A Tale of 2 Health Systems and Their Collaborative CEOs

Rejecting and restructuring a complex governance model helps member organizations realign to pursue their divergent strategies and face new market realities in Philadelphia.

Stephen Klasko, MD, only took the job as president and CEO with Philadelphia's Thomas Jefferson University and Hospitals under the promise from its board that he had their support in remaking its complex corporate structure. In doing so, Jefferson Health System essentially demolished the financial and operating allegiances that tied the system together.

Some would see that as going against the grain in a healthcare services business environment in which bigger is often seen as better—size as a hedge for leverage in healthcare contracting—a familiar strategy that smacks of a fee-for-service mentality, says Klasko.

But the move makes more sense than is immediately obvious, says the former CEO of both USF Health in Tampa and dean at the University of South Florida's Morsani College of Medicine.

In fact, the board already had the move in mind when it hired Klasko in June 2013 as president of Thomas Jefferson University and CEO of both Thomas Jefferson University Hospital and Jefferson University Physicians. Just in those titles alone, he saw a need for consolidation.

"We had [consolidated] the old fashioned way, and a good part of why I was chosen out of 50 people who were interested in this job from more traditional academic background, is that the board recognized we needed to be a very different entity going forward," he says.

The old structure had the person in Klasko's job reporting to the Thomas Jefferson University board, the board of TJUH System (which doesn't provide patient care services) and Jefferson Health System, which in essence was the holding company for Thomas Jefferson Hospitals and the four Main Line Health hospitals.

"The first person I talked to was Jack (Lynch, president and CEO, Main Line Health)," says Klasko. We both recognized that we have two great organizations that are very different and have different goals and aspirations, yet were part of a system that made a lot of sense when it was built but may not make sense in the same way now given where healthcare is going."

The old structure was an anachronism for many reasons, both leaders agree.

An Amicable Divorce
So did that mean the two provider systems joined together through an entity, Jefferson Health System, should tie themselves closer together, keep things the same, or cut themselves apart?

At one time, the system encompassed Thomas Jefferson University Hospital, Main Line Health's four hospitals, Magee Rehabilitation Hospital and what is now Aria Health—at that time a three-hospital system anchored by Frankford Hospital, and what is now Einstein Healthcare Network, anchored by Einstein Medical Center.
Over time, both Einstein and Aria left the Jefferson Health System, leaving Main Line, TJUH and Magee.

Together, Klasko and Lynch quickly came to the determination that the two organizations were vastly different, with different goals and aspirations, and would likely do much better apart. The divorce was amicable, say both leaders, and started before Klasko was hired, as Lynch was on the search committee when the combined organization went looking for a new CEO.

"In his interview process, Steve made it clear that he believed urban academic medical centers could not rely just on clinical revenue to support the research and teaching mission. There were other income streams needed. That was music to my ears because [Main Line] doesn't have enough clinical income to support that."

Klasko says the reorganization clearly needed to happen because the two organizations were so different, the cultures would have never successfully blended in an environment where the organizations' goals were, and should be, so dramatically different.

"Bottom line: while we're both delivering healthcare, Main Line has minor involvement in research and education, while Steve's mission is very different," Lynch adds.

"We both have significant capital needs and different geographic regions we pull our patients from, so some investments make sense for one and not the other. Yet we were latched together in terms of debt."

Governance
Klasko says the kindred spirits agreed that while the current in healthcare is dominated by those who feel driven headlong toward mergers and developing necessary scale of services, what's least talked about and considered is culture and what different entities' relationships should be going forward.

"What it really gets down to is governance," says Klasko. "For all the right reasons, our board consisted of Main Line people and Jefferson people. There weren't really any independent directors. So that made it strategically unaligned. They acted as they should, representing their interests within the holding company, and that worked for a long time. But there was no way, unless you did a full merger, that you were going to be able to push through that board to satisfy what we needed as an academic urban medical center."

For instance, says Klasko, for Jefferson University and Hospitals, the entity he now leads, the main competitive threat consists of the academic medical centers near the close border with New Jersey.

"That's the least of Jack's worries," Klasko says. "So how do I go to that combined board and ask them to invest $100 million in New Jersey?"

Through that lens, the dissolution of the combined holding company was the only right decision.

The first and perhaps most important change is that the two entities are no longer tied together in joint capital decisions.

"We took back our bonding and Main Line took back theirs," says Klasko.

That simple step allowed Thomas Jefferson University and Hospitals to look at strategies that might not have been of interest to Main Line and vice versa, and now both boards can make decisions unconstrained by other, complicating governance.

The second casualty of the dissolution of the holding company was in joint managed care contracting.

"That wasn't much of a loss because first-dollar coverage we're still doing together through the ACO," says Klasko [more on that later]. "Insurers are smart enough to know if you don't have a population health framework, they'll still look at you and negotiate with you as two separate entities if you're not fully merged."

"It does mean Main Line now has to negotiate separately with not quite as large a market share and the same with us. But in different ways, we're so important to the area, we'll be fine even in those contracts," Klasko says.

Rumors
During the process of dissolution of the holding company, what kept rumors in check was constant communication between the two leaders and constant updates to their boards, both leaders say.

"Jack and I meet every two weeks about rumors," says Klasko. "Everyone's looking for the bad part of this, the soap opera. But even when we were JHS we were in a coopetition model. The same is true now. But Jack knows he won't wake up and read in the paper about something with a negative impact to his system that the full board has decided. And that didn't always exist."

For his part, Klasko envisions Thomas Jefferson University and Hospitals as the entrepreneurial academic center in Philadelphia. It's a crowded market— there are four other academic medical centers in Philadelphia. That's one reason TJUH merged with the university following the dissolution of TJUH System.

"We needed to be nimble, creative, and not have a physician group being part of one entity and not another," Klasko explains. "In fact, I would argue that I did consolidate. This allowed me to consolidate with the university. The question is when we do other strategic alignments, who would they be with and what would they look like?"

Going from three boards to one, he argues, makes it much easier to make such decisions.

"Any consolidation we would do would be something that adds to our academic, geographic, or physician alignment," he says. "I don't think scale for scale's sake is necessarily the answer. And a lot of people make mistakes based on scale with mergers."

The ACO
Though they're not tied together directly in a financial sense any longer, that doesn't mean there aren't plenty of areas for collaboration between Thomas Jefferson University and Hospitals and Main Line, not the least of which is Delaware Valley ACO, the accountable care organization owned by Jefferson, Main Line, Holy Redeemer and Magee, which has 35,000 lives and an expanding group of about 300 physicians.

Klasko and Lynch are co-board chairs. "Now we spend more time together than before," Lynch jokes. "Another thing is that we redrafted an academic affiliation between the two organizations that is stronger than we had before. We maintained or strengthened our clinical collaborations. Through this restructuring, for the things that matter to patients and doctors, we still have an open-book opportunity to do things together."

"How we've done this represents our best relationship and what will be a model for how we can be stronger today than we were before," says Klasko. "We're literally not constrained around anything artificial anymore."

Besides being willing to be interviewed together, Klasko and Lynch still find plenty of opportunities to get together and work in other ways, despite the "amicable divorce." For Lynch, one recent meeting is forever seared in his very synapses.

"How many people are able to get their partner to dump ice over their head for charity?"