Week 2 - Assignment Southeast Medical Center Case Study Review the Southeast Medical Center case study found on page 92 of the course text. Of the recommendations found on pages 100-101, select the t
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CH AP TER
2
Or ganized Deli very S yst ems
Myro n D . F o ttle r, D on na M alv e y, a n d K eil a R oon ey
Multihospital s yst ems ha ve been r edeined as multipr ovider healthcar e syst ems to incorpor ate structur al
changes in organizational arr angements and to r elect the pr ovision of a wide r ange of services be yond
acut e hospital care. The American Hospital Association (AHA) deines a multihospital healthcar e syst em
as “tw o or mor e hospitals owned, leased, sponsor ed, or contract managed by a centr al organization. ” 1
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 ) This chapt er will include
multihospital syst ems, as deined by AHA 's criteria, but will also cover the br oader consequences of
sy st em de velopment , including horizontal, vertical, and virtual int egration, and other diversiication
acti vities. The chapt er ends with a case study that looks at a large multihospital/or ganized deli very
sy st em.
No healthcar e syst em in the w orld has under gone as much structur al change as has that of the United
States over the past thr ee decades. It has been suggest ed that the ext ent and the swiftness of structur al
change in US hospitals are unpr ecedent ed in postindustrial society. 2
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 ) Some ha ve char acterized this
change as fundamental and per haps rev olutionary . Nowher e is this mor e evident than in the tr ansition to
multipr ovider healthcar e syst ems. The pr evious cottage industry of indi vidual, freestanding hospitals has
become a comple x web of syst ems, alliances, and netw orks.
The de velopment of hospital s yst ems in the Unit ed States initiall y integrated facilities horizontall y,
resulting in the cr eation of multihospital syst ems that pr ovided similar acut e care services in multiple
locations. Lat er, syst em capability expanded thr oug h vertical int egration and diversiication int o acti vities
that may or may not have been r elat ed to a hospital's inpatient acut e care business. Mor e recentl y,
e xpansion has r elect ed “virtual” integration that invol ves r elationships based on contr acts. 3
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 ) This s yst em de velopment r elects
the tr ansf ormation of multipr ovider s yst ems fr om pr oviders of acut e care to pr oviders that ar e capable of
addr essing a continuum of healthcar e needs.
Given this e volution and their v aried arr angements and structur es, multihospital syst ems ha ve been
redeined as or ganized or int egrated healthcar e delivery s yst ems, the theme of this book. Thus, the
follo wing questions and issues should be addr essed: 7/7/2019 Print
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• How and why ha ve multipr ovider healthcar e syst ems evol ved and changed o ver time, and ho w are
the y expect ed to change in the futur e?
• How does the perf ormance of syst ems compar e to the perf ormance of nons yst em or ganizations?
• Ho w does the perf ormance of not-f or-proit syst ems compar e to the perf ormance of invest or-o wned
sy st ems?
• What fact ors are expect ed to contribut e to pr oitability and success?
• Do functions such as go vernance or or ganizational structur e make a difference in perf ormance?
• What has been the impact of horizontal, vertical, and virtual int egration?
• What managerial recommendations can be made concerning s yst ems?
Healthcar e Syst em De velopment
A di versity of arr angements char acterizes the conigur ation of US hospitals, including alliances, joint
ventur es, feder ations, consortiums, netw orks, and s yst ems. A variety of en vironmental for ces ha ve shaped
the deli very of healthcar e services and broug ht about variations in the de velopment of hospital s yst ems.
Pr eeminent among these for ces has been the shift in the industry from an emphasis on pr oviding hospital
services t o an emphasis on pr oviding healthcar e services. An aging population, the increasing demand for
chr onic car e, and new technologies that support alt ernati ve deli very s yst ems ha ve f ocused att ention on a
broader spectrum of healthcar e services. 4
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 ) ,5
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 ) Subsequent t o this shift has been
the r ecognition that the mar ket f or healthcar e services is local rather than national in natur e. 6
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 ) ,7
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 ) Indeed, industry perf ormance
has indicat ed that patients tend to feel allegiance t o local hospitals and not to national hospital chains. 8
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 8 ) Thus, consumer choice at the
local and r egional le vels has emer ged as a powerful inluence in the deli very of healthcar e services.
The expansion of syst em capacity thr oug h horizontal integration, in which hospitals acquir e other
hospitals, has been declining, and this decline primaril y has been attributed to economic for ces.
Speciicall y, rising healthcar e costs, the shift to a risk -based payment syst em such as the pr ospecti ve
pa yment syst em (PPS), and other cost containment eff orts and regulations ha ve neg ativel y inluenced the
horizontal gr owth of hospital s yst ems. Mor eover , these for ces ha ve pr ecipitat ed a trend tow ar d economic
concentr ation, consolidation, and vertical and virtual int egration in which both the pr oduction and
distribution stages of health car e are included. 9
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 9 )
Althoug h the economic concentr ation of hospitals is not a new trend and has its origins in the 1970s
with the gr owth of in vest or-o wned hospital syst ems, the shift tow ar d a local and regional orientation is
relati vel y new . Risk -based payment has compelled syst ems to consolidat e, downsize, and divest because a
lar ge invent ory of hospitals is no longer proitable. 10 7/7/2019 Print
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(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 0) F urthermor e, government
policies that in the past essentiall y subsidized hospital acquisitions throug h reimbursement of much of
the acquisition cost no w discour age horizontal integration by limiting reimbursement of capital
expenditur es for in vestments in f acilities. 11
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 1)
Short ell has argued that most syst ems ha ve f ormed as a def ense against an incr easing ly uncertain,
comple x, and hostile environment . 12
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 2) The primary moti vations f or
sy st em formation ha ve been t o maintain or g ain mar ket shar e by becoming mor e competiti ve, t o incr ease
access to needed capital, to g ain exposur e to new ideas, and to further car eer development opportunities
for s yst em personnel. Another moti vation behind industry consolidation has been the sear ch for
economies of scale and economic g ain.
To understand full y the evolution of healthcar e syst ems, it is necessary to e xamine both the e xt ernal
and the int ernal environments of hospitals (Figur e 2.1
(h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ig2 _1 ) ). In the mid-
1960s, the number of s yst ems beg an to incr ease dramaticall y in all ownership cat egories. 13
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 3) B y 1980, the number had gr own
substantiall y to a total of 267 s yst ems. B y 2001, 311 health syst ems exist ed in the Unit ed States (see Table
2.1 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ta b 2 _1 ) ).
The success and r apid e xpansion of horizontall y organized deli very s yst ems originat ed in a cost-based
payment syst em and a price-insensiti ve en vironment that encour aged and rew arded syst em gr owth.
Medicar e reimbursement essentiall y provided co ver age of costs and a reasonable return on in vestments.
Consequentl y, s yst ems could pur chase high-cost , ineficient hospitals in diverse locations with little risk of
failur e. 14 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 4) ,1 5
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 5) In addition, in vest or-o wned
sy st ems gained access to capital mar kets b y being able to issue st ock, and the y used this inancial resour ce
to underwrit e their acquisitions. 16
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 6)
Althoug h both invest or-o wned and not-f or-proit syst ems pursued horizontal int egration, their
methods of int egration diff ered. Not-f or-proit syst ems accumulat ed few er hospitals per syst em and w ere
less geogr aphicall y dispersed, wher eas their invest or-o wned count erparts tended to be lar ger, mor e
geogr aphicall y dispersed, and dominat ed by a few lar ge syst ems. 17
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 7)
Aft er the advent of pr ospecti ve pa yment in the mid-1980s, organizations beg an to r estructur e, vertical
int egr ation incr eased, and diversiication eff orts focused on de veloping a continuum of car e at the local or
regional le vel. The f ailur e of healthcar e ref orm at the national le vel and the gr owing impact of managed
car e char acterized the decade of the 1990s. As competition acceler ated, or ganizations r esponded b y
documenting the cost and quality of the car e that the y provided and b y cr eating both par ent corpor ation
—owned and virtuall y integrated deli very s yst ems. 18
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 8) 7/7/2019 Print
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Figure 2.1 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ig2 _1 )
details the e volution of stages in the de velopment of multipr ovider s yst ems. In the irst stage,
patient/outpatient car e was the “cor e business, ” and typically, tw o or mor e hospitals afiliat ed,
consolidat ed services, or merged within a given mar ket t o achie ve economies of scale (i.e., horizontal
int egr ation). In the second stage, the cor e hospital acti vities branched off int o both forw ard vertical
int egr ation acti vities, such as physician gr oup pr actices, and backw ard vertical int egration acti vities, such
as ownership of pharmacies and medical equipment companies. In this stage, ther e was relati vel y little
coor dination of activities across the syst em. The irst tw o stages occurr ed from the mid-1960s to the mid-
1980s.
The thir d stage invol ved eff orts to coor dinat e and optimize physician primary car e netw orks, sat ellit e
clinics, home healthcar e agencies, and components of the continuum of care. Howev er , the cor e business
remained acut e inpatient care, and the other acti vities gener ally fed or support ed the acute care business.
In the fourth stage, it w as expect ed that disease prev ention and/or health pr omotion would replace acut e
inpatient care as the cor e business for primary car e. The goal of the syst em w as to accept the risk for the
health status of populations serv ed, with incenti ves t o k eep the population w ell. Short ell, Gillies, and
Devers belie ved most s yst ems w ere in stage tw o or thr ee in 1995. 19
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 9)
FIGURE 2.1 En vironmental Fact ors Aff ecting the Healthcar e Industry and Strategic R esponses 7/7/2019 Print
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Table 2.1 Multihospital Healthcar e Syst ems in 2001 and 2006, by T ype of Or ganizational Contr ol 7/7/2019 Print
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As noted in Figur e 2.1
(h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ig2 _1 ) , Stage 1 (pr e-
1965) predat ed the development of s yst ems. Stage 2 (1965–1983) w as a period of de velopment and
unbridled e xpansion of syst ems. Hospitals beg an to int egrate horizontall y by consolidating int o organized
healthcar e delivery s yst ems. Stage 3 (1984–1993) beg an with the implementation of prospecti ve
pa yment , declining syst em pr oits, do wnsizing, and restructuring. Pr ospecti ve pa yment essentiall y
reshaped the healthcar e landscape by intr oducing price competition to the healthcar e equation. It
transf ormed hospital reimbursement for services, ther eby alt ering inancial incenti ves. Stage 4 (1993–
2000) her alded a period of reconigur ation, rebuilding, and redesigning of s yst ems. During this time,
healthcar e ref orm and managed car e initiati ves w ere the dri ving for ces behind br oad and sw eeping
changes in the healthcar e industry. Chaos and creati vity were the norms, as tr aditional boundaries
disappear ed and competition gav e w ay t o collabor ation. The focus w as on the pr ovision of compr ehensive
healthcar e services at the regional and local le vels.
In the new millennium (Stage 5), the en vironment has shift ed again, as managed car e has loosened its
contr ol over patient access t o pr oviders. This incr eased access comes at a cost , howev er , as emplo yers
ha ve tr ansf erred the bur den of incr eased premium costs to their emplo yees. The issue of incr easing costs
permeat es throug hout the healthcar e environment of this stage. With 70% of healthcar e costs generated
by 10% of patients, health insur ance plans are beginning to r ecognize the pot ential savings of full y
reimbursing services dealing with pr ev enti ve car e and disease management by including them in their
plans. 20 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 0) Healthcar e syst ems ar e
seeking alt ernati ve service pr ovision mechanisms as lo w-cost alt ernati ves t o tr aditional healthcar e
practice methods such as telemedicine and electr onic home monit oring of patients. Increased uses for
inf ormation technology and inno vation ar e essential components to s yst em survi val as health car e faces a
gr adual loss of its shar e of government spending. 2 1
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 1) As political f or ces continue their
quest for incr eased healthcar e affordability , the medical marketplace strugg les to meet the curr ent
demands of an aging population coupled with increasing rat es of chr onic illness. The climbing rat es of
obesity will further str ain the nation 's resour ces and requir e hospitals to str ategize incr easing their
physical capacity w hile balancing inancial constr aints. Bioterrorism thr eats also have emer ged and
requir e a coordinat ed response within s yst ems and betw een syst ems and other healthcar e providers. In
response t o this changing en vironment , healthcar e organizations ha ve placed incr eased emphasis on
patient satisf action, consumer choice, and a customer service orientation. Strategies incr easing ly r elect a
return t o basic “cor e” services in an attempt to attain or sustain pr oitability . Yet some hospitals remain
pr ogr essi ve b y seeking to specialize in electi ve pr ocedur es and endeavor on pr oitable niches lik e hospital-
led emplo yer-dir ected progr ams. 22
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S y st em Char acteristics
Betw een 1992 and 2001, over all gr owth of s yst ems w as modest . In 1992, 309 syst ems w ere report ed, but
this number increased by onl y 2 syst ems in 2001 for a t otal of 311 s yst ems. B y 2008, the total number of
sy st ems had sw elled to 381. T able 2.1
(h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ta b 2 _1 ) identiies the
number of s yst ems in 2001 and 2006 by type of or ganizational contr ol. Not-for-proits continue to
pr edominat e in terms of numbers, r epr esenting about 80% of syst ems in 2001, but observ ed a small drop
to 78.5% in 2006. Althoug h there were no real changes in the o ver all numbers, ther e was a dr amatic 7/7/2019 Print
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decrease in Catholic syst ems, w hich declined by 8.5%, fr om a total of 71 s yst ems in 1992 to 45 s yst ems in
2001 and 41 syst ems in 2006. Althoug h invest or-o wned syst ems report ed few changes in t erms of
numbers, these s yst ems mo ved ahead of Catholic s yst ems as the second lar gest cat egory type. In 2001,
invest or-o wned syst ems repr esent ed 17.7% of all syst ems. B y 2006, in vest or-o wned syst ems had gained
mor e momentum, jumping up to 78 s yst ems.
