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For the exclusive use of J. Macrina, 2018. 9-708-424 REV: JANUARY 27, 2010 MICHAEL E. PORTER SACHIN H. JAIN ThedaCare: System Strategy In January 2007, Dr. John Toussaint, CEO of ThedaCare—a health care system with four hospitals based in Appleton, Wisconsin—reflected on his annual board meeting and physician retreat. Although Toussaint had won support for ThedaCare’s strategy based on improving quality of care, there was resistance to the ThedaCare Improvement System (TIS) and other initiatives to improve cost and quality transparency. While Toussaint believed that health plans would demand increasing value over time, had ThedaCare moved too far, too fast? ThedaCare’s board was strongly supportive, but the relationship between ThedaCare and its physicians was challenging. Toussaint had to navigate an increasingly competitive health care marketplace while bringing along all of the key constituencies. ThedaCare and the Fox Valley ThedaCare’s mission was to “improve the health of [its] communities.” With 2006 revenues of $480 million and over 5,300 employees, ThedaCare was the largest employer in Northeast Wisconsin (see Exhibit 1 for financials). ThedaCare accounted for more than 17,000 inpatient admissions and nearly 200,000 outpatient visits in 2006 (see Exhibit 2). Its board consisted of 15 members; 40% were physicians employed by or affiliated with ThedaCare, and 60% were local business leaders. ThedaCare had won several awards and honors including Solucient’s “100 Top Hospitals”™ in America, National Research Corporation’s “Consumers Choice Hospitals” designation for the Appleton/Oshkosh market, and the American Hospital Association’s “100 Most Wired” designation. ThedaCare’s primary service area was the Fox Valley region of Northeast Wisconsin consisting of 500,000 residents, evenly divided between rural and urban settings (see Exhibit 3). Located 100 miles north of Milwaukee and 100 miles northeast of Madison, the cities of Appleton and Neenah were among the major retail, commercial, and artistic centers for the region. In 2007, the ethnic and racial composition of the Fox Valley was relatively homogenous, with residents who were mostly of Caucasian origin. In recent years there had been an influx of refugees from Laos and Cambodia as well as increasing numbers of Hispanics and African Americans. For decades, the major industry in the region had been paper products and related fields. Other industries included wood products, iron work, foundries, and light manufacturing. With changing global manufacturing patterns, some of the traditional industries had been shrinking and the ________________________________________________________________________________________________________________ Professor Michael E. Porter and Senior Researcher Sachin H. Jain prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2007, 2009, 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy economy was gradually shifting from manufacturing toward services. In the rural parts of the region, the principal business was dairy farming, which was evolving from small privately-owned farms to larger corporate entities. ThedaCare’s Delivery System Hospitals The ThedaCare system included four hospitals: Theda Clark Medical Center, Appleton Medical Center, New London Family Medical Center, and Riverside Medical Center (see Exhibits 4 and 5). Appleton Medical Center was a teaching affiliate for the University of Wisconsin’s family practice residency program, but no other parts of ThedaCare maintained an academic affiliation. The Theda Clark system traced its history to the early 1900s when a young Neenah woman, Theda Clark Peters, a daughter of the founder of local paper giant Kimberly-Clark Corporation, died at home after childbirth. Theda Clark Medical Center was founded in her name. Appleton Medical Center opened its doors in 1958 after a 12-year fundraising effort by Appleton citizens, businesses, and charitable organizations that sought a nonsectarian, nonprofit hospital. With 156 and 166 staffed beds, respectively, Theda Clark and Appleton Medical Center were two of the largest acute care facilities in the area. The hospitals featured emergency rooms, general inpatient wards, general surgery, obstetrics, urology, and orthopedics, but each hospital had several distinctive service lines. Appleton Medical Center was the sole location for cardiac surgery and radiation oncology services. Theda Clark was the sole location for neurology and neurosurgery, trauma, bariatrics, and inpatient rehabilitation. Theda Clark was also the sole location for inpatient pediatric services, specialty pediatrics care, and neonatology care, which were operated by Children’s Hospital of Wisconsin through a separately owned and managed hospital within the hospital, “Children’s Hospital of Wisconsin-Fox Valley.” The New London Family Medical Center was a 25-bed critical access1 community hospital providing general acute care to New London and nearby rural communities in Outagamie and Waupaca counties. The hospital, which had been in operation since 1928 and affiliated with ThedaCare since 2000, offered general medical care including inpatient/outpatient surgery, orthopedic services, a 24-hour emergency department, rehabilitation services, a birth center, and transitional care. In 2006, the New London center closed its intensive care unit (ICU) and directed these patients to other ThedaCare sites. Riverside Medical Center, founded in 1954, was another critical access hospital providing a fully staffed, 24-hour emergency department and inpatient care along with ambulatory care services, cardiac care and cardiac rehab services, diagnostic imaging services, and services for obstetrics, occupational health, orthopedics, surgery, urgent care, and laboratory services. Riverside had joined the ThedaCare system in 2006. In 2007, Riverside was beginning to implement quality-improvement initiatives aimed at waste and error reduction. ThedaCare maintained a partnership with Milwaukee-based Froedtert Hospital, to which it directed patients for bone marrow transplantation. ThedaCare had pursued a more expansive oncology relationship with Froedtert, but progress had been stalled by oncologists affiliated with ThedaCare. In 2005, ThedaCare and Froedtert had implemented a joint system for electronic ICU monitoring, which allowed both organizations to provide 24-hour remote video-based intensivist coverage for their respective ICUs. 1 “Critical access” is a designation used by rural hospitals that allows cost-based reimbursement instead of diagnosis-related group (DRG)-based reimbursement. 2 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy 708-424 ThedaCare had also pursued a relationship with Green Bay-based Bellin Health System for cardiac surgery, in which ThedaCare had above-average mortality rates, while Bellin’s heart surgeons had achieved some of the best cardiac surgery outcomes in the state. Bellin’s surgeons had begun operating at ThedaCare in 2001, but ceased providing services in 2003 when local cardiologists stopped referring patients to them because of personality differences. ThedaCare subsequently recruited new affiliated surgeons who improved ThedaCare’s performance on cardiac surgery mortality. ThedaCare Physicians ThedaCare Physicians was a wholly owned primary care practice spread across 20 sites (see Exhibit 6 for organizational charts) that employed over 180 providers. ThedaCare had acquired primary care physician practices throughout the Fox Valley beginning in the early 1990s. Most physicians in the group were board-certified in internal medicine, family practice, or pediatrics. Other physicians were internists who worked as hospital medicine specialists (hospitalists) at Theda Clark and Appleton Medical Center. Most specialists were outside physicians. ThedaCare had traditionally employed a few specialists in fields and regions where it was difficult to find affiliate physicians, and had hired its first specialists in orthopedic surgery in 2005. Each ThedaCare Physicians site included nurse practitioners and physician assistants. Primary care physicians were compensated based on their own individual revenues (70%), practice site revenues (25%), and performance on quality metrics (5%). Full-time equivalent (FTE) compensation ranged from $136,427 to $344,351 (median = $200,034). ThedaCare hospitalists, nurse practitioners, and physician assistants were paid on a salary basis, although ThedaCare was considering ways to add a productivity component to their compensation. In addition to ThedaCare Physicians, 400 independent primary care doctors and specialists had received admitting privileges at ThedaCare hospitals. Some of these physicians had privileges at rival hospitals as well. Admitting privileges involved no compensation but allowed an independent physician to claim affiliation with the hospital, admit patients, and use facilities to perform surgeries and procedures. Physician fees and facilities charges were billed separately. Fifty percent of the affiliated physicians leased office space on hospital campuses from ThedaCare hospitals; the other half had offices in buildings in close proximity. Affiliated independent specialists typically received referrals from ThedaCare Physicians practices as well as from other independent physicians. Independent specialists often operated as solo practitioners or as members of groups of physicians with the same specialty that shared office staff, billing departments, and clinical policies. Many operated on ThedaCare’s information technology platform that was installed and supported by ThedaCare for an up-front hardware payment and a monthly fee per physician. Despite the absence of a formal relationship, ThedaCare collaborated closely with its affiliated specialist physicians in setting practices and protocols. In 2007, ThedaCare was considering ways to strengthen these relationships. Ingenuity First Ingenuity First was a stand-alone unit that served the on-site primary care needs of employers including occupational health services; on-site doctors, nurses, and counselors; and employee assistance and health and wellness programs. Ingenuity First sought to help selfinsured employers reduce health care expenditures. Physicians employed by Ingenuity First were not part of ThedaCare Physicians. In 2007, Ingenuity First was beginning to adopt ThedaCare’s electronic medical record system. ThedaCare Behavioral Health ThedaCare owned and operated seven facilities in its service area that provided a full range of behavioral and mental health services including inpatient and outpatient psychiatry, psychology, behavioral medicine, group therapy, alcohol and drug abuse counseling, and individual and family counseling. Some sites were co-located with ThedaCare 3 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Physicians, which was the largest source of referrals to ThedaCare Behavioral Health. ThedaCare Behavioral Health also operated the inpatient psychiatry unit at Theda Clark. ThedaCare Behavioral Health operated on the ThedaCare electronic medical record system. ThedaCare Laboratories ThedaCare Laboratories, a full-service clinical laboratory with sites at both Appleton Medical Center and Theda Clark, was formed in 1988 when the laboratories of the two hospitals were consolidated. ThedaCare Laboratories provided services to a number of customers which included ThedaCare hospitals and physicians’ offices as