By Christopher Guadagnino, Ph.D.

Published December 1999

• React to this article in the Discussion Forum.

PND: What’s your plan for turning around the Allegheny hospitals?

CO: It’s multifaceted. First, looking at getting the financial house in order with those institutions, both with an operating plan as well as with a capital restructuring plan. Part of the endeavor is to make it an even refinancing over 30 years as opposed to the way the debt is currently structured. The operating plan is to identify areas such as corporate overhead, supply chain, management structure, and to get those at a reduced expenditure level. One of our objectives is to get rid of some of the high corporate overhead that they had and get the operating plans balanced.

PND: Do you have a goal for these reductions?

CO: In terms of the corporate overhead in those kinds of areas, yes, we’ve looking at about seven percent on an overall expenditure basis. We’re making progress towards this.

PND: What role does Highmark play in your plans?

CO: They are providing part of the capital financing on a loan basis. But they’re not part of the operational plan at all. The total loan will be $125 million. We’ve utilized about $25 million of that so far. We won’t bring in their total until we get the refinancing done, which we should have done the end of January, the first of February.

PND: What role do you hope Community Health Alliance might play?

CO: The plan in working with community hospitals and the Health Alliance group is to help them in their own particular markets. We have two objectives there. Number one is to do things as independent entities working with each other—such things as purchasing programs, laboratories—could be both administrative and clinical. Secondly, working to see how we can be of assistance in the referrals that do need to go out of the community. It would be collaborating, as opposed to controlling type plans. Those are in the formative stages right now.

PND: Are there existing collaborative arrangements with any of the community hospitals?

CO: Actually both Allegheny and West Penn have a number of different relationships with institutions in the region, usually for clinical programs or programmatic support. For example, Allegheny’s got an affiliation with Somerset Hospital. It’s got an affiliation with Trinity Health Systems in Stubenville. West Penn’s got an affiliation in Dubois. Then there are a number of informal relationships that exist throughout the region already, and our expectation is that we’ll be able to capitalize on those. There are groups of physicians at different institutions that relate to specific services at one or more of the community hospitals.

It’s not our belief that the institutions have to be wholly-owned in the way that some systems have: they affiliate and then they want to own the hospital. We believe that, to a great extent, a lot of the value both to the community as well as to the tertiary institutions is obtained by collaboratively working together. That means putting together a clinical program that may be beyond the capabilities of a particular medical staff or putting together some support services that enable a diabetic program or a heart program, or other kinds of things, to function very effectively in the community.

PND: Are there any financial arrangements between your system and Community Health Alliance Hospitals that you might seek?

CO: No, but we’ll look at opportunities as they come up that seem to be mutually beneficial.

PND: Why did West Penn decide to merge with the Allegheny hospitals, given the number of problems that those hospitals had?

CO: We looked at the four Allegheny-related hospitals and we saw institutions that had a strong market presence in a distinct part of a market, institutions with good quality medical staffs, good community reputations. And looking together with our system we thought we would be able to provide superb regional coverage, high quality services, be able to build on the clinical reputations recognizing that there were going to be some pretty substantial efforts in terms of getting the financial house in order. Once one accomplishes that, the institutions themselves are very high quality organizations and have a good role in the region, help provide a good geographic coverage in the metropolitan area and we think will serve our region and community very well.

PND: Many analysts have concluded from Allegheny’s situation that the large integrated delivery system model has not achieved the efficiencies that had been hoped for. Why not adopt a different approach?

CO: The term "integrated delivery system" is a pretty fuzzy concept in a number of ways. What our experience indicated, and analysis of difficulties that others have identified, a couple of things. Number one, taking reckless risks. One of the big types of risks that one can take, that I think is dangerous, is taking full risk capitation. Certainly the AHERF model did that for some managed health care plans and that really exceeded their capability of managing. They took the risk without the infrastructure and the skills to be able to manage that. That was quite costly. Secondly, I think a number of these big organizations have embarked on endeavors that are outside their core competency. In other areas provider-based insurance companies have tended to have a very bad track record over the long term. The percentage of provider insurance companies that have been successful is pretty small. Most organizations have not managed their physician networks particularly well. They have not been able to identify how they’ve added value to the physicians and they’ve tended often to overpay for those kinds of resources. Many of these folks have strayed far from what their core competencies are and perhaps have counted on some of the strategies of a capitated environment that, to date, have not materialized and they’ve ended up with excessive risks, perhaps ones that they either didn’t evaluate carefully or that they executed poorly.

PND: How do you plan to make your integrated delivery system work?

CO: First of all, we’re primarily a group of hospitals and physicians working together. We don’t believe we have to own every piece of a delivery system. I believe that we can partner with the people that have more competencies in areas that we don’t. Number two, we’ve going to try to focus on the things that we do well, which is the provision of care and be a partner to those who add complementary services to us. Not pursue ownership.

PND: The flip side of the issue is, of course, that if a system does not integrate beyond collaborative arrangements, then it’s not integrated enough to achieve efficiencies.

CO: That’s if you plan to take a capitated risk. While you can do packaged programs and things like that, I think the ability to do fully at risk contracts for areas that you don’t control is not wise. If you look around the country almost all of the organizations who had pursued those are pulling back from them, both the insurance companies themselves as well as the delivery systems that contracted with those.