Table 2.2 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ta b 2 _2 )
pr ovides a br eak down of the number of syst ems that owned, leased, sponsor ed, or contract-managed
hospitals or other providers in 1992, 2001, and 2006. Althoug h there was appr oximat ely a 5% decr ease in
the number of syst ems that owned, leased, sponsor ed, and contract-managed healthcar e facilities in 2001,
ther e was also a 5% incr ease in syst ems that either owned, leased, or sponsor ed these facilities. As such,
ther e appears to be a tr end tow ar d mor e lexibility , with syst ems incr easing ly opting f or “either—or” type
arr angements that relect impermanent relationships with other healthcar e facilities and pr oviders. This
notion is further support ed by the data collect ed in 2006.
Table 2.3 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ta b 2 _3 )
sho ws one measur e of inancial performance (oper ating margin) for both in vest or-o wned and not-f or-
proit syst ems betw een 1996–2001 and 2007. For all syst ems, the oper ating margins have f allen in mor e
recent y ears (1998–1998) as compar ed to ear lier years (1996–1997). This is undoubt edly due to both
incr eased competition in local mar kets and the impact
T able 2.2 Multihospital healthcar e syst ems in 1992, 2001, and 2006 of the Balanc ed Budget Act
passed by Congr ess in 1997 which reduc ed reimbursement for healthcar e providers.
T able 2.3 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ta b 2 _3 )
also sho ws that the oper ating margin of for-pr oit syst ems consist ently exceeds the oper ating margin of
not-f or-pr oit syst ems, althoug h the margin is narr owing. The e xplanation is that the primary goal of
in vest or-o wned syst ems is to maximize r eturn to st ockholders. By contr ast, not-f or-proit syst ems ar e
responsible t o man y more key stak eholders, whose goals ma y conlict . For example, eliminating
unpr oitable services is undoubt edly easier in an invest or-o wned syst em with a focus on pr oitability than
in a not-f or-proit syst em.
It is also int eresting to not e that the low point for oper ating margins for all w as 1998. Betw een 1998
and 2001, invest or-o wned mar gins climbed signiicantl y wher eas mar gins for not-f or-proit syst ems rose 7/7/2019 Print
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modestly. The r eimbursement relief fr om the feder al government fr om 1999 to 2001 enhanced the pr oit
mar gins in invest or-o wned syst ems to a much gr eat er degr ee than in not-f or-proit syst ems. This ma y
relect the gr eat er focus of in vest or-o wned syst ems on pr oitability , which caused a gr eat er
responsi veness t o changing r eimbursement incenti ves. In addition t o the r esolution of Columbia/HCA 's
problems, gr eat er access to equity capital, gr eat er willingness to cut unpr oitable services, location in
areas of hig h income, renegotiation of managed car e contr acts, and a focus on the most pr oitable services
also ma y have enhanced pr oitability of invest or-o wned syst ems.
Table 2.3 Median Hospital Oper ating Margin by Syst em Status 1996-2001, 2007
With the majority of hospitals belonging to s yst ems (deined as a common corpor ate ownership) and
most of the remaining hospitals being members of alliances of one form or another , the question of the
advantages and disad vantages of independent v ersus fr eestanding hospitals is no longer rele vant . 23
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 3) The “mar ket” has spok en and it
seems to be sa ying that independent , freestanding institutions ar e not competiti ve with s yst ems (either
owned or “virtual”). This appears t o be at odds with the e xisting lit eratur e, which pr ovides little e vidence
on the relati ve perf ormance of the different arr angements (e.g., syst em-afiliat ed or independent facility),
or the types of s yst ems (e.g., those or ganized b y hospitals, insur ance corpor ations, or physician gr oups).
Furthermor e, a recent stud y of Florida hospitals by Tenn yson and F ottler indicat es that syst em hospitals
ha ve no ad vantage o ver fr eestanding hospitals in terms of their inancial r e-turns. 24
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 4) Ho wev er , accor ding to a
Healthcar e Financial Management Association (HFMA 2004) survey on hospital capital in vestment , the
industry is advised to allocat e a great er level of e xpenditur es on plant modernization and information
technology . 25 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 5) This costl y
initiati ve puts e ven inanciall y sound freestanding hospitals at a distinct disad vantage and f or ces them to
seek afiliation with multihospital s yst ems to g ain access to lar ge sour ces of funding. 26
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Multipr ovider s yst ems of the 1980s, w hich emphasized administr ative economies of scale and eng aged
in a variety of di versiication acti vities, seemed to add v alue on almost an y dimension of perf ormance. 27
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 7) The y tended to r epr esent loose
collections of hospitals that eng aged in relati vel y unr elated diversiication of services. The y lack ed
“syst emness” in that the y did not beha ve as a s yst em in w hich each oper ating unit underst ood its strategic 7/7/2019 Print
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role r elati ve t o other units of the s yst em. P ossibl y, en vironmental and mar ket pr essur es were not se ver e
enoug h to r equir e more integrative beha vior at the time.
As a result , many syst ems ha ve come t o the r ealization that a s yst em is an int egrated, clinical
continuum of car e for a deined population with an ability t o pr ovide cost , quality , and outcome data for
purposes of accountability . Understanding what a syst em is and being able to implement that
understanding ar e tw o diff erent things, ho wev er .
The Impact of Managed Car e
Managed care has incr easing ly dri ven pr oviders t ow ar d int egration. Healthcar e executi ves w ho pr eviousl y
wer e mar ginall y aw ar e of mar ket shar e have ent ered int o a variety of or ganizational arr angements that
promised continued gr owth and survi val in hig hly competiti ve managed car e mar kets. The y institut ed
integr ative str ategies aimed at impr oving the mar ket and or ganizational po wers of their syst em relati ve t o
those of their competit ors. Montague Brown, a leading healthcar e industry expert , has explained that
being positioned for survi val in a managed car e mar ket ma y repr esent the crown jew el of purpose of
major national alliances. Furthermor e, he predict ed that regional multipr ovider s yst ems w ould be the best
positioned or ganizations t o become pr oviders of choice for managed car e or other types of direct
contr acting arrangements. 28 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 8)
Ear ly e vidence fr om healthcar e studies conirmed that hospitals joined local syst ems primaril y as a
competiti ve r esponse. 29 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 2 9)
In lar ge part , much of the impact of managed care has result ed from expectations about ho w managed
car e would reshape the healthcar e industry and how organizations w ould respond to these changes. F or
example, it has been r eport ed that in markets dominat ed by managed car e syst ems, pr oviders ha ve
pursued complet e vertical int egration mor e rapidl y than in other markets because the y belie ved it w ould
help them compet e effecti vel y—e ven thoug h there was no compelling evidence that v ertical int egration
provided a competiti ve ad vantage. 3 0
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 0) Similar ly , academic medical
cent ers incr easing ly ent ered int o strategic alliances and other collabor ative r elationships because the y
anticipat ed that integration would mak e them more competiti ve in a managed car e environment and
would assist them in pr eserving the educational and resear ch missions of their institutions. 31
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 1) Bost on's Massachusetts Gener al
Hospital and Brigham and Women 's Hospital, two leading academic medical cent ers and ierce
competit ors, merged with the expectation that the resulting partnership w ould enable them to be mor e
competiti ve on cost and quality in managed car e mar kets. A mer ger typicall y creat es possibilities for
eficiencies b y making it possible to consolidat e hospital services such as inance and human resour ces, as
well as to do wnsize clinical staff s. 32
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Managed car e organizations ha ve continued t o r evise the mechanisms b y w hich the y actuall y manage
costs. They initiall y relied on price discounts to achie ve sa vings; ho wev er , because price discounts did not
complet ely contr ol costs, managed care organizations then mo ved t o include utilization management and
capitat ed payment methods to achie ve substantial eficiencies. 3 3
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to e xpect managed car e organizations t o select pr oviders w ho pr omise the most eficient and cost- 7/7/2019 Print
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effecti ve deli very of a compr ehensive r ange of services. Thus, competing in managed car e mar kets
requir es multipr ovider or ganizations t o g ain contr ol over such things as ph ysician pr actice patt erns and
resour ce utilization, because these elements play an essential role in det ermining cost . 34
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 4) , 3 5
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Effect on Ph ysicians and Hospit als
Managed care has eroded the patient car e mar ket f or both ph ysicians and hospitals. In addition,
ph ysicians view managed car e's int ervention into day-t o-da y medical treatment as a thr eat to their
aut onom y and incomes. 36 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 6) Man y
independent practitioners ha ve appr oached hospitals and medical centers, asking to be acquir ed or to be
gi ven emplo yment contracts, because they have r ecognized that the health services mar ket is becoming
incr easing ly orient ed tow ar d managed car e. 37
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 7) Ph ysicians belie ve that hospital
o wnership of medical pr actices is pr efer able to managed car e because this arrangement can be organized
under structur es that allow physicians t o r etain some contr ol over medical pr actice. 38
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 8) In man y circumstances,
managed car e has driven ph ysicians and hospitals t o int egrate full y into sing le structur es such as
physician—hospital or ganizations or f oundations that can g ain le ver age in negotiating managed car e
contr acts or can contr act directl y with emplo yers t o pr ovide medical services.
Managed car e also has inluenced syst ems to acquir e and/or manage group pr actices. Pr eviousl y,
ph ysicians acti vel y soug ht integration with hospitals, althoug h most hospitals, with the exception of lar ger
hospitals, did not aggr essivel y att empt to acquir e group pr actices. When hospitals did ent er into formal
afiliation arr angements with physician gr oup pr actices, it typicall y was thr oug h an emplo yment
arrangement rather than a contr actual one. 39
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 3 9)
Althoug h many hospitals and physicians ha ve soug ht more permanent and enduring verticall y
integr ated structur es to accommodat e their relationships, needs, and joint acti vities, others expect less
permanent and mor e lexible relationships in the form of virtual int egration. In Calif ornia, for e xample,
w her e unmanaged indemnity insur ance no longer exists, or ganizational change is pr oceeding at an
acceler ated rat e. In this cont ext , comple x ownership and contr actual relationships with hospitals and
outside specialists mak e up the core of an emer ging healthcar e delivery s yst em based on capitat ed care. 40
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 0)
Effect on S yst ems
Man y hospital syst ems ha ve acceler ated the de velopment of deli very s yst ems that ar e capable of pr oviding
healthcar e services to a lar ge number of people on a capitat ed basis. They have pur chased medical clinics,
other hospitals, and even pr epaid managed car e organizations. Some s yst ems ha ve aligned themsel ves
with insur ers in order to e xpand their mar kets. Ho wev er , man y syst ems ha ve had little e xperience in
capitat ed contract arrangements. 41
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 1) In addition, in vest or-o wned 7/7/2019 Print
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s y st ems ha ve att empt ed alliances with not-f or-proit syst ems in or der to r espond to the tr end tow ar d
managed car e.
A 2001 Modern Healthc are surv ey r ev ealed that gr eat er numbers of invest or-o wned chains were
pr oitable compar ed to prior y ears, althoug h losses on investments ma y have obscur ed their
improvement . Merging institutions of different ownership types is not common, but it has the ad vantage
of incr easing patient volume and pr oviding le ver age that enhances negotiation for managed car e
contr acts. 42 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 2) ,4 3
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 3)
Clear ly , managed car e has had a tremendous impact on health car e in the Unit ed States. It has
introduced incenti ves that call f or patients t o r ecei ve the appr opriat e type and amount of healthcar e
service, which gener ally in vol ves settings outside the hospital. 4 4
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 4) Healthcar e executi ves
subsequentl y have adopt ed a different perspecti ve r eg arding their viewpoint of the healthcar e delivery
sy st em. The y have shift ed their thinking and outlook tow ar d or ganizing a deli very s yst em ar ound other
facilities, such as outpatient ofices and sub-and postacut e care facilities. 45
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 5) Thus, managed car e has creat ed
incenti ves f or hospitals t o look for the most cost-eff ective means of pr oviding healthcar e services. Syst ems
that can pr ovide compr ehensive services and can demonstr ate hig h quality and cost-eff ectiveness will be
“winners” in the emer ging healthcar e environment . Syst ems or indi vidual providers that ar e unable or
unwilling to mo ve in this dir ection ma y well be among the “losers” over the ne xt decade. 46
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 6)
S y st em Int egration
As syst ems ha ve de veloped, the y have e vol ved fr om horizontal, to v ertical, to virtual int egration.
Integr ation is horizontal when hospitals bu y other hospitals to become multihospital s yst ems. Int egration
is vertical w hen hospitals (or other institutions) pur chase or sign contr acts with other healthcar e
organizations that ar e “upstr eam” or “downstr eam” from the original institution. For example, a hospital
ma y pur chase physician gr oup pr actices to incr ease ref err als to their inpatient services. Finall y, virtual
int egr ation ref ers to horizontall y or verticall y integrated syst ems that ar e based primaril y on a series of
contracts rather than common o wnership.