well as other hospitals, employers, and agencies throughout the state. Senior Care ThedaCare first entered the senior care business in the 1980s, as part of a national movement of hospitals acquiring senior care facilities. In 2007, ThedaCare operated a full range of senior living facilities but did not brand these with ThedaCare name. Residents chose from various kinds of residential apartment living with optional support services in homelike atmospheres. Choices included independent residential living (Heritage), assisted living (Heritage Woods), shortterm rehabilitation services, or full-service, long-term skilled nursing care (Peabody Manner). Residents could choose a higher level of care if their needs changed and almost always used ThedaCare hospitals and physicians when they became ill. ThedaCare at Home ThedaCare operated a full-service home care agency and home medical equipment company that served more than 19,000 individuals annually in the Fox Valley and surrounding counties. Its goal was to help people of all ages regain their independence after illness or injury and maintain their quality of life. Some of the services it provided included skilled nursing, hospice, pediatric services, infusion therapy, home medical equipment, mastectomy support, and respiratory services. In 2006, ThedaCare at Home began to record each patient visit on the patient’s electronic medical record. Gold Cross Ambulance Service In 1991, ThedaCare and the Affinity Health System jointly purchased the Gold Cross Ambulance Service to preserve service availability for its patients. Gold Cross was the major ambulance service serving Appleton Medical Center, Theda Clark Medical Center, and St. Elizabeth’s Hospital. The Oshkosh Fire Department offered a competing ambulance service. Information Technology Platform ThedaCare had first begun investing in electronic medical records in 1997, with the full-scale rollout of EPIC, a commercially available electronic medical record system, at ThedaCare Physicians in 1999. The Web-based software initially featured outpatient medical records and a data repository for lab reports, radiology reports, and imaging. The system was also made available to affiliated specialists. In 2002, additional functionality was incorporated into the electronic medical record including features for inpatient medical record keeping, patient registration, scheduling, and management of accounts receivable. The system included a patient-facing interface called “MyThedaCare,” which allowed patients to read their charts online, request refills of medications, e-mail their providers, learn about their specific conditions, and schedule appointments. By 2007, 297 of 400 affiliated physicians were using the ThedaCare electronic medical record and 30,000 primary care patients had “MyThedaCare” accounts. Affiliated physicians not using ThedaCare’s electronic medical record cited the burden of using multiple systems because of the other providers with whom they were affiliated. 4 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy 708-424 In 2003, ThedaCare began implementing EPIC’s computerized physician order entry system. It allowed physicians to order medications, diagnostic tests, laboratory studies, and other services electronically instead of through paper-based systems that sometimes resulted in errors. The system supported improved inpatient record-keeping and quality assurance. Computerized order entry faced resistance from many physicians who were unfamiliar with computers and objected to the additional work required to enter data, due in part to cumbersome interfaces. By 2007, only an estimated 5% of inpatient orders were being entered using the system. In 2007, ThedaCare was planning an upgrade to the EPIC system that would allow physicians to order and monitor home health care services (e.g., a visiting nurse) through the electronic medical record. Efforts were also underway to incorporate guidelines into the system from the Institute for Clinical Systems Improvement to assist clinical decision-making. A new release of the order entry system with a simpler interface was expected to streamline physician ordering. ThedaCare was also hiring ancillary data-entry staff to save physician time. Competitors In 2005, there were 124 community hospitals in Wisconsin, which accounted for $11 billion in combined inpatient and outpatient revenues. Of these, 69 hospitals had fewer than 100 beds; 35 had 100 to 200 beds; and 20 had more than 200 beds. In total, Wisconsin had 12,387 community hospital beds, 608,252 inpatient admissions, 2.6 million inpatient days, and an average length of stay of 4.3 days. ThedaCare had two primary local competitors, Affinity Health and Aurora Health System (see Exhibits 4 and 7). Exhibit 9 compares service lines offered by ThedaCare and these competitors by American Hospital Association service code. Affinity, a Catholic regional health care network, was a partnership of Ministry Health Care, based in Milwaukee, and Wheaton Franciscan Healthcare, based in Wheaton, Illinois. Affinity Health System was ThedaCare’s primary competitor and the Fox Valley’s third-largest employer. The Affinity network included Mercy Medical Center and Mercy Health Foundation in Oshkosh; Franciscan Care & Rehabilitation Center, St. Elizabeth Hospital, and the St. Elizabeth Hospital Community Foundation in Appleton; Affinity Medical Group, a regional network of 23 family medicine and specialty clinics in 13 communities; Calumet Medical Center in Chilton; Affinity Occupational Health; and Affinity Visiting Nurses. St. Elizabeth’s Hospital was located in Appleton, four miles from Appleton Medical Center. Mercy Medical Center was located in Oshkosh, 17 miles from Theda Clark Hospital.2 Like Appleton Medical Center, St. Elizabeth’s was a teaching affiliate of the University of Wisconsin family medicine residency program. Affinity owned and operated the Network Health Plan that had achieved “excellent” accreditation status (the highest possible level) from the National Committee for Quality Assurance (NCQA). It was ranked 41st in terms of customer satisfaction and clinical performance among the 246 rated health plans in the nation.3 Aurora, established in 1984, was a not-for-profit health system that operated throughout Wisconsin. Aurora employed 25,000 people at sites in more than 90 communities throughout eastern Wisconsin, including hospitals, more than 100 clinics, and over 120 community pharmacies. More 2 http://www.affinityhealth.org. 3 According to the U.S. News & World Report/NCQA Best Health Plans in America listing, 2006. 5 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy than 3,400 physicians were affiliated with Aurora, including about 680 who made up the Auroraowned practice, the Aurora Medical Group. Aurora offered inpatient care at 12 acute care hospitals and one psychiatric hospital. Its hospital services included cardiac and cancer treatment programs. Aurora Medical Center of Oshkosh was located 15 miles from Theda Clark Hospital. Aurora, in partnership with the University of Wisconsin Medical School, operated community clinics in the Milwaukee area, most of them in underserved neighborhoods. Aurora’s community outreach efforts also included an extensive parish nursing program that served more than 50 congregations. Aurora offered home care and hospice services through the Aurora Visiting Nurse Association of Wisconsin, family and social services through Aurora Family Service of Milwaukee, and behavioral/mental health care through Aurora Behavioral Health Services.4 Payors In 2006, ThedaCare’s largest payor was Medicare, with a 38.3% share. United HealthCare’s health maintenance organization (HMO), formerly owned in part by ThedaCare, was the next largest payor with 23% market share. Blue Cross Blue Shield (WellPoint) had a 7% share. Medicaid accounted for 6%. United Healthcare’s preferred provider organization (PPO) had a 1% share. Self-paying customers accounted for 4%. Other commercial insurers accounted for 21%. ThedaCare’s payor mix had remained relatively constant over time. In recent years, ThedaCare had approached the contracting units of a number of commercial insurers and self-insured payors about new payment and referral models that would reward ThedaCare’s value-improvement efforts. Some payors had expressed interest in new contracting approaches, but concrete agreements had not yet resulted. History of ThedaCare ThedaCare was created in 1987, the result of a merger between two rival hospitals, Theda Clark Memorial Hospital and Appleton Medical Center, located nine miles from each other. The merger was prompted by the hospital boards, consisting mostly of CEOs from local corporations, who felt that the two hospitals were engaged in costly efforts to build competing services and capacity in a relatively small region. Each hospital had evolved many redundant service lines such as cardiac surgery and neurosurgery that required high capital investment. Appleton Medical Center had previously engaged in merger negotiations with nearby St. Elizabeth’s Hospital, but had failed to consummate an agreement. Physicians were not consulted in the merger decision, and most of them first learned about it in the local newspaper. Despite the fact that they were now working at hospitals with common ownership, the physicians at the different hospitals continued to view each other as competitors. After the merger, the hospitals remained essentially autonomous operations. Before the merger, half of the referrals to Theda Clark came from a large multispecialty group practice, the Nicolet Clinic; the remaining half came from independent physicians. Appleton Medical Center’s referrals were almost entirely from independent physicians. After the announcement of the merger, there was a significant reconfiguration of medical groups and referral patterns. 