Alignment from the Health System Perspective, Part 1

Part 2, Alignment from the Physician Perspective, appeared March 19, 2020.

By Max Reiboldt, CPA
March 18, 2020

Undoubtedly, alignment involves a certain degree of risk for health systems, but despite such risks, the need for alignment still exists. Health systems are willing to take on these risks to reap the resultant rewards, including baseline sustainability, increased market share, and better patient care.

The following are risks and rewards health systems face when pursuing alignment strategies.

Risks

Capital Outlay

An alignment strategy often leads to the purchase of something that requires a capital outlay. It could be the purchase of a physician practice’s assets, the assets of an endoscopy center, a significant piece of equipment, or simply the commitment to spend funds to further the business efforts of an entity that is the target of the alignment. Thus, from a planning perspective, alignment strategies must be factored into the health system’s capital budget. In some cases, the organization’s ability to pursue alignment strategies is hindered by its health and the concomitant inability to access capital.

In addition, any time capital spending is in play, a health system is focused on the return on investment of their spending. In other words, are they going to realize the necessary benefit to justify the capital expenditure?  In most cases, the return on investment is perceived to be simply a monetary calculation, but in the healthcare environment, this could be viewed in more of a qualitative fashion as well. For example, when aligning with a primary care practice, the return on investment may be better access to patient care rather than the primary care practice making money for the health system.

With the varying alignment alternatives in today’s environment, and physician practices literally lining up at health systems’ doors looking for some sort of affiliation, the health system must weigh the risks of the capital involved in each transaction to ensure that the alignment strategy provides long-term benefit while meeting all of the necessary legal parameters.

Increased Costs

In addition to the initial capital outlay, many alignment strategies increase the ongoing costs for the health system. For example, if a health system historically has not provided compensation to physicians for call coverage, but begins to as part of the alignment strategy, costs increase for the organization. This increase can become substantial. For example, if a health system begins paying general surgery $1,000 per night for call coverage, this translates to an increased cost of $365,000 per year. Multiply this by the other specialties who will desire similar compensation, and the cost of this alignment strategy grows exponentially overnight.

The most common alignment strategy today, physician employment, entails significant added costs as well. In most cases, health systems lose money when they employ physicians because of the economics of the practice and the fact that employed physicians often see slightly higher compensation arrangements than when they were in private practice. Further, if a health system is not adept at managing physician practices, the losses tend to grow with every physician added. In addition, revenues that were previously part of the practice operations for ancillary services may be pulled out by the health system and redirected to another facility. The allocation change has a negative impact on the practice’s future revenues, so the losses in revenue appear larger. Thus, while the employment of physicians may provide some benefit in meeting the health system’s patient care and other goals, it may create an economically unsustainable environment.

Changing Reimbursement Environment

Another key risk that health systems take on with respect to alignment is the risk of the changing reimbursement environment. Because many physicians are paid in employed/aligned settings, they do not take on direct payer risk. While their pay may ultimately flex based on changes in the payer environment, this is by no means immediate, as it would be in private practice. Thus, in an aligned environment, health systems take on all of this risk. In addition, many alignment strategies have been fueled based on the ability of hospitals to generate higher revenues if they “own” the ancillary asset. This has been the case for endoscopy centers, cardiology diagnostic testing, and many others. Thus, if the ability for the hospital to generate these higher revenues were to disappear, it would threaten the economics of many of the existing alignment strategies.

Concentrated Risk on Single-Provider Groups

Another consideration is the concentrated risk for single-provider groups. When many private practices provide services to a health system, there is less risk because, for example, there may be 10 different cardiologists in four separate private practices providing services. As employment grows, all of those physicians are concentrated in a single the health system risks having no cardiologists to care for patients. The principle holds true for all specialties.

