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Consolidation Comes with Benefits (and Costs)

By Philip Betbeze  
   October 16, 2013

Reaping the rewards of population health

Cleveland Clinic's relationship with CHS—which owns, operates, or leases more than 135 hospitals and reported 2012 net operating revenues of $13 billion—originated about a year ago when CHS leaders asked Cleveland Clinic to help CHS with its quality, says Cosgrove. Though Cosgrove doesn't describe the partnership this way, it could be considered a virtual merger in that both organizations are seeking to leverage each other's perceived competitive strengths—Cleveland Clinic on quality and CHS on operations.

Cleveland Clinic puts a priority on publicizing its treatment outcomes on its website, and has spun off a company, Explorys, that now has 40 million patient test histories, physicals, and lab results in an effort to offer reporting, analytics, clinical integration, at-risk population management, and pay-for-performance solutions for its clients.

"The more we talked, the more they realized there were things we could do for them, but we realized they could do a lot for us," Cosgrove says. "While we've concentrated on quality, they've really concentrated on efficiency. If you're looking at value for your healthcare dollar, those two things are what you have to focus on. So we each brought different strengths to the relationship. The relationship came about because both leadership teams believe effective population health management will increasingly be a differentiator for patients and the payers for healthcare services.

"Our ability to access big data will be a tremendous advantage for us," Cosgrove says, "and we think there are economies to be had without necessarily owning the other or merging."

Another step many organizations are already busily taking is the idea of expanding services outside the outpatient arena—even to the payer side in bigger systems—says Dennis Vonderfecht, president and CEO of the 13-hospital Mountain States Health Alliance, based in Johnson City, Tenn. Its health plan, CrestPoint Health, has 15,000 members, but significant expansion is on the horizon.

"You're seeing volume declines across the country, and part of it is due to the ACOs and focus on keeping people out of high-cost settings. We're seeing the same declines in our organization," he says. Vonderfecht expects to lose as much as 30% in inpatient volumes over the long term if recent trends hold true.

"If we lose 30%, that's a lot of our revenue, so we're working on backfilling that by moving to the top of the healthcare food chain to capture part of the savings through creative initiatives with other insurance companies," he says. "But we can capture all of it if we're the insurer. Also, to lessen the impact of volume declines, we're focusing on outpatient ambulatory and retail activity. For example, we now own seven pharmacies."

Burgeoning health systems won't be the only source of competition, however.

"You'll find the major disruptor will be in primary care," Cosgrove says, adding that drugstore chains like Walgreens, CVS, and even Walmart are emerging to fill gaps in primary care.

"They're getting more sophisticated and with the shortage of primary care physicians, they'll take up more primary care—we hope, linked with providers."

Size and success

Vonderfecht says no one has all the answers, but at every conference he attends, "the size you will need to be successful keeps growing. You can only take so much cost out, and larger systems have an advantage there."

He believes very large regional systems like his, which operates in four contiguous states, will be most successful.

For his part, SSM's Thompson couldn't agree more, and he worries about the same things leaders worry about with any combination—that the promise of better efficiencies and lower healthcare costs will never be realized. "There will be organizations executing on this and at the end of the day they will not have derived any benefit from it," he says.

He also questions how big his organization needs to be, and whether there is such a thing as being too big.

"We're on the same bigger-is-better bandwagon as everyone else, but can I derive the same or better significant economies of scale as a $15 billion [revenue] organization as I can as a $5 billion one? The jury's out that everyone can achieve the cost savings they're targeting."

And Thompson has advice for anyone else on this road:

"You have to fully understand what you're trying to achieve when you go into these deals, make a detailed integration plan, and work with an organization that understands there will be equal disruption to achieve the benefits we believe are there through the transaction. The worst outcome will be if you don't change following these deals."

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This article appears in the October issue of HealthLeaders magazine.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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