4 http://www.aurorahealthcare.org. 6 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy 708-424 The Nicolet Group and Medical Arts Clinic (another large multispecialty group practice) merged to become the LaSalle Clinic. LaSalle Clinic was closely aligned with St. Elizabeth’s. While Theda Clark continued to receive referrals from physicians associated with the LaSalle Clinic, independent physicians became increasingly important as referral sources. In 1990, ThedaCare’s board recruited Jim Raney, previously CEO of Northern Michigan Hospitals, to the same position at ThedaCare. Raney sought to bring the management and physician groups into closer alignment; in particular, he hoped to more closely ally with LaSalle Clinic. LaSalle was viewed as the market leader in providing quality care according to market research data, but planned to open ambulatory surgical centers that would compete with ThedaCare. Because of LaSalle’s plan, Raney and the board opted to develop stronger relationships with independent physicians. ThedaCare had partnered with independent physicians in creating a health plan. In 1985, a number of independent primary care doctors and specialists had banded together to create Touchpoint Health Plan in which the physicians, Appleton Medical Center, and a small Green Bay, Wisconsin, insurance company were co-investors. The goal of creating the plan was to drive a predictable volume of patients to ThedaCare and its physicians and for all parties to share in the profitability of the health plan. During the first three years of Raney’s leadership, the internal competition between Theda Clark and Appleton Medical Center began to ebb, though the hospitals remained largely autonomous units with a full range of services. In 1993, the governor of Wisconsin and the Clinton administration were championing the notion of “accountable health plans” (integrated health plan/delivery systems) that aligned payors and providers. Wisconsin was to be organized into four regions in which integrated health plan/delivery systems would compete for the business of purchasing alliances composed of employer groups. During this period, Appleton Papers, a major local employer, and the Business Healthcare Alliance, a group of seven major local employers, decided to form an alliance to contract for the care of a combined 28,000 employees. St. Elizabeth’s and Mercy Medical Center, two key ThedaCare competitors, entered into a joint operating agreement with LaSalle Clinic, the leading physician group in terms of market share. LaSalle hoped that the alliance would allow them to compete effectively for the Appleton Papers and Business Healthcare Alliance contract. With the failure of the Clinton administration’s health reform measures in 1993, Wisconsin dismantled its own accountable health plan program. The alliance between St. Elizabeth’s, Mercy, and LaSalle persisted as a loosely connected group under the banner Network Health System. Meanwhile, ThedaCare acquired physician practices to create ThedaCare Physicians and improve the volume of referrals to its facilities. ThedaCare and Touchpoint Health Plan were able to secure the business of the Business Health Care Alliance and Appleton Papers. Raney, together with ThedaCare’s then Chief Medical Officer (CMO) Toussaint, also focused on improving ThedaCare’s standing in the community as a provider of quality care. Raney was an early devotee of the “patient-focused” care movement based on the idea that health care systems should focus increasingly on the experience of the patient as he/she moves through the health care system. Market research demonstrated that LaSalle Clinic was seen as the quality leader in the market. Raney saw the quality of the patient experience as a way to move ThedaCare from a follower in the market, behind LaSalle, St. Elizabeth’s, and Mercy, to a leader. Raney also pursued the mission of “improving the health of the community.” He embraced the HMO model, with its focus on prevention and disease management. HMO membership size was considered the key metric for organizational success in the mid-1990s. In 1997, Touchpoint applied to the NCQA for certification. Health plans were increasingly seeking certification because large health 7 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy care purchasers began to use certification to choose between competing health plans. The physician ownership of Touchpoint created a vested interest in its success, and Raney used NCQA certification as a rallying point for getting physicians to engage in efforts to improve health care quality. ThedaCare was able to improve along a number of standardized measures including breast cancer screening rates, diabetic eye exam rates, and operating room cycle time for cardiac surgery. By early 1998, however, HMOs were the subject of considerable backlash because of their tendency to introduce gatekeepers who restricted services and limited consumer choice. PPOs became favored. Touchpoint Health Plan’s HMO enrollment remained stable, but Touchpoint patients represented only 13% of ThedaCare’s patient base. The independent providers who formed the referral base for ThedaCare were feeling squeezed by an increasingly consolidated health plan environment that kept reimbursement rates stagnant. In 1997, the LaSalle Clinic had posted an annual $5 million operating loss that it attributed to payor consolidation and declining reimbursements as well as numerous physician defections. St. Elizabeth’s and Mercy, now merged under the name Affinity Health System, were also struggling financially. A new competitor, the Aurora Health System, was making plans to build a new hospital in the Fox Valley region. As a result of its progress on quality, ThedaCare had become the market share leader and was financially solvent. A New Strategy In 2000, Dr. Toussaint became CEO. Toussaint, a board-certified internist, had been employed by ThedaCare since 1985, starting as a practicing physician but gradually assuming a series of management roles. Toussaint embraced Raney’s goal that ThedaCare not just aspire to be the market leader in terms of share, but to be the best provider in terms of the quality of care provided to patients. Toussaint had a national reputation in the growing health care quality movement. In 1997, he became a participant in an Institute for Healthcare Improvement (IHI) effort to redesign office practices to be more patient-centered with shorter waiting times. Toussaint summarized the prevailing state of affairs: “Patients couldn’t get in to be seen. They were complaining and the doctors were complaining because their patients were angry.”5 Under Toussaint, ThedaCare implemented the Idealized Design of Clinical Office Practices (IDCOP) model to dramatically improve customer service and practice-level profitability in primary care. The model, which centered on the use of variable staffing and keeping a fixed number of appointments available for same-day patient visits, was rolled out to select practices. In the sites with IDCOP, patient and staff satisfaction levels rose to all-time highs and net revenues grew. While all ThedaCare Physicians offices were given presentations on IDCOP, only the few pilot sites opted to implement the system because of fears that the system might lead to declining revenues. In 2002, ThedaCare began to introduce the concept of “lean thinking,” pioneered by Toyota. Toussaint remarked: “I realized I didn’t want ThedaCare to just keep being good. I want us to be great. We looked at a bunch of organizations throughout the country, not just in health care. We saw that those organizations with a continuous quality-improvement methodology were the ones that were becoming great.” 5 http://www.ihi.org/IHI/Topics/OfficePractices/Access/ImprovementStories/ThedaCareFeatureStory.htm. 8 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy 708-424 Drawing on consultants, ThedaCare developed the Thedacare Inpatient System (TIS) based on three main pillars: 1) improved staff morale, 2) improved quality (reduction of defects/elimination of waiting), and 3) improved productivity. Toussaint saw the TIS and its focus on reducing mistakes and wasted effort as critical to the organization’s competitiveness in an increasingly challenging payor environment. TIS rested on a series of principles drawn from the Toyota Production System: value (what customers are willing to pay); value stream (the steps that deliver value); flow (organizing the value stream to be continuous); pull (triggering flow from customer needs); and perfection (continuous improvement culture). These principles were used to implement seven-week rapid-cycle improvement events (see Exhibit 8) that aimed at first, identifying waste and second, eliminating waste. The centerpiece of each cycle was a five-day lean event in which front-line employees engaged in an assessment of the current approaches, a collaborative effort to redesign processes, and rapid iteration of new processes. Following each event, process changes were assessed to quantify savings. Between 2003 and 2007, ThedaCare held several “value stream mapping” processes and lean events on accounts receivable, patient registration, and phone triage. The results included a reduction in accounts/receivable from 56 to 44 days, equating to a $12 million cash reduction; a simplification of the patient registration process from 39 to six questions; and a reduction of phone triage abandonment from 11% to 3%. Staff participation in rapid improvement events was associated with higher job satisfaction. Rapid improvement events had led to the redeployment of 100 FTEs within the organization. Since 2004 Toussaint had tried unsuccessfully to engage cardiologists in efforts to improve ThedaCare’s care of patients who presented to the emergency room with chest pain. A key indicator of quality for heart attack care was the speed with which patients were assessed and taken from the emergency room to the cardiac catheterization laboratory, also known as “door-to-balloon time.” Toussaint aimed to have ThedaCare’s times match or improve on national standards. A “physician champion” was found in 2006, and ThedaCare was able to quickly achieve best-in-state results, reducing door-to-balloon time from 130 minutes to under 80 minutes. While Toussaint and his leadership team advocated lean methodologies, there was limited support among physicians. Physicians were often not involved in the decisions to convene or participate in the lean events, and involvement was often seen as a distraction from clinical practice. Physicians who were involved in lean events were typically not the “rank-and-file” doctors but a select few physicians with whom ThedaCare leadership always worked. Larry Sobal, CEO of the Appleton Heart Institute, the private cardiology and cardiac surgery practice at Appleton Medical Center, reflected on physician reactions to the ThedaCare Improvement System: “Physicians feel like every time we try to engage ThedaCare leadership in a conversation, they always steer all conversations into lean. There’s a standing joke: ‘It’s raining today. Let’s do a lean event to solve the problem.’” Many physicians felt more like observers than active participants in the TIS, and felt burdened by the value stream mapping process and the constant flux in approaches. Some saw TIS as solely benefiting ThedaCare and with little benefit for physicians. Matt Furlan, chief operating officer (COO) of Theda Clark, commented: “They aren’t getting enough back personally. It doesn’t improve their life. No one is saying, “that is a great investment of two days.” Are there opportunities that really impact physicians? Sure. It’s the electronic medical record, the flow of work when they make rounds, communication with ThedaCare Physicians, and office processes.” 