Corpor ate Structur e
The exist ence of a corpor ate structur e may be the most obvious char acteristic that distinguishes a syst em
hospital fr om a freestanding institution. Syst ems ha ve an or ganizational structur e that consists of a
corporate or syst em wide component and a ield component of facility managers. A t the institutional le vel,
sy st em ownership det ermines reporting relationships. Within in vest or-o wned syst ems, the facility's chief
executi ve oficer (CEO) usuall y reports to a corpor ate oficer . In not-for-proit syst ems, the facility's CEO
ma y report to a hospital boar d of trust ees, a corpor ate boar d of directors, or, less typicall y, t o a s yst em
corpor ate executi ve. 4 7 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 7) With the
mo ve t ow ar d vertical int egration, syst em or ganizational structur e becomes even mor e complicat ed, as the
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When syst ems beg an to form ther e were no text book models to follo w. The in vest or-o wned syst ems
had alr ead y developed a corpor ate structur e, but it was based on ownership of the majority of hospitals in
the syst em. The not-f or-proit syst ems learned to cr eat e structur es largely as the y went along. 48
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 8) As s yst ems gr ew , the y
experienced pr oblems with expanding corpor ate staff s, bureaucr acy, and conlicts of int erest betw een the
corpor ate and ield components. The pot ential for conlict gener ated is not arithmetic, it is log arithmic. 49
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 4 9) One stud y of nursing home
administr ators indicat ed that those who were a part of a syst em and report ed to corpor ate oficers
experienced mor e stress and role conlict than did their count erparts in freestanding facilities. 50
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 0) S y st ems requir e managers who
ha ve superior mediation skills in or der to r espond to these challenges. 51
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 1)
Go vernanc e
Despite the unprecedent ed, rapid, and dr amatic uphea val in the healthcar e industry, governance of
hospitals r emains basicall y unchanged. For syst ems, the lack of de velopment in go vernance is particular ly
pr oblematic because go vernance must occur at a v ariety of le vels in or der to meet both s yst em wide and
institutional needs. The presence of multiple go verning boar ds to addr ess multiple needs at various le vels
oft en causes conlict , enlarges the bureaucr acy, and leads to po wer strugg les. It has been suggest ed that
sy st ems should recognize go vernance on tw o levels: (1) the or ganizational or str ategic le vel of go vernance
w her e syst em wide decisions and policies are consider ed, and (2) the operational governance le vel that
addr esses local oper ations of institutions and should be advisory to institutional management . The work
of syst em facilities depends on the degr ee of success achie ved thr oug h oper ational governance, so this
le vel should be subsumed under s yst em wide governance. 5 2
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 2)
S y st ems ha ve t ended to r el y on thr ee models of governance. The most popular model, the par ent
holding compan y model, is also the most decentralized. Althoug h it has a syst em wide governing boar d, it
also has a separ ate go verning boar d for each institution. The second model is a modiied par ent holding
compan y model, in which ther e is one syst em wide governing boar d with advisory boar ds at the
institutional level. S yst ems that repr esent large numbers of hospitals tend to use these tw o models.
Sy st ems afiliat ed with religious or ganizations ar e mor e likely to adopt the par ent holding compan y
model, wher eas the invest or-o wned syst ems tend to fav or the modiied par ent holding compan y model.
The third model is the corpor ate model, w hich consists of one syst em wide boar d with no other boards at
any other level. The major ad vantage of this go vernance structur e is its simplicity and clear lines of
authority . Syst ems that ha ve small numbers of hospitals t end to use this model; oft en, the y are not-f or-
proit or public syst ems. 53 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 3)
The type of go vernance model in use has not been f ound t o inluence the str ategic decision making for
w hich syst em wide boar ds assume responsibility . In decision making at the institutional level, ho wev er , the
type of go vernance model appears t o be inluential. The par ent holding compan y model tends to lea ve
hospital-le vel decisions t o the hospital go verning boar ds, wher eas the modiied par ent holding compan y
model seems to gi ve all boar ds equal invol vement in most hospital-le vel decisions. The corpor ate model 7/7/2019 Print
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demonstrates gr eat er invol vement b y the syst em wide boar d in hospital decisions. 54
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 4)
The Joint Commission on A ccr editation of Healthcar e Organizations ( JCAHO) has recognized the
comple xity of syst em go vernance and has changed its standar ds for go verning boar ds accor dingly . In
1986, the standar ds were upgr aded to r elect the comple x responsibilities that result fr om an incr ease in
the number of boar ds and the dynamic relationships that e xist among these boar ds and all levels of the
or ganization. Speciicall y, if ther e are multiple levels of go vernance, the Joint Commission r equir es
mechanisms to ensur e communication and participation at all levels. In particular , these mechanisms
must ensure that medical staff have the ability t o communicat e and participate at all levels of go vernance
in matt ers invol ving patient car e. 55
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 5)
R ecent political for ces ha ve pushed f or e ven gr eat er boar d accountability to the viability and quality of
car e deli ver ed by their or ganizations. Ov er the past decade boar ds have been pr eoccupied with focusing
on mer gers and acquisitions and on the inancial and economic aspects of strategic planning. Ho wev er , the
judicial syst em is further pr essuring boar ds to centr alize on quality agendas throug h ver dicts deli ver ed in
malpr actice cases that “conirm the medical staff is responsible to the go verning boar d for medical car e
quality .” 5 6 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 6) Despit e the fact that
regulation and accr editation standar ds have changed t o r elect this emphasis, boar ds have strugg led with
the task by being lar gely uninf ormed and unprepared for the depth of their r ole. In response, man y
hospitals have institut ed orientation and education progr ams for their trust ees. In 2007, the state of New
Jerse y escalat ed the issue a step further; a law w as enact ed that requir ed hospital trust ees to r ecei ve at
least one full da y of formal leadership tr aining. Participation in similar certiied tr aining pr ogr ams is likely
to be inanciall y fav or ed by pa yers lik e Blue Cross and Blue Shield that ha ve alr ead y announced their
support of educat ed boards. 57 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 7)
Thus, this unorthodo x precedent could concei vabl y redeine the e xpectations of boar ds nation wide in the
coming years.
The tr ansition from hospitals to multihospital s yst ems, to or ganized deli very s yst ems, and to
community car e netw orks will r equir e profound changes in go vernance. 5 8
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 8) The structur es and processes of
governance suit ed to one type of or ganization pr obabl y will not work equall y well in others. Althoug h
sy st ems ha ve been doing a gr eat deal of experimentation in their appr oaches, there are as yet no deiniti ve
models t o suggest w hat go vernance structur es and processes are lik ely to w ork best under diff ering
conditions.
It is clear , howev er , that all boar d members need to understand their vision for the s yst em, plans for
futur e structur al change, and the interactions of other syst ems with their go vernance. It is also important
to build trust among all the s yst em components by changing their int ernal incenti ves t o r elect concern for
sy st em perf ormance and by pr omoting communication/inf ormation exchange acr oss all syst em
components and le vels of go vernance. Finall y, the s yst em 's multiple boar ds need a clear deinition of
governance r oles, responsibilities, and authority .
Horizontal Int egr ation 7/7/2019 Print
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Most syst ems during the 1980s could be char acterized as horizontall y integrated. Such syst ems w ere
expect ed to off er hospitals sever al ad vantages:
• Incr eased access to capital mar kets
• R eduction in duplication of services
• Economies of scale
• Impr oved pr oducti vity and operating eficiencies
• Access to management e xpertise
• Incr eased personnel beneits, including career mobility , recruitment , and ret ention
• Impr oved patient access thr oug h geogr aphical integration of various le vels of car e
• Impr ovement in quality thr oug h incr eased volume of services for specialized personnel
• Incr eased political power to deal with planning, r egulation, and reimbursement issues
The pursuit of horizontal int egration by hospitals has been attribut ed in part to hospitals' att empts to deal
with an incr easing ly comple x and often hostile environment that creat ed int ense inancial pressur es and
risks that threatened institutional survi val. 5 9
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 5 9) S y st em afiliation off ered
hospitals opportunities to r educe or di versify certain f acility -speciic risks. Hospitals could gain
management expertise and access to capital and impr ove their o ver all perf ormance.
Sy st ems w ere able to enhance their perf ormance by “using size and scale to dri ve certain economies or
to r espond to certain opportunities such as competiti ve contr acting. ” 60
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 0) Man y of the proposed beneits
of economies of scale in syst ems ma y actuall y be limited, as certain diseconomies of scale have been
associat ed with extr emel y high corpor ate over head expenditur es. 61
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 1) –6 3
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 3) A ccor ding to healthcar e
analysts, hospital s yst ems gener ally ha ve f ailed t o int egrate full y and have been unable t o perf orm as
sy st ems rather than as collections of facilities. 64
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The absence of shar ed or common institutional interests and or ganizational cultur e may contribut e to
sy st ems' inability to int egrate complet ely. Althoug h not-for-proit syst ems ha ve been mor e likely to select
members based on commonality of missions, in vest or-o wned syst ems ha ve t ended to be mor e sensiti ve t o
existing mar ket conditions, the local econom y, and the pa yer mix. 6 5
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 5) ,6 6
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 6) F urthermor e, many hospitals
have f ormed or joined s yst ems to obtain access to e xpertise on regulat ory matters and to enjo y
advantages in the political en vironment . Afiliated hospitals can establish a political presence thr oug h 7/7/2019 Print
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name recognition, a coor dinat ed message, and the inancial ability to r etain political ad visors. 67
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(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 8) Ho wev er , syst ems afiliation
cannot be expect ed to r educe risk s relat ed to gener al economic conditions or the over all health car e
industry . 69 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 6 9)
Most anal yses pr ovide little support for the cost-r educing promises of horizontal int egration. In cases
re view ed, integration was oft en incorpor ated at an administr ative le vel as opposed t o a clinical le vel that
ma y have yielded gr eat er cost savings. 70
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 0) Aft er comparing the 1988
perf ormance of independent and syst em hospitals in Calif ornia, Drano ve and Shanle y found that s yst ems
ar e no mor e able to e xploit economies of scale than ar e independent hospitals. 71
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 1) The y found that the beneits of
horizontall y integrated hospital syst ems ar e mor e in their ability to mar ket themsel ves than in the
economies the y achie ve.
Horizontal int egration str ategies dominat ed syst em de velopment during the lat e 1960s, continued
throug h the mid-1980s, and diminished in signiicance with the implementation of PPS and the cost
reduction pr ogr ams of other payers. In addition, ther e may actuall y be a saturation point for s yst em
horizontal int egration, and hospital acquisition should be selecti ve. Selection f act ors have been sho wn to
include mar ket char acteristics, mission compatibility , and facility management . Thus, the potential for
horizontal int egration as a str ategy will be limit ed to inancing mechanisms and selecti ve acquisitions. 7 2
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V ertic al Integr ation
Diversiication thr oug h the integration of clinical services transf orms a horizontall y integrated syst em int o
a verticall y integrated one. Vertical int egration invol ves incorpor ating within the organization either
stages of pr oduction (backw ard int egration) or distribution channels (forw ard int egration) that were
former ly handled thr oug h arm 's-length transactions with other or ganizations. 7 3
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A v erticall y integrated syst em is described as off ering “a broad range of patient car e and support
services oper ated in a functionall y uniied manner. The range of services off ered ma y include preacut e,
acute, and postacut e care organized ar ound an acut e hospital. Alternati vel y, a deli very s yst em mig ht
specialize in offering a range of services r elat ed solel y to long-t erm care, mental health care, or some other
specialized area.” 74 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 4) The purpose
of v ertical int egration is to incr ease the compr ehensiveness and continuity of car e, while simultaneousl y
controlling the channels or demand for healthcar e services. Thus, vertical int egration emphasizes
connecting patient services with diff erent stages in the healthcar e delivery pr ocess. 75
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V ertical int egration can occur thr oug h a variety of arr angements:
• Int ernal development of new services 7/7/2019 Print
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• Acquisitions of another or ganization or service
• Mer gers
• Leases or sales
• Franchises
• Joint v entur es
• Contr actual agreements
• Inf ormal agreements or afiliations
• Insur ance progr ams 76 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 6)
The ad vantage of a v erticall y integrated deli very s yst em or netw ork (IDS/N) is that uniied ownership
allo ws for coor dinat ed adaptations to changing en vironmental cir cumstances. 77
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 7) In principle, v ertical int egration
provides a unity of contr ol and direction that allo ws the IDS/N to focus all the ener gies of the subunits on
the same goals and strategies. Ther e is a single mission statement , hierarch y of authority , and “bottom
line.” The unity of purpose is essential to trul y manage care (as it is curr ently structur ed) and underlies
the drive t ow ar d verticall y integrated deli very s yst ems that incorpor ate primary car e physicians, specialty
panels, hospitals, and managed car e organizations.
If v ertical int egration worked in pr actice the way it w orks in principle, then mar kets and contr acts
would be rar e. 78 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 8) The healthcar e
sy st em could be structur ed as one large administ ered bur eaucr acy with centr alized planning, centralized
resour ce allocation, a single purpose, and a single process. Verticall y integrated syst ems suff er from tw o
weaknesses, ho wev er; incenti ve att enuation and inluence costs. Vertical int egration replaces the
entr epreneurship of the owner-managed medical pr actice with administr ative hier archies w her e
managers and clinicians are paid lar gely by salary . It also greatl y incr eases inluence costs, deined as the
effect of int ernal strugg les for contr ol over r esour ces by various incumbent constituencies (e.g., primary
car e physicians, specialists, managed car e organizations, hospitals, s yst em managers). A t the extr eme, the
verticall y integrated syst em or netw ork could resemble public bur eaucr acies with a civil service mentality .
