A merger between two Michigan healthcare providers has been called off because of stark cultural differences between them, observers say. Those differences include the patient populations they each serve and the organizations' physician compensation models.

Detroit's Henry Ford Health System and Beaumont Health System announced this week that they would let expire a deadline for merger talks that would have created a $6.4 billion integrated system. In the end, observers say, it came down to a clash of cultures that could not be overcome by the advantages gained from a merger of equals.

Seven months after telling a room full of journalists that Beaumont was "the absolute ideal partner for us" Henry Ford CEO Nancy Schlichting sent a note to employees saying the deal was off. "This decision was made because it became apparent that two very different perspectives had emerged for the new organization between Henry Ford and Beaumont," Schlichting wrote.

At Beaumont, CEO and President Gene Michalski said in prepared remarks that "we have benefitted greatly from our merger discussions and have great respect for our colleagues at Henry Ford. However, we found through our discussions that we are not aligned on how to achieve our vision for a model health system due to differences in our structures and business models."

Beyond those public statements, neither side was talking, which left the field free for speculation.

Signs that the deal was faltering surfaced last week when physician leaders at Beaumont reportedly asked the system's board to reconsider the merger.  

Marianne Udow-Phillips, director of the University of Michigan's Center for Healthcare Research & Transformation, says she was not surprised that the talks fell apart.

"I was more surprised in the first place when they said they wanted to do it," Udow-Phillips says. "The cultures are so different between these two organizations. Mergers and acquisitions are hard to do generally and in this particular case when you layer on top of it two organizations that have fundamentally different backgrounds and structures, that makes it even harder. I was surprised it was on track for as long as it was."

For starters, Udow-Phillips notes, the two health centers served different patient populations and used different physician compensation models.

"Henry Ford Health System is a very integrated academic health center where the physicians are predominantly salaried. The main campus is in the inner city of Detroit. They serve a population that is predominantly Medicaid and uninsured," Udow-Phillips said.

"In contrast Beaumont Health System," she said, "while it has some staff physicians, the leadership is predominantly led by independent physicians and private practice physicians. Their traditional home is in the wealthy suburbs. Their Medicaid population is very small."

"The physician cultures are quite different. Henry Ford has been an owner of the Health Alliance plan and is very familiar with capitated systems and salaries and structures for physicians and Beaumont is a much more fee-for-service oriented environment.

Allan Baumgarten, an independent health policy analyst and author of the Michigan Health Market Review, acknowledged the vast operational and cultural differences between the two systems, but said he was still surprised that the merger talks flopped.

"I thought these were two organizations that had concluded that they needed to combine forces to be more competitive in what has become a more dynamic and competitive regional market and I thought they had enunciated goals of improving quality and achieving efficiencies and reductions in costs that they thought they could achieve together better than separately," he said.

"Having said that, merging two organizations of that size and with different cultures and structures is obviously very difficult and at a certain point there were enough sticking points that they said they were better off walking away from the table than going any further."

Udow-Phillips believes that the merger talks were initiated last year more as a response to the Patient Protection and Affordable Care Act and other cost-containment and market share pressures brought forward by healthcare reform. Baumgarten says Vanguard Health System Inc.'s $1.2 billion acquisition of Detroit Medical Center in 2010 "stirred things up and was a major driver of Henry Ford and Beaumont to look for a marriage partner literally."

"Since Vanguard acquired the Detroit Medical Center, they have been pumping nearly $1 billion in capital into improving the buildings and the practices and challenging Beaumont on its own turf," he says. "Vanguard has now completed a major clinical center about two miles from the main Beaumont hospital at Royal Oak. Vanguard clearly has a strategy of trying to pick up more patients with better insurance than the inner city patients they have been seeing mostly up to now. They've been doing that by building new facilities and trying to acquire certain specific practices and had some success with that."

Neither Beaumont nor Henry Ford gave any suggestion in their brief statements to the media that they would pursue mergers or other alliances with other providers.

"We haven't seen the first quarter numbers yet, but for the end of the year the Beaumont finances improved significantly so there wasn't the same kind of financial pressure on them as there was when they first started the discussions I am not sure their path is going to be toward a merger," Udow-Phillips says.

"Henry Ford has already in their history done some mergers with other organizations. I am not sure which ones now they would approach. Henry Ford because their patient base is much more heavily based with public programs, they would benefit financially by finding a partner that would balance that out a little bit but I don't know how realistic that is going to be at this stage."

Baumgarten says Beaumont has already rejected advances from Vanguard "and I don't think that is likely to change."

