The Emerging Organizational Structure of Health Care

This paper has been brewing in me for some time.  I can't say it's finished, but it is up to a place where I would like to show it to you all and invite your comments.  While it is clearly written from my perspective as a primary care practitioner and as a member of the Section on Administration and Practice Management of the American Academy of Pediatrics, nonetheless, I believe it is widely enough based to have practical applicability.

Warning: 3,500 words (in other words, not publishable in its present form in a journal, alas.)

The Emerging Organizational Structure of Health Care

May 2017 draft

It is a recognized principle that structure and function must go together. Thus, the organizational structure (OS) of our health care delivery system strongly conditions the cost, quality, and experience of care produced by that system. So it is somewhat remarkable that, even as the OS of our system changes profoundly right in front of us, and even as the financing of that system is discussed perhaps more than any other domestic issue, there is little systematic and critical discussion of OS.

This absence needs to be rectified. Not that an ideal OS needs to be identified – indeed, I will argue that there is no such ideal OS. But unless an overt and conscious policy is developed that will encourage an evolution of OS that serves the public well, the evolution will fall prey to ungoverned political and economic forces that will not necessarily respond to the needs of the public. This paper intends to help uncover the conditions that the policy needs to address.

How OS Is Changing

The universal theme of OS change is agglomeration and centralization, and some would say, corporatization. Horizontal Integration (HI) is ubiquitous. “Sixty percent of hospitals are now part of health systems.”ⁱ Independent physician offices have become larger single-specialty groups and community clinics. Health insurance companies are fewer, larger, mostly for-profit, and richer.

Vertical integration (VI) has occurred as well. Multi-specialty groups have grown and multiplied, often tied to hospitals. Hospitals currently employ over half of the physician force, and have absorbed aftercare units.ⁱⁱ The completely integrated system (IS) of Kaiser Permanente, continues to dominate California's market and is increasingly emulated elsewhere. Accountable Care Organizations (ACO's) can be viewed as the most recent iteration of VI. Large hospital centers are increasingly partnering with insurance companies or trying to bring the financing arm in-house. Insurance companies are buying practices and investing in clinical services such as nurse advice and telehealth. Ownership of the means of production (which means clinicians and their facilities) has shifted from professional dominance to corporate control.

Agglomeration is clearly a fact. But, is this fact a good thing?

Evaluating Agglomeration

The Pluses of Agglomeration

Mid-20^th century liberals derided the traditional decentralized system as a “cottage industry” model, and proposed a more modern industrial model of VI financed by capitation for “prepaid care.” The business-oriented Nixon Administration agreed, renaming “prepaid care” as Health Maintenance Organizations. Alan Enthoven suggested that “the provider community must be divided into competing economic units” with his concept of “managed competition.”ⁱⁱⁱ Today, the argument for larger integrated entities has become orthodoxy.

The agglomeration argument asserts that larger organizations can internalize operations and thus decrease open market transaction costs and rationalize the disparate functions of health care delivery; that if costs are centralized, then priorities will shift to prevention and efficiency; and that larger scale will deliver economies of scale and decrease risk. Rationalization will come from leadership's having more information and control, from recruiting and training physician leadership, from specialized professionals leading corporate functions such as personnel, finance, and information technology, and from allowing most physicians to devote themselves only to the practice of medicine. Larger firms can better adjust to new payment schemes by payers. Innovation will be fostered by larger accumulations of capital, and lower risk of the consequences of failure. Larger firms can integrate lesser-trained professionals more easily into productive clinical roles.

In addition, larger size confers benefits in relations with the world outside the firm. Insurance companies will pay higher rates to larger firms. Larger firms have more power in governmental negotiations. Large firms can afford to advertise, and can recruit high quality personnel more easily.

The minuses of agglomeration

The minuses of agglomeration, however, are just as compelling. “In companies with lots of divisions and product lines, it’s hard for executives to concentrate on the core business.”^iv In academic centers the research agenda may trump clinical service, and within VI entities highly profitable specialties can trump the attention paid to primary care. Moreover, large organizations can cushion the competitiveness of individual units – a specialty unit with built-in referrals from the network needs only to be “good enough” rather than outstanding.

Bureaucracies experience careerism, turf battles, and information withholding. Creativity can be stifled; promotion of clinicians can depend on deference to administrative leaders.^v Administrative overhead can expand needlessly; profit-driven and power-driven leadership can drive out the medical ethic. Clinicians in large groups can seek approbation from colleagues rather than patients.^vi As losing a patient has smaller economic consequences, patient service can become a bureaucratic afterthought.

