Many independent hospitals are joining with bigger systems in search of access to capital, scale, and survival. But that doesn't mean acquisition is right for everyone, says the CEO of Lodi (CA) Health.
Joseph Harrington has been a hospital CEO for 38 years, and he's been president and CEO of Lodi Memorial Hospital, a 214-bed community hospital in California's Central Valley, along with the new umbrella organization Lodi Health, for the last 20 years. He's witnessed a lot of change during the course of his career, but it seems that most of it has come during the past three years, as the federal, state, and local governments, not to mention payers and employers, have begun to push back hard on healthcare cost growth.
Harrington knows is his executive and clinical teams have to do a better job of managing down their costs so that the hospital can continue to survive in a low-cost environment. Hospitals themselves are the highest cost center in healthcare, so they're first on the chopping block. Because they're less diversified and don't have the economies of scale of the big systems, the nation's small, independent hospitals are less able to absorb some of the belt-tightening that's necessary.
As he moves toward the end of his career, Harrington estimates that Lodi Health needs to cut $600 in cost per adjusted bed day over a two-year period to be able to survive on Medicare reimbursement rates. Many formerly independent hospitals have given up the fight—and local control—by affiliating or being acquired by larger systems.
I spoke recently with Harrington about his strategic thinking and recent tactics. It might happen that Lodi Health is eventually acquired by a bigger player, but neither Harrington nor his board is shutting the door on independence just yet.
HealthLeaders Media: Lodi Health is reinventing itself from a patient care point of view. You have added cardiac rehab facilities, primary care clinics, you've invested heavily in follow-up care, and you've added a multitude of programs to adapt to a value-based reimbursement system. How have you chosen your investments?
Harrington: We have a series of clinics, about 14—mostly primary care—and we're trying to organize all of the physicians into a medical group. The group is formed, but we're working on the governance issues. About 4–5 physician leaders are taking the lead on determining compensation. One other initiative we're doing is a private ACO with Blue Shield. They're partnering with local IPAs and Dignity Health. We've been talking for about eight to nine months about doing a shared savings program for CalPERS [California Public Employee Retirement System] retirees. There are about 16,000 enrollees in the county, so this is kind of a narrow network shared savings model. What it means is we're getting our feet wet without a bunch of risk involved.
HealthLeaders: So it looks like you're doing all the right things, but with Medicare and Medi-Cal reimbursements trending downward, what's your strategy for replacing that expected lost revenue?
Harrington: We hope to have a number of very philanthropic donors who will give us millions of dollars! Seriously though, we look at ourselves in the mirror and know our limitations. We decided we were going to try the CMS bundled payment initiatives. We chose total joints [replacements]. We do 130–150 of those a year, and about half are for Medicare patients. It's an opportunity to learn and redesign care without a bunch of exposure, and through it, we're trying to get experience in how to handle a bundled payment.
We actually joined an advanced payment model ACO based out of Sacramento County as well. Eight of our primary care physicians put in applications, starting January 2014. It's the only one in California, but it appears they still have a lot to do get the work going. These kinds of projects are becoming the norm. About two years ago, we were starting to see reimbursements ratchet down, and at the same time we were trying to figure out what we need to do to downsize our operations and expenses in order to be at that Medicare reimbursement level or below to survive. We figured we had about $600 per adjusted bed day to cut down over a two-year period.
HealthLeaders: Do you feel you have the right pieces to thrive in a value-based environment? If not, what's missing?
Harrington: At that time [two years ago], we were looking at a lower census and asking ourselves what's causing this and how low will it go. We think that got answered last year. This year, our numbers are up substantially. ER volumes continue to be strong. We're still growing at 13%–17% in the ER. But a big question is why aren't these guys hooking up with a primary care physician instead of using the ED?
One of the reasons we believe we're getting busier is that a lot of the physicians tell their patients if they get sick, to go to the ED. What they should be telling [patients] is that they will deal with their issue. It's a convenience issue because it's a lot easier for them to just tell [patients] to go to the ED. And what's surprising about it is we have our own urgent care, too.
Those numbers are climbing as well. We've brought on more midlevels in the last three years than in the past 10 years prior, and we have a significant number of mature physicians who are now 70 or so and still working. That's good for us. We're competing with the Kaisers, and it's very difficult if you don't have shift work available for your physicians. The medical foundation model is what we're forming. We're trying to move all our docs into that which will create the foundation in 6–9 months.
We think that's important for integration. So to answer your question, I do think we have the pieces but I don't have a real high confidence level. I'm always thinking: do I have enough backup strategies in place? It's more of a feeling than knowing for sure, and it's not unique to us. Is what's happening evolutionary or revolutionary? We think evolutionary. We'll have a number of people in the exchange by '14, but in our county, 20% of the population is uninsured, and another percentage consists of illegals who still won't be covered, so we'll continue our free clinic. We're going to need more primary care physicians but we're competing with heavy hitters.
HealthLeaders: Independent hospitals are being gobbled up left and right. What path have you decided to follow at Lodi Health?
Harrington: We have had over the years a number of conversations about this. We're making sure we talk regularly with different consulting groups who can take an assessment of us and tell us the future. Every time we've done that—with different groups over three years—they've told us we don't have excellent numbers, but we're fine. Our [board members] aren't diehard independents, but they believe there are a lot of advantages to being independent. We have the ability to make a timely decision, for example.
But if the landscape changes, it's our job to make sure there's hospital services here, but it doesn't need to be independent. We have a discussion about the landscape about every other board meeting. We've had a bunch of consolidation around us. We've seen different affiliations. We're talking with Dignity about the ACO and we have an ongoing relationship with UC Davis. If we ever needed to get more serious, we could get to a decision pretty quickly.
HealthLeaders: Some say that the time to affiliate or be acquired is when you are at a position of financial and operational strength, as your negotiating position is better. Do you worry about becoming less attractive as time goes on?
Harrington: As long as we're making our money and have capital left over for tomorrow, we're good for two to three years. We've got a pretty good handle on the finances right now. That's why it's constantly on our calendar now. If we see certain ratios on our bond covenants, we project that out two years. Our board members are pretty sharp to look at these numbers. If they see a small tilt, they're quick to say 'What are you doing about it?' We feel like we have a pretty good sense on this, and we're ready to move if things start to deteriorate or if we do see a trend that way.
Fortunately the last few months have been better on those numbers, as we predicted they would be. Last year was the worst on that. We were very close to making a decision on independence, but the board members trust us. We predicted the numbers would get better. The good news is when you say something like that, and it comes true, the trust level doubles.
Philip Betbeze is the senior leadership editor at HealthLeaders.