9 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Focusing on Delivery Touchpoint ranked as the No. 1 health plan in the country in outpatient disease management in 2001 and 2002, according to NCQA measures. The health plan’s joint ownership between independent specialist physicians and ThedaCare created a community of interest. Dr. Dean Gruner, ThedaCare’s CMO, reflected on the relationship: “The health plan engaged in considerable discussion with the physicians. We argued all the time, but the arguments formed a basis for productive conversations about quality.” Touchpoint had grown in the 1990s based on ThedaCare’s strong relationships with local businesses. However, managing a health plan and managing a provider organization were different tasks. While the health plan provided patient volume to ThedaCare hospitals and physicians—for some practices, 60% of patients were Touchpoint Health Plan members—some local employers using Touchpoint had been sold to larger corporations. Their health care purchasing decisions were no longer made locally, but instead shifted to headquarter units that favored national contracts. Touchpoint was sold to Minneapolis-based United HealthCare for $44 million in 2003. John Toussaint reflected: “It was the right time to sell. We were the No. 1 health plan in the country, and the business landscape was changing. We had to decide a question of purpose. Were we a health care delivery organization or an insurance company? We saw a transition in health care from a wholesale purchase by large payors to purchase by individual customers.” Becoming a Health System Theda Clark Medical Center and the Appleton Medical Center had evolved remarkably similar service offerings which had been largely unchanged since the merger. The presence of similar service lines limited volume. For example, inpatient pediatric services at both Theda Clark and Appleton Medical Center operated at low volumes. Kathryn Correia, senior vice president of hospital services, recalled a meeting in which a physician reported doing “one spinal tap on a child per year to keep his skills sharp.” The unit at Appleton Medical Center was operating at an average of less than one admitted inpatient per day and there were few pediatric subspecialists on staff at either hospital. The hospitals faced combined yearly losses of $300,000 year in pediatric services. By 2003, Toussaint had articulated a philosophy of providing only services where ThedaCare could be certain of their quality: “We’re only going to function where we can provide our patients with the best care. It just doesn’t make sense to do otherwise.” ThedaCare began to rationalize service offerings across sites, in part to better focus limited capital for investment. In 2003, cardiac surgical services were designated to Appleton Medical Center, while trauma, neurology, and neurological surgery were concentrated at Theda Clark. Some physicians appreciated the improved facilities, streamlined processes, and the expected effects on clinical quality of concentrating patient volume in specific facilities. Other physicians remained skeptical. Physicians worried about the effect of closing one hospital’s programs on that hospital’s reputation. Some physicians would be required to change the location of their practices, and might opt to affiliate with competitor hospitals that were closer. Travel distance for some patients would increase, as Appleton Medical Center and ThedaCare were located a 20-minute drive from each other. Finally, there was concern that closing down some services such as pediatrics might affect patient volume for others. Would other members of the family stop coming to the hospital? Jeff Hunter, ThedaCare’s vice president for strategy, expressed the consensus of management: “Patients travel 1,000 miles for better cancer care. If we could provide better service and demonstrably better 10 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy 708-424 outcomes, patients would travel 9 miles.” In subsequent years, revenues for cardiac surgery, neurology, and neurological surgery had been stable or had actually increased. At Appleton Medical Center, management decided in 2005 to close pediatric inpatient services. Based on resistance from community pediatricians and family practitioners, however, the service continued with the understanding that it would close if volumes did not improve. Because of declining volume, inpatient pediatrics at Appleton Medical Center was closed in 2006. At Theda Clark, ThedaCare entered into an agreement with Children’s Hospital of Wisconsin, a tertiary care pediatrics hospital in Milwaukee. Children’s was granted a long-term lease from ThedaCare to manage inpatient pediatrics using its own staff. Children’s would introduce a specialized children’s ward with Children’s own care processes and, for the first time, comprehensive pediatric specialist care (i.e., pediatric gastroenterology and cardiology). The service was named Children’s Hospital of Wisconsin-Fox Valley. ThedaCare board members, many of whom were business leaders, strongly supported the service line decisions. But among community pediatricians and family practice doctors, the reaction was mixed. Some physicians were relieved. Pediatricians could cede care of acutely ill patients to pediatric hospital specialists. Many family practice physicians, however, believed that they should have the right to take care of patients in the hospital regardless of volumes. In 2007, ThedaCare estimated that the licensing of pediatric services to Children’s Hospital had been slightly revenue negative, with losses partially offset by Children’s Hospital’s use of its shared services. ThedaCare was considering working with Children’s to create a pediatric intensive care unit for the region at Theda Clark. Orthopedics Plus In March 2005, a number of independent orthopedic practices that performed surgery at Appleton Medical Center decided to create their own ambulatory surgical center to capture the revenues paid to the surgery center in addition to their surgeon’s fees. ThedaCare faced the potential loss of $12 million in annual revenues. The trend toward using ambulatory surgery centers was increasing because of lower total costs for payors and because of profit-sharing by physicians. ThedaCare management proposed several potential joint venture arrangements to the orthopedists that would enable them to share ownership and profits and improve the care delivery model. However, the orthopedics group wanted to capture more of the profit opportunity in the ambulatory facility and maintain their current care delivery methods. Unable to agree with the existing orthopedists, ThedaCare decided to hire new specialists as employees of ThedaCare Physicians with guaranteed salaries and create its own specialty center on the Appleton Medical Center campus with a new practice model, “Orthopedics Plus (+).” Dr. Toussaint commented: “We cannot allow all ambulatory surgery to go to ambulatory care centers owned by doctors. Half of our profitability is driven by outpatient surgery and ancillaries. We have to find ways to work with surgeons, not lose the business.” Orthopedics Plus was a center that would co-locate all orthopedic-related services, staff, and physicians at a single location including facilities for physical therapy, some radiology/diagnostics, and physician offices (Exhibit 10). Staff specialists, employed by ThedaCare, included orthopedic surgeons, physiatrists, rheumatologists, physical therapists, and family practice/sports medicine doctors. 11 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Orthopedics Plus represented a departure from standard orthopedics care where a patient might have to wait several days from the time of injury to be seen in an orthopedic office and where the patient was left to coordinate care on their own. Providers from the various needed specialties and fields were only loosely affiliated and rarely co-located. Orthopedics Plus was designed to unify processes that might take place across a number of locations and provider groups. When patients contacted the Center, they were served by a triage specialist who arranged all the necessary appointments. Staffing levels and scheduling methodology allowed most patients to be evaluated within 24 hours. In the initial visit, the patient typically first saw a board-certified sport medicine family practitioner. Only patients judged to need surgery were referred to an orthopedic surgeon. Physicians and skilled staff from the different disciplines, including sports medicine, orthopedics, rheumatology and physical therapy, communicated directly about care needs and responded to issues in real time. Orthopedic surgeons who typically scheduled one surgery for every 25 patient appointments were able to schedule one surgery for every 10 appointments. If evaluation by a physical therapist was necessary, the physical therapist would be immediately consulted. The facilities allowed patients—whose mobility was often limited—to stay in a single examination room during their visit and have providers come to them. ThedaCare invited numerous existing provider organizations and orthopedic surgeons to use the center to serve their patients. The Orthopedic Surgery Center opened in July 2006 to enthusiastic reviews from patients, staff, and referring physicians. By early 2007, 85% of orthopedic referrals by ThedaCare Physicians were directed to Orthopedics Plus instead of to the previously affiliated orthopedics group, even though ThedaCare management imposed no formal or informal requirement. The changing referral pattern reflected mostly the positive patient reviews of the center. For some conditions, the lead time to treatment was reduced from 14 weeks to 31 hours. Further, Orthopedics Plus staff had some of the highest job satisfaction rates system-wide. ThedaCare continued to engage other orthopedics providers in the community in the hope that they might begin to see patients at Orthopedics Plus. Such providers typically operated their own ambulatory surgery centers, but continued to perform non-ambulatory surgeries requiring inpatient admissions at ThedaCare hospitals. Larry Sobal, CEO of Appleton Cardiology Associates, the private practice cardiology group, noted that the decision to create Orthopedics Plus changed physician perceptions of ThedaCare. “ThedaCare has shown a willingness to respond when provoked. We have a long-term lease on our cardiac care facility. Our best position is to have a strong relationship with ThedaCare and see them as a partner.” Quality and Cost Transparency Even as ThedaCare was making improvements in quality and costs, consumers, referring physicians, and health plans had difficulty evaluating quality and efficiency and in choosing health care services. There was no basis on which providers in the region could be compared objectively. ThedaCare saw an increasing trend toward transparency in quality and cost that would ultimately drive providers to improve, but transparency was coming slowly. Toussaint convened eight hospital CEOs around the state in 2002 with a proposal to establish the Wisconsin Collaborative for Healthcare Quality (WCHQ) to collect and disseminate information on health care quality metrics. All eight CEOs agreed. Toussaint stated bluntly, “If ThedaCare can get its dirty laundry on the cover of the paper, we can improve.” 