A careful anal ysis of the eff ects of int egration sho ws that big, verticall y integrated, in vest or-o wned
healthcar e organizations ar e oft en clums y and slow to inno vat e. 79
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 7 9) The y are dificult to manage,
requiring signiicant cash infusions and massi ve managerial eff orts to k eep their components netw orked.
The y typicall y act to suppr ess competition and are unr esponsi ve t o local communities. Consequentl y, the
results of v erticall y integrated healthcar e organizations ha ve been disappointing. A ccor ding to one surv ey,
onl y 17% of hospitals that pur chased physician pr actices achie ved a positi ve r eturn. 80
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 8 0) Conr ad and Dowling explained
the failur e of vertical int egration as follo ws: “Because man y of the organizations considering v ertical
int egr ation are acut e hospital syst ems, expertise ma y be lacking at both the corpor ate and institutional
levels. Y et expertise—in e valuating and negotiating…and in managing new services—is oft en the sing le 7/7/2019 Print
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most important ingredient in success. ” 81
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Di versiic ation
Diversiication str ategies in the healthcar e industry have mirr ored the tur bulence and uncertainty in the
envir onment; the y have in vol ved intr oducing new services and deleting others on a trial-and-err or basis.
Some efforts have been mor e successful than others. 82
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 8 2) It has become appar ent that
diversiication acti vities relat ed to the hospital's cor e business, such as ambulat ory care and physician
joint v entur es, tend to be mor e proitable than those that are onl y partiall y or totall y unrelated to acut e
care. 83 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 8 3)
R egionaliz ation
Vertical int egration is consist ent with the trend tow ar d regionalization because it concentr ates resour ces
in local markets. The tr end tow ar d regionalization relect ed that 99% of healthcar e services deliver ed in
the Unit ed States take place within the region in w hich the patient resides. Thus, s yst ems ar e shift ed in
their focus t o establish pr edominance in local and regional mar kets r ather than national ones. 84
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Virtual Int egr ation
It is dificult to manage a s yst em that pr ovides man y different pr oducts or services in man y different
mar kets. It is impossible f or managers of full y integrated syst ems to understand all the diff erent pr oducts
and services in their mar kets. F or this reason, tig ht coupling and hig h degr ees of vertical int egration are
not incr easing in other parts of US industry . In fact , “decoupling” is occurring as corpor ations struggle to
focus on their “cor e compet encies.”
It is true that healthcar e providers will need t o be part of a lar ger organization that pr ovides a wide
range of consumer and emplo yer choices, economies of scale, cost-eff ectiveness, clinical quality , and
service quality. It is not true that the only way t o achie ve these goals is thr oug h participation in a full y
integr ated syst em.
The ad vantages of virtual int egration, that is, int egration thr oug h contr actual relations (mor e loosel y
coupled syst ems) lie in its pot ential for aut onomous adaptation to changing en vironmental
circumstances. 85 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 8 5) Or ganizational
independence pr eserv es the risks and rew ards for eficient perf ormance. Althoug h coordination may
result fr om negotiat ed authority , it must invol ve collabor ation (i.e., creating new value), a dense w eb of
int erpersonal connections based on trust , and partners willing to nurtur e the collabor ative r elationship
rather than simpl y trying to contr ol it.
Because ther e is practicall y no hard evidence of the superiority of an y one appr oach to structuring, it is
prudent to pr oceed with caution. Much of the acti vity seen in the industry toda y is an imitation of the
actions or presumed actions of others. The do wnside of all of the emphasis on new acquisitions, new
enr ollment , and restructuring has been that the consumer has been “lost in the shufle. ” In the future,
consumer choice of providers should incr ease rather than decr ease. 86 7/7/2019 Print
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(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 8 6) Ther efor e, syst ems that do not
pr ovide open access t o plans and br oad netw orks of pr oviders ar e at a competiti ve disad vantage.
In the futur e, it is likely to be risky for pr oviders t o r el y on exclusi ve partnerships because the winners
and losers ar e unkno wn. Rather , the emphasis should be on patient satisf action, patient ret ention,
le xibility , the availability of options f or consumers, minimal paperw ork, and multiple capitat ed
contracts/partnerships for pr oviders.
No one structur e is necessaril y the inal answer . Ther e are multiple possible paths to achie ve incr eased
integr ation and coor dination of clinical services under managed care, and indi vidual mar ket d ynamics will
det ermine the appr opriat e level and structur e of integration. Multipr ovider s yst ems face a tr ade-off
betw een the advantages of coor dinat ed adaptation throug h vertical int egration and the advantages of
aut onomous adaptation thr oug h contr actual networks. The curr ent hypertur bulence and lack of deiniti ve
evidence mak es it dificult to pr edict eventual out comes. It also indicat es the potential downside of giving
up aut onom y and/or making large capital investments in a v erticall y integrated (o wned) syst em. The
trend toda y, both within and outside of health car e, is tow ar d mor e contr actual relationships and less
vertical int egration.
Sy st em Performanc e
Fear of managed car e has been identiied as a moti vating f or ce behind impr ovements in s yst em
perf ormance. Modern Healthc are conducts annual surv ey s of multipr ovider s yst ems that pr ovide a
compr ehensi ve view of s yst em perf ormance. In 1997 nonpr oit syst ems outpaced in vest or-o wned syst ems
in terms of gr owth and pr oitability; by 2001 in vest or-o wned syst ems w ere the clear winners. In 2001,
invest or-o wned syst ems attribut ed outperforming their nonproit counterparts primaril y to do wnsizing
and consolidation, as well as to r eturning to their cor e missions and services. 87
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 8 7)
F rom 1997 t o 2001, in vest or-o wned syst ems routinel y report ed increased proitability , wher eas
nonpr oit syst ems consist ently sho wed losses. Ho wev er , the pictur e is more complicat ed than this statistic
shows. For example, in 1999, despit e their losses, nonproit syst ems also report ed increases in rev enues.
This meant that their labor and other oper ational expenses w ere incr easing at a fast er rat e than rev enues.
In vest or-o wned syst ems, on the other hand, actuall y experienced a decline in their rev enues, most of
w hich result ed from selling off facilities. In addition, because in vest or-o wned syst ems ar e responsible to
their shar eholders, they can be expect ed to shift quickl y out of money-losing v entur es. For example, w hen
Medicar e cuts in home healthcar e payments were full y implement ed in 1999, invest or-o wned syst ems
di vest ed themsel ves of home health services. 8 8
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In 2001, the neg ative st ock mar ket and economic pr oblems led to modest incr eases for in vest or-o wned
sy st ems and small gains for nonpr oit syst ems, primaril y because syst ems w ere unable to use their
in vestments t o co ver losses. In past y ears, in vestment portf olios had provided a necessary cushion for
both types of s yst ems, w hich faced inancial pr essur es from managed car e and feder al cutback s. Howev er ,
inancial pr essur es are expect ed to continue, along with rising medical liability costs and incr easing
requir ements for in vestment in inf ormation syst ems, technology , and plant replacement . Which type of
sy st em will far e best in the coming years? In vest or-o wned syst ems ar e expect ed to r espond successfull y to
such challenges because of their gr eat er access to capital and their ability to quickl y divest themsel ves of
unpr oitable services and service areas. Mean while, nonpr oit syst ems will most lik ely continue to 7/7/2019 Print
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struggle for survi val because the y are not able to eliminat e costly services and because they often furnish
the saf ety net for their communities. 89
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Healthcar e analysts belie ve that , other than eficiencies in labor producti vity relat ed primaril y to
ha ving few er full-time equi valent emplo yees and lo wer turno ver , syst em hospitals ha ve not demonstr ated
compar ative ad vantages o ver nons yst em hospitals. 90
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 9 0) –9 2
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 9 2) F urthermor e, although syst em
hospitals ha ve gr eat er opportunities to r educe their costs b y sharing administr ative services such as leg al,
data processing, and accounting services, the over head costs in vol ved in managing these and other
acti vities have been e xtr emel y high. Even so, the sharing of services among s yst em member institutions
situat ed near each other may reduce costs b y avoiding or eliminating the duplication of necessary , but
marginall y proitable (or unpr oitable), services. 93
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Despit e certain potential cost-sa ving beneits, primaril y in the areas of pur chasing and reduction of
duplicat e services, the creation and expansion of a syst em can also incr ease costs. As a syst em incr eases or
anticipat es increasing in size, its executi ves spend a signiicant amount of time on planning, policy
enf orcement , and relat ed acti vities. The y have less time a vailable t o de vot e to the da y-t o-da y conduct of
the syst em 's business aff airs or the deli very of healthcar e services. Then the executi ves either o ver ext end
themsel ves trying t o accomplish both pr esent acti vities and futur e planning, or they hire new
administr ators to w hom the y deleg ate da y-t o-da y oper ations. The quality of management may suff er
and/or costs may rise. The bett er perf orming syst ems keep a very tig ht rein on corpor ate staff costs. 94
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Managed car e incr eased administr ative r esponsibilities, because it requir es monit oring and evaluating
patient satisf action, documenting a variety of aspects of quality of car e, keeping tr ack of a variety of
contr actual oblig ations and their subsequent transaction costs, and managing the use of both clinical and
administr ative r esour ces. 95 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 9 5)
These new r esponsibilities called for sophisticat ed information syst ems, w hich were expensi ve. In
addition, hig h costs may have been caused b y additional administr ative contr ols needed to manage
medical r esour ces across institutions. 96
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Arista Associat es of Fairf ax, Vir ginia, and Modern Healthcar e magazine surv ey ed 141 s yst em CEOs and
examined the 17% w ho report ed operating margins of 4% or mor e. 99
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 9 9) The surv ey f ound that these
best-perf orming syst ems:
• F ocus on cor e compet encies
• Focus on quality of clinical out comes and service, not size 7/7/2019 Print
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• Have not become complacent in their success
• F ocus on execution of details
• F ocus on quality , not quantity , of physician int egration
• Reduce duplication of services
• Contr ol future growth
Another stud y conduct ed by Arthur Andersen and the National Chr onic Care Consortium, based on
interview s with executi ves fr om se ven s yst ems, concluded that (1) communications ar e vital to the
success of int egration; (2) a syst em hoping to succeed must de vot e suficient staff, dollars, time, and
ener gy to planning, pr epar ation, and training for int egration; and (3) syst ems must resear ch and
understand community needs, not make assumptions about their needs. 100
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A V iew fr om the Real W orld
Over the past tw o decades, hospitals, physicians, and nursing homes ha ve rushed t o mer ge or partner with
one another , cheered on by consultants, academics, and experts w ho claimed that such netw orking w as
imper ative f or these or ganizations t o survi ve in a hig hly competiti ve en vironment . Althoug h each syst em
should be consider ed in its unique market and cont extual situation, the enormous inancial, human, and
clinical r esour ces devot ed to int egration have not borne much fruit . Evidence of quantiiable sustained
inancial or clinical value is scant . 101
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Hospitals w ere reacting to dr amatic changes in their en vironments by linking together int o irst
horizontal and then vertical syst ems in the 1980s and 1990s. These syst ems took a v ariety of forms, fr om
fragile and tempor ary alliances to full-blo wn mergers. During the same time period, other industries were
abandoning the str ategy of building lar ge, comple x, verticall y integrated or ganizations. Major American
corpor ations such as IBM, General Motors, and Gener al Electric were do wnsizing, reducing la yers,
br eaking up comple x structur es, spinning off marginall y relat ed businesses, outsour cing necessary but
marginal functions, and ref ocusing on their “cor e compet encies.”
Healthcar e organizations ha ve no w follo wed suit in or der to k eep up with incr eased competition. The
horizontal and vertical shrink age trend that no w deines the healthcar e culture has been coined as
“lattening, ” indicati ve of eliminating le vels of management and incr easing the span of contr ol up to
thr eefold with an ext ended degr ee of autonom y as a result . 102
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 02) The leaner or ganizational
charts allo w for mor e eficient communication and fast er decision making, as well as mor e responsi ve
dispersement of compan y resour ces. 103
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Int egr ation Suc ce sse s
Ten y ears ago hospitals w ere acquiring ph ysician pr actices as fast as the y could. Then, one after another ,
they start ed losing mone y on them. Many have no w decided to dump the gr oups, for get int egration, and 7/7/2019 Print
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just run the hospitals.
Others, like Advocat e Healthcar e, have sta yed the course. 1 04
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 04) A dvocat e made a inancial
turnar ound because it did not treat ph ysician gr oups lik e hospital departments. Inst ead, the syst em
br oug ht in people to run them w ho ar e dedicat ed to the building of ph ysician gr oup pr actices and kno w
how to run that business. The y focus on the oper ations of the ofice wher e health services are deli ver ed
rather than ho w man y patients are ref err ed to other parts of the s yst em. A dvocat e, and other syst ems that
ha ve been successful with int egrating physician pr actices, ha ve gone back t o basics: billing, tr aining
emplo yees appr opriat ely, writing clear policies and pr ocedur es, and maintaining basic management
sy st ems. The common themes among those w ho ar e perf orming better than aver age with int egration are
setting realistic goals, obtaining ph ysician comments t o the s yst em, and managing accor ding to a formal
plan.
