By Christopher Guadagnino, Ph.D.

Published October 1996

• React to this article in the Discussion Forum.

PND: How does your purchase of Roxborough Hospital and Lower Bucks Hospital fit in with your regional strategy?

RF: Lower Bucks Hospital will be our eastern anchor of the Greater Delaware Valley system. We will have Roxborough, that’s central, and we’ll have somebody else on the west. We would also like to buy hospitals in the north and the south, except on the south there are not a lot of options. What we may have to do in south Philadelphia is to put in an ambulatory surgical center and a large physician's group practice. Our company thinks that community hospitals and the primary care physicians supported by their specialists are the backbone of this system. A lot of the problem is that the tertiary hospitals are moving into the communities, buying physician practices and re-directing admissions to tertiary hospitals that can be handled locally. We believe very strongly that patients need ease of access, that in order to address potential illnesses on a preventive basis, they need to have access to affordable health care. So, we believe there has to be a maximum number of entry points for them into the system. Our job is to keep these community hospitals open where there is a demonstrated need and there is a broad base of community and physician support. They are also a lower cost provider than tertiary hospitals. Our strategy in Philadelphia is to acquire and put into an integrated delivery system a minimum of 1500 beds, which would probably come to seven or eight hospitals in the Greater Delaware Valley.

PND: As a for-profit entity, how do you find a network of community hospitals to be lucrative?

RF: Most hospitals operate at a cash surplus, and some of them would shock you as to how much money they make. I am not going to name any in the Philadelphia area, but if you look at the cash flow from these institutions, they can be fairly considerable. Every community hospital is probably backed by a bond issue. So, you have had some very intelligent investment bankers’ opinions that they can serve as a debt, and supposedly informed investors buy those bonds on that basis. I think the key is to put hospitals together in a group so they have significant market share and they will be included in a managed care plan.

PND: How will you compete with existing community hospital networks?

RF: We have been in the most highly competitive markets you can imagine. This market is not particularly difficult. We are going to compete on access, on price, on quality. One of our strengths is dealing with physicians. We have very strong relationships with our physicians. Our administrators, our CEOs are expected to spend 80 percent of their time, or more, working with the physicians, determining what the physicians’ needs are and how we can help them solve their problems, helping them to grow their practices, marketing individual physicians, helping them bring in associates. If they are older and they want to retire, helping them transition their practice to a younger physician who will keep the patient base. A lot of the non-profits don’t spend much time with doctors. They don’t have very good interpersonal skills with physicians. We have a rule in our hospitals that if a doctor calls, the phone call is returned within ten minutes.

PND: You have a southeastern Pennsylvania and an Ohio presence, and you have a Coney Island hospital in New York. What is your global strategy?

RF: Our objective is to focus on the areas where managed care really has not hit hard yet—where there is going to be a lot of change, where you’re going to see the use rates per thousand drop. We think those are areas where there is going to be a lot of turmoil, where a lot of hospitals are going to be at great risk, and where somebody with the staying power and the capital can make a difference and put together a community hospital system.

PND: How will your hospitals be managed?

RF: A majority of this management team, including Steve Volla, who is the chairman of the board and I as the president, were with a company called American Healthcare Management. We had developed a model in Los Angeles where we had six community hospitals that had never worked together before. We were able to form an independent physician association (IPA) at each of the hospitals and manage them through an management services organization (MSO), and then we were able to take this market clout that we had and we did a joint venture with a very prestigious tertiary hospital in Los Angeles. They provided tertiary back-up and jointly we bid on managed care contracts.

PND: And is this the model and approach that you hope to take into the Delaware Valley region?

RF: Yes. Now in Cleveland, we purchased a tertiary hospital and that is not normally what we do. It was just that this was a very prestigious tertiary hospital that also had a very large primary care focus, including obstetrics, and it served a very significant population in the inner city of Cleveland.

PND: How will you handle the need for tertiary care in this region?

RF: We will contract it. As we go forward, we are gearing everything to at-risk contracting and capitation. We will develop a relationship with a high quality, cost-competitive tertiary hospital.