"There are other possibilities," he says. "The University of Michigan Health System at Ann Arbor is about 50 miles from Beaumont and that is a very prestigious academic medical center which has been trying to extend its reach into different parts of the state through some acquisitions but mostly through different kinds of partnerships."

Baumgarten says some sort of alliance between Beaumont and Oakwood Healthcare System might also garner consideration. "Oakwood serves the west side of the Metro area where Beaumont is on the northeast side. There are geographically compatible," he said.

"Or maybe we'll see a partner relationship where Mayo Clinic or Cleveland Clinic is sharing certain lines of expertise of medical management or other administrative expertise with if not Beaumont than one of the other systems in the area."

Baumgarten says Henry Ford's improving balance sheet means the system could keep merger plans on the back burner for a while.

"Henry Ford has remade itself in the last couple of years with some success. Their profitability is much improved over where it was five years ago. It is mostly because of two things: one was the opening of the new West Bloomfield Hospital, which is a prosperous suburb of Detroit; and second was they closed what had been a money-losing (Henry Ford Macomb Hospital-Warren). Their medical group is in good shape. They have their own Health Alliance plan, which about 18 months ago acquired a Medicaid HMO in Detroit, which is strengthening their position. Henry Ford is thinking they're in pretty good shape."

If there is a lesson to be learned from the failure of the merger, Udow-Phillips says that key players in both systems have to be on board. "It is more than just two leaders wanted to come together, and I know the boards wanted to come together. But you saw in the physicians at Beaumont last week came out publicly in opposition to the merger so for any hospital the cautionary tale is to make sure that your physicians are aligned."

"The other message I would take from this is Beaumont and Henry Ford are two very strong institutions with a lot of history and strength in their markets. What you see more in mergers with hospitals is a very weak hospital merging with a strong hospital."

Baumgarten says the breakdown "is just a reminder of how difficult it is to engineer a merger of this scope."

Doctors in the emergency department are the major decision makers in nearly half of all hospital admissions, giving them a significant role in controlling healthcare costs, research shows.

Jay A. Kaplan, MD, has been an emergency physician for more than 30 years and over the decades he has witnessed firsthand what he says is the evolving role of the emergency department in providing frontline healthcare.

"When I first started practicing we called it the emergency room," Kaplan says. "Then we got called the emergency department. We have morphed again. We are no longer an emergency department. We are an emergency care and acute diagnostic center."

Kaplan, a board member with the American College of Emergency Physicians, points to a Rand Corporation study commissioned by the Emergency Physician Action Fund which shows that emergency physicians are key decision makers for nearly half of all hospital admissions. Because of that, Kaplan says, emergency physicians are playing a critical role in controlling healthcare costs.

RAND found that hospital admissions from the ED increased 17% over seven years, accounting for nearly all the growth in hospital admissions between 2003 and 2009, offset by a 10% drop in admissions from primary care physicians and clinical referrals. Nearly all of the increase was from "non-elective" admissions from the ED—a rate 3.8 times the rate of population growth.

Hospital inpatient care is a key driver of healthcare costs, accounting for 31% of the nation's healthcare expenses. Because of that the role emergency physicians play in deciding who to admit to the hospital is critical to hospital cost savings, since the average cost of an inpatient stay ($9,200) is roughly 10 times the average cost of a comprehensive emergency visit ($922), RAND said.

"Use of hospital emergency departments is growing faster than the use of other parts of the American medical system," Art Kellermann, MD, the study's lead author and a researcher at RAND, said in prepared remarks. "While more can be done to reduce the number of unnecessary visits to emergency rooms, our research suggests emergency rooms can play a key role in limiting growth of preventable hospital admissions."

Kaplan says RAND shows that office-based physicians are directing some patients to the ED who they previously would have admitted themselves. The study also found that EDs perform complex diagnostic workups that cannot be done in primary care physicians' offices, and that EDs supplement primary care providers by handling overflow, after-hours cases and weekend call.

"Patients who come to the ED are coming either because they have been sent there by their private doctor, or they have no other healthcare provider to turn to," Kaplan says. "Even those who have primary care doctors, when they call them for an appointment, they say 'go to the ED.'"

Rather than a focus on keeping people out of the ED, Kaplan says the emphasis should be on providing EDs with the resources they need to successfully adapt to this new trend.

"That includes more widespread adoption of inter-connectability and interoperability of (healthcare information technology)," he says. "If the doctors have the patient in the ED from a skilled nursing facility, if I can access the patient's history and medications and allergies and test results that helps a lot. The more collaboration, the more we can create effective transitions of care."

"Care handoffs are crucial. Rather than seeing the ED as the more expensive place to receive care, they should be viewed as acute diagnostic centers that provide clinically and economically efficient ways to evaluate complex patients with worrisome symptoms."

