John Chesley, Ropes & Gray health care partner, addresses developments for providers to consider as they join together and move towards value-based health care models.
Population health management is the goal of increasing the footprint of many provider organizations comprised primarily of hospitals. That consolidation also has other benefits – it may create the opportunity for economies of scale – that is spreading the natural overhead across a larger number of revenue generating facilities. It also creates the opportunity to diversify market risk – individual geographies bring with them their own peculiarities of patient needs, of demographics, and when a system has footprints in a number of different demographic geographies or groups, it can diversify that care risk. There is also the matter of capital access – size gets you to better credit ratings, which get you to lower borrowing costs in the public debt markets. Why is that significant? The capital costs of a hospital system are enormous. One of the most significant spends within a hospital system is on its information technology resources and capital market access based on size then becomes critically important.
As providers join together and become parts of larger organizations, there are several developments that need to be kept in mind. One is culture fit – is the resulting organization a blend of cultures, will there be a dominate culture going forward? Often we see a combination described as a merger of equals. In my experience, that notion of a merger of equals never works out from the standpoint of sheer numbers or governance, but it must and always succeeds only if all the parties agree that it means equal access to the resources of the system. In the dynamic of joining a new system, an individual provider or entity, a hospital or a hospital system, is merging with a larger health system is necessarily giving up autonomy. What are they giving that autonomy up in exchange for? It always has to be for fair access to the resources of the larger system, to the benefits of being a piece of a larger whole that can do more perhaps with the resources that already exist or they can generate new resources that would not otherwise have been available.
Value-based health care puts a premium on vertical integration. The reason for that is if the hospital system, in particular, is the recipient and the taker of financial risk for producing the desired outcome at the end of an episode of care, or as a result of a bundled payment, it needs to have the ability to pull all the levers along the care continuum chain to make sure that the cost that others are generating as part of that care process, are being controlled, are being managed, are being quantified at the outset or even just known, so that at the end of the day the hospital’s risk is managed by being able to say down stream, “this is the budget you have to deliver the care so that we can all manage this quantum of payment that we are receiving to bring this patient back to health.” A vertically intergraded structure enables that through management control – it creates that single actor opportunity. It isn’t the only way to do it however – shared clinical and economic risk can be accomplished in other ways, particularly through carefully crafted contractual arrangements and understandings among individuals separate players or actors in the care chain. The advantage of vertical integration or of clinical and economic integration in any form, is that it puts for antitrust law purposes, all of the providers in a place where they can jointly contract with payers to receive payment without being limited significantly by the antitrust laws that would otherwise prohibit independent actors from coming together and charging a joint price for the care provided.