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Global Healthcare Perspectives

Filtering by Tag: 2014

Might health care consolidation be slowing and if so, why and what might it mean? A perspective on where we are, how we got here and what is next.

Daniel Zismer, Ph.D.

Trillion dollar industries that consume significant proportions of the U.S. economy inevitably pursue increasing levels of efficiency requiring ongoing restructuring, known as supply-side consolidation. Eventually, fewer, larger, more efficient producers dominate markets until innovations or major intra-industry “breakthroughs” disrupt the relative equilibrium of products, services, markets and business models, and a new cycle begins.

Health care in the United States is no different. Its need to seek higher levels of economic and market efficiencies was noticeable and observable long before legislated health reform. The drivers are evident:

  • care inflation rates that have out-stripped those of most other goods and services;
  • prices for same or similar services may vary widely within and across geographic markets;
  • a fragmented and inefficient competitive landscape;
  • historically low levels of out-of-pocket financial exposure to those insured; and
  • few constraints on health systems’ abilities to shift costs of negative-margin business to commercial payers.

On the supply-side of the equation (the provider side):

  • it is well accepted that supply stimulates demand; i.e. when health care supply exists, it will usually be converted to demand by the provider-side;
  • historically, policy, payment and consumer-driven incentives have been insufficient to drive the provider side (physicians and hospitals) to higher levels of health services manufacturing and management efficiencies; and
  • despite significant public subsidies of medical education and training, independent physicians have enjoyed relative freedoms to apply their professional interests and capacities to self-directed practice models and productivity profiles.

So, aside from these cursory lessons in health care policy, economics and market behaviors, what’s the point? It’s obvious that the provider and payer sides of the U.S. healthcare system will continue to consolidate at an accelerating rate—hospitals joining together to form and expand systems of care, physicians joining systems of care to form integrated delivery systems and larger, physician-only practices seeking alternatives to “independence” as a driving strategy. This is not new market behavior. 

The difference between then and now is telltale signs that suggest larger health systems’ capacity to integrate additional hospitals or large physician group may be slowing or, perhaps, be nearing an end (at least for some).


Consolidation isn’t free, and many large health systems are finding that the next hospital or medical practice integration is weighing heavily on balance liquidity (


), as well as the organization’s ability to produce sufficient levels of free cash flow going forward. (



There is also emerging evidence, such as in the article, “What doctor shortage? Some experts say changes in delivery will erase need for more physicians” (Modern Healthcare, Nov. 21, 2013), challenging the long-held view that there is a shortage of physicians in the U.S., which may be best addressed with new models of interprofessional team care and modified models of total cost of care management. New models of team care may slow the efforts of U.S. health systems to “buy more doctors”.

As U.S. health systems take on more financial risk through modified approaches to payer contracting (i.e. moving away from fee-for-service contracting models and methods) the incentives to aggressively add new capacity “at any price” may wane.

To participate in payer markets (commercial insurers and/or governmental payers) that are re-structured to shift financial risk to providers requires high levels of health services delivery platform sophistication, including costly information technologies and significant sums of resources dedicated to new managerial competencies; i.e. new core competencies that have their histories more in the realm of public health practice. (



So, is it too late for those who haven’t jumped on the integration bandwagon? Perhaps not, but there may not be an unlimited amount of time to participate effectively in a market consolidation cycle. A risk of waiting too long is market irrelevance.

Physicians will sometimes react to such an assertion with “I have a valuable patient base.” The related question is, who (if anyone) owns patients in the markets ahead? Or, physicians may say, “The hospital CEO said I can sell my practice to the hospital at any time.” “Any time” is too long to wait when faced with a business cycle marked by rapid consolidation. 

Many physicians have also asked, “Are you telling me I have to sell and become an employee of some health system?” Again, the answer is no. However, it is important that physicians understand there may be a price to pay for adherence to a business model that is vulnerable in consolidating markets.

Remember, Lightning Strikes

“Lightning strikes” are good descriptions for market risks for physicians and health systems. A lightning strike is an unexpected, swift and precipitous negative market or policy event—one that threatens the ongoing viability of health services business models.

For example, cardiologists in private practice experienced a lightning strike when those dependent upon the financial margins derived from office-based imaging services experienced swift and steep declines in reimbursements. Other specialties should expect the same. As with Wall Street, no one rings a bell signaling the bottom or top of any market; physicians shouldn’t expect a memo informing them of “time left on the path of private practice.”

Change Management as a Vital Competency

Another observation is the imminent risks derived from a profession that has demonstrated a reluctance to accept, adopt and adapt known clinical (and managerial) best practices, including those available from the successful application of interprofessional team care.