Two weeks ago the American Hospital Association came out with its own report that showed that EDs are treating growing numbers of sicker Medicare patients who require more complex and expensive treatment regimens. AHA says data show that between 2006 and 2010, the severity of illness of Medicare patients in the emergency department increased, as did the rate of use, a trend that policymakers fear is leading to higher spending with inadequate reimbursements.

The AHA says the federal government's more stringent inpatient admissions guidelines and growing claims denials are also putting more pressure on hospitals to treat Medicare patients in the ED rather than admit them.

The RAND report found that increased admissions were highest among people ages 65 and older. 

"If you look at the increase in admissions, what you see is that it has more to do with the aging population," Kaplan says. "Patients are being sent to the ED with their acute illnesses and with their complex illnesses. Admissions to the ED are 50% of all hospital admissions and 70% of all non-elective admissions. One of the things that we do know is that it is the Medicare patients, the sicker patients, who are admitting. When I first started practicing, if you saw an 80-year-old, that was relatively rare. These days probably half the patients I see are 80 or 90 and with more complex illnesses too."

"It's a function of an aging population and it is a function of the workforce shortage, particularly among primary care physicians," Kaplan says.

"And the truth is it also relates to the fact that there are many primary care physicians and other physicians who will not take Medicaid and for that matter will not take Medicare. They only want patients with private insurance."

The second round of federal Health Care Innovation Awards specifically seeks clinical models that will quickly shrink Medicare costs and improve care for populations with special needs as well as population health.

Nearly $1 billion in grant money will be available to healthcare providers that can demonstrate a high likelihood of success in rapidly lowering costs and improving quality for chronic and special needs populations, the Centers for Medicare & Medicaid Services announced this week.

"Over the last three years, we have seen national healthcare cost growth slow significantly and we want to continue that trend by helping to improve the delivery of healthcare by testing new models of paying for quality care, CMS's newly confirmed administrator Marilyn Tavenner said in prepared remarks.

"These awards will help spur private and public sector innovation in this endeavor."

This second round of Health Care Innovation Awards differs from the first round. This time, CMS said it's looking for innovations in four areas:

1. Rapidly reducing costs for patients with Medicare and Medicaid in outpatient hospital and other settings;
2. Improving care for populations with specialized needs;
3. Testing improved financial and clinical models for specific types of providers, including specialists; and
4. Linking clinical care delivery to preventive and population health.

Colin Roskey, an attorney at Cozen O'Connor Public Strategies in the firm's Health Law Practice Group, says "results" are the focus of the second round of grants.

"Without characterizing the first round of grants, maybe one might call it more generalized and aspirational. The second round is more results-oriented in asking for models that rapidly reduced spending and improve care for populations with special needs," he says. "So already they aren't just saying population health. They are saying population health with an emphasis on patients with special needs."

"This gets more specific when you look at the models they are looking for," says Roskey, a former health policy advice and counsel to the U.S. Senate Finance Committee. "They want approaches that test specific types of providers to transform their clinical and financial models. CMS is moving in Round 2 towards a grant environment that is going to force participants to show scalable provable propositions that can work in an environment where specificity is the rule and generality is the exception."

Roskey says oncology services for special needs populations is expected to be a focus of the grants as well. "For instance, oncologists or the clinical oncology delivery system in the community, or the academic medical center, or elsewhere maybe we take care of patients with specialized needs," he says.

"Not only do they have some type of cancer, they have other co-morbid conditions. While the Innovation Center has taken on accountable care and post-acute care and the notion of bundling payments, they have not yet taken fully on some of the various manifestations of cancer care."

CMS is also expected to target providers who serve populations with significant health needs, Roskey says.

"These might be dual-eligible (Medicare/Medicaid) patients, patients who are chronically ill or reside in long-term care hospitals and/or patients who have other disabilities that prevent them from being fully functional in the work place that this innovation program could facilitate better community-base care services," he says.

"I see some psychology, I see some psychiatry, and I see a larger emphasis on poor people who are dual-eligible being able to access through their delivery system care that might facilitate improvements in their population health."

Last year CMS awarded 107 round one Health Care Innovation Awards out of nearly 3,000 applications to organizations that are currently testing innovative solutions to improve outcomes and reduce costs. Projects are located in urban and rural areas, all 50 states, the District of Columbia and Puerto Rico, CMS said.

Notable projects include:

The Courage Center in Minnesota, which provides a medical home for people with traumatic brain injury and those in wheel chairs. The patients have lower rates of depression and have reduced rates of hospitalization by 71% - from 10.8 days per year to only 3.1 days per year. 

