are principally in the outpatient business. The integrated model owns and controls all aspects of care delivery including associated operating revenues. Inpatient care typically drives a lesser proportion of total operating revenues. Consequently, the organization and management of resources differs markedly from more conventional hospital-centric and inpatient-focused management models and methods. Theme #5: Asset Applications and Financings Because the greater proportion of care delivery resources are deployed to outpatient clinical programming, in excess of 50 percent of all fixed assets can be allocated off the hospital campus to larger, more clinically sophisticated ambulatory care centers. Clinical programming is, necessarily, standardized across all sites usually under clinical service line strategies. 2 Outpatient center assets are strategic as well as clinical. These centers are branded, geographically positioned points of market control and influence. Integrated health systems are often afforded time-limited opportunities to stake out strategic geographic markets. Consequently, many employ less traditional methods and models for asset financings (including alternative capital). These assets are expected to perform to high strategic, clinical, and financial standards, requiring effective organization, deployment, and management of people and programming. Theme #6: Leadership and Management Model Unlike the more traditional model, physicians are not customers of the health system they are engaged and embedded partners. Consequently, they are positioned formally and deliberately within the organizational design and leadership structure. They are embedded in the leadership fabric of the organization. As Peter Drucker might have described physicians in the integrated model, they are knowledge workers, not production workers. 3 Physicians occupy positions on the integrated health system board, as members of the senior leadership team, as leaders of the physician enterprise, and as co-manager of all manager clinical 2 D.K. Zismer and D.C. Wegmiller, Clinical Service Lines: Mapping the Future of Community Health [private publication], C-Suite Resources, October Available at 3 Adapted from P.F. Drucker, Management Challenges for the 21st Century, Harper Business, service lines. They have job descriptions and are compensated for their efforts and the value wrought. So, directors of integrated community health systems should know that with integration, everything changes; so goes the structure and function of governance. The balance of this white paper is designed to fulfill four objectives: 1. To make clear the market dynamics and health policy changes that will continue to drive provider-side consolidation and the integration of community hospitals and physicians. 2. To establish an understanding of how the integrated design creates strategic, operations, operating economics, and care model opportunities that are not readily available to the more traditional community health system governance and operating models. 3. To describe and defend the need for redefined leadership and management models. 4. To make the argument for a restructured approach to integrated health system governance with support for a new operating approach and functional mental model. Last, this white paper emphasizes the need for directors of integrated health systems to fully appreciate the value of becoming a learning organization with this core value driven from the top (governance) down. As will be made evident, the successful integrated health systems (and there are many) are governed by boards that fully appreciate the need and value of a continuous learning loop generated from the trenches through leadership to the board for application to an ongoing effort of translational and transformational benefit (i.e., the conversion of learnings to action in a dynamic industry and marketplace). Discussion Questions for Board Members 1. What does integrated health system (as per the use of the term in this white paper) mean to our organization? If we are not yet an IHS, are we going to be or should we take steps in this direction? 2. What steps are we taking to integrate with providers across the continuum? Are we building an organized physician enterprise? What is our integration strategy? 3. How are we changing our relationships with payers? Are we taking on risk-based payment models to improve care efficiency and utilization? How does this relate to our strategy to prepare for value-based payments? 4. How will/should these changes in integration and care delivery change the structure, composition, and activities of our board(s)? 5. How would a governance/management dyad or partnership change the way we lead our organization? Is this the right approach for us, and why or why not? 6. What implications do the ideas presented in this paper have on our strategic plan/organizational vision? 7. Are we a learning organization? If not, what steps do we need to take to gain the ability to acquire knowledge and innovate fast enough to survive in a rapidly changing environment? 2 High-Functioning, Integrated Health Systems SUMMER 2012 Call Toll Free (877) GovernanceInstitute.com