My colleagues and I at the University of Minnesota have demonstrated through several studies undertaken on behalf of MedPAC, that applied care models and methods across clinical specialties are largely idiosyncratic, meaning; “How we do it here is how it’s done.” Care models and methods, including the use of non-physician licensed advance practice clinicians, appear to be driven more by physicians’ individual choices and preferences, interacting with internal practice economics and compensation plans, than by models that seek to apply total physician capacity to its highest and best clinical use within a practice.

A health economist colleague characterized this observation as the “trade guild” phenomenon; physicians learn their craft from observation, training and mentoring by other physicians, apply what’s learned and repeat until faced with overwhelming pressure to change. Such behavior is rational. But unlike the manufacturing of precision medical devices, for example, the practice of medicine holds high tolerances for variations in methods of manufacturing.

More than one medical device company with solid technology and good prospects for success failed due to the risks associated with getting physicians to change their practice patterns and product preferences despite compelling evidence to the contrary.


The goal here is not to challenge independent physicians’ choice of business model or judgment in pursuing their preferred professional path. It is to provide a cogent argument to properly consider the environmental risks to help make informed choices. At the end of the day, one’s professional satisfaction may outweigh the financial risks associated with any turbulent market cycles. Under no circumstances must a professional change if he or she can afford the price that comes with self-determined consistency of purpose and pursuit; meaning “the risks may be worth taking”. However, it must be noted that supply-side consolidation of the U.S. health service delivery industry will not move at a pace that provides for comfortable transitions of all physicians and health systems.  


Zismer, D.K.; “How Might a Reforming U.S. Marketplace Threaten Balance Sheet Liquidity for Community Health Systems?”; Integrated Health Systems,

Journal of Healthcare Management,

pp. 168-172, Vol. 58, Number 3, May/June 2013


Zismer, D.K., Beith, C; “Free Cash Flow Productivity and its Connections to US Health System Financial Performance and Strategy in Current and Future Markets-A Macro View of a Potentially Systemic Problem”, Governance Institute, Boardroom Press, Feb. 2014


Zismer, D.K.; “An Argument for the Integration of Healthcare Management With Public Health Practice”; Integrated Health Systems,

Journal of Healthcare Management

, pp. 253-257, Vol. 58, Number 4, July/Aug. 2013

Barclays Healthcare Summit – 2014, New York City: “A Baker’s Dozen” Presentation of Observations

Daniel Zismer, Ph.D.

In June 2014 Barclays hosted its annual Healthcare Summit at their offices in New York City. I had the honor of keynoting day two of the conference.

Barclays assembled a blue ribbon group of attendees and presenters composed of U.S. health system leaders, health system securities markets executives, credit rating agency executives and senior leaders from Barclays’ health markets investment bankers group.

The title of my talk was “Issues the Credit Markets Should Consider When Financing the U.S. Healthcare System.” The value I derived from the conference (and wish to pass on to blog readers) was comments from an informed line-up of presenters and discussion panel members. Listed here are observations gleaned from these presentations. Where I believe appropriate, I have added editorial comments. I have limited this entry to the most important “baker’s dozen,” based upon my opinion.

Observation #1

As the U.S. health system markets consolidate, there is no practical strategy that is based upon market monopolization. Health systems that believe they hold monopolistic market positions and related pricing power, should reconsider that thinking. Market demand for elective services (especially) is mobile based upon payer strategies and out-of-pocket exposures and changing incentives for the end users (patients).

Observation #2

The future of the “obligated asset group” is in question. As health systems integrate and diversify beyond the traditional hospital business, credit markets and rating agencies recognize the financial importance of health system strategies beyond the hospital; including the effects on what credit markets have typically relied upon for credit performance (i.e., the core business of the hospital). Credit markets are appreciating that system component parts are inseparable from the whole.

Observation #3

U.S. health systems preoccupation with the holding of what could be defined as “excessive liquidity” (especially days cash on hand) may not be viewed by healthcare investment markets as prudent management. While balance sheet strength remains important, the credit markets may become concerned when management believes the best use of company cash is investment in assets outside their core business.

Observation #4

Capital markets are clearly betting on accelerating provider-side consolidation. Small players will experience increasing challenges, especially capital access. Many will hold out until balance sheet liquidity is weak. Acquisitions then become increasingly dilutive to the acquirers.

Observation #5

Most health systems represented believe the payer markets will force a transition from FFS payer “mechanics” to pay-for-value. However, few have a committed view on what transformation actually looks like, or understand the costs of the bridge from the old world to the new.

