By Samuel H. Steinberg, Ph.D.

Published November 2007

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In theory, health systems are organized for two reasons: to manage and coordinate care across a region or community, and to allow for economies of scale and business efficiencies, this accomplished through the formation of larger entities having greater clout in the marketplace, particularly in purchasing supplies and services.

Sounds simple and straightforward, right? Also sounds smart. These reasons for systems to exist would likely be true if health care organizations acted like regular companies; in particular if the people who work for those companies did as they are told, and if hospitals delivered a product or service that could be easily replicated and centralized.

The most important and obvious difference is that the chief revenue-makers, physicians, do not all work for the hospital. Secondly, the unfortunate truth is that all too often, hospitals only join a system because they are failing financially, and they are looking for a bail-out. While this may also be true when some for-profit companies merge; hospitals often fail because their core business, inpatient health care, loses money. Whether these losses occur because of inadequate reimbursement for the care of high numbers of uninsured patients, or because of an excessive number of competing hospitals in an area, joining a health system does not often solve the problem. Frequently, a brief reprieve results when the health system improves some practices or even provides the struggling hospital with needed cash. But long term, the problems persist and require drastic actions, such as the pruning of low-demand or money-losing services or even the ultimate closure of the institution. In fact, nearly 100 hospitals change their mission or close every year across the United States.

At the core of many health systems is a very successful hospital, both clinically and financially, often the leading institution in its community. Someone in a leadership role at that hospital sees other area hospitals failing – often due to this hospital’s own market dominance – and starts to think about saving these institutions. This thinking may be driven by ideas of developing a feeder network for certain services, maintaining an affiliated institution for some specialized activities, or keeping certain types of patients at those hospitals (usually the poorly reimbursed). Sometimes the aspiration is driven by the altruistic desire to maintain jobs and dollars in the community. All of these reasons for developing a health system may make good business sense, and many systems have accomplished these goals and benefited their communities by doing so. Conversely, some health systems have failed miserably (see the Allegheny Health System in Pennsylvania, for example) and have even brought down or significantly damaged the core institution that financed the entire system. Many health systems are somewhere in the middle, having some modest success at coordinating care or achieving cost reductions through coordinated purchasing of supplies, equipment, or services; or by development of new or expanded services for patients.

Unfortunately, while many academics and the occasional governmental authority have attempted to evaluate the success of health systems in accomplishing their stated goals, the answer is often unclear. It is difficult to determine if the coordination of patient care services has truly improved, if overall health care costs have been reduced, or even if the rate of cost increase has slowed. Most likely, the definitive study has yet to be conducted and health care systems are likely to continue to proliferate.

Many physicians find their practices significantly impacted by the development of health systems in their communities. The most direct effect may be the opening or closing of a particular service, but a number of other events can impact a physicians’ practice of medicine as well. Such other possibilities include the following:

· The purchase of physician practices.

· Changes in local hospital leadership.

· Funneling of locally derived profits to the failing hospital.

· The development of a costly system-overhead structure.

· Pressures on physicians to change their referral patterns.

This last issue may be the most important. System advocates commonly argue that efficiencies and improvements in the delivery of care will result from centralizing certain high-cost, complex services in one hospital location, and they urge physicians to send their patients to these centralized patient locations. Although this may be a good business practice, it may require physicians to disrupt long-standing referral patterns and personal relationships, delicately balanced interactions where patients move back and forth through an intricate network of relationships. Reasons cited for these referral patterns include history, geography, return referrals, and patient ease of access or perceived quality of the service.

Breaking these referral networks is difficult to accomplish, and many physicians and administrators come to major disagreements over this issue. The administrator may often overestimate the number of patients that may be diverted and does not understand the personal and professional cost to the physician in disrupting the doctor’s referral system. This results in physicians coming under intense pressure to make these changes. For all parties, the movement of patients to a new provider is a difficult element in ongoing interactions. Physicians must decide if they can confidently change their referral stream and not hurt their practices. This is a critical analytical process for a physician to deal with and cannot be done lightly or quickly. Physician colleagues within the practice or at other practices who have gone through this process can be helpful and may have a great deal of insight. External consultants may also be able to benefit the discussion. Helping the health system may be a positive action on the part of a physician, but harming one’s practice in doing so is obviously foolish and short-sighted.

The purchase of physician practices continues to fall into and out of favor across the country. All too often, the transaction is viewed as unsuccessful by the parties involved and results in angst and discord between physicians and hospitals. Whether you subscribe to the opinion that physicians selling their practices do not work as hard as they did for themselves, or you hold the view that hospitals do not know how to manage their practices, the effort simply has not worked well, for the most part. Physicians who want to be full-time employees need to fully understand what that means, and hospitals can be more helpful in working through that process before the sale. In the long run, it is about more than money changing hands, or assuming that because you own the practice, the patients will all come to your hospital. It is not even certain that patients will stay with the practice. All in all, this is a business activity that has not worked as well as hoped and requires a great deal of analysis and understanding before implementation.

A change in leadership is common when a hospital joins a system. This may happen overtly and in public, when the system replaces the hospital chief executive and some or all of the members of the board of trustees; or it may happen covertly, as the system moves the decision-making authority away from the hospital and up into the system. In some cases financial-authority levels are changed and the system leadership alone now has the authority to make major financial decisions.

It is important for each physician to understand where these decisions are now being made, what level of financial authority is assigned to each level of management, and even which members of the board are being retained. Physicians need to realize who is still helpful to them or if there are the new decision-makers they must become acquainted with. System development changes the power structure, and titles and people may not have as much authority as they previously did in a freestanding institution. They may still be calling the same person "chief executive officer," but this does not mean that that person continues to exercise the same level of authority.

This is the last impact on physicians listed above – the development of a costly system-overhead structure funded by the profitable hospitals in the system. Systems frequently move all member hospitals’ profits and cash flows under the control of the system. Monies can be taken from the successful members of the health system to help subsidize the less successful organizations, and this may hamper the profitable hospital by preventing it from reinvesting earned resources toward its growth and development. This can be beneficial to the poor relations, but may ultimately slow down the growth of the leading hospital and actually hurt its market position. Over a long period of time, the entire system can flounder when the "cash cow" funding everything is no longer producing as much profit.

Physicians need to be on the alert regarding the development of corporate overhead. Many systems build new corporate offices, add staff, and increase salaries and benefits for system executives, sometimes paying system managers higher wages than the member hospitals’ staff. While it is important to manage and control the dollars being spent on these expenditures, it is also important to link expense increases to savings or infrastructure improvements. Additionally, some basic questions must be kept in mind: does vacant space exist for corporate offices? Can certain hospital managers perform double duty as both hospital staff and system staff? Are any increases in the number of employees tied to new programs or direct savings? These and many other questions need to be answered, and physicians may be the only truly independent force left to hold the leadership accountable.

Health system development can be very good for a community, preserving jobs and improving patient care, but all parties need to be vigilant regarding how power and control are redistributed and where monies are being used relative to who generated those dollars. Most importantly, all of the members of the community must look for specific and measurable ways in which patient care is improved, and physicians can be the best resource for understanding if this has occurred.

Samuel H. Steinberg, Ph.D., FACHE, is Senior Associate Consultant with Health Strategies & Solutions, Inc. This article is adapted from his book, The Physician’s Survival Guide for the Hospital.