Lammenais observed that, “Centralization breeds apoplexy at the center and anemia at the extremities.” A more recent observer warns that the ills of VI are so pervasive that that VI should be avoided if possible because of the inherent difficulties of managing a vertically integrated firm, and that the motivation for VI is more often a search for market power rather than improved performance and efficiency.^vii

The pluses of decentralization

The conservative American Medical Association was the earliest defender of the decentralized status quo, citing a better doctor-patient relationship, and emphasizing the positives of professional dominance.^viii In 1971 a brilliant article by physician Michael Halberstam encapsulated the anti-corporate position of the Left, in surprising support of the AMA position, placing priority on authentic person to person relationships supplied by smaller organizations.^ix Today, a contemporary business theory supports decentralization in the form of the Centers of Excellence (COE) model.^x

COE envisions competition among smaller independent units of care connected by information and communication technology rather than by VI's ownership and overt direction. In this model, for instance, a primary care Patient Centered Medical Home (PCMH) would unite the patient and primary care provider in choosing referrals among competing centers with varying combinations of cost and quality, be they large or small specialist practices, general or specialty hospitals or procedure centers, etc., rather then being tied into a mandatory network. In theory, the PCMH alliance of PCP and patient makes free market competition practical by circumventing the problem of low patient knowledge, and activates the medical-fiduciary role of the clinician in choosing referrals freely rather than from a constrained list.

Decentralized units reduce bureaucracy and administrative overhead, and modern information and communication technology make it possible for smaller units to be exquisitely efficient. Unlike in an IS, lower performing units are not coddled, and competition for patients drives high performance and innovation. Smaller units tend to be more personal for both employees and patients, so important in the caring function, and so helpful in easing communications within the organization and from the organization to patients.

Owners are incentivized both financially, by professional pride, and by the caring connection to the patient. The more direct financial and personal connection to the patient may provide increased incentives for patient-centered care. Smaller units can be more flexible than larger bureaucracies in serving patient needs, can focus attention more acutely on their narrower missions, and can foster creativity rather than stifle it by demanding conformity.

The minuses of decentralization

On the other hand, smaller units can become isolated and slow to adopt new knowledge, have less capital available for investment in innovation, less expertise available for administrative and clinical functions, and may have poor quality oversight. Excellent staff may need to leave a practice to be promoted. The need to retain patients can lead to poor medical practices in order to maintain popularity (e.g., prescribing unnecessary antibiotics.) COE advantages might not be realized if the patient-PCP unit does not search well for superior referrals. Communications and information flows might be inhibited by lack of community inter-operability. Leadership may be dispersed instead of centralized, and network coherence might then not be realized. Individual units may suffer by their lack of market power.

Theory vs. Reality

The point is this: with so many pluses and minuses for each model, the key to success will not be adopting a single model everywhere, especially given America's taste for variety. Rather, most areas will need artful adoption to the strengths of each area, capitalizing on strong organizations and capable leaders wherever they are found. Most solutions will be hybrid, combining the virtues of the VI model and the COE model, and often using intermediate organizations such as IPAs for coordination and leadership.^xi Although highly specialized services will generally be centralized and primary care will most often be decentralized, it will be hard to prescribe whether it is better to put them in the same organization or keep them separate. Rather than any specific OS being ideal, practical implementation and even improvisation will be most important.

The case for more than one system in an area is strong, because people and preferences are different: both patients and professionals differ in their tastes for smallness or for bigness, professionals differ in their preferences for employment or entrepreneurial ownership, etc. There must be room for the brilliant individualist as well as the consummate leader, and often these shining lights will not fit into the same system.

Policy Implications

The traditional role of government is not to choose winners, but rather (1) to ensure that the playing field for competing solutions is level, (2) to protect against undue concentration resulting in oligopolies and monopolies, and (3) to establish regulation where concentration is desirable. In health care, where government has been intimately involved and has been the ultimate funder for perhaps 2/3 of healthcare provision, it has also appropriately (4) encouraged improvements by various grants and programs, (5) given feedback on performance, (6) actively established and run health systems on its own (Veterans Affairs, local safety net hospitals and clinics, public health departments, etc.), (7) affected care policies through its payment policies (DRG's, etc.), and done other things as well.

Even while government aims at the public good, however, like other entities, it is subject to its own prejudices. It is particularly difficult to establish policies where an industry is in flux, as is the case with healthcare. Established organizations typically attempt to use their expertise, money and power to extend their current predominance into the future, not only by making legitimate progress on their own, but also by suppressing other organizations. Government itself often tends to support larger organizations because they are easier to deal with than decentralized systems, and governmental officials might incline to the orthodoxy that larger is better. That has certainly been the case with health care. Because of these potential prejudicial factors, specific and overt policies are necessary for non-prejudicial competition to prevail.