Observation #6

Large health systems that own health plans recognize the historic capitalization of these plans to be a “big bet,” but now view these investments as a cornerstone of their market strategies moving forward. U.S. health system conference presenters reported health plan capitalization levels in excess of $250 million. They also reported holding liquidity at multiples of statutory requirements.

Observation #7

Health systems that evaluate their financial performance (including balance sheet condition) based upon peer rankings are missing the point.

The key question is not “How are we doing as compared with our peer group” but rather “How are we doing given the realities of the markets we live in”?

Observation #8

Some health systems in the group are spending significant time and resources on the assembly of networks of independent providers (physicians) dedicating significant time and resources to designs and mechanics required to “apportion financial risk transfers” from payers to networks of loosely assembled providers; with many (if not most) available to contract with multiple, competing health systems and payer strategies. The “bet” is a significant shift in payer contracting strategy. The question is the value of such efforts if this shift doesn’t occur.

Observation #9

Several executives asked questions of others that were indicative of their coming from health systems that are, perhaps, still in early stages of integration with physicians as employees. Chief among these were:

  1. “Do you permit your employed physicians to contract directly with payers?"
  2. “How do you divide profits earned on health plan contracts with employed physicians?”

Questions like these demonstrate how health systems that are comparatively new to integrated health system design and management are likely to misunderstand the nature of the employment relationship with physicians, i.e., employed providers do not and should not operate as they can and do in independent practice.

Observation #10

Leaders of academic health systems were present and candid. Key commentary from these AHC leaders highlighted:

  • Academic health centers must live and survive in the U.S. healthcare economy. “We will not be bailed out.”
  • Academic health centers must live and survive in the U.S. healthcare economy. “We will not be bailed out.”
  • “Less than 2% of the U.S. population receives healthcare from academic health centers (including those that control medical schools).”
  • “For 85% of all the care we provide we have local competitors.”
  • “Our opportunity to make it depends upon our ability to remain on the leading edge of healthcare innovations, which requires a well-managed strategy.”
  • "We are not good at holding ourselves to the discipline of financial accountability, especially as it pertains to the financial accountabilities required of our three principal mission components: clinical care, research and teaching."

Observation #11

Traders of U.S. healthcare securities (largely tax exempt securities) commented on health systems preoccupation with credit ratings. While the costs associated with downgrades are obvious and real, they stimulate market-trading action with increased profit potential for traders in these markets. The key comment was “If we believe in your story, down-grades can be positive as we pursue accumulation of your debt at desirable costs to us.”

Observation #12

Capital markets are becoming students of policy and related regulatory risk. Whether related to the ACA or other policy risk (e.g., the future of “provider-based billing”) capital markets (and market makers) are keen students of policy and potential risks to credits.

Observation #13

A number of health system executives reported their approach to presenting market risk with either a “wait and see” attitude or a “walk before we run” attitude, implying that in their markets, they are able to dictate the pace of transition, expressing almost inconsequential concern for “market disruptors,” to derail their pace of change.


This was an impressive conference with knowledgeable and experienced presenters who represented a range of perspectives on the future of the U.S. healthcare markets.

For me, the thirteen observations summarized here distill to what may be two important questions in the health markets ahead:

  1. Will a consolidated health insurance market (including the federal government) be willing to transfer a sizable proportion of the “premium dollar” to the provider side of the industry that admits having limited experience in the management of total costs of care for populations?
  2. Do health systems that wish to enter the “risk business” have balance sheets sufficient to support the costs of significant shifts in: organizational culture, strategy, business models and operating incentives?

Why a Revenue Cycle Company Cares about Consumerism in Health Care

Daniel Zismer, Ph.D.

In June of 2014 Michael Halberda, CEO of


, hosted a small group of advisors (including myself) to discuss the growing consumerism movement in U.S. healthcare.  

C-Suite Resources

organized and facilitated the session.

My question going in was, “Why does a healthcare revenue cycle company care about consumerism?”

As the day unfolded, the value of the discussion became apparent and, perhaps, useful to blog readers.

Questions and Observations

Observations from the discussion and debate distilled to points and questions of interest today, as well as for future discussion and debate.

1) If healthcare reform spawns insurance coverages and products requiring increasing levels of out-of-pocket payments by consumers, will consumers actually become more active price shoppers or will they simply resign to paying more for healthcare with little or no change in behaviors relating to provider choice decision-making?

On a related note, questions regarding provider pricing strategies were raised.

 “Will providers simply charge retail (i.e., full, gross charges) prices for services sold to out-of-pocket buyers or will new retail pricing strategies emerge?”