12 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy 708-424 In 2003, the WCHQ published its first report describing data on healthcare quality by institution level, physician group level, comparing each along a variety of metrics. The metrics, largely drawn from the Health Plan Employer Data Information Set (HEDIS)—a nationally standardized set of measures that evaluates management of common diseases—allowed for comparison on a variety of process-oriented measures associated with access, patient satisfaction, critical care, diabetes care, and health information technology, heart care, pneumonia management, surgery, and women’s health. By 2005, individuals could log onto the WCHQ website, enter the region of the state in which they lived and the care processes in which they were interested, and compare quality metrics (see the sample screen in the Appendix). Utilization reviews showed that payors and providers were the primary users of the web site. By 2005, Toussaint had also led the creation of another organization, the Wisconsin Health Information Organization (WHIO), of which he was chairman (see Appendix); each of nine initial members, including the state’s major payors, contributed $150,000 to create the administration and data apparatus to pool claims and cost data. Some providers had initially expressed anxiety about payor use of the data. By early 2007, however, WHIO had contracted with Ingenix, a health information management company, to analyze administrative claims data to produce sophisticated quality reports that could look at whole episodes of care across multiple provider settings. While the WCHQ and WHIO efforts were progressing, their effect on ThedaCare remained modest. While there were a few cases of changed behavior, such as a self-insured West Bend, Wisconsin, corporation that financially rewarded employees who traveled 60 minutes to ThedaCare to receive lower-cost computer tomography (CT) and magnetic resonance imaging (MRI) scans, the primary response of payors thus far was to wait and see. Toussaint commented: “I can sleep at night because we’re doing more for patients, but the market shares have not yet been affected.” In ThedaCare’s specialist community, reaction to its leadership role in WCHQ and WHIO were mixed. Some specialists complained that Toussaint did not spend enough time tending to local issues. Many were apprehensive about the public reporting of quality and cost measures and worried that patients might lack the sophistication to understand measures and make appropriate health care decisions. Larry Sobal (CEO of Appleton Cardiology Associates) commented: “The feeling among specialists is, ‘We admire John Toussaint for his leadership, but we’re not sure why he is doing this. We work in a hospital. We know that there are a lot of problems, but I am not sure that I would be out advertising our measures to the world.’” Redesigning Processes of Care In 2006, ThedaCare Physicians was testing a new outpatient model in its Kimberly, Wisconsin, outpatient site. For a patient with a known illness, the patient’s necessary laboratory tests and studies would be ordered immediately upon arriving on-site so that results could be used to inform care in a single office visit. It was expected that this model would reduce the number of visits, improve patient follow-up, and improve clinical outcomes. For a diabetic patient, then, a hemoglobin A1C test would be done immediately instead of requiring a subsequent office visit or phone call with the patient which delayed modifications in the patient’s care regimen. The initial IDCOP project had reduced waiting times and improved patient satisfaction at a number of ThedaCare Physician practices, but had yet to be adopted at all sites. Some physicians were concerned that the model of holding space in the schedule for same-day appointments might result in loss of revenues in a system where 30% of their compensation was linked to personal productivity. The new model also raised questions about the potential reduction of total patient visits in favor of higher-quality but lengthier visits that might not be adequately reimbursed by 13 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy payors. ThedaCare was considering how it might revise the compensation structure for physicians to address their concerns. Early conversations with payors about modifying payments to reflect the changing care structure were met with enthusiasm, but had resulted so far in few specific proposals. In 2007, ThedaCare was undertaking a redesign of its non-ICU inpatient care using a grant from the Robert Wood Johnson Foundation. Instead of previous incremental improvement approaches, the new model involved a collaborative care unit, involving a multimillion-dollar renovation of an existing 14-patient ward at Appleton Medical Center. Typical inpatient diagnoses in this unit included pneumonia, congestive heart failure exacerbations, chronic obstructive pulmonary disease, and heart attacks. Instead of meeting with patients separately, doctors (ThedaCare hospitalists), nurses, and pharmacists met simultaneously to assess each patient and develop a treatment plan. Patients were given explicit counseling about what to expect during their admission and were encouraged to participate more fully in their care. Once a patient was admitted, all subsequent visits with providers occurred with a team; nurses, physicians, and pharmacists made rounds together each day rather than separately. This approach required modified nursing schedules in which nurses worked for 12-hour shifts, three days in a row, in order to provide greater continuity of care. Additional pharmacists were hired to manage and monitor medication safety. Milliman Guidelines, a set of standardized care protocols, were built into the electronic medical record system to assist physician compliance with best practices. To launch the new unit, ThedaCare took 75 staff members off-line to train them in new processes and new roles and responsibilities. In early trials, patients reported much higher satisfaction levels than patients in standard wards. Preliminary results also suggested that the new approach resulted in shorter stays for many diagnoses and much lower costs. Participating physicians were enthusiastic about the new approach, but it changed the flow of a physician’s day and involved new activities and roles. As with the introduction of computerized physician order entry, there were concerns about physician buy-in. Issues in 2007 In early 2007, the TIS and the care redesigns efforts were producing improved clinical results and savings across the enterprise. Improving clinical and administrative processes had improved clinical quality and produced cost savings. However, many ThedaCare physicians and independent specialists remained uncomfortable with the changes being introduced. Toussaint and his management team had turned ThedaCare into a care delivery innovation laboratory, but the challenge of diffusing innovations throughout the organization remained. Toussaint was seeking ways to better engage physicians in the process. Early data from the WCHQ suggested that ThedaCare was providing high-quality care at costs substantially lower than many of its competitors. Major commercial payors and self-insured organizations had taken note, but this had not yet resulted in improving reimbursement or the steering of more patients to ThedaCare facilities. Competitors like Aurora with a presence throughout Wisconsin were using their clout to bargain for better reimbursement rates. Toussaint had to find ways to capitalize on delivering better value for patients in a payor environment that was slow to change. 14 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy 708-424 Appendix Wisconsin Collaborative for Healthcare Quality (WCHQ) The WCHQ was “a voluntary consortium of organizations learning and working together to improve the quality and cost-effectiveness of healthcare for the people of Wisconsin by developing and publicly reporting measures of healthcare performance.” The WCHQ, a collaboration of major hospitals and physician groups, sought to drive transparency and accountability in health care by making available to the public cost and quality data on various medical conditions at provider organizations throughout Wisconsin. The organization had grown steadily since it was founded in 2003. The group drew on the Institute of Medicine’s definition of quality that incorporates safety, effectiveness, patient-centeredness, timeliness, efficiency, and equity. Data was available on over 45 measures through the collaborative’s website, http://www.wchq.org, and included the following clinical areas: access, critical care, diabetes care, health information technology, heart care, patient satisfaction, pneumonia, surgery, and women’s health. WCHQ drew a range of data sources that included the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), Consumer Assessment of Health Plans (CAHPS), the Leapfrog Group, Medicare Provider Analysis and Review (MEDPAR), and the Wisconsin Bureau of Healthcare Information. In addition to publishing the website, the organization convened meetings of provider and payor groups to promote health care quality improvement. The following is a sample report from WCHQ on heart attack charges and quality of care from various hospitals: Figure A Comparison of Quality and Hospital Charges: Heart Attack LEGEND X-axis: Severity adjusted charge refers to the hospital-reported charges associated with heart attack care Y-axis: Acute myocardial infarction (AMI) composite score refers to a quality score assigned to hospital’s heart attack care Letters represent specific hospitals Source: WCHQ. 15 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Wisconsin Health Information Organization (WHIO) The WHIO was a partnership of health care payor and provider organizations (including health care providers, employers, and government) that aimed to ultimately compare all providers in Wisconsin on the basis of cost and quality using claims data. Launched in late 2005, the partnership initially consisted of Blue Cross and Blue Shield of Wisconsin, UnitedHealthcare of Wisconsin, Humana, and WPS Health Insurance. In 2007, WHIO sought to spur “value-based purchasing” that examined “entire episodes of care,” not just hospital charges. Each stakeholder contributed claims, cost, and quality data to a centralized data repository that was designed to support comparisons across providers. Because the payors were pooling data, there was the potential to provide a much more complete picture of physician and hospital quality and cost than if the payors analyzed their data alone. Funding was contributed by private-sector members of the consortium. WHIO would capture data from multiple points of access to the health care system including the physician office, outpatient services, pharmacy, lab, and hospital. This data would reflect insurance claims and payors from across the state. WHIO organized the data and analyzed it for trends in cost and quality. An important function of the WHIO was to perform risk adjustment, so as to not unfairly penalize physicians who took care of sicker patients. In 2007, WHIO was still working to organize its data analysis methodology. 16 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy Exhibit 1 708-424 Financials CONSOLIDATED BALANCE SHEET (IN 000S) December 31 2006 2005 ASSETS Cash Equivalents and Short-Term Investments Accounts Receivable (net) Other Current Assets Assets Whose Use Is Limited Property, Plant, and Equipment (net) Other Assets $185,659 $68,645 $4,576 $82,144 $279,274 $27,832 $165,036 $56,049 $4,439 $98,011 $234,009 $24,807 Total Assets $658,130 $582,351 LIABILITIES Long-Term Debt $94,831 $178,123 $115,477 $175,396 Total Liabilities $272,954 $290,873 Equity $375,176 $291,478 Total Liabilities and Net Assets $648,130 $582,351 2006 2005 $759,040 $(293,161) $465,879 $682,010 $(254,699) $417,311 CONSOLIDATED STATEMENT OF REVENUES AND EXPENSES (IN 000S) Revenue Gross Patient Revenues Deductions from Revenues Net Patient Revenues Other Operating Revenues $13,551 $12,483 Total Operating Revenues $479,430 $429,794 Expenses Compensation Benefits Supplies Purchased Services Bad Debt Interest Depreciation and Amortization $198,702 $55,597 $74,811 $80,317 $13,157 $9,306 $31,610 $186,421 $50,350 $76,558 $52,628 $12,363 $6,653 $29,624 Total Expenses $463,500 $414,597 Income from Operations $15,930 $15,197 Non-Operating Revenue (Expenses)a $14,815 $2,277 Excess of Revenues Over Expenses $30,475 $17,474 Source: ThedaCare. a“Non-operating revenue” refers to revenues from non-wholly owned enterprises, i.e., ThedaCare’s interest in non-wholly owned clinical centers, income from investments, and income from the Gold Cross Ambulance Services. 