9 Introduction d Healthcare in the U.S. is undergoing transformative change. Change is being encouraged, largely, by payers (including the federal government) who have determined that health cost inflation rates are excessive and the value received is not keeping pace with the health dollar spent. This ability for payers (commercial health insurers and the federal government) is driven largely by the consolidated nature of that industry. By any reasonable measure, the U.S. government now funds approximately 50 percent of all health costs in the U.S. and a relative few, large insurers comprise the balance of the commercial payers in the U.S. When asked, How many payers count? most community health system chief financial officers will answer with five or fewer, including the two principal governmental payers (Medicare and Medicaid). All payers are pressuring the provider-side for reduced unit prices, reduced utilization rates, and lower health costs and enhanced outcomes for defined populations under contract. Those pressures, coupled with the health reform legislation, will continue to encourage consolidation of the provider-side of the U.S. healthcare industry. Consolidation of the provider-side manifests, in part, as hospitals (and hospital systems) integrate with physicians to form integrated health systems (IHSs). The foundation for the structure of the integrated model is employment of physicians (and other licensed providers), including those emerging from clinical training as well as physicians with years of private practice experience under their belts. Small and large private medical practices are selling and merging with community health systems. Market dynamics will encourage accelerating formation of community-based, integrated health systems. The nature of the IHS design and operations requires a fundamental redesign of health system governance. A clarion call for enhanced value is clear as well. Dr. Donald Berwick, founder of the Institute for Healthcare Improvement and former CMS administrator, has challenged U.S. healthcare providers to achieve the Triple Aim: 1) improving the patient experience of care (including quality and satisfaction); 2) improving the health of populations; and 3) reducing the per-capita cost of healthcare. 4 If our traditional healthcare structure and delivery in the U.S. could have achieved this Triple Aim, it is reasonable to assert that we would have already done so. Thus, one might presume that Berwick was also calling for a new approach to the organization and delivery of healthcare. In addition, much of this change is being driven by a need for accountability and the realization that population health status is an important component of the social determinants of health. These forces of change will continue to encourage providerside consolidation and have been the subject of major public discussions and policy generation at the local, regional, and national levels. As a result of this accelerated consolidation and integration increasingly focused on achieving the Triple Aim and including the direct employment of physicians and other providers new challenges are arising in the strategic design, direction, and operations of health systems, much of which is new ground for the care delivery systems and processes, the providers, and the new financial approaches supporting this transformation. These challenges require ongoing learning by organizations in a way that requires a new and closer relationship between governance and management to successfully steer the ship. Ultimately, these new learnings will need to be inculcated into the educational systems from which the new leadership emerges. Community health system leaders must consider the effects of this change upon system structure, strategy, operations, mission, and governance. The effect on community health system governance is the focus of the commentary that follows. The central argument is that market dynamics will encourage accelerating formation of community-based, integrated health systems. The nature of the IHS design and operations requires a fundamental redesign of health 4 For more information, see Pages/default.aspx. GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems 3

10 system governance. The necessity of this restructuring is driven by the nature of the integrated model. This white paper will explore the changes that are occurring, arising challenges, and approaches to successfully creating, governing, managing, and leading a high-value, functionally integrated health delivery system that becomes a learning organization, and the new governance management partnership that is required to be successful. Community health system directors are encouraged to consider the propositions provided here as they examine the future structure for the organizations they govern. 4 High-Functioning, Integrated Health Systems SUMMER 2012 Call Toll Free (877) GovernanceInstitute.com

11 Contrasting Provider Care Delivery Models: Traditional vs. Employed Integrated Model d Integrated health systems with employed physicians are not new; some have over 100-year operating histories (e.g., Mayo Clinic and Cleveland Clinic); others have years of experience (e.g., Gundersen Lutheran Health System and Essentia Health). What is changing in the marketplace is the accelerated scope and scale of the consolidation and integration of systems of care along with a major increase in employed providers. The rapidity and extent of this shift is a major disruption in provider communities presenting profound cultural and performance challenges for management. To better understand these challenges, it is helpful to contrast the two ends of the provider care model spectrum: independent versus employed and integrated. In the traditional model of community health services delivery, hospitals are independent enterprises that have largely relied upon independent physicians to affiliate through medical staff structures that recognize the physician as having the privilege of using hospital resources in exchange for admitting patients for care. While there are duties set forth by the medical staff affiliation bylaws, affiliated physicians are, by design, independent from the hospital and are thereby: Largely free to practice their own care delivery processes Free agents to compete in the marketplace as their own entity Free to affiliate with other hospitals (including competitors) Free from implications of the hospital economic and the financial model Free from legal and regulatory implications pertaining to employees of the hospital enterprise In contrast is the direct employment of physicians by the organization and/or fully committed contractual