Providers in the room seemed to agree that the jury is out on pricing strategies for a new consumer who may pay more out-of-pocket for services. Most agreed the risk of increasing bad debt is a concern.

Regarding the more global question of increasing out-of-pockets leading to a more activated consumer, most leaned toward “yes”. 

2) If out-of-pocket payments increase, will primary care visit volumes suffer as patients attempt to manage costs by saving for the more serious health needs and events?  

Correspondingly, will demand for urgent and emergency services rise?


Are the health consumer behaviors and attitudes of Millennials, who apparently demonstrate less inclination toward physician loyalty, important in consumer strategies?

This question leads to the important issue of brand loyalty and health systems.  Brand promise and brand strategy are becoming terms used more frequently in C-Suites. The goal is to create brand loyalty, an enhancement of the likelihood of “sticking with” a health system for all care.

This goal is especially important for larger, more fully integrated health systems that invest heavily in primary care networks as patient acquisition and referral strategies. 

4) Larger, more fully integrated health systems with sizable reach in markets and strong balance sheets may move aggressively toward the ownership of health plans in hopes of better controlling an expanded proportion of the value chain (i.e., ownership of the premium dollar as well as the health services)

5) Manufacturing payments (reimbursements).

The theory of the strategy is to control as much of the universe of healthcare consumerism as possible. This strategy is a big bet for all health systems entering the “payer fray” at this stage of the game. 

6) While much has been said about public insurance exchanges, the effect of private exchanges is the object of much speculation by experts on all sides of the debate.

If personal ownership of health insurance becomes ubiquitous, as some speculate, the challenges for health systems are effective, efficient and understandable translations of their value proposition to attract and retain valuable markets (i.e., individual patients).

The conversation among the advisors turned quickly to health systems’ need to make quality, safety, access and total costs of care front runners in their brand promise strategies.

7) Health systems will need to fully appreciate a market-driven perspective on size and scale.

Another key discussion point was how some health care financial experts are willing to assert top-line performance as a principal predictor of success in future markets; e.g., a health system needs to generate in excess of $2 billion in annual operating revenues to succeed.

The topic of discussion here was, “Is this perspective over-simplified?” The argument against this assertion was, “$2 billion in annual operating revenues earned across assets positioned in multiple geographically dispersed markets is very different from $2 billion in operating revenues earned within one, unified market.

The point of interest here is market leverage; a health system’s ability to leverage market position to its full advantage within contained and diverse geographies. 


With this session, advisors to Cymetrix wrestled with a range of issues related to consumerism and health system behaviors in the U.S. under the dynamics of legislated health reform.

Irrespective of partisan debate in Washington, the Cymetrix advisory board agreed that healthcare consumerism is on the rise. The full effects are yet to be realized. Consensus was reached on several likely outcomes:

1) If consumers assume more responsibility for health costs, out-of-pocket payments and health insurances become disconnected from the employer. Under such conditions, the marketplace can expect more “free ranging” in purchasing behaviors; meaning, the behaviors of the insured will be less fettered by corporate health plan designs and related rules.

2) Health systems and other providers will need to invest in brand strategies that enhance consumer loyalties.

3) Health systems will become more transparent regarding their quality, safety, customer service and total costs of care. Consumers will likely view total costs of care from perspectives that differ from those held by providers; i.e., what it will cost to manage a full care event or a chronic condition over time, versus price charged per a unit of service provided.

4) Consumers will become less tole

rant of fragmented

systems of care that cause the user (the patient) to interact inefficiently and, perhaps, ineffectively among and between multiple, disconnected provider systems and individual providers—each operating from their own preferred business models and related incentive schemes.

5) Health systems will/should attempt to concentrate assets and capabilities within markets to provide a responsive, coordinated and broad range of services including, for some, the ownership of health insurance plans and products. 

So in returning to the beginning, why does Cymetrix—a revenue cycle company—care about healthcare consumerism? It may be because as populations become activated by the dynamics of a reforming healthcare market, attitudes toward health and healthcare change.

With Baby Boomers and generations coming behind, consumers and their discretionary spending power could disrupt the traditions and conventions of health use patterns, dollar flows, and the strategy and management of the provider-side of healthcare in the U.S.

The Challenges of the Comp Plan: How Physician/Provider Compensation Plans Might Hamper Strategy for Integrated Health Systems in Markets Ahead. What Can be Done.

Daniel Zismer, Ph.D.

With accelerating acquisition and integration of physician practices by hospitals and hospital-based health systems comes the pressing and overarching question, “Now how do we pay them?”