The OS policy task is then to determine:

• Which policies can best support the development of local institutions nationwide, giving each area full freedom to develop its own pattern of organizational structure, without prejudice for which structures should be centralized and which decentralized?
• How can the interests of patients be placed as the central focus of organization?
• How can the interests of individual providers, as workers in the system and as representatives of a traditionally idealistic profession, be respected as well?

The following suggestions for policy are aimed at those targets.

Acknowledging, refereeing, self-assessing

Government needs forthrightly to acknowledge that different solutions will be appropriate for different areas of the country, and thus to declare a neutrality policy for preference of scale of institutions, understanding that larger organizations will need regulation is they are oligopolistic.

To operationalize this principle, government needs to take the position that it will actively take steps to seek to establish a level playing field for the contending forces, and that it will continuously monitor and adjust the conditions of engagement.

Government should then examine the implications of all of its present program policies with regard to the agglomeration of organizations, and adjust policies which are not neutral. (For instance, the ACO program supports centralization without any balancing program for decentralization; the Medicare Alternative Payment Models regulations favor large organizations, and FTC regulations allow integrated systems to negotiate with insurance companies, but does not allow negotiation by more loosely aligned groups.)

Government should also require itself to inspect all proposed health care policies for their organizational agglomeration implications, and issue an agglomeration impact statement for each policy as a prerequisite for its being adopted.

Distinguishing Centralized Effectiveness from Market Power

Operational advantages of size – such as economies of scale, administrative specialization, decreased transaction costs and ease of internal coordination, investment in innovation and quality enhancement – benefit both the company and the public and need to be retained. Market power advantages of scale, however, may redound only to the benefit of the organization, and against the public interest. Government needs to assess these differences and regulate the marketplace so that only the former accrue to the advantage of the large scale organizations. Examples follow.

Clinical service pricing

Large predominant organizations – often hospitals – can be “must haves” for networks, which results not only in high payment rates for in-hospital services, but also in payment rates for outpatient services by in-network clinicians that are much higher than those obtainable by independent practices with less market power, not to mention added on “facility fees” obtainable only by hospital-based practices. Analogously, Federally Qualified Health Centers (FQHC's) are paid much higher rates for their services than independent practitioners. These economic rents are then translated not only into profit and high administrative and clinical salaries, but also into inducements for independent entities to be acquired (clinician capture).

One solution to establish a level playing field would be to establish all-payer rates for equivalent services in a locality or state, and to allow balance billing so that more desirable practices could benefit from a market. Allowing patients in IS's to access out of network services and requiring the IS's to pay a discounted fee to the accessed service provider would also be part of that solution. Another solution would be to allow non-integrated clinical associations to negotiate collectively.

Communication and information

The Electronic Medical Record (EMR) is becoming the keystone modality not only for patient record keeping, but also for communication and coordination of care. Adoption of EMRs will soon be near universal. Full inter-operability of EMRs, technically quite feasible, will enable all providers to operate equally with one another, no matter their ownership or affiliation. It is tempting, however, for larger medical centers or (in theory) insurance companies to purchase an enterprise-level EMR and restrict operability to network membership, thus steering patients preferentially to network members and restricting competition on price and quality (patient capture), thus compromising the ability of PCPs in a PCMH to fulfill their medical-fiduciary responsibility to their patients, and pressuring practices to join the network (clinician capture).^xii Ensuring full interoperability of EMRs should be a governmental level playing field responsibility.

Free substitution of services

Large systems also practice patient capture by not paying for services that patients access outside their networks. This is deleterious to patients, who might prefer alternative services for various reasons, and protects elements within the large systems which may be cushioned from competition and thus not be impelled to seek improvement. Government should consider requiring that all systems of care, including IS's, provide free substitution of services. An IS patient might need to pay more to go out of network, but that would be a choice the patient could make.

Equalizing Governmental Developmental Support

Government has concentrated its system development support programs on large systems. To level the playing field, government needs to fund development of diverse systems equally, and not to decide prematurely that large systems are the winners. For instance, grant programs to areas to establish COE systems would balance the attention given to ACOs. Another instance would be to offer support for decentralized systems to help them accept non-fee-for-service Alternative Payment Models.

Enforcing Anti-trust

Governments at both state and federal levels have been complicit in allowing large hospital chains to emerge, with the expressed belief that larger size will bring improvements in cost and quality, despite the lack of evidence that this has actually occurred. Simple enforcement of the law with assiduous and astute evaluation of data should remedy the deficiency.