17 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 Exhibit 2 ThedaCare: System Strategy ThedaCare Systemwide Hospital Utilization Statistics, 2006 Admissions 17,375 Patient Days 67,320 Average Daily Census 184.44 Average Length of Stay (days) Emergency Visits Outpatient Visits (without ER) 3.87 55,596 195,341 Deliveries 2,511 Surgeries 46,285 Inpatient 10,278 Outpatient 36,007 Laboratory Procedures 1,453,751 Source: ThedaCare. 18 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy Exhibit 3 708-424 ThedaCare Coverage Map TC TC TC TC Lake Michigan Source: Note: Casewriter. = Fox Valley region. 19 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Exhibit 4 Profiles of ThedaCare and Competitor Hospitals Staffed Beds Admissions Average Census (Occupied Beds) Appleton Medical Center 156 7,979 86 100,148 1,094 $133,869,000 $54,708,000 Theda Clark 166 7,788 83 67,327 1,195 103,765,000 46,231,000 New London 25 923 9 42,094 123 17,356,000 7,677,000 Riverside Health Center 25 1,732 14 51,732 205 2,544,000 11,410,000 St. Elizabeth’s 189 7,699 92 132,957 1,333 103,716,000 43,321,000 Mercy Medical Center 172 6,566 77 92,101 628 97,576,000 38,708,000 71 3,221 31 57,360 646 58,589,000 20,635,000 Outpatient Visits Births Total Expenses Payroll Expenses ThedaCare Affinity Aurora Aurora Medical Center of Oshkosh Source: Compiled by casewriter from AHA (American Hospital Association) Guide to U.S. Hospitals, 2006. 20 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy Exhibit 5 708-424 Components of the ThedaCare System THEDACARE is a comprehensive, community-owned health care system focused on caring, customer satisfaction, and value. Our mission is to improve the health of our communities. Appleton Medical Center 156-bed acute care medical center Theda Clark Medical Center 166-bed acute care medical center ThedaCare Behavioral Health Comprehensive provider of inpatient and outpatient mental health/substance abuse services ThedaCare Physicians Employing over 180 providers Source: ThedaCare At Home Home health, hospice, DME, respiratory therapy, infusion, and pharmacy services New London Family Medical Center 25-bed acute care medical center Riverside Medical Center 25-bed Critical Access Hospital The Heritage/ Peabody Manor A continuing care campus for older adults Ingenuity First Occupational health division that works with employers to reduce targeted health care expenses and improve employee health Gold Cross Ambulance Service Jointly owned with Affinity Health System ThedaCare. 21 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Exhibit 6 ThedaCare Organizational Charts Relationship PAT HAWLEY Sr. VP Finance & Materials Management BOARD OF TRUSTEES Matrix Direct JOHN TOUSSAINT, M.D. KEITH LIVINGSTON Sr. VP Information Technology President & CEO BILL MANN Sr. VP Employer Health Solutions DEAN GRUNER, M.D. CMO & Sr. VP Physician Services KATHRYN CORREIA Sr. VP Hospital Services ROSE CROW Sr. VP Home Care & Senior Services GREG DEVINE Executive VP Business Development & Behavioral Health JEFF HUNTER Sr. VP Planning & Marketing MIKE SPEER Sr. VP Human Resources & Quality Improvement THEDACARE PHYSICIANS ADMINISTRATIVE ORGANIZATION* Dean Gruner, MD CMO & Sr. VP Physician Services Brian Burmeister COO Physician Services Sharon Hanks Director Physician Services Greg Long, MD Medical Director Physician Services Jeff Mitchell Director TCP TIS & Growth ThedaCare On Call ThedaCare Physicians West/Black Creek/North Family Medicine ThedaCare Orthopedics Plus ThedaCare Physicians Waupaca/Iola Family Medicine ThedaCare Physicians Shawano/Clintonville/ Tigerton ThedaCare Physicians Appleton Pediatrics ThedaCare Physicians Oshkosh Source: ThedaCare Physicians Neenah Pediatrics Robert Dent, MD Associate Medical Directors ThedaCare Physicians Kimberly, Menasha Family Medicine ThedaCare Physicians Internal Med-Neenah Scott Schuldes, NP Associate Medical Directors ThedaCare Physicians Family Medicine-Neenah East Family Medicine-Neenah West ThedaCare Physicians Internal Medicine-Appleton ThedaCare Physicians New London/Manawa Weyauwega ThedaCare. 22 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy Exhibit 7 708-424 Top Five Diagnoses at ThedaCare and Competitor Hospitals Number of Cases per Year Percent of Total 1. Major Joint and Limb Reattachment Procedures of Lower Extremity (209) 2. Heart Failure and Shock (127) 3. Simple Pneumonia and Pleurisy Age > 17 w/ CC (089) 4. Percutaneous Cardiovascular Procedure w/Drug Eluting Stent (w/o AMI) (527) 5. Other Permanent Cardiac Pacemaker Implant (116) 299 203 177 138 6.8 4.6 4.0 3.1 115 2.6 Theda Clark Hospital 1. Major Joint and Limb Reattachment Procedures of Lower Extremity (209) 2. Intracranial Hemorrhage and Stroke w/Infarction (14) 3. Simple Pneumonia and Pleurisy Age > 17 w/ CC (089) 4. Heart Failure and Shock (127) 5. Rehabiliation (462) 155 125 83 66 50 8.6 6.9 4.6 3.6 2.8 New London 1. Simple Pneumonia and Pleurisy Age > 17 w/ CC (089) 2. Heart Failure and Shock (127) 3. No other DRG with > 30 cases 45 38 11.7 9.8 Riverside Medical Center 1. Heart Failure and Shock (127) 2. Simple Pneumonia and Pleurisy Age > 17 w/ CC (089) 3. No other DRG with > 30 cases 45 9 40 8.1 1. Psychoses (430) 2. Simple Pneumonia and Pleurisy Age > 17 w/ CC (089) 3. Heart Failure and Shock (127) 4. Percutaneous Cardiovascular Procedure w/Drug Eluting Stent (w/o AMI) (527) 5. Major Joint and Limb Reattachment Procedures of Lower Extremity (209) 143 102 97 83 5.3 3.7 3.6 3.0 78 2.9 1. Major Joint and Limb Reattachment Procedures of Lower Extremity (209) 2. Rehabiliation (462) 3. Simple Pneumonia and Pleurisy Age > 17 w/ CC (089) 4. Heart Failure and Shock (127) 5. Back and Neck Procedures except Spinal Fusion w/o CC (500) 747 161 144 140 134 20.6 4.4 4.0 3.9 3.7 1. Simple Pneumonia and Pleurisy Age > 17 w/ CC (089) 2. Heart Failure and Shock (127) 3. Esophagitis Gastroenteritis and Miscellaneous Disorders Age > 17 With CC (182) 4. Chest Pain (143) 78 78 32 7.0 7.0 2.9 30 2.7 Top 5 Diagnoses by Medicare DRGa ThedaCare Appleton Medical Center Affinity Health System St. Elizabeth’s Hospital Mercy Medical Center Aurora Health System Aurora of Oshkosh Source: Solucient, Profiles of U.S. Hospitals, 2006. aDRG number in parentheses. 23 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Exhibit 8 ThedaCare Improvement System Rapid Improvement (RI) Event The 7-Week Cycle of a Rapid Improvement Event BEFORE • 3 weeks before – Value Stream review, Event Selection, Select Team Leader/CoLeader and team members estimated financial, quality and staff impact • 1-2 weeks before – RI Checklist, preparation, Cell Communication, aim statement, measures Source: DURING AFTER • Day 1 – Current conditions • First week after – Capture the savings • Day 2 – Create the future • Second week after – Update Standard Work • Day 3 – Run the new process • Third week after – CFO validation • Day 4 – Standard work • Day 5 – Presentation ThedaCare. 24 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy Exhibit 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 708-424 Service Line Comparisons for ThedaCare and Competitors ThedaCare Facilities American Hospital Association Service Appleton Med Ctr Theda Clark New London Riverside Codes (Self Reported) Appleton, WI Neenah, WI New London, WI Waupaca, WI Acute long-term care ~ Adult Day Care program ~ Airborne Infection Isolation Room ~ ~ Alcholism-drug abuse or dependency inpatient ~ unit Alcoholism-drug abuse or dependency outpatient ~ ~ services Alzheimer Center ~ ~ Ambulance Services ~ ~ ~ Arthritis treatment center ~ Assisted Living ~ ~ Anciliary organization ~ ~ ~ ~ Bariatric/weight control services ~ Birthing Room-LDR room-LDRP room ~ ~ ~ ~ Blood Donor Center ~ Breast cancer screening/mammograms ~ ~ ~ ~ Burn care services Cardiac intensive care services ~ ~ Adult diagnostic/invasive catheterization ~ Pediatric diagnostic/invasive catherization Adult interventional cardiac catheterization ~ ~ Pediatric interventional cardiac catherization Adult cardiac surgery ~ ~ Pediatric cardiac surgery Cardiac rehabilitation ~ ~ ~ ~ Case management ~ ~ ~ ~ Chaplaincy/pastoral care services ~ ~ Chemotherapy ~ ~ Children wellness program Chiropractic services Community health reporting ~ ~ ~ Community health status assessment ~ ~ ~ Community health status based service planning ~ ~ ~ Community outreach ~ Complementary medicine Commuter assisted orthopedic surgery Crisis prevention ~ ~ Dental services Emergency department ~ ~ ~ ~ Freestanding/Satellite emergency department Trauma center (certified) ~ Enabling services Hospice program ~ ~ Pain management ~ ~ ~ ~ Palliative care program ~ ~ Enrollment Assistance Services ~ ~ Extracorporeal shock wave lithotripter ~ ~ Fitness center ~ ~ Freestanding outpatient care center Geriatric services ~ ~ ~ Health fair ~ ~ Health information center ~ ~ ~ ~ Health screenings ~ ~ Hemodialysis ~ ~ HIV-AIDS services Home health services Hospital-based outpatient care center services ~ ~ ~ ~ Intermediate nursing care ~ ~ Linguistic/translation services ~ ~ Meals on wheels ~ Medical surgical intensive care services ~ ~ ~ Mobile health services Neonatal intensive care ~ ~ Neonatal intermediate care ~ ~ Neurological services ~ ~ Affinity Facilities St. Elizabeth’s Mercy Med Ctr Aurora Facilities Aurora Appelton, WI Oshkosh, WI Oshkosh, WI ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ *Pediatric services at Theda Clark provided by an integrated, but separately licensed children’s hospital by Children’s Hospital of Wi 25 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. 708-424 ThedaCare: System Strategy Exhibit 9 (continued) ThedaCare Facilities 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 American Hospital Association Service Codes (Self Reported) Nutrition programs Obstetrics services Occupation health services Oncology services Orthopedic Services Other special care Outpatient surgery Patient controlled analgesia (PCA) Patient education center Patient representative services Pediatric intensive care services Pediatric medical-surgical care Physical rehabilitation inpatient services Physical rehabilitation outpatient services Primary Care Department Psychiatric care Psychiatric-child adolescent services Psychiatric consultation-liaison services Psychiatric education services Psychiatric emergency services Psychiatric geriatric services Psychiatric outpatient services Psychiatric partial hospitalization services CT scanner Diagnostic radioisotope facility Electron-beam computed tomography (EBCT) Full field Digital Mammography Magnetic Resonance Imaging (MRI) Multi-slice spiral computer tomography (MSCT) Multi-slice spiral computer tomography (64 + slice CT) Positron Emission Tomography (PET) Positron Emission Tomography (PET/CT) Single Photon Emission Computerized Tomography (SPECT) Ultrasound Image-guided radiation therapy Intensity-Modulated Radiation Therapy (IMRT) Shaped beam radiation system Fertility Clinic Genetic Testing/Counseling Retirement Housing Robotic surgery Skilled nursing or other long-term care services Sleep center Social work services Sports medicine Stereotactic radiosurgery support groups Swing bed services Teen outreach services Tobacco treatment/cessation program Bone marrow transplant Heart transplant Kidney transplant Liver transplant Lung Transplant Tissue transplant Other transplant Transportation to health services Urgent care center Virtual colonoscopy Volunteer services department Women’s health center/services Wound management services Appleton Med Ctr Theda Clark Appleton, WI Neenah, WI ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Affinity Facilities New London Riverside New London, WI Waupaca, WI ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ St. Elizabeth’s Mercy Med Ctr Appleton, WI Oshkosh, WI ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Aurora Oshkosh, WI ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Aurora Facilities ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ *-pediatric services at Theda Clark provided by an integrated, but separately licensed children’s hospital by Children’s Hospital of Wisconsin Source: Compiled by casewriter from AHA (American Hospital Association) Guide to U.S. Hospitals, 2006. 