Many health system executives have concluded, “Let’s pay them based upon the model they’re accustomed to: Productivity.” This conclusion and resultant compensation models have set in motion a pathway for physician work-effort that some might say is netting exactly what they were designed to produce; the good and the bad.  

The prevailing productivity-based physician compensation model is one based upon Work Relative Value Units (WRVU) produced. There is an internal value established per WRVU by clinical specialty. Cash compensation earned is derived with simple arithmetic; number of WRVUs generated multiplied by the internal value per-WRVU payment rate established.

The model sounds good on the surface and it is often pitched to all stakeholders as one that is easy and reliable to administer.

Key questions relating to the existing and emerging problems derivative of the model are:

  • What is a useful and effectively operational definition of productivity in the context of an integrated health system?
  • Does the model effectively align internal incentives?
  • Where/how can the model be counter-productive?

Before examining these questions in light of perspectives on the identified results, lets re-examine the rationale for the WRVU-based productivity model of physician compensation in Integrated Health Systems (IHS)—a rationale often, but not always, developed by non-physician managers for an IHS:

  • all productivity is good productivity. If the physicians stay busy, all other operating economics of the health system take care of themselves;
  • a production-based model manages itself. Physicians will want to optimize income through a direct production-based compensation model; and  
  • the work relative value unit is a standardized measure of a unit of physician effort. It was sanctioned by the federal government and reimbursement for professional services reimbursement runs on this track.

With these rationale as a foundational platform for the production-based WRVU model for physician compensation, let’s examine how it is working and how it may work in a reforming healthcare marketplace based upon relevant applied research and opinions of IHS leaders and employed physicians.

Observation #1

The model has decided advantages. Many are cited above. Beyond these, the model insulates physicians from the vagaries of payer contracts and related contractual adjustment rates that physicians don’t control and physicians are usually not accountable for related operating expense structures, direct or indirect, attendant to the work they perform.

Observation #2

Physicians report “working to the plan.” Their ability to optimize their productivity (and cash compensation) may not be optimally productive for the IHS. For example: physicians (within specific clinical specialties) can generate WRVUs that are beneficial to themselves, but are more or less productive for the IHS. “Downstream” financial productivity is variably productive for the IHS with little or no effect on individual physicians WRVU productivity and derivative cash compensation.

When physicians work inter-professionally with advance practice nurses, for example (especially in the primary care specialties) there is evidence of the potential for the total universe of clinical activity to be shared in-common at high proportions, meaning for a significant percentage of the total work physicians and APNs are interchangeable, with the observation that the more complex visits may be attended by APNs. When this observation was shared with Executive MHA physician students in a class session the response was,

“We work our compensation plan. I can do three .5 WRVU visits in the time it takes for me to do one, 1.0 WRVU visit. If my APN needs consulting for more complex visits, I am available. Care doesn’t suffer.”

Observation #3

As a component of one applied research effort physicians were asked, “What is your reaction to the concept of “working to the top of your license?” Many responded with, “If that means I must deal with the more complex medical issues each day, I’m not interested.”  The point being, many physicians are not interested in spending each day of productivity with the most complex clinical issues and as highlighted above, production-based compensation plans may not support such a strategy anyway.

Observation #4

An interview with a manager of a large, subspecialized cardiology practice observes that a disproportionately high number of visit slots for some of the cardiologists are consumed by follow-up visits rather than new patient visits. Physicians defending this scheduling practice will often respond with, “My patients only want to see me.” And while the assertion may have validity, the overall productivity potential of the practice becomes limited by physicians devising their preferred model of practice versus one that enhances the productivity of the practice overall. Individualized practice pattern designs may, at the end of the day, be as or more productive for physicians given the design of their compensation model (i.e., every WRVU is of the same value for the physician but not, necessarily for the practice or the IHS overall).

Observation #5

Secondary analyses of data from a research effort focused on interprofessional team care among physicians working with advance practice nurses (APN’s) demonstrated that for one group of subspecialists within a cardiology practice the wrvu system underestimated actual time spent with patients, while for a different subspecialty within the same practice the wrvu system actually over-estimated actual time spent with patients as much as 70% (the procedural subspecialties).

One could conclude from this one demonstration that unless clinical departments within an IHS are of sufficient size and well-subspecialized, working from a compensation plan that equitably pays physicians across subspecialties within a clinical department, there is potential for considerable misalignment of internal incentives, coupled with a potential reluctance of physicians to collaborate with each other on patient care leading to discord and disharmony between and among providers (resulting from perceived compensation inequities) and sub-optimal patient care and patient experience within the department.