relationships with non-employed physicians containing agreed-upon criteria for care delivery and operating and financial performance. In the integrated model, physicians: Become a category of employee of the system Practice in a more uniform care delivery model with varying levels of control over the process of care delivery Are not free to compete in the marketplace of health, but compete via the entity that employs them Are not free to affiliate (at will) with other hospitals Are exposed to the same legal, regulatory, and marketplace environment that affects the health system Operate from the same set of economic and financial incentives as the parent entity Are not obligated to invest personal assets or earnings in the business model Have an obligation for clinical quality, safety, and effectiveness Thus, the integrated model becomes more corporate and very different from the traditional model. This translates to new required management principles, practices, and leadership imperatives. Revenue and capital assets become corporate in ownership and management in the integrated model, with centralized planning and management and a strategic approach that is less inpatient and more outpatient focused. Design, Strategy, Operations, and Finance, and the Concept of Autonomy Moving into an integrated corporate environment necessitates a modification of autonomy (for all concerned) in such areas as operations, care plans, care delivery process and models, work environment, compensation, and the continued ability for professional growth and satisfaction. While the marketplace is moving in the direction of outcome accountability, the transition is nascent and is happening at a time of great growth in the demand for services driven largely by the demographics of an aging population. While this move to a corporate environment creates opportunities to design the delivery model and the performance and outcome metrics, this is a major cultural shift for both the managers and providers. Likewise, being held accountable for performance with linkages to financial incentives such as compensation is another major cultural shift for providers, especially when the financial aspects of the system are generally managed by administration. In this transition, several approaches are being used to include physicians into the decision-making structures and processes with responsibility for the design and productivity of the care model (e.g., the dyadic model of service line management and GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems 5

12 direct participation in senior system administration as a medical director with authority over the care model). Revenue and capital assets become corporate in ownership and management in the integrated model, with centralized planning and management and a strategic approach that is less inpatient and more outpatient focused. IHSs are largely an outpatient business and will continue to be so as inpatient care continues to become more acute, and additional services (e.g., chronic care management and end-of-life care) are added to the outpatient portfolio. Examination of current operating revenue structures of a number of integrated systems demonstrate a comparatively common operating revenue profile with key categories, by proportion, as: 26 percent inpatient 27 percent ambulatory (technical fees) 25 percent physician professional fees (often divided 51 percent inpatient and 49 percent ambulatory) 12 percent pharmacy and supplies sold There is every expectation for the ambulatory service revenues to grow to comprise upwards of 60 percent or more of the health system revenue base. While capital assets in the form of inpatient beds will retain an important position in the balance sheet structure, expansion of ambulatory strategies (and related facilities) will become increasingly prominent and a focus of considerable effort of health system resources and management time and effort. For academic health center models, this trend will challenge the conventional model of a faculty practice plan collaborating with a community hospital. As capital assets and related clinical programming and revenues (and expenses) move to the ambulatory arena, the questions of ownership, governance, and control of the care model will rise to importance for the faculty practices and community hospitals that are not integrated. Consolidated and Integrated Operations Support Systems While less mature IHSs tend to keep hospital and physician support services separate, operationally mature IHSs function on a platform of consolidated, integrated support systems: finance, accounting, billing services, human resources, information technologies, marketing, risk management, and purchasing, to name a few. Leaders of these services need to be experienced in the operations and management of the integrated model, including its hospital, ambulatory, and medical practice aspects. Finance, accounting, and billing services functions vary across these components as do related legal, regulatory, and reimbursement rules. Standardization of Service Lines Standardization of clinical service lines within and across operating sites is an essential feature of successful integration (i.e., care delivery that is held to the same quality and performance methods and standards at all points of patient contact). Health systems that allow self-stylized clinical programming designs at geographically diverse care sites sacrifice operating and capital efficiencies, quality management opportunities, brand leverage, and payer contracting leverage in favor of site-specific autonomy. Moreover, local autonomy, as a health system leadership principle, can violate customer (patient) expectations (i.e., the expectations of a single standard of care guided by unified clinical processes, across all sites of care). Service lines, both inpatient and outpatient, will need to be designed, implemented, and assessed by