Consolidations, affiliations, acquisitions and mergers in healthcare are announced every week. The picture associated with this posting reveals that an affiliation occurred a few years ago between the critical access hospital in my little town and the Dartmouth Hitchcock Medical Center which lies about thirty miles north up the Interstate. New London Hospital is not far from the eastern end of my lake. I often see a helicopter heading north across the eastern end of the lake. Each time I do, I can’t help but feel a little reassurance that if the medical needs of my wife or myself ever exceeded the excellent routine care that is a mile from our door, that helicopter is waiting to take us to the front of the line in a world class academic medical center.
Affiliations can be of huge strategic benefit to the achievement of the Triple Aim. They can also pose a real threat to our ability to control the cost of care. Context and circumstances vary from deal to deal. This posting tries to consider some of the issues in answering the question of whether or not consolidation can be the answer to our cost and quality issues and enable our efforts to realize the Triple Aim.
Near the end of my career as a physician when I became a healthcare CEO, I was on a pretty steep learning curve. That process was accelerated by my organization’s participation in a learning collaborative sponsored by Massachusetts Blue Cross where I met Paul Levy who had led the recovery of the Beth Israel Medical Center from near death following the merger of Beth Israel Hospital with the New England Deaconess Hospital. Both Institutions had been significantly disadvantaged by the merger that created Partners Healthcare. About the only things the “BI” and the “Deaconess” had shared before their difficult union began was geographical proximity, a teaching relationship with Harvard Medical School, faith based origins, and collateral damage from the financial success of Partners.
During the monthly meetings of the Blue Cross program I began to talk with Paul about a closer affiliation between our organizations. The idea had been growing in my head for several years. Five years earlier when both organizations were burning the furniture to make it through a long, cold financial winter our organizations had briefly discussed a closer relationship. Those conversations were unproductive at the time, but things change.
As a neophyte CEO, I spent a lot of time looking at spreadsheets prepared by more business savvy members of our executive team. The numbers told a story that my business colleagues did not have a clinicians “on the ground experience” to fully appreciate. If you sorted our expense by outside hospital providers, we had enough “accidental” usage of the BIDMC that occurred primarily when the Brigham was full and “on diversion” to allow us to do an analysis of our differential experience between the two. When our patients were admitted to the BIDMC we enjoyed significant savings for services of equivalent quality, and patient satisfaction scores were higher. As we looked down the road as it appeared ahead of us in those days of “Romneycare,” it just did not make sense to talk about an effort to lower the cost of care while continuing to pay premium prices for care at the Brigham that by any objective measurement was no better than was provided for less by the BIDMC about a quarter of a mile down the road.
I was not a neophyte in the world of affiliations, acquisitions, and mergers. As a member of the boards and physician organizations of Harvard Community Health Plan, Harvard Pilgrim Health Care, Harvard Vanguard Medical Associates and Atrius Health, I had already seen a range of affiliation experiences, from disastrous to difficult but worth the effort. As our conversations became more focused, Paul recommended that I join a quarterly meeting of healthcare CEOs that he attended in New York. Every three months for a whole day the group shared concerns, discussed evolving legislation, and had an in depth discussion of a specific problem or opportunity facing one of the participants. The highlight of each meeting was a guest presenter of national prominence.
The “guest presenter” of the late February 2010 meeting was a well known consultant, the late Larry Lewin. His healthcare firm, The Lewin Group, established in the early seventies, remains a source of understanding and strategic direction, long after he retired and now more than five years since his death. I was excited about the opportunity to hear what he had to say about healthcare reform. The legislation that would become the ACA had not yet cleared the hurdles that the death of Ted Kennedy and the election of a Republican, Scott Brown, to replace him, had thrown in the pathway.
Lewin’s topic was “The Post Reform World; Preparing for Deeper Alliances and Strategic Partnerships.” His discussion was a road map through uncertainty. I have no doubt about how he would answer the question, “Are consolidation, competition, and innovation the answer [to the high costs of healthcare]?” His answer would be, “Maybe, it depends on why and how you do it.” In that discussion more than seven years ago, Lewin emphasized several points that are still true and need to be echoed today.
- With or without reform tectonic forces for restructuring [healthcare] are at work.
- The goal should be a system that proactively and efficiently manages HEALTH.
- With reform, the restructuring process will accelerate
- Universal access produces net savings over time.
- [There will be] Accelerated adoption of innovative payment systems that shift risk and reward VALUE not volume.
- [More than ever, there is a need for] requirements for data standards, collection, protected sharing and use.