PND: Is the West Penn-Allegheny system going to avoid those sorts of risk contracts?

CO: We’re not going to engage in risk contracts that we don’t believe we have the skills to manage. We fully think we could take certain product line risks. They would be more chronic disease-related type approaches and defined population.

PND: Would that include Medicaid?

CO: Could be. But, again, it would be a more defined risk than some of the things that have been bandied about nationally.

PND: UPMC said they plan to open facilities in close proximity to yours. They’ve hired some high profile physicians. They’ve fought and called into question your financing. They’re obviously aggressively competing. What are you planning to do to compete against them, given their market share, their name, the fact that they have their own insurance company?

CO: The first part is, our market share is actually quite close to theirs in terms of the metropolitan area. I think the institutions that are in our system have a good geographic spread and our goal is to focus on the institutional strength in each of those markets and partner with medical staffs there to have them be a strong entity. Our view is that the system really exists to add value to the institutions, not necessarily the other way around. I think that’s a differentiating factor. Secondly, there are a number of nationally recognized programs at Allegheny General Hospital as well as West Penn. Consumer preference still is very strong with regard to the hospitals in our new system. We plan to strengthen the programs that we do well on a national basis and move forward, not so much competing against one entity, but being the best that you can be. The best that we can be is very good.

PND: There have been some high profile physician defections from some Allegheny system hospitals. How can you compensate for them and prevent others?

CO: I think that, given all that’s gone on, the number has been remarkably low. People do leave organizations on an ongoing basis and clearly the ability for the organization to recruit excellent, nationally-recognized replacements is important. We intend to pursue that.

PND: What role are physicians playing in the plans you’re making for the future of your hospital system?

CO: Significant. As we put the boards together of our six institutions, 30 percent of the boards will be made up of physicians who practice at those institutions. At the board level of the system we have established a clinical council made up of 24 physicians. The physician leadership from each of the institutions will nominate members to the sponsor board and will serve as a clinical sounding board for the board of directors. At the system level as well as at the individual hospitals, a substantial number of strategic planning individuals are made up of members of the medical staff.

PND: What is the function of the clinical council?

CO: Their official function is to nominate members to the sponsor board. They don’t take the place of the organized medical staff at each institution, but they are a group that springs from the leadership of each of the institutions. They will be dealing with issues that may cross institutional lines. For example, maybe each institution may have a very small piece of a particular market, say rehabilitation, but taken collectively the organization constitutes a high percentage of the rehabilitation market in the region. How do we position ourselves to be effective? Those are the kinds of issues they would be looking at. Also monitoring what best practices are, what’s going on at each institution in terms of quality management.

PND: What sort of authority will they have?

CO: It’s advisory. The attempt here is not to usurp the medical staff responsibilities at each hospital but rather, be a forum for advancing what looks to be best practices and those kinds of things. The board at each hospital has the responsibility for the clinical care at each hospital.

PND: Are medical staffs currently independent across your system’s hospitals?

CO: They are.

PND: Will they stay that way?

CO: Absolutely.

PND: What about departments or programs? Will they be consolidated?

CO: Part of what we’re doing right now is a planning process, both at the individual institutional level as well as at the system level. I think a number of areas will be identified such that the strength at one place can be leveraged to help other places. But in my experience those things are best done under a scenario where everybody that’s at the table reaches a consensus of how things need to be done as opposed to having them crammed down from on high. We’ll look at what makes sense to do, either as a group or in a collaborative way among the medical staffs, the clinical council and the boards of each hospital. If everybody would agree that it makes sense to combine something, that would certainly be considered. My suspicion is that there are a number of things in the educational arena that could be potentially combined or strengthened. Integration does not necessarily mean centralization.

PND: The image of Allegheny in the eyes of some consumers may be negative. There may be those who regard it as a failed institution. What are you going to do to rebuild the image of the Allegheny institutions for those people?

CO: If you really look at the analysis that we have of consumer preferences, Allegheny has remarkably stayed as a very strong, preferred institution in the region. I think people have been able to separate the financial problems of AHERF from the clinical expertise at Allegheny General. Obviously as we get the finances fixed we’re going to be focusing on how the system as a whole and each individual hospital enhances that reputation.

PND: UPMC officials have said that the only way for you to thrive is for Highmark to have some kind of arrangement with you for making sure that your beds stay filled. How do you counter that argument?

CO: I think the reason for Highmark’s investment in us is to assure that there are multiple provider networks in our region. I always get a chuckle when UPMC people try to talk about monopoly. We believe that as a system we can be the preferred provider system of employers, of insurance companies, and that we will be very efficient and have high quality and good service. That’s how we plan to compete.

PND: How many purchased physician practices does West Penn have apart from the Allegheny hospitals?

CO: We have about 85.

PND: How many do you take on from Allegheny?

CO: About a hundred.

PND: What will become of those purchased practices under the consolidated system?

CO: They continue to be in place. We’re looking at where are the opportunities for administrative efficiency that can add value to the physician practices.

PND: Do you plan to retain them all?

CO: Actually, Allegheny reduced the number, since those physician entities were part of AHERF and were bankrupt entities. At one time I think they had 230 primary care physicians. They’ve reduced that down to approximately 100. The ones that we have are the ones that we think really add value.

PND: Do you plan to reduce the number of practices either through attrition or termination?

CO: No.