Getting Paid To Keep People Healthy:

Two Ways Of Integrating A Healthcare System

by Joe Flower


This article was published in the Healthcare Forum Journal,
March-April 1993, Vol. 36, #2.
International Copyright 1993 Joe Flower All Rights Reserved
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Why are Americans so unsatisfied with healthcare when we pay so much? In simple terms: we aren't paying anyone to keep us healthy. We are paying people to do procedures on us. We don't reward them -- sometimes we actually penalize them -- for doing things that would keep people well.

We don't have a "health care system." We have a hodge-podge, patchwork "health care industry" made of doctor's offices, group practices, public health departments, government research institutes, hospitals that are public and private, for-profit and not-for-profit, religious, community, teaching, university-connected, general and specialized, funded by patients, employers, HMOs, the government, and a plethora of insurance companies and pension programs, connected together in an impossible welter of chains, buying consortia, and voluntary associations that compete, combine, spin off and re-absorb with confusing speed. All of these have institutional and systemic goals and incentives that conflict and combine and influence one another -- and few, if any, are truly focused on keeping everybody healthy.

Finally, though, something different is happening: "integrated systems" of all types are growing like petri-dish amoebae, sucking hospitals, insurance plans, doctors, clinics, and home-health groups into confusingly vast entities. These systems hold out an intriguing promise: when they become comprehensive enough, they can bid on providing total health care for a fixed fee to large population groups: unions, or employees of whole industries, sometimes even the public health responsibilities of whole cities. The advantage is simple: these huge systems are paid not by the procedure, or by the disease, or by the hospital admission. They are paid by the person. They are paid for "covered lives." They have every incentive to keep their populations as healthy as possible. And the cheapest way to do that is to help them stay healthy in the first place. For the first time in America, major organizations are being paid to keep people well.

So far, no basic model has emerged. A number of different ways of building integrated systems are being tried, different sizes, different ways of connecting the parts, of distributing the capital, of ordering the incentives. If we were closet Maoists, we would call it the "let a thousand flowers bloom" phase.

One spectrum of differences to look at is ownership. We often assume that if it's a system, somebody owns it. Recently a healthcare executive bragged about the $40 million of capital expenditures that had been saved when they bought the hospital down the street and turned it into a community outpatient center: "We were steaming ahead, trying to beat each other in the medical arms race." But was buying it the only way they could have solved the problem? The answer that we get from the two systems we are looking at here is a clear and solid equivocation: maybe, maybe not.

Rochester, New York, has attracted a lot of attention lately, and for good reason. Health care there costs about one quarter to one third less than it does elsewhere, access to health care is among the highest in the nation, and nothing in the outcomes suggests that the quality is anything but superb. How? No smoke, no mirrors, nothing up its sleeve, no man behind the curtain. In fact, it's all pretty basic: a combination of community rating, heavy HMO enrollment, and some serious cooperation among the hospitals.

The situation helps a lot: everybody's involved, there are fewer major players than usual, and the area has a history of progressive cooperation. One major insurer (Blue Cross/Blue Shield) carries 73 percent of the business, the second largest insurer carries another fifteen percent, and only a few employers self-insure. Fifty-five percent of the 1 million people in the area are enrolled in an HMO -- one of the highest penetration rates in the nation. Community rating has allowed 94 percent of the population access to health insurance, far above the 86 percent national average. All of the hospitals in town are independent not-for-profits, and the University of Rochester hosts one of the nation's premier medical schools. Five major employers (Xerox, Kodak, Bausch and Lomb, and GM's AC Rochester and Delco Chassis units) carry a lot of the business weight in town, and business executives figure prominently on the hospital boards. This tight inter-relationship made it obvious that it was to everyone's advantage to stick together, to stay with community rating, and to cooperate in major ways.

And the area has a long history of subjecting major healthcare decisions to the scrutiny and input of the community. In fact, New York State's strict Certificate of Need process grew out of a homebrew CON pioneered in Rochester in the 1960s. As a result, Rochester hospitals find themselves with little excess capacity (with occupancy rates steadily above 90 percent), and major capital improvements are rare. As Albert Sharbonneau, EVP of Genesee Hospital, put it, "No one proposes a Taj Mahal. It's not worth your time." Rochester hospital executives take it for granted that they cannot add bricks -- a reality that has forced them to ask how they can serve their mission beyond the walls. And it forced them to cooperate: Since they had no ability to add on a new wing whenever they wanted one, the hospitals tended to divvy up the specialties rather than duplicate them -- this one does open-heart, that one does psychiatry.

In 1979 the boards of the nine major hospitals formed the Rochester Area Hospitals Corporation, with two representatives from each hospital board forming the new board. Throughout the 1980s, the Rochester hospitals participated in various experiments, called HEP (Hospital Experimental Payments programs I, II, and III) that actually submitted the independent hospitals to group planning and budgeting processes. Medicare, Medicaid and the Blues paid into a pool, which paid the hospitals according to historical levels, plus inflation, adjusted by the board for special circumstances. A portion of the pool was set aside for new projects and renovations. Planning became part of the process in 1985. Medicare dropped out of the payment program at the end of 1987, while Medicaid and the Blues continued through 1990.

The hospitals actually sent $10.2 million of unspent capital projects money back to the three payors. When the checks for the federal portion arrived in Washington, federal officials didn't know what to do with them. No one had ever given money back before, so nobody had a procedure for accepting checks. Altogether, the federal government estimated that from 1980 to 1987, the Rochester area hospitals spent $30 million less than they would have without HEP.

Along the way, three institutions dropped out. Two small out-of-town hospitals felt they didn't fit in, and one major one felt it kept getting the short end of the stick in the group process -- not an unusual point of view for a big player in a group process. Then in 1990 all parties declared victory, and abandoned the project.