The cr eation and maint enance of a strong physician cultur e throug h adher ence to a clear mission,
vision, v alues, ph ysician in vol vement , and service was another key t o A dvocat e's success. 1 05
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 05) It runs the gr oup of ph ysician
pr actices lik e a group pr actice, as if the ph ysicians ar e pri vat e pr actitioners. The ph ysicians' income is in
pr oportion to ho w much rev enue the y bring in. Advocat e now has thr ee separ ate and distinct gr oup
practices, each with separ ate management teams and ph ysician go vernance. The y have tried t o cr eat e a
cultur e in which the needs of the gr oup pr actice are mor e important than the needs of individual
physicians. Althoug h the three have somew hat different cultur es, the common elements are standar dized
billing methodologies, one single information syst em, and one management syst em consisting of inancial
reporting, risk management , purchasing, and human resour ces.
Wisconsin 's two-hospital ThedaCar e health syst em also view s its 100 physician primary car e practices
as an essential part of the organization 's fabric. 106
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 06) Decentr alized management
empowers ph ysicians t o mak e their own business decisions, w hich has result ed in a iscall y strong
physician pr actice. Ph ysicians ar e pr ovided with incenti ves t o meet goals for out comes as well as inancial
perf ormance, because compensation is based on producti vity.
Integr ation Failur es
Most of the pr actitioner literatur e talk s about syst em successes, but the reality is that ther e have been
man y failur es. Recent resear ch, in fact , has suggest ed that hospitals and hospital syst ems ar e perilousl y
close to bankrupt cy in the not-too-distant futur e. Market competition and managed car e pressur es
combined with misguided strategies ha ve contribut ed to the pot ential for inancial disast ers. There is
some evidence that hospitals syst ems, in particular , may do bett er at the local mar ket le vel w her e the y can
acquir e the necessary lever age for successful negotiations with managed car e plans. 107
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 07)
Ho wev er , it is pr obabl y more realistic to assume that these failur es derive fr om a variety of pr oblems
and fact ors that have led t o failur es in nonhealthcar e organizations as w ell. For example, Enr on, which in
2002 exploded int o the pages of hist ory by almost causing the collapse of the st ock mar ket , illustr ated the
mor al and inancial failings of a w eak and corrupt ed corporate go vernance structur e. In the healthcar e 7/7/2019 Print
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industry, there is also evidence that or ganization and go vernance ma y have contribut ed to failur es, or at
least declining performance of syst ems.
The push tow ar d int egration of healthcar e facilities has r esult ed in the adoption of more corpor ate
forms of go vernance and management . As with business corporations, corporate go vernance structur es
creat e comple xity associat ed with large bur eaucr acies. The result is oft en organizational ambiguity ,
wher eby roles and responsibilities ar e not clear ly speciied and due diligence and monit oring go by the
w ay side. T wo real-w orld healthcar e failur es provide int eresting examples. Alleg heny Health Education
and R esear ch Foundation (AHERF) is an example of a f ailur e of a nonpr oit syst em that suff ered fr om
sever e go vernance and or ganizational pr oblems. Allina Health Syst em in Minneapolis pr esents an example
of an in vest or-o wned syst em that experienced similar pr oblems, but appears to be on the r oad to r eco very
thank s to r eor ganization and the establishment of new go vernance structur es.
The most conspicuous example of s yst em failur e is the collapse of AHERF . AHERF was established in
1983 and subsequentl y became one of the nation's largest nonpr oit multipr ovider s yst ems. In 1998
AHERF also became the nation 's largest nonpr oit healthcar e bankruptcy. Althoug h AHERF's failur e has
been attribut ed to a v ariety of fact ors, clear ly the or ganization and r eor ganization that occurr ed as the
sy st em evol ved cr eat ed bur eaucr atic layers of diffused r esponsibility and accountability . The end result
w as minimal inancial oversig ht throug hout the syst em. 108
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Allina Health S yst em, similar to AHERF , experienced tr emendous success initiall y as it for ged a syst em
that included int egrated hospital syst ems and a health plan under one corpor ate umbr ella. But an 18-
month feder al investig ation found Allina t o be out of contr ol, with excessi ve spending on such things as
corpor ate tr av el and ent ertainment , overpa yments to consultants, minimal o versig ht activities, and
conlicts of interest betw een the syst em hospitals and the health plan di visions. Allina has subsequentl y
reor ganized, spinning off its health plan, and no w each organization has a separ ate go verning boar d. 110
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 10)
Catholic Healthcar e West , a San Francisco—based s yst em, w hich is also the nation 's third largest
Roman Catholic healthcar e provider , is implementing an ambitious reor ganization plan in an eff ort to
rest ore pr oitability , having lost almost $900 million since 1997. The reor ganization f ocuses on
str eamlined go vernance s yst ems and centr alized management , and is expect ed to sa ve appr oximat ely
$100 million annuall y. F or example, the r eor ganization r emo ves middle la yers of go vernance and
management and r est ores contr ol to a s yst em that has experienced man y strategic misst eps such as
acquiring physician gr oups. It also rest ores the focus of the or ganization t o its mission and cor e
services. 111 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 11)
Human R esour ce s Manag ement
Because healthcar e syst ems ar e exceeding ly comple x and diverse or ganizational arr angements, human
resour ces management may be among their great est challenges. These syst ems requir e signiicant
numbers of highly skilled and specialized personnel at a variety of le vels. Ho wev er , syst ems also off er
opportunities not found in nons yst em hospitals. The y can develop staff-sharing pr ogr ams betw een
hospitals that not only reduce personnel e xpenses, but also pr ovide the pot ential for quality
impr ovements. In addition, s yst ems ma y have name r ecognition that facilitat es recruitment of personnel.
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Sy st ems also repr esent variety , mobility , and job security for emplo yees w ho can mo ve t o diff erent jobs
within the syst em.
The de velopment of car eer ladders within a syst em can enhance the syst em 's ability to attr act and
retain personnel. Pr omotions and transf ers can occur without the emplo yee e xiting the syst em. A
corpor ate ofice can also pr ovide indi vidual facilities with human r esour ces expertise that the y would not
be able to aff ord otherwise. Finall y, r epr esenting large numbers of emplo yees can f acilitat e the
development of mor e compr ehensive and less e xpensi ve beneits pack ages that are attr active both t o
emplo yees and t o the s yst em 's budget . 112
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During 1992, s yst em do wnsizing contribut ed to the incr eased proitability of both invest or-o wned and
not-f or-pr oit syst ems. Do wnsizing ma y be easier to manage in a s yst em hospital than in a fr eestanding
facility , because syst ems ha ve mor e opportunities to mo ve staff ar ound within the syst em and, thus, ar e
bett er able to pr otect emplo yees' economic security . The stability of employment at one facility within the
sy st em can pr ovide job openings for emplo yees displaced b y staff reductions at another s yst em facility . 113
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 13)
Emplo yees in s yst ems, ho wev er , do face the str ess of being exposed to the eff ects of vertical and
horizontal int egration. Almost no resear ch has investig ated the eff ect of mer gers, acquisitions, and other
strategies on emplo yees, nor is ther e a human resour ces model to deal with the eff ects of syst em
de velopment on emplo yees. Human r esour ces managers must deal with syst em changes and ensur e that
emplo yees ar e recognized as assets within the s yst em. 114
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 14)
Compensation f or s yst em executi ves r elects the comple xity and responsibility of s yst em management .
Multihospital syst em executi ves earn mor e than their count erparts in freestanding hospitals and ha ve
continued t o earn mor e rapid salary incr eases along with cash incenti ves and other per ks. 115
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 15) S y st ems also ind ad vantages in
reduced CEO turno ver . CEOs ha ve hig h-risk relationships with medical staff and boar ds, and they often
lose their jobs because of failing r elationships. In a s yst em, the CEO can mo ve t o another facility , and the
sy st em does not lose an important management resour ce. 116
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 16)
One of the major challenges f or a s yst em is to align the int erests of ph ysicians with those of the s yst em
and pr omot e physician participation. 1 17
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 17) Ph ysicians ma y have the
gr eat est opportunities to inluence standar ds of care in syst ems. In vest or-o wned syst ems, in particular ,
have pr omot ed physician participation in go vernance. 1 18
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 18) Y et , ph ysician lo yalties oft en
are associat ed with the individual facility r ather than with the lar ger syst em. Incr easing the numbers of
physician administr ators within the syst em, incr easing the numbers of physicians on corpor ate boar ds,
and impr oving communication with ph ysicians ma y impr ove ph ysician lo yalty . 119
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 19) 7/7/2019 Print
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The most proitable and eficient syst ems appear to oper ate with few er people on their management
staff s and pay hig her than aver age salaries to their emplo yees. Financiall y successful syst ems ha ve
report ed spending about one third mor e on human resour ces, planning, marketing, and public r elations
than do their lo wer perf orming count erparts. 120
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 20) In theory , these advantages
should e xist for all s yst ems. In pr actice, man y syst ems restrict themsel ves t o onl y certain subcat egories of
personnel. For example, some r eligious or ganization-associat ed syst ems requir e or prefer their executi ves
to be pr acticing members of the religious or ganization. This ob viousl y restricts the talent pool, as does the
pr actice of pa ying “belo w the market” in s yst ems afiliat ed with religious or ganizations.
In addition, the de velopment and enf orcement of appr opriat e standar ds of professional qualiications
and job perf ormance are crucial to the success of s yst ems. The de velopment and oper ation of a syst em ar e
comple x and requir e signiicant numbers of highly skilled and specialized personnel. The syst em needs to
set and enf orce appr opriat e standar ds of qualiication and performance and then recruit indi viduals who
can meet these standar ds. If this is not done, the anticipat ed advantages will not be achie ved.
Financial Manag ement
Finances have t o be centr alized in a syst em. When seeking long-t erm debt or equity funds, invest ors are
likely to insist on in vol ving all of the relat ed organization 's assets. The syst em needs to appr ove budget ,
capital expenditur es beyond a gi ven amount , sale or purchase of property , and changes in rat e structur es.
Sy st em hospitals vary in the inancial responsibilities of CEOs for capital management . Typicall y, CEOs
of indi vidual institutions in invest or-o wned syst ems ha ve a r educed role in cr eating capital; that function
normall y resides with corpor ate oficers. In both in vest or-o wned and not-f or-proit syst ems, expenditur es
that ext end be yond y ear ly budgets r outinel y requir e corpor ate appr oval. F urthermor e, the capital
approval pr ocess ma y diff er accor ding to s yst em ownership. In vest or-o wned hospitals tend to r el y on
authorization fr om the corpor ate ofice, and not-f or-proit syst ems usuall y requir e approval fr om both the
hospital-le vel and s yst em wide governing boar ds. 121
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 21) The success of capital
management inluences the cost and pricing structur e and ultimately the ability of the facility t o be
competiti ve within its o wn deined mar ket segment; 122
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 22) ther efor e, capital allocation has
a pr ominent position in syst em management .
Alloc ating Capit al
The traditional capital allocation appr oaches, which focus on discount ed cash low, net pr esent value, and
int ernal rat e of return, ma y be inappr opriate for multihospital healthcar e syst ems. For syst ems, shaping
capital structur e invol ves a s yst em wide vision and the int egration of local and corpor ate needs in a w ay
that e xt ends be yond the normal capital budget pr ocess. 123
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 23) The s yst em includes diff erent
facilities that ha ve diff erent needs and face diff erent risk s. Sever al facilities can be locat ed in markets with
diff erent inancial perf ormance trends and diff erent futur e potentials, as well as widel y diverse f acility ,
management , and medical staff characteristics. 124
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 24) A multif actored model that 7/7/2019 Print
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incorporates varying needs and risk s, and originat es in the capital asset pricing model, can be derived t o
allocat e capital among a variety of member institutions. 125
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Of particular importance t o s yst ems is the concept of a syst em-le vel mission fund. A member
institution w hose survi val w as in jeopar dy could r ecei ve a signiicant subsid y from the syst em to continue
its mission. As in a sing le institution, syst ems can establish allocations to mission acti vities based on either
an ongoing cash low subsid y or an endowment model. Often, a combination appr oach can be
emplo yed. 1 26 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 26)
P er haps the most distincti ve and important economic ad vantage of a s yst em in terms of its capital
allocation str ategy is the syst em 's ability to minimize the amount of aggr egate saf ety stock that is requir ed
to pr otect the syst em. Saf ety stock repr esents a powerful ad vantage that r elects a s yst em 's ability to
reduce or e ven eliminat e speciic risks to indi vidual facilities thr oug h diversiication of risk acr oss
multiple facilities. Thus, as the number of facilities in the s yst em incr eases, the importance of a sing le
facility's perf ormance declines, and the contribution to saf ety stock can also be reduced. F or syst ems, this
reduction in saf ety stock requir ements frees capital for allocation at other le vels within the s yst em and
repr esents a substantial economic beneit . 127
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S y st ems should also focus on hospital gr owth pools that ar e similar in conceptualization to gr owth
pools at the indi vidual level, but include both s yst em-le vel and hospital-le vel risk pools. Aft er making all
allocations, syst ems should assign the remaining capital to this pool in or der to pr ovide funding for
sy st em-le vel initiati ves such as v ertical int egration and other diversiication acti vities. 128
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Because the capital allocation pr ocess in a syst em in vol ves both corpor ate and facility participation, it
requir es the support of a strong syst em cultur e; communication among all participants in the process; an
incenti ve s yst em that associat es hospital management's compensation with the over all perf ormance of the
sy st em, as w ell as the indi vidual perf ormance of the facility; appr opriat e management and inancial
sy st ems; an eff ecti ve budgeting pr ocess; and an implementation plan. 129
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Financial Dificultie s within a Syst em
Bankrupt cy presents special problems for s yst ems and their members. “When dealing with a inanciall y
troubled hospital that is part of a multihospital syst em, the pr oblems seem to multipl y geometricall y.” 1 30
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 30) Leg al and practical pr oblems
arise from the exist ence of multiple boar ds and over lapping memberships on these boar ds. Fiduciary
obligations of boar d members can conlict , especiall y when an action appr opriat e for one institution ma y
not be beneicial to the s yst em. Boar d members with multiple loyalties can be disrupti ve. F urthermor e,
statutes and case law of a particular stat e may support the community or indi vidual hospital interests
over the s yst em int erests. 131 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 31)
S y st ems ha ve earned hig her bond ratings than fr eestanding institutions and ha ve sho wn stability in
ratings o ver time, both important consider ations for s yst ems. This perf ormance has been attribut ed to a 7/7/2019 Print
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sy st em 's ability to di versify risk and size. R ating agencies tend to measur e successful syst em perf ormance
by centr alized operations and mechanisms for monit oring planning, budgeting, and capital expenditur es
of syst em members. 132 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 32)
S y st ems ha ve the pot ential to incr ease interest earnings thr oug h a cash sw eep, a technique designed to
eliminat e the time lag between recei ving and investing funds. It in vol ves a dail y electr onic withdr aw al of
funds fr om all hospital oper ating accounts and the placement of these funds in one centr al account wher e
the interest begins accruing immediat ely. This t echnique allo ws the syst em to eliminat e the problem of
idle cash in local bank s. 133 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 33)
S y st ems also ha ve access t o pooled inancing that permits a member institution to use inancial
resour ces that would be otherwise una vailable. The inancial mar kets ha ve appear ed to fav or s yst ems as
sounder cr edit risk s than independent freestanding facilities. Empirical e vidence indicat es that syst ems
ha ve gener ally recei ved hig her credit ratings than most independent hospi-tals. 134
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 34) Ther e can be disad vantages t o
this type of inancing, ho wev er . Member institutions ma y have t o submit their assets as collat eral, and the
sy st em, over all, ma y ind that it is subor dinating its long-t erm inancial goals and depleting its assets in its
efforts to str engthen the inancial position of weak er, less responsible member institutions. 135
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 35) The str onger facilities ma y be
for ced to pledge or otherwise encumber their assets to support the debt-inanced oper ations and
activities of the syst em. The separ ate long-r ange plans and goals of stronger member institutions ma y be
subor dinated and harmed to shor e up other syst em institutions and to honor pledges and guar antees. 136
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 36)
Financiall y weak er institutions within the syst em ma y incur even gr eat er costs if the syst em functions
ineficientl y or becomes over lever aged. Hig h interest , debt service costs, and fees for s yst em corpor ate
services ma y neg ativel y aff ect the survi val pr ospects of weak er institutions to a gr eat er degr ee than the
more stable units.
