The right strategy and perseverance can make an IDS profitable - Integrated Delivery Systems - financial management - Statistical Data Included

Healthcare Financial Management, Dec, 2001 by Dean C. Coddington, Keith D. Moore

Results of a recent study of 11 leading integrated delivery systems (IDSs) belie the common perception that IDSs are incapable of turning a profit. The study determined that the primary factors driving the poor financial performance of IDSs are organizational complexity, payment reductions mandated by the Balanced Budget Act of 1997, and a general lack of foresight regarding financial problems when embarking on an integration strategy. By implementing a wide range of initiatives to stem losses and improve financial performance, several of the case-study IDSs have accomplished dramatic financial turnarounds over the past three years. and all have achieved consistently stronger financial performance.

A current perception regarding integrated healthcare is that most integrated delivery systems (IDSs) lose money. In fact, it is widely believed that most, if not all, IDSs have lost money both on their primary care networks and on their health plans. Largely as the result of such perceptions, many in health care advocate a strategy of going "back to basics" -- that is , selling off the continuum-of-care components and reverting to te status of a stand-alone hospital of multihopital health system.

This perception may be inaccurate. According to a recent study sponsored by the Medical Group Management Association (MGMA) that examined the financial performance of 11 leading IDSs, if the right strategy is used under the right circumstances, IDSs can be profitable (see Exhibit 1, page 38). (a)

Factors Affecting Financial performance

Several of the IDSs in the MGMA study, like many IDSs across the country, have faced financial problems over the past three years primarily due to the impact of the Balanced Budget Act (BBA) of 1997, declining Medicaid payments, the growing number of uninsured patients, and the tough negotiating stances of managed care organizations. Exhibit 2, on page 38, summarizes the chief financial challenges faced by six of the organizations.

The overriding financial challenges facing all 11 IDSs are:

* Organizational complexity;

* BBA payment reductions; and

* Lack of foresight regarding financial problems.

Organizational complexity. For each of the case-study IDSs, organizational complexity is a chief concern for the future. While there is little evidence that vertical integration leads to lower costs, proof does exist that the complexity of these organizational types usually leads to higher costs. The individual factors that drive up costs include the need to develop information systems linking various elements of the system, the need to maintain a primary care network and a regional system, and the administrative expenses associated with providing systemwide leadership and coordination. All of these costs are avoided by single-specialty medical groups and independent hospitals.

BBA payment reductions. All of the case-study IDSs were affected adversely by the payment reductions under the BBA. Most of the organizations have responded by implementing performance-improvement and cost-reduction initiatives.

For example, Scott & White, Temple, Texas, anticipated payment reductions under the BBA amounting to $55 million over five years. To respond, the IDS has undertaken initiatives to reduce its expenses by $20 million per year. At the same time, the president and CEO of Scott & White's hospital and foundation lamented the need for such measures, commenting, "You don't shrink to greatness."

As another example, Moses Cone Health System, Greensboro, North Carolina, relies on Medicare payment for more than half of its revenue. Moses Cone projected total BBA reductions to be $65 million over five years. Moses Cone's CFO noted that his organization was looking for ways to preserve its margins by reducing System expenses.

Lack of foresight regarding financial problems. In many instances, the case-study IDSs knew that financial challenges were on the horizon, but they did not adequately prepare for them. An executive at Henry Ford Health System, Detroit, Michigan, remarked, "We saw this situation coming, and we talked about it a lot, but we didn't do anything about it." He went on to observe that when the financial problems arrived, they were more severe than had been expected. Another manager noted that the organization had not taken sufficient advantage of its economies of scale to reduce costs, particularly in the clinical areas. In addition, like many systems, Henry Ford learned about the cost structures of certain business elements, such as primary care clinics, only after it had acquired them.

Responses of Case-Study IDSs

The case-study IDSs have undertaken various initiatives that, in many instances, have contributed to dramatic turnarounds or, in the very least, consistently stronger financial performance over the past three years. These initiatives include:

* Renegotiating managed care contracts;

* Closing unprofitable business units or reducing their subsidies;

* Implementing performance-improvement and cost-reduction measures;