Difficulty Unwinding

Another key risk health systems face with respect to alignment strategies are the unwind options if the relationship does not work out. It may not be easy for the health system to unwind the arrangement and pursue other alternatives. For example, a call pay arrangement typically is easy to unwind with a 30- to 60-day without-cause termination provision, but the employment of a large physician group is much more complicated to unwind, especially after their operations have become intertwined into the health system. Another key issue is precedent. Using call compensation as an example, once the physicians receive payment for this service, it may be impossible to revert to an arrangement whereby physicians provide uncompensated services. The pursuit of an alternative alignment strategy often is necessary, and typically entails more risk due to the level of alignment. Therefore, regardless of the complexity of the alignment strategy, health systems must realize the unlikelihood of being able to unwind completely; some form of alignment will be the new normal for the foreseeable future.

Challenging Provider Relationships/Cultural Development

As health systems and physicians have become more aligned, the lack of cultural development/integration has become an area of focus. Many health systems have done well to develop a critical mass of aligned physicians, but few have been able to truly integrate those physicians into the overall organizations and create a collaborative culture and governance model that brings the physicians into the decision-making realm. Physicians who spent many years in private practice feel disenfranchised with their lack of ability to effect change. Additionally, the slow-  moving nature of large health systems and the seemingly poor management of their practice about which the physicians can do nothing, are sources of frustration. Needless to say, this model eventually will fail, or at least result in much higher costs and less value-added than the initial vision that was cast. Thus, developing critical mass is not enough; if a health system cannot create an effective governance model and culture wherein the physicians can thrive, not just economically, the alignment strategy is at risk of failing.

Rewards

Alignment strategies for health systems clearly entail significant risk, but they would not be pursued if there were not benefits. The following outlines key rewards of alignment strategies.

Stable Volume/Revenues

Although reimbursement in today’s healthcare environment is anything but stable, pursuing alignment strategies helps ensure stability, at least from a volume perspective. As an example, a hospital that pursues an alignment relationship with local orthopedic surgeons cannot require the surgeons to refer to their facilities (without certain caveats) and clearly cannot compensate for such referrals, but undoubtedly will receive the majority of their business. This stabilizes the volume in this key area. The same is true for many other hospital-based specialties as well as primary care specialties.

While the ambulatory primary care physicians do not perform any work in the hospital, they are the primary source for many of the admissions, and pursuing an alignment strategy with them helps stabilize the volume and revenue of the health system.

Ability to Negotiate with Payers

Another key benefit from alignment is in the negotiation clout with payers. In most instances, health systems benefit by being able to better negotiate with payers when they are aligned with a strong physician base.

Further, as is important in today’s market, these alignment strategies give a health system the ability to offer comprehensive packages of services to payers, allowing alternative payment models to be crafted or pursued. In a fragmented market that has many players, creating alternative payment models may be difficult or impossible to achieve.

Population Health Management

The benefit of better negotiations leads to advantage. While the negotiating ability is clearly an economic reward, the more qualitative, but related benefit is the ability to manage overall populations of patients. In other words, the integrated health system can manage the entire life cycle of disease, which is beneficial largely in the ability to streamline the process and have data to track and monitor the quality of care being delivered at all stages. In a fragmented healthcare market comprised of multiple providers and multiple technology platforms, population health management is more challenging than when everyone is on the same team and working from the same technology platform.

Ability to Provide Key Specialties

Another area where alignment rewards health systems is in their ability to provide key specialties or services that would otherwise be unavailable. For example, a market that would benefit from having an oncologist wherein patients could receive cancer care in their community, but that does not guarantee enough business to attract a private practicing oncologist, could pursue this service from an alignment standpoint. Alignment could occur through employment or some other affiliation arrangement.

Summary of the Health Systems’ Perspective

The benefits and risks discussed here are not comprehensive; rather, the intent is to outline some of the key risks and rewards that health systems face when pursuing alignment strategies. In most cases, the rewards can far outweigh the risks, but this requires proper structuring of the alignment strategy and all players pursuing the strategy from a mutually beneficial/collaborative standpoint rather than simply pursuing “what is best for me.”

 

Excerpt from:  Max Reiboldt, Physician Alignment: Ensuring Success with Negotiations, Payment Systems, and Education of Stakeholders, available in print or eBook.

Important Links:

Book, Physician Alignment: Ensuring Success with Negotiations, Payment Systems, and Education of Stakeholders

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