Manag ement Innovation
The uphea val in the healthcar e environment has creat ed a variety of pr essur es for managers, w ho ar e no w
expect ed to contain costs without jeopar dizing quality of care, downsize while simultaneousl y increasing
producti vity, and maintain good relationships with medical staff s that have gr own incr easing ly w ary of
management int erference in patient car e issues. As expectations for w hat managers can accomplish
incr ease, so does the demand for managerial inno vation. Gi ven the gr owth of s yst ems and the comple xity
of these organizations, it is important that these s yst ems pr omot e managerial innovation.
Sy st ems ha ve the or ganizational r esour ces to encour age managerial innovation. Wher eas freestanding
hospitals ar e connect ed only throug h ad hoc relationships, s yst ems ha ve the beneit of gr oup norms and
mor e formal r elationships that can be helpful in implementing inno vation. Mor eover , syst ems ha ve
standar dized communication channels that promot e the diffusion of innovation. Matur e syst ems, in
particular , are lik ely to fost er managerial inno vation. As a s yst em matur es, it recognizes the importance
and v alue of communication and w orks t o build channels and mechanisms that encour age the sharing of
information. Matur e syst ems also usuall y have a lar ger resour ce base from w hich to implement new
pr ogr ams. 137 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 37) 7/7/2019 Print
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Tec hnolog y Assessment
With the rapid incr ease in technology de velopment and pr essur es to contain costs without decr easing the
quality of healthcar e services, institutions are focusing att ention on evaluating new t echnologies. Unlik e
single facilities, s yst ems must addr ess the needs of multiple facilities that ar e frequentl y in multiple
locations. Thus, decisions on technologies can occur at the int erregional level and in vol ve br oader
standar ds of assessment . When the organization e xt ends be yond the local community , community
standards may not be appr opriat e. 138
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The dilemma f or s yst ems depends on the ext ent of decentr alization within the organization. A hig hly
centr alized syst em can assist indi vidual hospitals in technology assessment , but the resulting guidelines
for adopting or implementing the new t echnology ma y be inconsist ent with community standards. A
decentralized syst em, on the other hand, can allo w local facilities t o assess technology within the cont ext
of the f acility's en vironment . This approach, howev er , can lead to e xpensi ve duplication.
R isk Manag ement
Sy st ems ar e positioned to tak e advantage of legislation that r egulat es inancing mechanisms for insur ance.
Increasing ly , s yst ems ar e obtaining liability and other insur ance cover ages thr oug h alternati ve methods of
inancing. In particular , risk ret ention gr oups, a inancing mechanism authorized by the Feder al Risk
Ret ention A ct of 1986, off er syst ems unique opportunities for a r eliable and stable sour ce of liability
protection. These gr oups are essentiall y insurance companies formed b y institutions with similar
int erests, such as hospitals, to pr ovide an y casualty cover age, except w orkers' compensation. All
policy holders must also be stockholders. Unlik e traditional insur ance companies, which must conf orm to
the r egulations of each stat e in which the y oper ate, risk ret ention gr oups are able to oper ate nation wide
once licensed in one state.
Capti ve insur ance companies, another alternati ve t o tr aditional insur ance companies, write cover age
for onl y one emplo yer or one gr oup of emplo yers. Se ven stat es have cr eat ed tax laws that allo w syst ems to
tak e advantage of this arr angement . 139
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Mar keting
Althoug h little is known about the practice of mar keting in s yst ems, a stud y of marketing in multihospital
sy st ems rev ealed minimal diff erences betw een invest or-o wned syst ems and not-f or-proit syst ems. 140
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 40) Mar keting staff s were lar ger in
invest or-o wned syst ems, ho wev er , w her e mar keting r esponsibilities ar e mor e likely to be formall y
speciied within the organization chart . The larger staff s tended to be associat ed with a decentralized
approach to mar keting. In contr ast, not-f or-proit syst ems report ed smaller marketing staff s and
emplo yed a mor e centr alized reporting structur e for the mar keting function. Ov erall, in vest or-o wned and
not-f or-pr oit syst ems demonstr ated remar kable similarities in patt erns of inluence over mar keting mix,
the status of mar keting inf ormation syst ems, and attitudes tow ar d mar keting. The mo ve b y not-f or-proit
sy st ems to a mor e aggr essive and bott om-line orientation may have made mar keting diff erences of the
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It has become evident in mar keting that most hospital mar kets r emain local or regional in natur e. Local
and regional s yst ems ha ve hig her levels of mar ket contr ol in distinct areas than do lar ger, mor e
geogr aphicall y dispersed invest or-o wned syst ems. 141
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 41) The tr end tow ar d syst em
str ategies that focus on r egional and v ertical int egration is likely to inluence mar keting eff orts in syst ems.
Information S yst ems
Incr easing ly , s yst ems ar e facing new inf ormation requir ements to accommodat e strategies that in vol ve
do wnsizing, reor ganization, r estructuring, and di vestitur es, as well as demands by pa yers f or inf ormation
on the costs of healthcar e services. The management of information within syst ems must facilitat e
communication between a diversity of oper ations and across a variety of facilities. 142
(h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 42) In s yst ems, the tr end is tow ar d
centr alizing information syst ems, with inf ormation syst ems managers reporting either to the CEO or to
executi ve oficers in char ge of oper ations or inance. These managers typicall y face e xpanded
responsibilities that include t elephone s yst ems, management engineering, and data communications. In
addition, the y have incr easing ly become in vol ved in the implementation of alt ernati ve deli very s yst ems
thr oug h the development of s yst em wide clinical and managerial inf ormation syst ems. The gr owth of
inf ormation syst ems management within hospital syst ems relects the gr owing r equir ements and
information needs of diversiication and int egration str ategies. 143
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Healthcar e syst ems linking hospitals, ph ysicians, insur ers, emplo yers, and others f orm the foundation
of most healthcar e ref orm pr oposals. Shar ed information on health out comes and costs of care will help
identify and encour age the most eficient forms of car e. This requir es the development of a health
inf ormation netw ork. 144 ( h ttp :/ /co n te n t.t hu ze le a rn in g.c om /b ook s/ W olp er.3 070.1 7.1 /se ctio n s/ n av p oin t1 0# ch ap 2_ft 1 44) Such
an inf ormation netw ork w ould help to dir ect patients to the most appr opriat e settings and reduce
redundancies.
In-Depth Case Stud y: Southeast Medical C ent er
The follo wing case stud y invol ving a lar ge organized deli very s yst em exempliies man y of the issues
described earlier in this chapt er.
Hist ory and Ev olution
Southeast Medical Cent er (SMC; a pseudon ym) was established as a public hospital in the 1920s, just
bef ore the Depr ession. Locat ed in the Southeast , a $1 million bond inanced the 250-bed facility . Major
expansion pr ojects in the 1950s incr eased the hospital's size to 600 beds. F ormal afiliation with the local
uni versity's College of Medicine r esidency pr ogr am in the 1970s further expanded capacity . Thus, SMC
became a public academic health center and subsequentl y assumed multiple missions of patient care,
teaching, and r esear ch. Capital improvement pr ogr ams were conduct ed during the 1970s, and in 1982, a
massive r eno vation and construction pr oject ($160 million) added 550 beds to the facility . In the 1980s, a
59-bed freestanding rehabilitation cent er was opened adjacent to the hospital, and a ph ysicians' ofice
building w as construct ed next to the hospital. Medical helicopt ers were also acquir ed in 1989, expanding
SMC's tr auma services. In addition to serving as a r egional pr ovider for tr auma, SMC also furnishes burn,
neonatal, and transplant car e for the r egion. 7/7/2019 Print
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Responsibility for go vernance of SMC has shift ed over the y ears. In the ear ly y ears of oper ation, a
hospital board ran SMC. In the 1940s, the city w as given dir ect contr ol over the hospital. In the 1980s, the
stat e legislatur e creat ed a public hospital authority (to be appoint ed by the county commission) to go vern
the hospital. In the 1990s, the hospital's boar d of trust ees vot ed to turn oper ations of the hospital over t o a
pri vat e, not-f or-proit corpor ation (501c-3), the SMC Corpor ation. Howev er , oversig ht for charity car e
remained with the county's hospital authority . The SMC Corporation is directed by a 15-member boar d of
direct ors and essentiall y manages the organized deli very s yst em thr oug h a lease arrangement with the
county hospital authority .
Toda y, SMC is a pri vat e, not-f or-proit academic health center that is accredited by JCAHO . It also serves
as the primary teaching hospital for the local uni versity . Approximat ely 1100 pri vat e and uni versity -
afiliat ed attending physicians and mor e than 400 resident ph ysicians in the uni versity's College of
Medicine r esidency pr ogr am serv e the community's medical needs. SMC also serves as the clinical site for
associat e, baccalaur eate, and graduat e nursing progr ams for the uni versity and community colleges.
SMC serv es as a regional and int ernational ref err al service with mor e than 800 acut e care beds. SMC
has established community cent ers in a variety of locations, w hich has cr eat ed incr eased access. In
addition to specialized medical services, SMC is committ ed to pr oviding community r esour ces for
education, inf ormation, and progr ams aimed at helping residents sta y it and health y. F our out of ten
patients that passed thr oug h the SMC's door came from outside the county .
SMC also operates an HMO health plan for charity car e patients. In 1991, the County Commission
established the SMC Health Plan to oper ate as a Medicaid HMO or insur ance healthcar e plan for the poor .
The plan reimburses SMC on a case-b y-case basis f or medical services, but it also negotiat es discount ed
rat es and costs with the hospital. During the ear ly 1990s SMC's pa yment from the health plan dr opped
substantiall y. In 1996, the pr ogr am was under a freeze by the stat e and could not enroll participants for
mor e than a year .
Thus, SMC is not just the hospital—it is a compr ehensive or ganized deli very s yst em that also includes
facilities distinct fr om the hospital (i.e., SMC Health Plan). In addition, SMC ambulat ory care cent ers are
locat ed throug hout the county . SMC was the onl y public hospital in a metr opolitan area with a population
of one million or mor e that recei ved no public subsid y. Most citizens belie ve that SMC w as subsidized by
their tax es. In 1971, the County Commission agr eed to supplement hospital r ev enues with pr operty tax es.
In 1985, the county commissioners passed a quart er-per cent sales tax to fund indigent car e. The tax was
repealed in 1987. In 1991, the county institut ed a one-half percent sales tax to fund indigent car e at all
hospitals in the county , including SMC.
In sum, while SMC recei ves no public subsid y, it does r ecei ve a portion of the half-cent sales tax w hich
depends on the pr efer ences of the county commissioners each year . Unlik e a direct subsid y, no public
mone y is ever guar anteed.