Improving Evaluation and Feedback

A prime element that distinguishes the health care market from the market for more mundane goods and services is lack of the ability to evaluate the health care product. Quality measures are now far more robust than in the past, but much more improvement will be necessary for patients and payers to be fully informed. One persistent problem, however, is that no simple measures reflect the quality of a practice as a whole, yet collecting an extensive set of measures is impractical, establishing cost data is particularly difficult, and many important aspects of care still remain unmeasurable. In addition, insurance companies assembling narrow networks continue to conflate acceptance of low rates of pay with high quality.

Government would be well advised to set in place procedures to make public sets of measures as are illustrative, to be clear as to the limitations of the implications of these measures, to practice good data hygiene in making the data simple and clean to obtain, and to make it mandatory for all EMRs purchased with government money to incorporate standard data collection modules for these data. It would also be important for the data to reflect multiple factors of care, and to incorporate private social media techniques in gathering and communicating information. Once again, it will be important to ensure that evaluation does not preferentially favor large organizations, either by the measures chosen, or by the data collection requirements imposed.

Building leadership capacity for the future

Finally, systems are dependent on personnel. Industrial theory has recommended for a century that workers in the system be tapped for their mental contributions to the industry they work in, from suggestion boxes to workers councils to promoting from within. It is actually scandalous that practicing medical professionals, one of the most highly selected sets of personnel in the country, and one of the most idealistic set of professionals willing to contribute to the common good, are so often outsiders in the formation of policy.

Tapping this potential resource of experience, knowledge and judgement needs to be a prime objective of national policy. Potential leaders need to be identified and nurtured, and rank and file professionals need to be taught the basic principles of organizations and organizational behavior so that they may better contribute to ongoing shaping of policy. Government would be well advised to utilize both law and funding to help teaching institutions and professional societies to provide this important education, and to include this source of practicality in their councils more fully immediately.

Conclusion

One of the prime tasks of policy-making is to decide on the target. Too wide becomes ineffectively diffuse; too narrow misses the forest for the trees. Focusing on OS as the general area, and honing in on the specifics of propelling development forward would make for effective health policy. Critical thinking about the salient issues of OS would lead to more even-handed governmental actions, and to accelerated progress on achieving higher quality, lower costs, and improved patient service. Beyond the passive leveling of the playing field that I have stressed here, active governmental involvement in cooperation with the private sector in devising regional solutions would be salutary.

While I have concentrated this discussion on OS as centralization vs. decentralization, other criteria are certainly germane. Not-for-profit vs. for-profit is a perennial subject, as is medical versus business ownership. These and other criteria are certainly worthy of evaluation. The overall message of this paper, however, is this: it is difficult to believe that there is a single OS to apply everywhere in the United States. If there were ever anything that looked ready for state and regional experimentation and evaluation, it is the Organizational Structure of health care delivery. Making haste to focus on OS would be prudent

Budd Shenkin

iCutler DM, Morton FS, Hospitals, Market Share, and Consolidation. JAMA 2013;310(18):1964-1970.

iiIbid.

iiiEnthoven AC, Managed Competition: An agenda for Action. Health Affairs: 7 (3), 25-47, 1988.

ivWilliamson OE, Corporate Control and Business Behavior: An inquiry into the effects of organization form on enterprise behavior. Prentice Hall, Englewood Cliffs, NJ, 1970.

vMarsh H, Do No Harm, St. Martin's Press, 2014.

viFreidson E, Profession of Medicine: A study of the sociology of applied knowledge. New York, Dodd Mead and Company, 1973.

viiStuckey J, White D, When and When Not to Vertically Integrate. McKinsey Quarterly, August, 1993

viii Alford RR, Healthcare Politics: Ideological and Interest Group Barriers to Reform. Chicago, U of Chicago Press, 1975

ixHalberstam MJ, Liberal Thought, Radical Theory, and Medical Practice. NEJM, 284: 1180-1185 1971

xPorter ME, Teisberg EO, Redefining Health Care: Creating Value-based Competition on Results. Boston, Harvard Business School Publishing, 2006.

xiShenkin BN, The IPA in Theory and Practice: Notes from the Field. JAMA, 273 (24), 1937-1942, 1995.

xiiJayanthi A, Epic Under Investigation for Information Blocking in Connecticut. Health IT & CIO Review. http://www.beckershospitalreview.com/healthcare-information-technology/epic-under-investigation-for-information-blocking-in-connecticut.html. Accessed May 11, 2017.