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For Small Health Systems, Big Decisions Can Mean Life or Death

 |  By Philip Betbeze  
   February 17, 2014

Seeking a strategic path for a healthcare organization amid historic levels of disruption can be exhilarating, but small systems and standalone hospitals are essentially betting their institutional lives on the changes they're making.

This article appears in the January/February 2014 issue of HealthLeaders magazine.

Mike Phelps is not shy about adapting to a rapidly changing healthcare business model under which healthcare organizations' success—or lack thereof—is less a function of their ability to attract referrals and patients and more a function of their ability to deliver better outcomes and, critically, better value.

Despite his willingness to change, he knows that as the chief operating officer for Ridgeview Medical Center and Ridgeview Clinics in Waconia, Minn.—a relatively small organization with an 85-staffed-bed hospital, several clinics, and about 1,700 employees—the strategic shifting required to adapt to a new measurement regime in healthcare is inherently more risky for him and for leaders of other small or standalone systems than for those with bigger war chests. By changing too fast or too much, are organizations like his essentially making life-or-death decisions?

They are, he says, but what's the alternative?

"Sticking to your knitting won't suffice in the new world," he says. "We can't stand still in a highly competitive market, so we need to carve a niche for a community health system."

Other community health systems are in the same pickle. Big systems are getting bigger, and unlike the lip service some of those behemoths previously gave to the promise of reduced overhead from their combinations, they're making a serious commitment to efficiency these days by fully integrating their hospitals into an operating company structure as opposed to the holding company structures of the recent past.

They are also increasingly expanding their footprint to dominate many markets that previously may not have had a dominant provider of healthcare services. For small systems or standalone hospitals to survive the clout of their competition, they need a niche. Phelps and others are using a variety of approaches to selectively carve out that niche.

"With a smaller war chest, you have to be pretty thorough in your due diligence," Phelps says.

The risk for hospitals in the near future, particularly smaller ones, is that they become marginalized. What may happen is a winner-take-all dynamic by which larger players gain market momentum due to their "network effect" and smaller hospitals begin to lose critical mass on the commercial side.

The answer could lie in some form of specialization, which culturally is difficult for hospitals, especially those that see themselves as providing comprehensive acute care and those that don't have businesses that extend outside the four walls of the inpatient facility. But there are strategies such hospitals and systems are using to turn business dynamics back to their favor.

Growth bets

Phelps, for one, says the niche he's hoping to carve out isn't based on limiting services, but on dominating his local market.

"We have everything larger systems have, just smaller scale," he says.

But with many organizations behaving through acquisition and partnership as though scale is the chief variable in determining future success among healthcare providers, Phelps is betting against the herd.

Scale isn't the only way to succeed, he argues. Home market growth can also yield big dividends, he contends, citing his system's debut in 2011 of a freestanding emergency department 12 miles from Ridgeview's main campus. The center sits in a highly competitive market where larger and more well-known health systems represent the competition.

Phelps says the new center is a true freestanding ED, which meets all the requirements of CMS rules such as hospital-based participation and provider-based rules, so it is paid at ED rates. In fact, it is a level IV trauma center, which is similar to small hospitals in the market, he says of the venture, which is paired with an urgent care center, which of course is reimbursed at a much lower rate.

Ridgeview budgeted for approximately 12,500 combined ED and UC visits in the first 11 months of operation but instead attracted more than 27,000 patient visits over that time. In 2012, its second year, it recorded more than 32,000 visits and will surpass that number in 2013.

"We evaluated the market share and we figured that even with the most conservative return-on-investment projections surrounding this proposal, it was still positive, so our risk was that it would be minimally successful," he says. "That would've been good enough for us, but it's gone gangbusters."

As a silo it is profitable, Phelps notes, but the intangible benefit to downstream service line growth has been its biggest benefit to the system.

"Many of these patients need additional care and follow-up, and some don't even have a primary care provider, which is another issue," Phelps says. "Referrals can be made directly to the services available on the campus, which has improved our service line market share in nearby geographies and, hopefully, we've found a better attachment for those patients who've gone without a PCP relationship."

Another area of projected growth is through Ridgeview's ACO strategy, something many, if not most, smaller organizations are still evaluating. Many small systems are trying to understand whether they are better off with their own such entity or as a partner with a bigger organization. Ridgeview plans to take its own ACO path.

"We've started an ACO through a wholly owned subsidiary of our health system," Phelps explains. "Worst case, we get into limited agreements [with payers]. The upside would be total cost of care contracts and conversations around changing the way we deliver care."

The ACO features relationships that Phelps characterizes as independent, but just short of ownership and joint ventures.

Phelps and Ridgeview have the inherent advantage of being low-cost providers, due at least in part to Ridgeview's historically less lucrative arrangements with payers, which he attributes to the fact that the health system does not dominate its greater market, while it has areas of real strength in more localized markets. But somewhat ironically, in an era in which demonstrating value should be of key importance, he now sees that low-cost culture that had been forced on his health system as a latter-day area of competitive strength.

Another growth prospect could be Ridgeview's recent acquisition of a critical access hospital that's 15 miles from the world-renowned Mayo Clinic "because we currently own that market share," Phelps says.

"Can we leverage the critical access market? We're actually looking at putting together the final pieces of a partnership with a postacute organization, so we think so."

The partnership will provide some elder housing and other transitional care for patients being discharged from that hospital.

"Again, that's back to the point about risk," says Phelps. "We've looked at that as an investment diversification strategy, run by someone who knows how to run these. We'll look at other opportunities for leveraging relationships, too."

Strategic partnerships, low-cost care

With the world-renowned Mayo Clinic on its doorstep, Ridgeview has to be innovative and wrap its arms around its local market, Phelps says.

He and his leadership team are considering other opportunities that he sees as higher risk, but are where he feels his health system may have an advantage thanks to its relatively small size and low cost.

"Unfortunately, we can hang our hat on being low cost. We haven't had the luxury of what the large players get in commercial contracting. There are models now that will hopefully let us leverage that through exchanges or even private exchanges such as the one we have with Medica [a health plan operator based in Minnesota]," he says. "We're the low-cost option. With our community-based ACO model, in order to have a larger economic footprint, we finally can leverage that position."

Other areas Phelps labels as high-risk include deals with physicians and decisions on whether to own or partner with existing physician practices.

"The higher-risk areas typically surround things like owning physician groups, which we haven't been shy to do in particular areas, but we have in others," he says.

Outside of primary care, he feels Ridgeview has done better in partnership with best-of-breed independent physician practices. Ridgeview has joint venture partnerships, which have done well by employing such groups as gastroenterology practice and an oncology group. Cardiology was another area where he says a system like Ridgeview would undergo a lot of unnecessary risk to start its own.

"What if you have bad outcomes?" he asks, for example. "All of a sudden no one's coming to your multimillion-dollar cath lab. So we partnered with one of the best groups in the market, and we're doing that through a partnership instead of organically."

Thanks to these growth and efficiency moves, Phelps see a bright and, critically, independent future.

"We're in a desirable mix of urban and rural markets that are part of the referral sources for the big ones," he says. "Everyone wants a piece of you, and it puts you in a good negotiating position. Our independence is the thing that got us here."

Reprint HLR0214-7

This article appears in the January/February issue of HealthLeaders magazine.


Philip Betbeze is the senior leadership editor at HealthLeaders.

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