Observation #6

Some might suggest that in a reforming U.S. healthcare marketplace the production-based physician compensation model has lost all utility. Interviews with physician leaders refute the claim. One physician leader of a large integrated health system comments,

“We’ve not figured out the best compensation model as yet. We may operate at least two. For primary care, we may adopt more of a salary-like model with bonus potential based upon some combination of the right productivity, overall, quality and team effectiveness. For the procedural specialties WRVU productivity may remain the driver of compensation providing there is effective peer review and over-sight to ensure that productivity is clinically appropriate and consistent with leadership’s views of what is good for patients and healthy for the system overall.”


As cited above, the compensation plans that operate in many U.S. health systems that employ physicians may be producing results as would be expected from their designs; i.e., incentives favor the production of “units of service.” On the surface this has made (and still makes) sense for a number of health system leaders during a time of rapid consolidation and integration of physicians with community-based health systems.

However, the evidence may support a conclusion that not all physician production is necessarily optimal for the financial health of the health system. Clearly “pure production” physician/provider compensation models offer the potential for:

  • dislocation of value, meaning a specific path of productivity for a physician or group of physicians  within a specific clinical specialty creates varying downstream productivity profiles for the IHS within a clinical specialty and for the IHS overall;
  • prevailing incentives that may cause physicians to pursue work effort profiles that could be undertaken by lesser trained staff working alone or within a team;
  • IHS market strategies that may cause competing internal incentives, especially as they relate to the physician compensation plan. An example is when IHS’ assume financial risk for specific insured populations. A physician compensation plan based solely upon WRVU productivity only can cause expected “cost over-runs” on generated professional and related institutional utilization rates and imputed costs; and    
  • creating internal cognitive dissonance among providers as payers evaluate IHS’ based upon total cost of care performance.  Physician compensation plans designed to encourage service units produced can disturb an IHS’ internal behavioral economics gyroscope. i.e., “What do you want me to do, produce more or less?”

So, how will/should IHS address the challenges of the production-based provider comp plans in the road ahead?

The best advice I’ve been able to glean from experienced IHS leaders is:

  • accept that large, complex IHS’ may have more than one provider compensation plan operative at any given time;
  • as compensation designs move away from “pure production” to models weighted to salary-like designs there is a commensurate need to infuse more physician leadership involvement. Divisional/departmental leaders actively manage provider productivity; i.e. the “right” productivity;
  • physician leaders need to have comprehensive, intimate knowledge of how provider productivity in their charge affects/drives overall economics and operating and financial performance according to the IHS strategic plan; and
  • physician leaders must become students of the forensics of the finances attributable to the intersection of the internal provider compensation plan with desired operating performance; i.e., learning how to troubleshoot operating incentives and their effects on the operating economics of the operating units and the IHS overall. 

Based upon the evidence at-hand, it seems clear that as models and strategies for integrated health systems evolve the need for physician/provider compensation model innovation and transformation is elevated to a higher priority on organizational development and strategic plans and should be on the watch list for physician leaders. 

Integrated Health System CEO’s Perspectives on Market Share Strategy in The Market Place Ahead: Strategic Application of The Integrated Health System Model

Daniel Zismer, Ph.D.

(Pictured: Frauenshuh Healthcare Real Estate Solutions, developed a new 120,000 square feet ambulatory care center in partnership with the Franciscan Health System in Tacoma, Washington.  The new ambulatory care center fundamentally changes how care is provided by organizing physician practices into whole floor centers of excellence that support collaborative care and population health management.  Segregated patient-only hallways, self-rooming, and expedited registration and check-out procedures enhance and streamline the patient experience. Frauenshuh fully financed the project and provided the hospital with a 50 percent ownership interest in the facility though the contribution of land and equity grant with limited impact on the hospital's balance sheet.)

My conversations with several CEOs of large, regional, integrated health systems have focused on the question, “What is your strategy for acquisition of productive market share given the likely dynamics of a reforming U.S. healthcare marketplace?” Or rather, “How do you expect to acquire the markets you want, leaving what you don’t want to your competitors?”

First, it’s important to define

integrated health system



means: a.) a large, multi-site, regional provider system that employees virtually all clinicians required to meet mission, clinical programming and strategic needs and/or, b.) a provider system, as described, that also owns its own health plan.

The recipe for market strategy did not vary much between and among those consulted. Those that owned a health plan felt they had an advantage for some portion of their target markets, especially Medicare markets.

The ingredients that composed the “recipe” were consistent, clear and concise across many of the executives interviewed.

       1.  Move up the financial risk ladder

Get as close to the premium dollar as possible (including owning the premium dollar flow if possible). The strategy here is to pursue contracts where financial risk is transferred to the provider system at

per unit

revenue realization rates that permit sufficient margins as the health system reduces

per case

and total cost of care rates to full best-practice potential.