As an academic health cent er (AHC) SMC has multiple, conjoined missions of teaching, r esear ch, and
patient care. While providing patient car e for appr oximat ely 40% of the nation 's poor, AHCs are strugg ling
to ind a competiti ve position in t oda y's rapidl y changing healthcar e environment . Until recentl y, the y have
enjo yed a pri vileged position atop the healthcar e pyr amid as a niche pr ovider of t ertiary services. With the
gr owth of managed car e and reductions in go vernment funding, the ability of AHCs t o compet e is being
drasticall y undercut.
It is widel y recognized that multiple missions of teaching, r esear ch, and patient care contribut e to the
pr oduction of costl y clinical services that are inconsist ent with the demand for less e xpensi ve services in 7/7/2019 Print
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toda y's healthcar e environment . The majority of the services that AHCs provide ar e no w available
elsew here, such as local community hospitals and specialty pri vat e medical pr actices. Furthermor e, it is
estimated that roug hly 70% of their clinical services can be pr ovided elsew here at a lower cost . It is
belie ved, f or e xample, that AHCs ar e appr oximat ely 30% mor e expensi ve, on a case-mix -adjusted basis,
than their nonteach-ing competit ors.
As a result , AHCs are losing gr ound to other hospitals and medical pr actices. The y have become
pr oviders of a small number of e xpensi ve hig h-tech services invol ving unique and comple x care. Howev er ,
the y continue to be the pr edominant providers of the nation 's charitable care. As an AHC, SMC relects
these tr ends. For example, SMC's or gan tr ansplant cent er and burn unit are unique hig h-cost services that
account for few er than 2% of the patients treat ed at SMC each year .
SMC Leadership
In Oct ober 1994, the CEO of SMC abruptl y resigned. A former county administr ator assumed management
of SMC on an int erim basis. In 1996, SMC select ed a new CEO and president . The new CEO left his current
job as director of one of the lar gest public hospital syst ems in the Unit ed States because he had opposed
privatization of that city's hospitals. Nonetheless, shortl y after coming to SMC, the new CEO beg an laying
out plans for pri vatization, and at a f orum on the futur e of public hospitals, he publicl y announced that
privatization w as the best path for man y public hospitals, including his own, SMC.
Public hospitals deli ver a dispr oportionat e share of charity care compar ed with their privat e
count erparts. Because the number of public hospitals is decreasing, either by con version or closur e, there
is concern about wher e car e to the poor will be pr ovided. F rom 1985 t o 1995, the number of public
hospitals in SMC's stat e dropped from 57 to 29. Eig ht of these hospitals closed and 20 con vert ed to pri vat e
institutions.
In 1997, the new CEO explained that SMC could onl y decide its ownership status aft er it decided who
its partners would be and w hether it want ed primaril y to be a community hospital, a teaching hospital, or
a county charity hospital, and “w e don 't know that yet .” One month lat er, he w ould become an ad vocat e for
pri vatization without identifying partners or articulating w hat it was SMC primaril y want ed to be.
The follo wing pot ential beneits of privatization w ere identiied prior to con version:
• E conomic freedom—Pri vat e, not-f or-proit hospitals can borrow and spend mone y more easil y than
public ones, which need go vernment appr oval. Con version could mak e SMC more competiti ve in the
local mar ket .
• R educed tax bur den—In theory , a more competiti ve hospital w ould requir e less help from stat e and
local taxpa yers t o sta y in the black.
• Reduced regulat ory burden—F reedom fr om stat e public recor d laws w ould assist in str ategic
planning.
• Less political turmoil—Public hospital boar ds often get bogged down in politics. Pri vat e boar ds,
which oper ate out of the limelig ht, gener ally can mak e decisions without such intense political
pressur e.
• Enhanced ability to ent er into joint ventur es—Essentiall y, it will become leg al for the pri vat e
institution, SMC, to partner with others, such as a gr oup of doct ors, to jointl y develop and o wn 7/7/2019 Print
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ambulatory clinics and other outpatient facilities.
• E conomic beneits—SMC could recei ve much lo wer int erest rat es fr om the bond mar ket .
• Enhanced ability to r aise pri vat e funds—SMC w ould be mor e appealing to pot ential donors as a
privat e, not-f or-proit hospital than as an arm of local government .
Pot ential disad vantages included the f ollo wing:
• Change in mission— A privat e SMC mig ht not meet the community's needs the same way a public one
must . The hospital could reduce its commitment to needed services such as its burn cent er and
trauma unit , which lose mone y.
• R educed charity car e—SMC provides millions of dollars in fr ee car e to poor and uninsur ed residents.
Some indigent patients mig ht ind medical care toug her to get if the hospital w ent pri vat e.
• Less public scrutin y—Pri vat e hospitals do not necessaril y have t o compl y with the state's open
go vernment la ws, making it toug her for the community t o k eep tabs on their successes and failur es.
Table 2.4 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/W olp er.3 070.1 7.1 /se ctio n s/n av p oin t1 0#ch ap 2_ta b 2 _4 )
contains the r esults of a public opinion poll reg arding the pri vatization of SMC. R espondents fav or ed
keeping the hospital publicl y owned b y a 3 to 1 r atio. Ho wev er , the poll did not att empt to learn w hether
respondents underst ood the differences betw een public and privat e ownership.
The S tr at egic Plan: Mo ve and R ebuild, 1997-2002
The str ategic plan for SMC cent ered on pri vatization; that is, con verting SMC t o a pri vat e, not-f or-proit
corpor ation, Newco Health Sciences Cent er, Inc. All other str ategic initiati ves w ere based on SMC's
con version t o pri vat e ownership. The str ategic initiati ves of the plan w ere:
• The 1.5 million squar e foot f acility do wnt own will be demolished.
• A new 450-bed hospital and r esear ch comple x will be built near the university .
Approximat ely $100 million will be raised fr om pri vat e donations to fund the new construction. This
w ould addr ess problems of SMC's aging ph ysical plant . Also, the location near the university is pr efer able
because do wnt own is vulner able to se ver e w eather disast ers such as storms and hurricanes.
• The mo ve near the uni versity will r equir e an estimat ed $100 million in privat e funds as w ell as
appr oval fr om stat e healthcar e oficials to tr ansf er the Certiicat e of Need (CON) to the new facility . It
should be noted that other growing academic health cent ers (Portland, Or egon; Birming ham,
Alabama; and University of Florida) w ere unable to r aise this much mone y in privat e funds.
Table 2.4 R esults of a Local Ne wspaper P oll, conduct ed March 23, 1997
Opinion on Going Privat e
Should remain public 74%
Fav or pri vatization 13%
Don 't kno w 13%
Support for Remaining Public
Non-w hite 88% 7/7/2019 Print
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White 74%
African American 96%
Conc ern about Privatization
Somew hat concerned 34%
Very concerned 28%
A little concerned 18%
Not concerned 17%
• Pr oits from the sale of the curr ent SMC site do wnt own will be used t o cr eat e and/or expand sat ellit e
clinics around the county .
The new CEO predict ed that SMC would go out of business by the year 2005 unless this plan w as adopt ed.
Furthermor e, he project ed a $14.3 million proit by 2005 if the plan w ere implement ed. The former SMC
pr esident ask ed the new CEO to e xplain w hat would be a fallback plan in the e vent things didn 't go as
planned. The new CEO responded that none e xist ed. Alternati ves t o pri vatization had been consider ed, but
none were acceptable.
The unacceptable alt ernati ves t o pri vatization included:
• selling the hospital t o a pri vat e for-pr oit corpor ation
• closing the hospital
• asking for a public bailout in the form of a tax subsid y
In addition, the “Shands Model” was held out as a possible futur e for SMC as a pri vat e hospital. The Shands
Model ref ers to Florida 's Shands Hospital, which hit bott om in the late 1970s. As a public academic health
cent er, Shands couldn 't afford to mak e needed safety impr ovements or hir e enoug h talented workers.
Because la wmak ers never pr ovided the mone y executi ves belie ved w as needed to run a top health cent er,
Shands Hospital con vert ed to a pri vat e, not-f or-proit corpor ation in 1980. Shands ran a budget surplus
that y ear and experienced 17 consecuti ve y ears of “r ecor d-breaking” inancial perf ormance. Privatization
w as cr edit ed with turning things around because it freed the hospital from political and inancial
constr aints. SMC oficials and board members who support ed converting SMC t o pri vat e status used the
Shands Model as a ref er ence. Ho wev er , Shands, unlik e SMC, recei ves a substantial stat e subsid y of
approximat ely $10 million annuall y.
Financial Pr essur es and Charit y Car e
Much of the impetus for SMC's con version w as inancial. Accor ding to the new CEO , SMC was not lik ely to
survi ve inanciall y as a public institution. He predict ed a $31 million loss by 2001 if the hospital's
go verning boar d failed t o mak e the hospital privat e. The audit ors, who were retained to v erify accur acy of
these igures, put the number closer to $44 million. Under a w orst-case scenario, the audit ors said losses
could reach $70 million. Clear ly , the new CEO w as not exagger ating the precarious inancial futur e facing
SMC.
SMC lost mar ket shar e in the county every y ear since 1992 (dr opping from 23.4% to 15.7%). Mor e than
half of SMC's beds were empty each nig ht, and SMC continued to see few er indigent , Medicare, and
Medicaid patients than its competit ors. Although SMC's rev enues gr ew by $7 million betw een 1992 and
1996, expenses incr eased by $31 million, and annual net income dr opped from $14 million to a loss of $46
million. Cash r eserv es also dropped substantiall y. 7/7/2019 Print
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One of the most contentious issues that surfaced in the debat e over pri vatization w as the impact on the
indigent car e mission. Man y worried that SMC, as a pri vat e entity , would not retain the same commitment
to car e for the poor and uninsur ed. Similar fears had sunk pr evious att empts to pri vatize SMC in 1990.
This time, assur ances were made by SMC's pr esident , oficials, and others that the hospital's mission
would not change because of ownership. SMC's commitment to indigent car e would remain a cor e mission
and top priority . Furthermor e, the County Hospital Authority w ould leg ally retain o versig ht authority for
charitable car e. Yet questions w ere raised about the public hospital authority's ability to carry out the
stat e-mandat ed mission to serv e the poor if SMC went bankrupt . The lease arrangement was also
questioned because it did not specify ho w good, accessible, or ext ensi ve the charity car e must be.
Despit e these unans wer ed questions, the county oficials appr oved SMC's r equest to become a pri vat e,
not-f or-pr oit corpor ation on the strength of the argument of SMC's CEO that such a mo ve w ould pr eserv e
the hospital's commitment to charity car e.
Less than two years aft er the vot e to pri vatize SMC, the new CEO t estiied under oath that caring for the
poor w as no longer SMC's top priority . County oficials now admit that the y should have done mor e than
rel y on his pr omise—the y should have (1) cr eat ed an effecti ve method f or o verseeing the hospital's
contr actual oblig ation to tr eat the poor , and (2) determined what sanctions or punishment would be used
if SMC violat ed the lease agreement . A privat e SMC, without a commitment to serving the indigent , would
place an additional bur den on the county , which is requir ed by stat e law to pr ovide health car e for poor
people.
The A ftermath of Pri vatiz ation
Ironicall y, in its inal y ear as a public institution, SMC sho wed a pr oit of mor e than $4 million. As a privat e
hospital, its losses ha ve incr eased dramaticall y from 1997 to 2000. Une xpect ed losses were not part of the
str ategic plan to “mo ve and r ebuild. ” The CEO predict ed a $7.2 million proit for SMC in its irst y ear as a
pri vat e hospital, but the hospital lost near ly $6 million in the irst tw o months. SMC and its par ent
compan y lost $12.7 million that irst year—$11.5 million on the hospital and $1.2 million on the health
plan. Confr onted with these losses, the CEO continued to ar gue that SMC was on the rig ht course. In
addition, he and his staff attribut ed the losses to for ces outside the hospital's contr ol, including the
Feder al Balanced Budget Act, w hich reduced hospital funding, and an incr ease in the number of patients
served by managed car e in the region.
Ho wev er , it turns out that the hospital's most signiicant losses w ere the result of the hospital's
inability as a pri vat e corpor ation to r etain “lien authority ” and essentiall y be irst in line to collect mone y
from the accident victims it tr eat ed. Lien authority did not aut omaticall y transf er to the hospital w hen it
con vert ed to a pri vat e corpor ation. The county attorne y, w ho no w repr esents the public hospital authority ,
warned that the loss of lien authority could signiicantl y cost SMC in incollectable rev enue—as much as
$20 million annuall y. The lien authority matt er was raised prior to con version, but had been dismissed b y
the new CEO , his staff, and consultants as not being a potential problem.
SMC was no w mir ed in inancial, political, and legal problems. Emplo yee la yoff s were anticipat ed, but
multimillion-dollar losses were not . Man y critical issues remain unr esolved f ollo wing SMC's con version.
F or e xample, in or der to sell the land on w hich the curr ent hospital stands, the county would ha ve t o pa y
for demolition as w ell as remo val of asbest os and hazardous wast e cleanup. In addition, it has become
clear that man y important issues had been over look ed in estimating the impact of privatization. The
hospital's loss of lien authority as a collection t ool has led to une xpect ed poor inancial performance and
projections of major futur e losses (i.e., $20 million annuall y) for SMC. In addition, because the hospital had 7/7/2019 Print
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used lien money to help co ver the cost of emer gency care for tr auma victims, some w orried that SMC
would be for ced to r educe its tr auma services. SMC oficials no w say the lien authority is crucial to iscal
turnar ound.
In addition, when SMC went pri vat e it lost the inancial pr otection that go vernment agencies enjo y from
law suits (litig ation damage cap). Althoug h legislative r emedies ar e being pursued in an att empt to r est ore
lien authority for SMC, the r esolution of this issue appears elusi ve f or the time being. The County
Commission appears unlik ely to gr ant SMC lien authority .