26 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. For the exclusive use of J. Macrina, 2018. ThedaCare: System Strategy Exhibit 10 Source: 708-424 Model of Muscoskeletal Care, Before and After Orthopedics Plus ThedaCare documents; modified by casewriter. 27 This document is authorized for use only by Joseph Macrina in Healthcare Management Fall 2018.1 taught by WILLIAM TODD, Georgia Institute of Technology from Aug 2018 to Dec 2018. Against All Odds: The Successful Hospital Merger that Formed Children’s Healthcare of Atlanta “What do we all have in common?” Introduction James Tally, the then newly appointed CEO of Children’s Healthcare of Atlanta, had 26 years of experience in healthcare administration in both academic medicine and private practice. Tally was known for his transparent leadership, strategic planning and passionate drive to create relationships within the organization. His appointment as CEO brought unease as concerns arose regarding the nature of the merger and whether it would be one of equals. He found himself overwhelmed with the task of integrating Scottish Rite Children’s Medical Center and Egleston Children’s Health Care System, two pediatric hospitals with a long tradition of competition. Tally questioned his ability to complete his inaugural merger while accomplishing both financial synergies and creating a unified culture. Tally held countless meetings with the stakeholders in an attempt to gain support for the new organization and justify the abundance of changes brought upon on the employees, patients and community. Shortly after the merger was announced publicly, Tally sat down with the new Children’s Healthcare of Atlanta board. The new board comprised of members from both hospitals in hopes of gaining their mutual support. While many board members had a supportive view of the merger, Tally faced opposition as to how to structure this new entity and merge two groups that experienced a discontinuity of opinions. Discussions broke out on how to create a cohesive culture and create efficiencies to make a better organization, but this only exacerbated the problem as more opinions were shared and no course of action could be decided upon. It became very clear that the two hospitals had fundamentally different philosophies and histories ingrained in the respective organizations that would be difficult to merge. Tally began to question if the two hospitals would ever overcome their differences for the common good. © 2012 by the Georgia Tech Research Corporation. This case was prepared by Professor William J. Todd and Kristin Watkins, Scheller College of Business, Georgia Tech. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. 1 Tally sat at the board table patiently listening to the discussions and feedback, trying to unify these leaders. As time progressed, Tally noticed that progress and decisions regarding how to move forward with the merger were not being made as the two sides were not ready to compromise. He stood up, and in a caring tone voiced to the board, “We are here for the kids.” This phrase resonated so well with those involved in the merger that it became a sort of battle cry for Tally whenever conflict arose. The board was there for the betterment of the children, but this fact required reiteration from time to time as a reminder that the details were insignificant with respect to the bigger picture. Tally felt at ease that there was hope that those involved in the merger could see his vision. Feeling that there was sense of support, he began to focus on the changes in the organization that would have to occur for the merger to be deemed a success. The Environment From 1994 to 1997, the number of not-for-profit hospital mergers and acquisitions in the United States increased fivefold.1 Hospital consolidation during this period was driven by the assumptions that: 1. Hospitals needed to join integrated healthcare systems or risk losing patients to larger providers. 2. Hospitals could achieve major economies of scale by rationalizing capacity and consolidating functions such as information technology and purchasing. 3. Hospitals would be better able to negotiate with other players in the vertical chain, such as payers and physicians, if they could create scale based structural advantages.2 McKinsey & Company conducted a study from 1984 to 1998 analyzing 300 hospital mergers and discovered that, “the economic advantages local hospital networks were expected to derive from consolidation have largely eluded them.”3 Of the chief executives involved in these mergers, 75% indicated that the results of the merger failed to live up to expectations. History of Hospitals Scottish Rite Scottish Rite opened in 1915 about six miles east of Atlanta in the Oakhurst area of Decatur. The hospital was unlike any other hospital in the Southeast at the time. It was a place where children could recover after surgery regardless of their family’s financial standing. For this reason, funding was a constant focus of the hospital in order to ensure sustainability. The hospital grew to 165 beds and more than 2,000 employees in 1997 and was now a comprehensive pediatric care center. Thousands of volunteers supported Scottish Rite and developed an allegiance to the hospital. Scottish Rite had a private practice orientation and was affiliated with private physicians. From this standpoint, the hospital operated as an effective business with an economic and financial mindset. Physicians were highly involved in management and governance. 1 Joanne M. Todd, “The Trouble with Mergers: Why are so many nonprofit hospital partnerships crumbling?” Healthcare Business, Sept./Oct. 1999. 2 Grace Colόn, Ajay Gupta, and Paul Mango, “M&A Malpractice,” The McKinsey Quarterly, 1999, Number 1. 3 Ibid. 2 Egleston Thomas Robert Egleston, a colonel in the Confederate Army, had lost four of his five children to childhood diseases. His only surviving son left a provision in his will to create a children’s hospital providing $100,000 for its construction and $12,500 each year in support. This was the largest single gift given to a nonsectarian charity in Atlanta at that time. In 1928 Egleston opened with a total of 52 beds and eight private rooms. Strong relationships with the Atlanta community and foundations allowed Egleston to grow quickly and gain market share. Egleston aligned itself with Emory University and was staffed primarily with Emory physicians. The hospitals physicians were generally focused on patient care, research and teaching. Egleston believed that management and the board should be left to run the hospital while the physicians exercised their medical knowledge. Leading Up to the Merger Financial Position Weakening Healthcare economics in the 1990s posed a threat to the financial viability of charity hospitals. Egleston and Scottish Rite developed a dependency on revenue generating patients to balance their obligation to serve all patients irrespective of their financial position. Technological advancements and more sophisticated service offerings were changing the dynamics of the hospitals. From 1990 to 2000, the average length of stay by patients under the age of 18 had shortened by 10%.4 From 1987 to 1997 the percentage of fee-for-service patients dropped to 15% from over 60%. The shift towards a greater number of Medicaid and managed care patients meant that the hospitals saw a decline in the percentage of billed charges being collected (Exhibit 1). While these trends were beneficial for patients, they disrupted the business models of Scottish Rite and Egleston. The declining bottom lines of these respective hospitals brought into question the viability of their operations moving forward. In response to managed care organizations taking a larger share of the payment mix, both Egleston and Scottish Rite began to negotiate for exclusive insurance contracts. The companies identified the struggle for the hospitals to maintain profitability and took this situation as an opportunity to negotiate payment terms that were in the best interest of their company. These forces left both hospitals concerned with their ability to operate over the long term. Competition among Hospitals As the two hospitals aimed to increase their market share and presence in the Atlanta area, competition between Egleston and Scottish Rite developed. The dynamics of the healthcare industry were drastically changing. Although both hospitals sought to provide sound medical care to children in the Atlanta community, downward pressure on margins in conjunction with reliance on philanthropic capital led to intense competition. A combination of expensive marketing campaigns and unnecessary satellite networks took a toll on the limited financial capacity of each hospital. The battle for patients had the potential to be detrimental for either or both of the hospitals in the long term. 4 “Remembering the Bullpups!,” The Atlanta Journal Constitution, Nov. 19, 2006. 3 Trustees of the Egleston and Scottish Rite grew uneasy with the pressing situation as many board meetings revolved around competition for patient loyalty and marketing tactics. This took the hospitals away from their goal of improving the lives of sick and injured children. Joe Rogers served as an Egleston board member and chief executive officer of Waffle House during this period. In an interview, Rogers remarked that, “I was friendlier with my competitors in the food service business than the leaders of these two charitable children’s hospitals were with one another.” It became clear that this competition was hindering the hospitals from achieving their goal of aiding sick children. Philanthropic Community Pushback The combination of changing healthcare economics and unhealthy competition between Scottish Rite and Egleston caused donors, physicians and parents to grow frustrated with the system. The community had a significant investment in these two hospitals and believed their competitive actions were detrimental to the community. Parents showed a clear preference for pediatric hospitals over general hospitals. This is highlighted by the fact that 45 out of every 100 children in metro Atlanta were taken to one of the two organizations. The competition between the two hospitals posed a threat to both Scottish Rite and Egleston if they betrayed the confidence that parents had entrusted in them. Physicians grew increasingly frustrated with the current system and began to question whether they were providing the best possible care for their patients. Egleston and Scottish Rite developed Physician Hospital Organizations and pressured pediatricians to pick sides. The concern was that by belonging to one, a pediatrician had to refer patients to specialists within that system. Pediatricians on the other hand, were far less concerned with allegiance to an organization, and wished instead to focus their efforts on the best interests of