He emphasized what remains true today, that few systems were significantly integrated to respond to the growing financial challenges. He described them as “price takers,” living on what the market gives them. He posited that in most healthcare organizations there was diffuse accountability (often no accountability) for economic and health outcomes. He suggested that the core issue was dysfunctional incentives. Our system of care needs to produce value and most of the time we pay for volume.
He felt there was a generalized shortage of managerial skill that produced a failure to effectively use information to manage risks. He thought that managerial deficiencies were often enhanced by low levels of cooperation between management and professional (physician) staffs. At the heart of it all we often find poor governance and organizational confusion with a variety of ownership and partnership models loosely knitted together to attempt to provide care for a community, or compete for the opportunity to provide care in a community with multiple medical providers. That picture in early 2010 is still a very common reality across the country today. Couple such a system of care with social disparities, and many citizens without access to care, and you can begin to understand our current problem with the cost of care.
Lewin had some critical concerns and advice to offer about creating affiliations and mergers. He had been a participant consultant in the failed merger of the Stanford and UCSF systems, and in the very rocky BI/Deaconess marriage. Lewin distilled his experience about mergers, alliances and partnerships into two bullet points.
- Can it [the venture] be truly strategic?
- Can it be be a workable partnership?
He then offered a piece of sidebar advice: “Remember, there is no deal that isn’t easier not to do!”
Expanding the first point on strategy:
- Has a compelling case been agreed on by the leadership and key constituents?
- Will it strengthen the sense of “brand” (differentiation, indispensability, barriers to entry)?
- Will it increase market strength with respect to control over price, volume, terms of trade?
- Will it produce a substantial net increase in capital available to the enterprise?
- Will it have the potential to really improve the efficiency of the production function (economies of scale, coordination of care, new products)?
- Will it add to the ability to proactively manage health?
- Can goals be realized at acceptable levels of risk?
I conflated his questions into one question. Will this “deal” support the Triple Aim? Creating capital or real value that can be leveraged for the Triple Aim should be the goal of all consolidations.
He concluded with questions that all require an affirmative answer if plans, schemes and dreams of success through mergers, alliances and strategic partnerships are to ever become positive realities.
- Has due diligence been thorough enough to eliminate any unpleasant surprises? (c.f. UCSF-Stanford)
- Are governance, executive leadership, and succession clearly specified and agreed on? Are incentives of governance and leadership aligned?
- Is it clear that cultural differences will be accommodated, not glossed over, and is there an ongoing commitment to maintaining faithfulness with key constituencies, especially if they are faith based? (Louisville Jewish-Alliant; Medco-Accredo)
- Is it clear how, at least in the short run, important differences in the future will be resolved?
- Is there an agreement on how to “unwind,” if necessary?
- Have efforts been made to establish and sustain TRUST?
I have verified every point Lewin made, the hard way, through personal experience. I have participated in the development and execution of several successful consolidations, and some that did not ever create value or failed to get off the ground for one or more of the reasons Lewin named. I have also worked in an organization that was disadvantaged by the monopolistic impact of an outside merger that created an entity that over the course of twenty plus years has extracted billions of dollars from the community. The hill that other providers in the market had to climb and the price that employers, government, and individuals have paid because of the market advantage the merger created is antithetical to the objective of sustainable healthcare costs. We must be vigilant to be sure that any merged enterprise does not create a distorted market at the expense of the community and other providers whose activity is equally necessary to cover the needs of the community.
As affiliations and mergers continue, as they surely will as financial pressures continue, we will always be told that the motivation is for the public good. It is difficult to know the intent in the heart of others. Good intentions frequently do not materialize for many of the reasons Lewin outlined. We need to be diligent in our efforts to assure that the impact of any new larger organization will really improve the cost and quality of care for the community.
In any large metropolitan area with multiple providers competing with one another, it may be increasingly difficult to be sure that more consolidation will not deter the effort to lower the cost of care. In these markets it is possible that we should be unwinding some of the huge consolidations that have occurred. The benefits of consolidation may reach a peak far below the size of many of our existing systems. Conversely consolidations and public-private efforts to promote more effective affiliations in rural communities and small cities may be in our best interest if the Triple Aim is our goal. Perhaps population health considerations and not financial distress should be the driver of the consolidations of the future.
Getting regulatory approval, signing all the final papers, and having the party to celebrate it all is just the beginning. The real work is putting the pieces together into something that creates “capital” in all of its financial and clinical dimensions. When I look back on the affiliations and consolidations that I have experienced, the success depended on a shared sense of mission and the work was facilitated by using Lean methodology to work through many of the issues Lewin so effectively identified. Lean will discount his humorous advice to “Remember, there is no deal that isn’t easier not to do!”