Indigent care clear ly slipped as a t op priority for SMC and became mer ely one of man y priorities. In
addition, the move near the uni versity is on hold. SMC also e xplor ed buying other hospitals, the price of
which could reach $200 million. Ho w the pur chase of these hospitals it with the strategic plan w as ne ver
explained.
Finall y, SMC w as not able to k eep its meetings secr et despit e conversion. Ther e has been intense media
scrutin y, and local new spapers are suing SMC in or der to open the hospital's r ecor ds. Furthermor e, the
State Supr eme Court recentl y ruled that (1) privat ely leased hospitals cannot meet in secr et and cannot
keep r ecor ds from the public, and (2) it is illeg al to tr ansf er authority from a public to a pri vat e boar d in an
effort to a void the sunshine la ws—essentiall y what SMC did.
The College of Medicine beg an to be concerned about ho w it would train medical students and resident
ph ysicians if its main t eaching hospital could not survi ve. The patient census w as dr opping, emplo yees
w er e being laid off, and mor ale was det erior ating. The hospital began to look lik e a dinosaur on the brink
of extinction in a hostile healthcar e environment . Could a multipr ovider t eaching hospital and tr auma
cent er survi ve in this r egion?
The New Plan and New Leadership
In 1999, the ph ysician leadership met t o la y out a plan to sho w the community why the hospital w as so
essential. Local political leaders and members of the media w ere in vit ed to view the hospital and its
various pr ogr ams one at a time. These indi viduals came, listened, wrote, and called their colleagues. The
community became aw ar e of the value of a robust and health y mul-tipr ovider s yst em. The Chamber of
Commer ce, the County Commission, and the County Legislati ve Deleg ation worked t ogether to sa ve SMC.
Aft er a consultant's review , these groups spear headed legislation that ultimat ely impr oved
reimbursement f or indigent car e for hospitals acr oss the stat e, including SMC. During that time, the SMC
governing boar d select ed another CEO with a mandat e to turn the hospital ar ound. This “turnar ound” CEO
went to w ork repairing mor ale, bringing in a new administr ation team, and assigning a br oad range of
task s to e xisting and talent ed administr ators. He met with emplo yees on all thr ee shifts, list ened, and dealt
with issues. Business practices impr oved dr amaticall y. Managed car e contr acts were renegotiat ed. Patient-
and ph ysician-friendl y operations became the mantr a.
As operations impr oved, mor e physicians and patients came and the census incr eased. Admissions, ER
visits, and sur geries all incr eased dramaticall y. Most of the incr eased occupancy has been in tertiary car e.
The impr oved iscal viability allo wed for the de velopment of new pr ogr ams (i.e., lung transplants and liver
tr ansplants). New stat e-of-the-art equipment was installed and the ph ysical plant r epair ed. Finall y, the
hospital has not diminished its saf ety net healthcar e services for the medicall y indigent.
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This organized deli very s yst em has experienced man y ups and downs over the y ears as SMC's priorities
ha ve shift ed. The leadership team in the mid-1990s tried to totall y privatize the s yst em and focused on
leg al and organizational r estructuring rather than the cor e mission of patient care. This restructuring w as
in response to pr essur e from politicall y oriented board members who br oug ht in a CEO speciicall y to
pri vatize the hospital. The pri vatization has been a mix ed blessing, with man y unanticipat ed negative
consequences. One of the major consequences of pri vatization, w hich neg ativel y impact ed rev enue, w as
SMC's inability (as a pri vat e corpor ation) to r etain lien authority to collect mone y from accident victims.
When the new leadership team arri ved in 1999, it beg an to focus on meeting the needs of both
ph ysicians and patients. The ph ysicians became int egral members of the leadership team. The focus
shift ed to pr oviding hig h-quality clinical car e with high-quality service rather than handling leg al and
organizational structur e issues. The new CEO had been given the authority b y the boar d to focus on the
cor e mission and has done so successfull y.
A second major f act or in the turnar ound was the successful political eff orts of the new administr ation
to gener ate additional stat e rev enue f or indigent car e, which beneit ed all hospitals in the state. This was
accomplished thr oug h a political coalition spear headed by SMC with support fr om man y political and
community groups.
The follo wing lessons can be deri ved fr om this case stud y:
• The organizational structur e, legal structur e, and size of an organized deli very s yst em ma y be less
important in det ermining organizational perf ormance than previousl y thoug ht.
• The quality of the leadership team and its ability to communicat e a common mission and vision to
key stak eholders may be far mor e important than organizational structur e in enhancing
organizational perf ormance.
• Political decision making to beneit a small gr oup is antithetical to or ganizational perf ormance.
• A focus on int ernal oper ations to serv e physicians and cust omers is a fundamental necessity for
achie ving high levels of or ganizational perf ormance.
Managerial Implications and Rec ommendations
The jury is still out on the futur e of organized deli very s yst ems. It is unclear w hether the man y problems
and issues identiied her e and elsew here are due to a la wed str ategy , lawed implementation (leadership),
or both. Clear ly , multipr ovider int egration has not worked w ell either in American industry or in health
car e. The point is not to la y blame w hen syst ems strugg le or collapse. Rather , we need to identify
managerial pr ocesses or methods that will enhance the probability that syst ems will survi ve and pr osper .
The overriding goal of s yst ems should be to pr ovide maximum v alue to the healthcar e customer . 145
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The fundamental question is, What types of s yst ems, netw orks, and alliances ar e best able to compet e
effecti vel y and deli ver cost-eff ective car e? At this time, ho wev er , ther e is no deiniti ve ans wer to this
question, because ther e is almost no evidence associating diff erent types of or ganized arr angements with
successful perf ormance or failur e.
The futur e of healthcar e syst ems is hig hly speculati ve, gi ven the v olatility of mar kets and futur e
initiati ves f or healthcar e ref orm. As the go vernment's r ole in health car e expands, these syst ems become 7/7/2019 Print
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more vulner able to shifts in go vernment policy .
It seems likely that most multipr ovider healthcar e syst ems will emer ge successfull y from their
“gr owing pains” and continue t o solidify their position in the healthcar e market as long as the y are
virtuall y integrated rather than v erticall y integrated.
Health car e will be pur chased primaril y on a local or regional basis. Quality and v alue will be
incr easing ly important t o patients w ho once ag ain ha ve a choice of pr ovider . Few er resour ces will be
av ailable t o deli ver car e, and the deli very of health car e will continue to shift fr om acut e care to
ambulat ory settings. Barry noted the importance of a syst em CEO being a “change agent” in this futur e
envir onment:
Those who can understand and embr ace change; those who can transf orm traditional but key v alues to
tomorr ow's en vironment; those who can educat e their boards of trust ees, medical communities, and
the community at large; and those who can “rig ht size” the production acti vities of their organizations,
and pr ovide both hig h quality and cost-eff ective services will be the winners of t omorr ow . 146
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R ec ommendations
• Healthcar e executi ves in multipr ovider healthcar e syst ems need to allo w lexibility for member
institutions t o r espond to speciic local mar kets w hile pr oviding a clear ly articulat ed and well-
underst ood vision for the s yst em.
• Each syst em should de velop a detailed mission stat ement and set of beha vioral norms (i.e., cultur e)
shared by each facility within the s yst em in or der to enhance cohesi veness.
• Each s yst em should de velop a f ormal str ategic plan for the s yst em with input and a hig h degr ee of
interaction among the corpor ate ofice and institutions in all geogr aphic regions.
• Each s yst em should de velop and implement e xplicit measur es for quality of car e, patient satisf action,
eficiency , and community beneit, and then provide these data t o pur chasers and other key
stak eholders.
• Each syst em should de velop an or ganizational structur e that is simple, lean, lat, responsi ve,
cust omer-dri ven, risk -taking, and focused.
• Go vernance at the corpor ate le vel should be str ategic in natur e, wher eas governance at the
institutional le vel should be oper ational in natur e and focused on local community/r egion needs
and concerns.
• Syst ems should pr ovide formal and inf ormal education for those r esponsible for go vernance at all
le vels in the s yst em.
• S yst ems should pr ovide a clear deinition of go vernance r oles, responsibilities, and authority among
the s yst em and institutional boar ds of its component parts.
• Syst ems should pr ovide the leadership r equir ed for the indi vidual units of a syst em to think in terms
of o ver all syst em perf ormance rather than just in terms of the particular unit's perf ormance. 7/7/2019 Print
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• Only institutions that it a particular cultur e and strategy should be in vit ed to join or r emain a
member of the s yst em.
• S yst ems should align ph ysician incenti ves and achie ve clinical int egration.
• Syst ems should de velop inf ormation syst ems to support the int egration of clinical and managerial
information.
• Syst ems should use their mission and values as a guide in making dificult tr ade-off decisions.
• Syst ems should change their incenti ve structur es to r elect concern for perf ormance of the syst em as
a w hole, not just the indi vidual components.
• Syst ems should own few er facilities and contr act for most services so that the y are virtuall y
integr ated rather than v erticall y integrated.
• S yst ems should bu y or contr act for services onl y if the additions will add value to the s yst ems'
cust omers and are compatible with the existing mission, v alues, goals, and cultur e.
• Syst ems should allo w the indi vidual oper ating units within the syst em to ha ve suficient aut onom y to
be r esponsi ve t o the needs of their local cust omers.
• Syst ems should focus on cor e compet encies rather than trying to be all things to all s yst em
components.
• S yst ems should not allo w success to br eed complacency . Each integrative st ep must be evaluat ed for
sy st em wide effects.
• Syst ems should focus on quality r ather than the size of the pr ogr am or syst em being int egrated.
• S yst ems should focus on quality r ather than quantity of ph ysician int egration.
• Syst ems should place hig h-perf orming executi ves in k ey positions t o implement their int egration
plan.
• Syst ems should tar get select ed patient populations and payers.
R efer ences
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16 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn16) . Smith, Virgil.
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34 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn34) . Brown. Mer gers,
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35 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn35) . Shortell, et al.
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36 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn36) . Jacobson GK. A
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38 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn38) . Unland J. Group
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41 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn41) . Kenk el, PJ. Filling
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44 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn44) . Shortell, et al.
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45 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn45) . Robinson, Casalino.
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46 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn46) . Brown. Mer gers,
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47 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn47) . Smith, Virgil.
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48 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn48) . Kaiser LR. The
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49 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn49) . Ibid.
50 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn50) . McGee GM, et al.
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51 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn51) . Kaiser. The future
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52 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn52) . Toome y RE,
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53 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn53) . Morlock LL,
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54 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn54) . Morlock,
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55 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn55) . Ibid, 1134.
56 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn56) . Gautam KS. A call
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58 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn58) . Alexander J A, et al.
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59 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn59) . Shortell. The
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60 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn60) . Risk. Multihospital
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61 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn61) . Clever ly W O.
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67 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn67) . White. The
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68 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn68) . Ramir ez.
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69 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn69) . Feder a RD, Miller
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73 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn73) . Shortell. The
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74 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn74) . Conrad, Dowling.
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75 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn75) . Ibid.
76 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn76) . Ibid, 11.
77 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn77) . Robinson, Casalino.
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78 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn78) . Ibid.
79 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn79) . Herzlinger R.
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81 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn81) . Conrad, Dowling.
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82 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn82) . Alexander J A.
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94 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn94) . Greene J. 1992.
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95 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn95) . Robinson, Casalino.
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96 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn96) . Ramir ez.
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97. Cle ver ly . Financial and oper ating performance of syst ems. 68.
98 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn98) . Drano ve, et al. Ar e
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99 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn99) . Bilynsky U.
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105 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn105) . Ibid.
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122 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn122) . Schwartz GF ,
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127 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn127) . Ibid, 74–74.
128 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn128) . Ibid, 75.
129 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn129) . Ibid, 77–77.
130 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn130) . Gerber L,
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135 (http://c ontent.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn135) . Ibid, 6–6.
136 (http://content.thuzelearning .com/books/W olper.3070.17.1/sections/na vpoint10#chap2_fn136) . Ibid, 12.
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Biogr aphical Information
Myron D. Fottler , PhD, is a Professor and Dir ector of Progr ams in Health Services Administr ation at the
University of Centr al Florida. He has author ed or coauthor ed 14 books, 30 book chapt ers, and more than
100 journal articles in most of the major management and health service journals. His most recent book is
Achieving Ser vice Ex ce llenc e: Str at egie s for Healthc are (Health Administr ation Press, 2002). He recei ved his
MB A from Bost on University and his PhD in business fr om Columbia Uni versity . He serves on man y
editorial review boar ds and is coedit or of the JAI Pr ess/Else vier series Advanc es on Health C ar e
Manag ement .
Donna Malvey, PhD , is an Assistant Professor of Health A dministr ation in the College of Public Health at
the University of South Florida in T ampa. Her ar ea of expertise is the str ategic management of health
services or ganizations. P ast experience includes teaching courses in labor r elations and healthcar e
organizations and management . In addition, she has served as the executi ve dir ector of a national trade 7/7/2019 Print
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association repr esenting health professionals and also as a congr essional aide. She has coauthor ed articles
on a variety of healthcar e-relat ed topics and is curr ently a visiting assistant professor of Health
Administr ation at the University of Centr al Florida. Dr. Mal vey r ecei ved her PhD in health services
administr ation at the University of Alabama at Birming ham and her master's degree in health services
administr ation from Geor ge Washingt on University .