interdisciplinary teams, led by partnerships of provider and manager leaders. Minimization of Internal Competition Traditional hospital and medical staff clinical and business model designs favor and often encourage internal competition (i.e., physicians in private practice competing with each other and the hospital). As systems achieve full integration, internal competition is minimized, if not eliminated, enabling new opportunities for improved operating and capital efficiencies. Provider Deployment The integrated system will have a centralized plan for deployment of highly trained and skilled professionals based upon the economic principles of sub-specialization and division of labor, with optimal leverage of the most expensive personnel. Specific clinical specialties have performed exceedingly well under such principles cardiovascular services in integrated health systems, especially. For example, a large, integrated group of cardiologists will be composed and deployed based upon a clinical sub-specialties plan where personnel are assigned to key clinical services (e.g., interventionists, electrophysiologists, imaging specialists, heart failure specialists, etc.). While all will share certain responsibilities (e.g., hospital rounds and clinic visits), clinical assignment models will emphasize the enhanced efficiency, quality, and safety available through an integrated team approach. The compensation plan design recognizes the value of this subspecialized model. 5 Such centralized planning will require expert 5 D. K. Zismer, Questions the Emerging Practicing Physician Should Ask When Considering Employment by an Integrated Health System, Physician Executive Journal of Medical Management, Vol. 36, No. 6, November/December High-Functioning, Integrated Health Systems SUMMER 2012 Call Toll Free (877) GovernanceInstitute.com

13 input and sufficient distribution of resources, authorities, and responsibilities to the provider manager co-leadership model required for success. Interdisciplinary care models are also being implemented in chronic disease prevention and management, care coordination, medication management, and end-of-life care, along with the use of communities of health in the care of populations. Such approaches are frequently nurse-clinician or clinical-pharmacy centric, use interdisciplinary teams, and are beginning to define the knowledge and potential new providers that will be needed to approach the non-healthcare social determinants of health (e.g., lifestyle issues as a determinant of health status and healthcare use patterns). Operating Expense Structures While management of operating expenses related to supplies, costs of capital, and hard assets is always important, IHSs are a people business. When operating expenses related to physicians, clinical staff, and related operations and finance staff are added to the operating expense structures of hospitals by way of integration, total people costs (wages and benefits) rise from about 46 percent to 61 percent of operating revenues. This ratio is the principal driver of operating margin performance. For example, a 1 percent reduction of people costs for an IHS with annual operating revenues of $500 million can create a $3 million positive operating margin effect (assuming a 60 percent people cost ratio to start). Total costs of physician cash compensation for IHSs are generally 16 percent of operating revenues, with drugs, devices, and supplies accounting for another percent. So, upwards of percent of annual operating revenues can be consumed by people costs and supplies, with the next largest single operating expense category being total costs of capital at about 6 percent. Maintaining flexibility and incentives alignment in the workforce relative to work performance and productivity will become a major challenge. This will be particularly so with the continued shift to outpatient care, the care demands of the aging population, as the emphasis shifts from the volume to the value of services, and as the need increases to expand the number of covered lives in the population for which the IHS is responsible and accountable. acceptable levels of capital efficiency. There is evidence to support the assertion that fully integrated health systems achieve higher levels of capital efficiency due, in part, to the design characteristic that physicians are not independent, nor are they competitors of the health system owning competing capital assets and services. Furthermore, alignment of internal financial incentives within the IHS can favor system performance, including that of capital assets. Consequently, as capital asset investment demands increase in community health systems, the integrated design offers the opportunities to manage capital asset performance to levels higher than might be predicted. As systems achieve full integration, internal competition is minimized, if not eliminated, enabling new opportunities for improved operating and capital efficiencies. The integrated model also allows for the application of alternative capital to finance strategic projects. Examples of alternative capital include: strategic facilities development owned and leased by third parties to the health system, joint-ventured enterprises, and access to taxable, commercial debt. The historic and more conservative views of alternative capital have caused some notfor-profit health systems to eschew these opportunities in favor of tax-exempt debt due to beliefs that alternative capital is too expensive, especially when it comes to tax-exempt debt versus third-party owner/lease arrangements for strategic facilities. A deeper and more critical analysis leads to a reconsideration of this position resulting from a changing definition of cost of capital as it pertains to strategic facilities, especially those that may include multi-tenants and varying lease terms across facilities. 