Welvie, LLC in Ohio, which is teaming with Anthem Blue Cross Blue Shield in Ohio to enable Medicare beneficiaries to make better informed decisions about surgery and their treatment options. Since September 2012, nearly 3,500 patients have participated, with 48% considering surgery alternatives and 17% choosing less invasive options, resulting in an average savings of $7,000 for each surgery avoided. 

Ali Chisti intends to pursue a career as an internist and a population health specialist providing care in underserved and rural areas—not as a neurosurgeon as he had originally planned. He changed his mind when he came to understand the gap in resources between rural and urban areas.

Medical student Ali Chisti had planned a career as a neurosurgeon when the real world stepped in and offered a decidedly different career path.

A friend and coworker at a Bandon golf course along the rural southern coast of Oregon where Chisti caddied broke his wrist and had to declare bankruptcy because he couldn't pay the $12,000 in medical bills he'd incurred.

"That's when I saw that resources were different in rural versus urban areas," Chisti says.

In fact, there was a community health center, the Waterfall Clinic, serving the Bandon area, but its Web site wasn't working, their phone lines were often busy and they didn't have the staff or the technical support to fix the problem. As a result, Chisti's friend couldn't find out about reduced fee services they provided.

So he had to go with a more expensive option that left him with a huge bill relative to his income and few options beyond bankruptcy.

"It really is a group of good-hearted people that just didn't have the resources of the federally qualified health centers in Portland, where there is a staff of physicians," Chisti says.

"At Waterfall there was one physician who oversaw eight nurse practitioners and the physician comes in one day a week. They were trying to recruit more, but they were having problems getting people to come out there. I was thinking if I was a doctor trying to come out and work at this clinic, the first thing I would do is look for their website. Or if I was a patient I'd want to know if they have the resources so I would look them up on the website to see what they have. But those things weren't there."

Chisti saw where he could help and he volunteered to reboot the clinic's Web presence. "I used to build websites in college to pay for my MCATs, so I could do one thing really [easily] and build them a website, get them some web presence, put in some software that lets you know how long people are sitting on each page—the analytics. That is when I saw that their employment page was the top hit after I launched it, and still is. People sit there for a few minutes and they are reading it. They are getting a lot more people responding."

Chisti also helped to build a referral network, but it didn't quite develop as well as he wanted. "I saw a need to address access issues, programs, and interventions, but I realized I didn't have any formal training," he says. "Some of the initiatives I started failed. And that is when I realized that I am capable of performing these tasks but I couldn't. I wanted to make sure they were sustainable and done the right way."

So he took a year off from medical school at the Oregon Health & Science University to attend the Harvard School of Public Health, where he will earn a master's in public health this month before returning to OHSU for his fourth year of medical school. "The Harvard School of Public Health is good for health policy management, the track that helps me realize how to manage a program and how to study it to know whether or not it is good enough for a policy intervention to upscale it."

When he graduates from medical school next year, Chisti, 27, will pursue a career as an internist and a population health specialist providing care in underserved and rural areas like Bandon. Eventually he hopes to serve on the faculty of OHSU while maintaining an active practice.

Chisti's story is impressive and even inspiring. It is also plainly illustrates the sacrifices that young physicians are forced to make if they want to provide primary care in rural America.

For starters, Chisti is not wealthy. He had to work summers as a caddie and find other odd jobs to help pay for his education. He will graduate from medical school with more than $150,000 in student loan obligations. And he is planning to enter a medical field that will pay significantly less than he could otherwise earn.

Physician recruiter Merritt Hawkins says that the starting salary for a neurosurgeon in coastal Oregon is about $450,000 while an internist can expect to earn about $190,000 or "probably less if they are practicing at a community health center."

Chisti is a notable exception, but it is not realistic to expect too many young physicians already mired in debt to take up a career path that offers long, uneven hours and a huge pay cut.

"For me, I don't really count the hours when I am doing something that is very rewarding," Chisti says. "When people ask you for a favor and you are in a position to do that for them, whether it's helping a friend navigate a healthcare system, it's not something that I consider being on the clock for that. I actually know the answer to these questions so I can help. Or I can help somebody create a program that will help stop kids from taking drugs, if I can do that as a job it's a no brainer."

Chisti says the Rotary Club in Bandon asked him what would make a physician stay in a community. "You can make people feel like it's their community, which it is," he says. "Get them out there and involved and they will realize how special it is and how it is a gem to be there."

What about a family? What about meeting a spouse who'd be willing to settle down in rural America and put up with the longer hours without the frills and distractions of urban life? Chisti says "that's the hard part. Whoever chooses or agrees to be with me will know what is important to me, so that will self-select somebody, I think."