The theory of this strategy is that, even though health insurers are under pressures to moderate premium inflation rates, real rates will remain on a positive, but reduced, inflationary slope for the foreseeable future. While health insurers—especially those operating in consolidated provider markets—typically have reasonable visibility on case costs and unit price paid, only the most sophisticated insurers have a handle on total costs of care supplied by integrated health systems for specific disease and health event categories.

Consequently, if the more competitive and attractive integrated systems are able to negotiate revenue realization rates on a positive inflationary slope and, at the same time, succeed with reducing total costs of care, actual and aggregate health system profitability may be sufficient or even superior to historic fee-for-service performance.

      2.  Get control over total costs of care for high-risk populations

Especially those with chronic conditions:

These health systems understand which clinical cohorts are the high consumers of care, including end-of-life care. Upwards of 75% of all US healthcare costs are attributable to those with chronic diseases/conditions.

These systems seem to have a reasonable handle on where clinical care inefficiencies exist within high risk clinical cohorts and have the ability, through system design and available resources, to intervene and curb inefficient and ineffective utilization behaviors at the individual provider level.

3.  Leverage providers through interprofessional team care

Research by my colleagues and me demonstrate that even when health systems employ licensed physician extenders across clinical specialties, few effectively leverage physician potential, meaning, in many instances, there is an excessive and inefficient overlap of work between and among the providers.

Stated simply, physicians are doing work that licensed and trained extenders could do, in many instances. The more sophisticated and mature IHS’ have recognized this potential. They are aggressively re-designing the composition and clinical models of interprofessional teams to exploit the potential, including the re-design of provider compensation plans.

      4.  Fully develop ambulatory facility and clinical programming models

As cited previously in this blog, integrated health services delivery is largely an outpatient business. It is my opinion that many, if not most, U.S. health systems are behind the curve in their investments in ambulatory facility assets and programming.

Successful strategies typically emphasize fewer, larger, multi-specialty ambulatory centers including urgent care, and for many, full emergency care delivered at some distance from owned hospitals.


The demand for such ambulatory facilities in the U.S. is spring-loaded.  I expect a precipitous and pronounced acceleration of investments in advanced, ambulatory destination strategies for U.S. health systems. Those interviewed agree. (See photo)

     5.  Brand Promise as Strategy

Every successful business in the history of U.S. industry made a brand promise to customers and delivered on it. Healthcare is no different, including pharmaceuticals and healthcare devices.

Leaders of integrated health systems recognize and embrace the value of “the brand”. Effective brand management in healthcare


sends important messages to markets:

  • we are comprehensive;
  • we are top-quality and we can prove it;
  • we are convenient and responsive to your needs;
  • we deliver value;
  • we will personalize your care;
  • if we don’t have what you need we will get you to those who do;
  • we are in any insurance plan you choose;
  • we are innovators;
  • the “triple aim” is our strategy; and
  • price and value are transparent

Brand value and brand promise should not be under-estimated as a principal strategic tool. Effective execution on a brand promise leads to brand loyalty and brand “stickiness”.

      6. Many Open Doors

Integrated health systems create and exploit multiple “open doors” meaning; they deliver on the promise of multiple, reliable and convenient points of access to the health system. Examples include:

  • primary care
  • urgent care
  • emergency care
  • direct access to specific clinical specialties (e.g. orthopaedics)
  • cyber access; i.e., on-line access (or telephone access) to diagnosis and treatment that does not require a visit to a practitioner. (see HealthPartners, Twin Cities, progress with “Virtuwell”)

Successful integrated health systems create many open doors to their systems of care. These doors are principally responsive to the users; not necessarily the providers.


The Mastery of Health Informatics

Not I.T. systems, but supported by I.T. systems.

Practical informatics

is defined by CEOs as the ability of organizations to ask and answer important questions from the data resident internal to their information systems: billing systems, accounting systems, electronic health records and patient information systems. Effectiveness in this regard requires systems and staff that have not, historically, been available in health systems.

Effective informatics feeds organizational balance scorecards and provides for required ad-hoc inquiries useful for practical decision making.

The art of the scorecard is knowing what outcomes and related metrics should be observed, evaluated and managed; i.e., the most important questions in need of reliable answers to improve the value of decisions made.



apital Asset Leverage

In an article I published with Jay Sterns, head of public finance for Barclays, we examined the question of capital efficiency in integrated health systems.