7 Capital management for IHSs may be viewed as more complex resulting Capital Asset Efficiency and Alternative Capital Applications There is every reason to believe that capital markets will consider the IHS delivery model as a qualifier for capital access in the markets. 6 Interviews of investment bankers specializing in public capital markets (including the bonding of tax-exempt debt) show a more forward-looking perspective on the ability of health system credits to effectively manage debt in competitive markets. Among such considerations are a) the physician alignment strategy and its depth, breadth, functionality, stability, and durability; and b) the ability of the business model to produce 6 D.K. Zismer, J.B. Sterns, and B. Claus, Capital Efficiency and the Integrated Health System Design: Does the Business Model Design Predict Capital Efficiency Performance in Community Health Systems? hfm, July D.K. Zismer, J. Fox, and P. Torgesen, Applications of Alternative Capital to Strategic Healthcare Facilities Financings for Tax-Exempt Health Systems: When and Why Does It Make Sense? hfm (forthcoming). GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems 7

14 from an expanded array of capital access opportunities which, in the end, provide strategic capital management flexibility and improved asset leverage in the design of the IHS. Community health systems will be forced by market pressures into the population health business a business that is very different from hospitals designed to be the workshops of independent physicians. Population Health Much of the emphasis in health reform will cause community health systems to adopt more of a public health approach to their strategies, operating models, clinical care models, and contracts with third-party payers. Community health systems will be forced by market pressures into the population health business a business that is very different from hospitals designed to be the workshops of independent physicians. The emphasis shifts from treating the sick for a profit to managing the health of populations under contract. Here, the system of care is responsible and accountable for the coordination of care, over time, for a defined population represented by an intermediary (which could be governmental) that controls the terms of the agreement, which, by several available method and models, transfers financial risk from that intermediary to the care system. To function successfully under such terms and conditions, the care system must have internalized the tools to perform to contractual requirements and within the financial terms prescribed by the contract (e.g., preventive care, lifestyle management, team care, rapid cycle adoption of evidence-based clinical best practices, and internal operating incentives that cause providers to be rewarded under new and different operating economics and financial models). The ability for the system of care to succeed over time will be dependent largely upon its ability to demonstrate cost-effective improvement or at least maintenance of the health status of the population(s) assigned by contract. Informatics Most systems are viewing informatics as the electronic health record. Clearly this is an important and useful tool. However, management at the system and service line level requires the availability of real-time data regarding the process of care as well as the outcomes and business aspects of care: the right information in the hands of the right people at the right time to make the best decision. Having such information leads to the next level of information: having real-time access to predictive models to compare actual performance. Such data availability is essential and the subject of health informatics research and development. Investment in such capabilities will become an essential success factor for the system, the service lines, for evaluating professional productivity (provider and administrative), for setting performance goals, identifying areas of needed quality improvement, marketing, and also for incentive-based reimbursement for providers, administrators, and the system. Informatics science is moving into the area where large databases of outcomes, metrics, and reimbursements, as well as the global cost of care and/or the per member, per month cost of care are becoming readily available; it is a new form of outcomes research. While it has its biases and needs more validation relative to other forms of research demonstrating efficacy and effectiveness, this new approach has the potential of producing transformative, real-time change in the care delivery process in ways that enhance current quality improvement methods and models. Learning Organizations Transforming the structure and function of governance for community health systems creates integrated organizations that will be capable of higher levels of clinical and business model integration. A principal goal of these recommended transformations is enhancing the performance of integrated health systems as learning organizations, defined by the Business Dictionary as organizations that acquire knowledge and innovate fast enough to survive in a rapidly changing environment. Learning organizations: 1) create a culture that encourages and supports continuous employee learning, critical thinking, and risk taking with new ideas; 2) allow mistakes and value employee contributions; 3) learn from experience and experiment; and 4) disseminate the new knowledge throughout the organization for incorporation into day-to-day activities. 8 The performance potential of the IHS board is greatly enhanced due to the nature of the IHS design and the effects of that design on board composition, structure, and function. The sections that follow describe challenges and opportunities for organizations to become learning organizations that will survive this rapidly changing environment. 8 See 8 High-Functioning, Integrated Health Systems SUMMER 2012 Call Toll Free (877) GovernanceInstitute.com

