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Shared Success

Carrie Vaughan, for HealthLeaders Magazine, May 9, 2008
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A growing number of large health systems and community hospitals are discovering that each of them has something the other one wants. But crafting a true partnership—often with a perceived competitor—is a complex task. Here's how some hospitals are doing it.

Collaboration among hospitals is not new. Organizations of varying sizes have worked with each other to one degree or another for years—mostly out of necessity. But as market forces such as increased transparency pressures, work force shortages, and new forms of competition continue to grow, hospitals both big and small are beginning to look at these relationships in a new light: Maybe we don't just have to collaborate. Maybe we want to collaborate.

For the average standalone community hospital, delivering quality healthcare while staying competitive in today's market is increasingly difficult. First, there are physician shortages that will probably only get worse. One-third of active physicians are more than 55 years old and likely to retire by 2020, according to the Association of American Medical Colleges. That leaves many community hospitals in a vulnerable position, says Alan Sager, PhD, professor of health policy and management at Boston University's School of Public Health. "Their physicians are aging, their medical staff may be shrinking, and they may find it difficult to persuade new physicians to affiliate owing to fear that the hospital may downsize or close," he says.

Then there's access to capital. Even a community hospital that is relatively well-positioned financially may lack the resources for its future projects. Many small-town facilities still need renovations or even full replacement, and myriad new technologies require significant capital. Recent changes in the way nonprofits are able to borrow money in the bond markets, along with the economic ripples of the subprime mortgage crisis, mean that future access to capital is a serious consideration for every hospital, says Rick Wade, senior vice president of communications for the American Hospital Association.

The worries don't end there. Community hospitals typically treat a high payer mix of Medicare and Medicaid patients, and current reimbursement levels will likely decline in the near future—not to mention the impact of the uninsured on these facilities. Steve Warden, executive vice president of CIT Healthcare, a finance and advisory firm in New York City, says that bad debt (defined as uncollectible accounts) in rural hospitals has risen from roughly 6% to 11% in the past six years, according to information from public facilities. In addition, rural hospitals have been plagued by weak volume growth, he says. "Volumes have been anywhere from flat to declining 1% to 2%."

All of these factors conjure a bleak outlook for rural and community hospitals trying to maintain financial viability on their own. "If you are sitting there and running a 40-, 60- or 100-bed hospital in a rural community, and you know that you will have these kinds of demands and you look at your economic structure as you stand alone, you think, 'It might be nice to have a partner,' " says Wade. Many healthcare experts—including a growing number of hospital executives—have concluded that community hospitals must seek partnerships with larger hospitals to bring stability to their organizations. "Decade after decade, the larger teaching hospitals are much more likely to remain open and smaller community hospitals are much more likely to close," says Sager, who has been tracking 1,200 hospitals in 52 cities using records dating back to the 1930s.

But why would a large urban hospital want to partner with a smaller facility? Because community hospitals have something the healthcare giants want: more access to patients in new markets. Community hospitals can help urban facilities increase admissions, gain a higher case mix of specialized services, and market their services. For example, a patient who needs more specialized care than the local hospital can provide will likely seek out a "name brand" hospital or go where his physician recommends. Large urban hospitals want to ensure their facility is top-of-mind in these outlying regions, because competition for healthcare services in many urban markets is rising. What's more, as consumer-driven healthcare gains momentum, health systems that have established themselves as the preferred tertiary provider in smaller communities may have an advantage in the years ahead.

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