their patients. This dilemma created frustration between hospital management and physicians. Donations from the community and foundations were instrumental in allowing these hospitals to thrive and grow over the years. Both hospitals received significant funding from the Robert W. Woodruff Foundation, Joseph B. Whitehead Foundation, and the Lettie Pate Evans Foundation. The foundations began to step in and indicate that enough was enough, pushing for the intense competition to cease. Duplicative marketing and other expenditures were not in the best interest of the Atlanta community. Scottish Rite and Egleston were at risk of damaging their relationships with the foundations that they relied upon for funding. Merger Strategic Options Pressure from the community and financial uncertainty left both Scottish Rite and Egleston with a limited number of strategic options: continue with current operations, collaborate with an adult hospital, develop alliances with other hospitals or merge with another children’s hospital. Both hospitals looked into these options in an attempt to identify the best opportunity from a business perspective that would also benefit the community at large. In evaluating prospective mergers, three factors must be considered regarding the degree of organizational resistance: relationships between physicians and hospitals; the assets, governance, and leadership of the hospitals; and the drivers of performance.2 4 Egleston and Scottish Rite had clinics at a number of community hospitals and quickly saw that a merger with one of these organizations was not in their best interest. They found a lack of commitment to pediatrics in these clinics as this service line consisted of roughly 10% of the community hospital. Tally and CFO Donna Hyland visited the leadership teams on behalf of Scottish Rite to discuss joining a large hospital alliance; however it became clear that an alliance would not add the most value. Fundamentally, adult hospitals and pediatrics have two differing roles and their viewpoints do not inherently converge. Leadership from Scottish Rite was not convinced that an alliance would create the necessary efficiencies, as many hospitals had failed to do. The number of hospital mergers and alliances in the US, in response to the expansion of managed care systems, has hindered hospital prices and utilization rate. Multihospital systems may not outperform independent hospitals, however, due to their limited ability to capture economies of scale, falling demand and excess capacity, and high relative fixed-cost structures.5 Merger talks began in 1996 as Egleston and Scottish Rite realized that the current financial situation was not sustainable and the other options were not appealing or in the best interest of the community. Guiding Principles Trustees took note of the financial positions of the hospitals as well as the philanthropic pushback and began to look for common ground for further merger discussions. Members of Scottish Rite and Egleston boards met to speak about the possibility of a merger between the two pediatric hospitals. Each hospital was concerned with the perceptions and tactics of the other. The merger was built upon three fundamental principles: 1. Sick and injured children are better off in a pediatric hospital than on a pediatric floor of an adult hospital. 2. Egleston and Scottish Rite belong to the community, not the board of trustees. 3. Specialized pediatric care in a children’s hospital is a precious community asset that must be preserved. The development of these principles provided a justification for the merger and allowed people to align their ideals and move away from the rivalry. It allowed for the creation of a common ground for merger discussions moving forward. Throughout the integration of the hospitals, these principles were used to make decisions and push the hospitals in the right direction. Intent and Efficiency Study On August 8, 1997, Inman Allen and Richard Hiller, respective chairs of the two hospitals, signed a memorandum of intent (MOI) for the hospitals to merge. It began by identifying the common mission of the organization as serving “the pediatric healthcare needs of the Atlanta metropolitan area and surrounding region.” 5 Milt Gillespie and Aileen Lee, “Building hospital market power through horizontal integration – is it working?,” The McKinsey Quarterly, 1996. 5 Both sides saw the benefit the combination would have on the community through: “Assuring the availability of high quality clinical services and facilities with a sound fiscal foundation; stabilizing or lowering the cost of care by avoiding duplicate investment in expensive technology and facilities, reducing the cost of capital, better deploying excess capacity and other measures; providing healthcare in a cost effective manner under a variety of managed care arrangements; and integrating research, training, information technology and academic medicine to realize the full value of affiliation with an academic institution.” The MOI had an expiration date of less than 90 days after signing due to concerns that opposition to the merger might cause significant interference. A consultant was hired to identify possible cost savings and synergies of merging Scottish Rite and Egleston. The consultant worked with management as data was collected, reviewed and analyzed. Total annual operating expense savings were estimated to be between $26.1 and 30.6 million in five years. Cost savings were identified from the consolidation of administrative, marketing, physician, and education services; unification of financial functions, consolidation of support services, coordination of hospital based patient care services; reconfiguration of ambulatory delivery (Exhibit 2). These synergies, if achieved would help the merged hospital to mitigate the effects of declining margins and ultimately provide a higher level of care for children. Structural Changes in Team and Board The chairmen of Egleston and Scottish Rite prepared a slate of trustees for the new board. A provision in the MOI indicated that the board would consist of ten trustees from each hospital, three external members, a chair approved by both boards, the medical directors from Scottish Rite and Egleston as well as the CEO (Exhibit 3). Those trustees who were truly committed and dedicated to the hospitals were those that stayed on the new board, which led to a board that was ambitious and heavily involved in the integration of the hospitals into one new entity. After its creation, the board was tasked with choosing a CEO. An international executive search and leadership consulting firm was hired to help identify a CEO. Both Tally and Alan Gayer, respective chief executive officers of their hospitals, were encouraged to apply. Gayer served 17 years at a top management consulting firm and was CEO of Egleston for eight years. He was known for his focus on strategy and strong analytical decision making skills. The new CEO would have significant recourse on the result of the merger as Tally and Gayer had different goals and leadership styles. External candidates were considered, however the committee identified Tally as the best candidate for CEO. This choice was met with apprehension and concern by Egleston on whether Tally would promote the unification as a merger of equals or show preference toward the Scottish Rite tendencies. Tally’s selection had to be approved by the board before it would go into effect. Larry Gellerstedt III, chair of the new board, recalled after the merger, “We saw Jim Tally as especially strong on the administrative side with communicating with the board and the physicians groups. We knew that success or failure would be determined in the first five years, and would depend on blending cultures, blending medical staffs and physicians, and doing it all in a way that the volunteers and the community felt was 6 right. Everything was complicated, and we believed Tally would be good at playing a statesman-like role.” Upon appointment of CEO, Tally spent ten weeks building a leadership team and attempting to create unity and understanding between Egleston and Scottish Rite (Exhibit 4). Tally wanted to speak to the employees at Egleston and used forums as a way for the other side to get to know him. He was overcome with anxiety and nerves as he was asking the opposition to accept him as their new leader. This would be Tally’s first merger and his aptitude of such matters had yet to be tested. He took these meetings as an opportunity to listen and try to understand the needs of the employees. Gayer, made an effort to endorse Tally throughout these meetings, however there was still a great deal of skepticism and uncertainty at this time. At this point, uncertainty was building and people began to question their place in the hospital. Tally wanted to eliminate as much of this ambiguity as early as possible. He had thought about defining senior positions prior to his selection, so he quickly brought on a recruiting firm to develop descriptions for the positions. The executive committee approved Tally’s organizational chart, and he quickly began interviewing both internal and external candidates. Two key positions were appointed early on in the process. Donna Hyland was selected as the chief financial officer and Susan Sciullo from Egleston as the chief integration officer, a new position devoted solely to merger issues. Due to the talent within both organizations, the new leadership team was split evenly between Scottish Rite and Egleston employees. The only external member of the team came with the addition of a senior vice president of medical affairs. Not everyone was satisfied with the selection process and some attempted to sway Tally’s choices in one way or another. Tally stressed the importance of flexibility and leadership’s ability to take the position that would benefit the organization as a whole. Candidates called board members in attempts to get ahead of the competition. Those who did not receive a position were aided to find positions within the health system or elsewhere. Tally cared about the employees, but also reminded them that the choices were all made with the well-being of the children in mind. The new leadership team members then went to their respective teams to communicate the structure and their support for the unified organization. This was the first step in helping to alleviate the uncertainty and tension within the hospitals. Transitioning to a Unified Organization Employee Satisfaction and Morale While confusion surrounding organizational identity mounted, anxiety was also building due to uncertainty and resistance to change. As a result, employee satisfaction was less than desirable. Two months after the merger, employees were dissatisfied because they felt they were competing with multiple priorities in conjunction with bureaucratic decision-making. Frustration continued to mount as issues with people practices began to escalate. Pay, performance evaluation, career paths, work life balance and development opportunities were concerns of employees that they felt were not being addressed. Tally and his leadership team had to find a way to address these issues quickly; otherwise employee morale would continue to diminish. Emory’s academic orientation and Scottish Rite’s private practice orientation 7 created a difficult situation. Physicians were for the most part not employed by the hospital direc…
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