PND: How can you compete with networks like Allegheny and Penn?

RF: I think we’ll compete very effectively. We will be a low cost, high quality provider. I think as our system grows, we will be very attractive to managed care plans. We will not have the baggage of the high cost of the tertiary hospitals, so our prices are going to be extremely favorable. We are going to have lots of access points. We will be forming an MSO and the physicians will own between 80 and 85 percent of this organization. The idea is to put the physicians together in an organization that they can control and they can, in the long run, have equity build up.

PND: What options would physicians have as members of this company?

RF: Once they are part of the organization, if we negotiate with an insurance company at a capitated rate, they would have to accept the capitated rate. The advantages, of course, would be a range of services available. They could sell their practice into the MSO. They could merge it into the MSO. They could retain ownership of the practice and just purchase billing and contracting services from the MSO. These could be physician groups who are in markets that we don’t cover with the hospital, but it would be beneficial to the group to cover a specific area. As an example, suppose we can’t buy a hospital in the greater Norristown area. That doesn’t mean that we wouldn’t want coverage there, and we would be willing to work with a group of physicians in that area to get them included.

PND: Would member physicians be allowed to contract elsewhere?

RF: Initially, it would not be a closed situation because, if for some reason the group decides not to contract with a certain insurance provider and he has a significant amount of business with that provider, he needs to have some flexibility. There has to be some loyalty to the overall organization.

PND: What sort of timetable for the Delaware Valley region do you have for the start-up of the MSO?

RF: We would hope to close on the two hospital acquisitions here by the end of the year. Roxborough may even close November or early December, so we’ll start working on the MSO even before those close.

PND: Are you purchasing physician practices?

RF: We try not to, but we have and we will, if we have to for a strategic purpose. We would prefer to help the physician buy another physician’s practice. One of the advantages of the MSO: the MSO will be able to buy the practice.

PND: Isn’t it risky to abstain from aggressive acquisition of physician practices when others are doing it aggressively?

RF: We have seen this in many markets. They have driven the prices very high in this market and they did the same thing in Cleveland. Now all of a sudden people are backing off from buying practices in Cleveland, so it is an over-valued stock. I think there has been kind of a feeding frenzy by the tertiary hospitals. They have spent very large sums of money to buy practices and I don’t know if they have been successful or not successful. In Cleveland, University Hospital has spent a small fortune buying practices, but losing tons and tons of money operating those practices. Now they have scaled back significantly their practice purchase operation and they are beginning to come in at more reasonable costs. We think that doctors prefer to work for themselves. Doctors are very well-educated, they are highly motivated, they work extremely hard. It is difficult to get groups of doctors to work together, so by buying a practice, you are putting a doctor into groups that perhaps he would not work with. We find if you can support them in their practice and give them a vehicle where they can be involved with all the benefits of being owned, that they can maintain their independence, they prefer that.

PND: What do you say to physicians who may be reluctant to trust a for-profit company?

RF: I don’t think the physicians, when they have worked with a for-profit company see a heck of a lot of difference between the for-profit and not-for-profit. The only difference, I think, is that the for-profits are more responsive to the market than the not-for-profits. I think they are just operated better from a business standpoint. I think they are more in touch with what is going on in the communities. If you don’t run a successful operation, the doctors and the patients are not going to come. We can borrow money as long as we operate successful hospitals, and we don’t operate successful hospitals by not paying attention to business. I think that there is a focus on day-to-day operations—on service levels, patient satisfaction levels, physician satisfaction levels, quality controls. We have our own proprietary quality measurement system, where on every patient we benchmark 23 parameters. We measure volumes of things done, like how many bills a biller should get out in a day, how many hours of care it takes for a patient to be treated based on the acuity of the patient, how many lab tests that a technician should be able to do a day, and we measure them very tightly. The history of this industry is that those things have been under-managed. We think everybody should be allowed to compete on the basis of quality and on the basis of price. So, as proprietary operations are established in the area, I think the acceptance grows and they are pretty much seen as just another competitor.