Why Consolidation Is Different From Integration

Wesley Curry

Wesley Curry , MD, FACEP

President and CEO

Published August 29, 2012

The coming widespread implementation of the physician reimbursement methodology, known as bundled payments, will require hospital-based physicians to find more objective ways to demonstrate value and seek leverage in the determination of how money will be distributed, from both commercial and government entities. The concept of bundled payments is not new. It was previously used for years on a limited basis in demonstration projects by CMS.

But today, healthcare reform is making it one of the more important elements to cost containment. Bundled payments, and the accelerating trend among hospitals and physician staffing companies to consolidate, will require true integration of the clinical care delivered by physician specialists across the Acute Care Continuum.

Physician and hospital consolidation is different from integration. A timely report from the Robert Wood Johnson Foundation illustrates this point.

“It is important to distinguish between consolidation and integration. Consolidation is simply bringing together two (or more) previously independent entities. Integration implies more—in particular, elimination of unnecessary duplication, creating systems to bring the previously separate entities together, and comprehensive management of the organization as a whole.”

The report goes on to document the degree of consolidation in healthcare:

“Increasing numbers of physicians are working as hospital employees and increasing numbers of physician practices are owned by hospitals. The number of physicians working as employees grew from around 31 percent in 1996–97 to 36 percent in 2004–05 (26). Another survey found that the percentage of primary care physicians employed by hospitals rose from under 20 percent in 2000 to over 30 percent in 2008 and the percentage of specialists employed by hospitals rose from just over 5 percent to 15 percent (25). The percentage of physician practices owned by hospitals rose from around 20 percent in 2002 to over 50 percent by 2008 (25). On the other hand, the percentage of hospitals with other kinds of physician-hospital relationships, such as physician hospital organizations (PHOs) and independent practice associations (IPAs), has fallen steadily from 2000 through 2010”.Martin Gaynor, PhD and Robert Town, PhD from The Synthesis Project, Robert Wood Johnson Project Update June 2012

Before we conclude that hospitals will employ the majority of all physicians in the future and will successfully integrate their clinical practices, we should not forget the lessons of the past. This same scenario was predicted for physicians 20 years ago when managed care was introduced. At that time, people expected investor-owned publicly traded physician staffing groups to be the Emerald City of the future. Yes, there were many success stories, but there were even more failures. Are hospitals today hiring physicians because the hospital industry has come to the carefully considered conclusion that conditions are different now? Or are hospitals hiring just because they have the money and they can do it? The verdict is still out.

From my perspective, there is growing anecdotal evidence that history will repeat itself. I believe the purchase of physician practices by hospitals and the employment of hospital-based physicians will not necessarily realize the cost savings and value creation expected with this strategy. I think that we will once again go full cycle as we did 20 years ago, and that hospital employment of physicians will once again decline even though it is rising today.

Integration is about the culture of the physicians coming together, not about employment contracts. While there are some successfully integrated systems, such as Kaiser, Geisinger, and The Mayo Clinic, even these well-known integrated systems sometimes outsource hospital based physician services. And I believe many hospitals who attempt to integrate the clinical practices of physician employees will fail to do so. This will be largely due to ineffective physician leadership, a lack of a sense of ownership in their practices and insufficient incentives. In fact, large physician staffing companies are betting this will happen. They are deploying a “land grab” strategy by aggressively consolidating hospital-based physician practices at each hospital where possible. And they are using revenue sharing between different hospitals and different specialties in various combinations as a growth strategy to their competitive advantage.

The hospitals that recognize they cannot provide lower costs and create value with employed physicians across the Acute Care Continuum will have to abandon the strategy of consolidation without integration, or risk obsolescence. Independent single specialty hospital-based practices will be unlikely to thrive again in the future of a highly complex new practice environment where their leverage in compensation for hospitalized patients is minimal. This is particularly the case when other physician specialties are aligned against them in sharing a finite pool of money for the patients who are included in selected bundled episodes of care. Nate Kaufman has put it this way: “There is no new money (with healthcare reform), only consequences.” The fact is that without better patient care at a lower cost, there will be no value creation by physicians for their hospitals and healthcare partners.

The last hospital based physician specialties to be recognized by organized medicine were the relatively new areas of inpatient and emergency medicine. Ironically, it is becoming very clear these late arrivals will be the first to collaborate in new ways and integrate their clinical practices. Just as atomic nuclei are more than the sum of their parts, such integrated practices will become new entities that provide better patient care above and beyond today’s fragmented standard in which each physician specialist works in his/her own silo of specialty care.

Perhaps there will soon be a new take on the “No Margin No Mission” mantra that has been repeated by the pundits of our current system. In the future, perhaps it will be “No Integration, No Value in Physician/Hospital Consolidation.” One way or the other, if physician/hospital integration does not occur, hospitals will fail to realize their mission of service to their communities. This will certainly accelerate more hospital consolidations and closures, which, in turn, will increase the overcrowding in hospitals and emergency departments that remain. There will be many pathways to success, but lack of urgency and an unwillingness to collaborate now to achieve integration is a sure way to fail.

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