If it worked so well, why did it stop?

Several reasons: for one thing, the doctors' practices and clinics were never part of the scheme. Hospitals would voluntarily forego some expansion, or the latest piece of Body Wars equipment, only to find the doctors competing with them under no such constraints. While only the University of Rochester's Strong Memorial Hospital owns an MRI unit, it competes with five doctor-owned units. For another, the state and federal bureaucracies have their own inertia. Despite the experiment's evident success, they were not interested in institutionalizing the necessary waivers and special contracts beyond the experimental stage. And finally, there is the obvious: it is difficult to cooperate, there are bumps and bruises, and not everyone wins. The system had no coercive power to hold the hospitals together against the centrifugal force of their own agendas. It is, in the end, more surprising that six hospitals voluntarily cooperated for a decade than that they finally stopped.

Today the Rochester Area Hospitals Corporation is in a holding pattern. The six CEOs still meet every Friday to jawbone each other cooperatively about who should house some new service, and what the cooperative arrangements should be. They work on TQM projects together under the tutelage of Xerox. And they continue to bask in the press attention that has only increased as healthcare has taken center stage.

All nine hospitals are talking about what to do next. The likely candidate is not global budgeting but global planning, along with such special projects as a new type of Medicaid managed care that would change the way health care reaches the poor, and regional clinical databases. And all the players, from Blue Cross/Blue Shield to the employers, the hospitals, and local politicians, are discussing ways to bring non-hospital medical practices into some kind of CON-style, global planning process. And the creative, ferocious national debate over how to fix healthcare will likely continue to draw lessons from Rochester.

In the other corner of the country, Sharp HealthCare is rapidly becoming a major regional player through a more usual and recognizable tactic -- buying, building, and contracting for comprehensive services across a wide geographical area.

In the 1980s, Sharp bloomed from a single hospital (Sharp Memorial) into a regional system of five hospitals, 14 clinics, seven group practices, five skilled nursing facilities, two insurance products (one HMO and two PPOs) and a number of special services. Somewhere along the line, according to Charles Koch, Sharp's SVP for clinical systems development, "We stopped being a hospital system, and became a healthcare organization."

This is much more than a semantic quibble. The engine of a hospital, or a hospital-driven system, is the push to put bodies in beds and perform procedures on them. The engine of an integrated healthcare system is the insurance premium. For a hospital, a body in a bed is a profit center. For an integrated healthcare system, it's a cost. This shift in incentives echoes down through the system into every tactical and strategic decision.

Capitation is the key to that engine. Some 55 percent of Sharp's business is government-funded. Of the rest, over 95 percent represent some kind of managed care, across the whole range of risk-sharing. At one end of the scale, the IPO and PPO contracts (which Koch dismisses as "just a form of discounting") are decreasing. At the other end, pure capitation is increasing. Some branches of the organization, such as the Mission Park Medical Clinic and the Sharp Rees-Stealy Medical Group, do nearly 90 percent of their business in capitated care. According to Koch, "When you cross a certain line, the whole style of practice changes. Utilization falls, and you get a whole different pattern." Sharp is negotiating with Medicare and MediCal to find a way to capitate the government part of the business.

"Capitation," says Koch, "has put wellness activities into the mainstream of what we do as a business. To the degree to which we are successful, it means money in the pocket." For instance, in order to join Sharp's HMO, you have to go through an assessment. If you undertake the lifestyle changes that the counselor recommends, Sharp will give you a discount on your premium. Beyond that, Sharp educates over 20,000 San Diegans a year in special health classes.

Capitation also becomes the catalyst to the cooperation between the hospitals and the doctors. "Most systems are struggling with how to get their doctors together," says Koch. California has the advantage of a half-century-old working model of one method of capitation in the vast Kaiser-Permante system. But the more than 2000 doctors that work with Sharp come under a welter of independent and group contracts. Some are paid fee-for-service and others come under one or another capitated plan. Sharp executives attribute their success with the doctors to straightforward team-building: they treat the doctors as partners, put at least two of them on each board, consult them about strategic planning, get them to serve in management, and involve in key decisions at all levels.

Sharp is tying the system together with a new $30 million clinical and financial information system. At the same time, Sharp management has centralized all the business functions, the warehousing and materiel functions, and contracting. And Sharp clinicians have embarked on the long task of setting up system-wide clinical protocols.

Sharp's market penetration is significant, and increasing: about half of the 2.6 million people in San Diego County are in some kind of managed care program, and Sharp covers nearly 400,000 of those.

In San Diego, unlike Rochester, any drive toward integration has to come from healthcare itself -- there are no outside regional players strong enough to force change on the hospitals. Except for the government and the Navy, there are few large employers (Sharp itself is the largest non-governmental employer) and no single insurer dominates the market (the Blues have only a small penetration).

Sharp's achievement is integrating doctors, hospitals, clinics, and insurance products into one system that is increasingly driven by the premium, not by the procedure, that has the capacity to treat almost every patient at an appropriate level of care without leaving the system. Single ownership provides Sharp an efficient method of making decisions, allocating capital, and forming strategic plans, which Rochester lacks. It has the ability to shape the incentives of each member institution so that it serves the system as a whole.

What San Diego lacks, though, is the community rating of insurance, and the intense regional cooperative planning that has shaped Rochester's health policy for decades. Sharp has brought new systemic efficiencies to healthcare in San Diego, but without community rating and regional planning, it has not been able to serve the poor, increase access to healthcare, or push regional prices down with anything like the success of the Rochester Area Hospitals Corporation.

Integration that really works would ideally combine features of both: community rating, capitation, and strong, comprehensive systems in the context of community-based regional planning.

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