15 Management Challenges from Physician/Provider Employment in Integrated Systems d Unique challenges arise in integrated models from the presence of directly employed physicians/providers and/or committed contractual relationships with providers, and the challenges to their cultures and to the culture of the IHS itself. Some of these challenges are in the planning, implementation, and accountability of the care model for the various clinical services; their role in policy and governance of the business; the design and implementation of productivity goals and the subsequent performance assessments; the alignment of performance incentives with productivity and service line business performance, including customer satisfaction and medical and financial outcomes achievement; providing an environment of professional growth and satisfaction; and the effectiveness and efficiency of operational support systems such as the electronic health record and performance information from health informatics services. The work environment must provide sufficient room while also providing accountability for providers to have substantive directional influence in the design, implementation assessment, and subsequent improvement of the care models. Likewise, provider leadership, in partnership with management leadership, must have sufficient responsibilities, resources, and authorities to make the operation of the care models effective and to achieve the performance outcomes (accountability). Definition of Productivity and Financial Incentives Alignment Highly integrated health systems share a definition of physician productivity that extends beyond seeing patients and generating work relative value units and professional fees, to include the efficiency of physician time and effort to optimizing the performance of clinical teams, enhancing capital asset efficiency rates in high-tech clinical areas (e.g., procedure suites), expansion of geographic markets through specialty outreach programs, and achieving best-practice health outcomes as well as business outcomes and patient satisfaction goals. Compensation and benefit incentives design, while supporting individual productivity, also must address the performance of the clinical team and the IHS. One approach is for the IHS to disconnect how the system is reimbursed for physician services from the internal compensation model, recognizing that payment for physician services is one of several types of revenues earned. How the IHS is paid for physician services need not drive how physicians are paid. 9 This characteristic becomes an important tactical advantage as the IHS contracts with payers under a range of financial risk models. Learning organizations will need to embrace the principles and models of team care rapidly and effectively to meet workforce demand (here in a competitive marketplace). With the employment model, providers need not be directly affected by the terms and conditions of every third-party payer agreement executed by the IHS. IHSs with considerable time and organizational maturity under their belts report this to be a fundamental advantage over the less integrated or virtually integrated models. These IHSs are free to move more quickly in markets with the freedoms to execute risk-bearing agreements without needing to get approval from a number of independent physicians who may or may not elect to participate based upon terms of the agreements. Provider Workforce Planning and Human Resource Deployment Over decades of history, the education of medical providers (physicians especially) has operated within a paradigm focused on professional and business autonomy, making all decisions (being the captain of the ship ), taking full 9 J.B. Christianson, D.K. Zismer, K.M. White, and J. Zeglin, Exploring Alternative Approaches to Valuing Physician Services, a report by staff from the University of Minnesota, Division of Health Policy and Management to the Medicare Payment Advisory Commission (Med PAC), June GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems 9

16 responsibility and accountability for patient care, and, essentially, owning the patient directing patient care to any providers (or provider systems) thought to be best for my patient. Schools of medicine have, historically, seen little need to coordinate or integrate educational curricula and/or professional training experiences with healthcare administration teaching programs due, in part, to this historic perspective. Traditional healthcare administration and management educational programs followed suit. The traditions have been straightforward. Physicians have been autonomous in their clinical and business models affiliating with the independent medical staff of hospitals. Hospital leaders treated physicians as their principal customers (not patients). Operating systems and methods were designed for the convenience of the medical staff responsive to self-stylized approaches to practice patterns and clinical care. Boards delegated oversight of the medical staff to committees composed of the independent physician affiliates. Boards took actions (principally the granting of credentialing and privileging) based upon recommendations of these committees. Independent physicians have been permitted to hold seats on hospital governing boards, frequently governing from a perspective and principal goal of protecting the interests of the medical staff. However, in practice this is not an appropriate role of a board member and has rarely been functional, given the unlikelihood that an independent physician could/would ever speak for other independent physicians; it was and is a flawed model all the way around. With mounting market and policy pressures, healthcare provider-side integration accelerates. With integration comes fundamental and transformative change of clinical care and business models. A focus on team care emerges; a focus that encourages leveraging the productivity of the team to