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Castling Partners

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80 South 8th Street
Minneapolis, MN, 55402
United States

(612) 888-1160

Global Healthcare Perspectives

Micro Strategies = Macro Risks: Playing Hide and Seek with the Risks of Health System Strategy

Daniel Zismer, Ph.D.

By 2024, the number of healthcare systems is expected to reduce by 50% to an estimated 900; there are approximately 1,800 in the U.S. today. Consolidation of the industry proceeds at an accelerating pace.

Discussions with senior health system leaders regarding their visions for strategy indicates that many are charting a course for unfamiliar waters. Health system boards will be asked to approve strategic plans fraught with unseen risks. So, by definition, if the strategies and related tactics are unfamiliar, the related risks are either unknown or not fully appreciated for their potential negative financial and reputational consequences.

This specter of risk has a broad span. Categories fall into the more mundane of: legal, regulatory, tax code and licensure and certifications (e.g., certification for state and federal payment programs), but the array is much broader including: financial, operational, reputational and what can be described as “derivative enterprise risk”; risk derived from various affiliations, contractual arrangements and “incident-to” third party relationships.

Discussions with legal experts reveal that risks of emerging and novel health system strategies are far out in front of the available case law. Today’s strategic risks will become tomorrow’s case law.

Sample case

A sample case vignette is useful here:

“Community Health System (CHS), (fictitious case derived from a combination of real-life facts and circumstances) has been aggressively acquisitive over the last five years, adding several small hospitals and affiliated employed physicians by merger. CHS keeps local boards in-place and the senior health system board delegates quality, safety and oversight of the medical staff to the local boards.

With one regional hospital transaction, a surgery center joint venture (ASC) comes with the deal. The local hospital is a 49% partner in the JV. Two surgeons employed by the hospital are equity partners in the deal. Terms of the arrangement distributes profits based upon proportion of ownership. ASC management is delegated by contract to a physician-owned management company (physicians who are also equity owners of the ASC).Payer mix of the surgery center favors the best payers. CHS is a tax-exempt organization.

CHS expects to double its number of employed physicians over the next five years and assume financial risk from third party payers for assigned populations by contract. Regional clinical service line strategies will be launched. Members of one community hospital medical staff have complained to the chair of that medical staff executive committee on the basis of organizational ethics. Independent physicians feel that hospital strategy favors employed physician practices. The chair of the Medical Executive Committee (MEC) sits on the governing body of the hospital. She, and the hospital CEO, determine the complaint is “baseless and unfounded”; it is not reported to the hospital board.”

The availability of space in this blog installment is insufficient to fully catalogue and explain the full spectrum of risk implied in this sample case vignette. It is, however, illustrative of the byzantine nature of risk potential deriving from new and novel health system consolidation strategies. 

Priority Areas of Emerging Risk: What Matters?

The following is not an exhaustive array of the risks of strategy to be examined by a health system governing board and senior leadership, but is a good start. Readers should pay special attention to the nuance provided in the descriptions; four are identified as being of principal concern.

  1. The connection and promotion of “brand” as pursued through clinical service line strategies: 85% of health systems surveyed ([a]) reported they are actively pursuing or intend to pursue clinical service lines (CSL) as a principal tactic in a broader strategic plan. There is no accepted industry definition of a “CSL”. The typical brand promise delivered to target patient markets is; “highest quality, evidence-based, best clinical practices by all our physicians with a focus on well-coordinated, team care based upon your needs as our patient”. Patients assume all sites and all providers are on the “same team” with a “one best way” of treating “my problem”. In fact, the CSL is often a collection of variously affiliated (or not) physicians, clinics and other providers who, on any given day, perform variously on the operational “brand promise”.
  2. We will pursue the assumption of financial risk from payers for defined populations, as strategy. If third party payers are interested (at all) in transferring risk for defined subsets of “enrollees” it is certainly not at historically high price points and utilization run-rates. So, by definition, financial risk assumed, under contract, by health systems will be by terms and conditions that are unfamiliar. So, how is the health system to respond; i.e. how does it alter, modify, or change its care models and methods to succeed financially under newly assumed economic pressures derivative of assumed financial risk? 
  3. A health system now employees 50% of all the physicians required to meet its mission, vision and strategic goals. Over the next five years that percentage will move to 80%. Growth in the number of employed physicians will be by acquisition of independent physicians (including all related practice assets) and by organic strategies (recruiting and hiring). Growth will span 20 clinical specialties at 10 geographic sites. Terms and conditions of acquisitions will vary and there is no standardization of employment agreements or compensation plans. Employed physicians will be covered for professional liability risks variously (i.e., the health system maintains policy coverages as they were for physicians when their practices were private). The health system may assume historic risks of practices acquired based upon purchase agreement terms and conditions; e.g., stock purchase agreements.
  4. Medical staffs of affiliated regional hospitals will include employed and independent physicians. Local boards will oversee quality of care and patient safety. Each hospital will manage an array of localized physician affiliation models and methods.

What Does this Mean?

I have merely scratched the surface of the breadth and depth of risk of health system strategies in a changing market place. Some may argue, I am “crying wolf”, “our lawyers and risk managers tell us we’re protected”. Well what does “protected” mean in an emerging world of untested strategy? The issues here are not whether “our deals are legal”, the issues are:

  • "What is our depth of experience with the tactics we will launch?”
  • "Have we reasonably examined and evaluated the risks?”
  • "Have we sufficiently managed what we can?”
  • "Are we effectively insuring against risk where we should?”

These four questions lay the foundation for a comprehensive enterprise risk management strategy. It is important to remember that while risks maybe “insurable”, the costs associated with reputational risk may extend far beyond policy coverages.

A rapidly consolidating health care market place will encourage U.S. health systems to higher levels of strategic risk. Senior leadership and health system governing boards will assume these risks. Good intentions and a community mission focus will not substitute for a comprehensive plan for managing unfamiliar risk.

Kevin Egan, retired healthcare lawyer and former U.S. federal prosecutor comments,  “It is my experience that as health systems pursue strategy, they tend to assemble a portfolio of deals—all intended to serve the organization’s vision of that strategy. And while each tactic within the plan may be skillfully designed and lawfully constructed, operation of each arrangement—in conjunction with all others—often creates unintended and under-appreciated risks. All of these risks are manageable and some are insurable. However, few organizations are sufficiently experienced to know where to start the enterprise risk management process.”

As stated above, the intent here is not to “cry wolf”. It is to assist health system leadership in the understanding of how novel strategies produce unique risks. A recent fourth circuit ruling pertains:

“Fourth Circuit affirms $237 million judgment against Tuomey (Healthcare System, Inc.) finding no error in jury’s conclusion that physician compensation varied with volume or value of referrals.”

[a]

Zismer, D.K., Wegmiller, D.C.; “Clinical Service Lines: Mapping the Future of Community Health”,

C-Suite Resources

, Mpls., MN., Dec. 2011