The working hypothesis was the well-integrated delivery systems should be more capital asset efficient; that is to say given their ability to better control the availability of supply of provider production potential and scheduling and flow of patients through the system, the ability to produce more revenue per unit of fixed asset (i.e., ability to better manage fixed asset turnover rates) should be superior to the traditional community health system design where most physicians are independent and therefore more are likely to compete for “prime-time” procedure room slots and are more likely to compete with their hospital (and other physicians) for profitable ancillary diagnostic and procedural services.

The results of this study showed that for what were categorized as the more mature IHS’ (i.e., those with more time and experience as an IHS) capital efficiency performance was better than that of the less-integrated or less mature IHS’.

Why do leaders of IHS’ see this asset efficiency as important and a strategic advantage? 

a) Compressed depreciation curves; i.e., expensive clinical and information technologies, especially, have practical useful lives that will prove to be less than assigned depreciation schedules, due to accelerating innovation and related obsolescence.


a growing need to access less traditional, alternative capital financings at overall costs rates higher than traditional tax-exempt financing rates causes a need for improved fixed asset turnover performance




strategies demanding the deployment of expensive fixed assets to multiple strategic sites for convenience of patients and providers and more effective responsiveness to patients’ expectations and demands, and

d)   the need to mitigate the financial risks of high-investment clinical programming; i.e. more capital-intensive clinical services and programs.

      9.  Leading the Physician Enterprise to its Full Potential

Those experienced in leading integrated health systems recognize the value of a well-structured, well-led organized physician enterprise. I have referred to the physician enterprise within the IHS as the “economic flywheel” and argued that the IHS is a closed economy; the economic productivity of the physician enterprise dictates the aggregate economic productivity and financial performance of the IHS.

High-functioning IHS’ are not collections of independent medical practices. IHS mission, strategy and operations is a team sport.

Leaders of the higher-functioning IHS’ characterize the future potential of IHS performance in a reforming US healthcare marketplace to be encouraged or challenged by:


the ability to get provider compensation plans right; i.e. advancing model design to higher levels of internal incentives alignment (better alignment of provide compensation incentives with those driving IHS economic and financial performance);


harnessing the potential for teamwork, team care and the effective and efficient application of the potential for highly skilled professionals;

c)   effective balance of the entire provider enterprise; clinical specialty balance, geographic supply balance and productivity balance as a closed economy The effective balance of supply with demand and access across the continuum of care is more challenging than with the historic and traditional community hospital/independent physician designs;


effective application of total cost of care strategies; team care strategies that effectively manage care across time for challenging clinical populations;


meeting the changing personal and professional life-style expectations of the younger generation of care providers “coming up”; and


developing clinicians as leaders.

Strategic, economic, financial success of an IHS pivots on the successful leadership of the medical provider enterprise.

      10.  Consolidation of Strategy and Strategic Assets

Under Jack Welch, GE’s strategy required it to be #1 or #2 in market share in any business it was in. As U.S. health systems have grown by mergers and acquisitions, many of the larger find themselves with revenue structures composed of multiple operating units spread over wide geographies occupying less than dominate positions in markets served.

Said otherwise a $5 billion health system with assets spread over ten states holds a strategic and market share potential that differs from a $5 billion dollar health system with assets located within a fifty mile radius of the home office.

There is evidence that larger U.S. health systems are re-shuffling their operating asset portfolios. Catholic Health Initiatives (CHI) comes to mind. Over the last several years CHI has sold assets and left certain markets to re-deploy liquidity gained in new ventures with, presumably, better prospects for improved market position and longer term strategic and financial performance.

Leaders of healthcare financial advising houses indicate more M & A activity on the horizon directed to greater market strength positioning potential.


CEO’s of IHS’ recognize that the integrated model provides performance potential that can produce strategic (and market share) results that are superior to less integrated models and thereby, advantages in the health market place ahead. But, THEY DON’T RUN THEMSELVES; meaning the integrated model is a tool. Performance is dependent upon the operator.  


(a)  MHA Executive Interview;

Full Service,Free Standing Emergency Services Departments as an Anchor for a Destination Ambulatory Care Strategy, July 2013

(b)  Zismer, D.K.; “Brand Loyalty in a Reforming US Healthcare Marketplace-Applications of the Science and Lessons Learned from Other Industries”, PEJ, May/June 2012.

(c)  Zismer, D.K., Sterns, J.B., Claus, “Capital Efficiency and the Integrated health System Design: Does the Business Model Design Predict Capital Efficiency Performance in Community Health Systems?”; HFM, July 2011, Healthcare Financial Management Association

(d)  Zismer, D.K., Fox, J., Torgenson, P.; “financing strategic healthcare facilities, the growing attraction of alternative capital”; hfm, May 2013,