its highest potential in pursuit of improved quality, enhanced value, and comprehensive and continuous care for patients. Patients interact with the team for acute care and chronic disease management. Team care and integrated models of care management will be encouraged to the highest levels of efficiency and effectiveness due, in part, to shortages of highly trained and skilled providers for the foreseeable future. Learning organizations will need to embrace the principles and models of team care rapidly and effectively to meet workforce demand (here in a competitive marketplace). Patient Engagement This concept is becoming central to the transformation of care delivery and is a major factor in achieving the outcomes of the Triple Aim. Clearly, the mantra to date has been patient-centered care, and the new science of genomics is promoting care tailored to an individual patient. However, percent of the social determinants of health are not part of the care delivery process (e.g., work placement assistance, affordable housing, access to healthy food options and exercise, and lifestyle education). These pieces are largely under the control of the individuals and the population to which the IHS provides services. The groundswell being created is one of engaging the users in the design, implementation, and evaluation of the process of care. This kind of engagement will require new and different skills and inclusion in the outcomes and quality improvement process. The effectiveness of this inclusion will likely become part of the changes in reimbursement models in the future. 10 High-Functioning, Integrated Health Systems SUMMER 2012 Call Toll Free (877) GovernanceInstitute.com

17 Strategic Transformation into an Integrated Model d Approach Unlike the more traditional community health systems in the U.S. where a principal challenge is aligning with independent physicians, the developmentally mature IHS with employed physicians and providers focuses strategic energy on the differentiating value propositions of the integrated model. The following is a list of value propositions necessary for superior clinical outcomes in an IHS: 1. Team care through interdisciplinary clinical collaborations 2. Standardization of clinical service line strategies 3. Minimization of ineffective clinical process variation 4. Financial risk strategies with payers 5. Capital asset efficiency 6. Economically productive geographic expansion 7. Optimization of patient/customer access 8. Electronic wiring of the system, including direct connections to patients 9. Realignment of internal operating incentives through new compensation models 10. Attention to the development of informatics capacities 11. Developing longer-term approaches to workforce planning 12. Creating a productive work environment This integrated model facilitates strategy in ways that are unavailable or, at least, less available to the more traditionally organized community health systems. The potential for strategic differentiation is inherent with the integrated design, as is speed in the execution of strategy. Interestingly, much of the organizational design and development to get to the integrated state is being developed on the job. The science is also being developed as new approaches are modeled, implemented, and experienced, and then analyzed for their impact on such outcomes as the Triple Aim. Such a disruptive environment where great change is occurring places increased demands on governance, management, and leadership. Leadership Model IHSs will integrate physicians throughout the operating model as co-leaders and co-managers of the enterprise, making frequent use of the dyadic management models (i.e., the pairing of physicians with non-physicians as co-managers of operations including clinical service lines). 10 In one case, upwards of 23 percent of all employed physicians served as co-leaders and co-managers of the IHS with aggregate compensation paid to physicians approximately 4.5 percent of the total physician compensation pool. Physicians will also lead the embedded medical enterprise within the integrated model, which typically takes one of two forms: a single, unified, multispecialty group practice or multiple, controlled divisions. 11 In certain cases, both models are applied. Effective applications of the clinician as leader and manager requires a specialized organizational design and a culture that respects the clinician as leader/manager, whether that clinician is a doctor, nurse, pharmacist, or other provider leader. Effective applications of the clinician as leader and manager requires a specialized organizational design and a culture that respects the clinician as leader/manager, whether that clinician is a doctor, nurse, pharmacist, or other provider leader. Where the physician group is an academic medical practice (i.e., one not fully integrated with a health system, or referral hospital), the ability to achieve real functional integration will be challenged. The lack of full economic integration frequently results in a business model that causes multiple agreements between the hospital and academic practice (often referred to as a practice plan ). Money passes from the hospital to the practice for a range of real and necessary services but, at the end of the day, the relationship is based upon a litany of transactions and inharmonious incentives. This challenge is, incidentally, the acid test for integration. Does the model cause the organization to be inextricably 10 D.K. Zismer and J. Brueggemann, Examining the Dyad as a Management Model in Integrated Health Systems, Physician Executive Journal of Medical Management, Vol. 36, No. 1, January/February D.K. Zismer, The Psychology of Organizational Structure in Integrated Health Systems, Physician Executive Journal of Medical Management, Vol. 37, No. 3, May/June GovernanceInstitute.com Call Toll Free (877) summer 2012 High-Functioning, Integrated Health Systems 11