Policy for Emerging Organizational Structure of Health Care

I continue to think that this issue needs attention!  Government policy needs to focus on organizational structure, and not just blandly accept the increasing concentration that is more and more pervasive.  Here is a 2,000 word version of the paper I presented last time, and which has gotten excellent reviews from readers.  For those of you who skipped the first version, this should be more digestible. (I apologize for the difficulties in line formatting -- Word and Open Office get mixed up on my Apple and Windows computers.)

A Problem in Search of a Policy: The Emerging Organizational Structure of Health Care

Budd N. Shenkin, MD, MAPA

June, 2017

The organizational structure (OS) of health care delivery is changing rapidly and profoundly, as both horizontal integration (HI) and vertical integration (VI) are producing larger and more centralized units of production.  This is important, because if we want health care with the Triple Aim of lower costs, higher quality, and more impact, the OS must be conducive to improved functioning.  Yet, amazingly, public policy seems not to have taken an overt stand on OS, and in practice, in concert with the most powerful political and economic forces that currently dominate the industry, has notably favored agglomeration and centralization. 

In fact, however, there is scant evidence that larger units are particularly conducive to theTriple Aim, and in practice both patients and professionals often prefer smaller units.[i]  If one accepts that the problem of scope and scale has not been solved, then it should be clear that an intelligent policy guiding OS will be even-handed in allowing best solutions to emerge rather than forcing a foregone conclusion.

Agglomeration Is Increasing

Both HI and VI are ubiquitous.  “Sixty percent of hospitals are now part of health systems.”[ii]   Independent physician offices are morphing into single-specialty groups and community clinics.  Health insurance companies are fewer, larger, mostly for-profit, and richer.  Multi-specialty groups abound; hospitals employ over half of the physician force, and have absorbed aftercare units.[iii]  The completely integrated system (IS) Kaiser Permanente continues to dominate California's market and similar systems are growing.  Accountable Care Organizations (ACO's) are VI creatures.  Large hospital centers are increasingly partnering with insurance companies or trying to bring the financing arm in-house.  Insurance companies are buying practices and extending into clinical services such as care management and telehealth.  Pharmacies own and run urgent care clinics.  Clearly ownership of the means of production is shifting from professional dominance to corporate control.[iv]

Evaluating Agglomeration

For agglomeration

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

The hope is that larger organizations will:

·         Rationalize and economize by internalizing operations

·         Improve operations by utilizing administrative professionals

·         Relieve rank and file physicians from administrative operations, while identifying others for administrative leadership roles

·         Shift priorities to prevention and efficiency by unifying costs

·         Introduce economies of scale

·         Use concentrated resources to foster innovation and cushion the risk of failure

·         Utilize lesser-trained professionals rationally

·         Adjust securely to new payment schemes by payers.

In addition, larger size organizations can use increased market power to:

• Negotiate better terms with payers and suppliers
• Influence government policies
• Facilitate recruiting and advertising 

Against agglomeration

Less talked about, however, are the equally compelling minuses of agglomeration and the diseconomies of scale:

• “In companies with lots of divisions and product lines, it’s hard for executives to concentrate on the core business.”[vi] 
• In academic centers the research agenda may trump clinical service
• Within VI entities highly profitable specialties can trump the attention paid to non-procedural care. 
• 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.
• Administrative overhead can expand needlessly
• Bureaucracies can induce conformity and stifle creativity
• Promotion of clinicians can depend on deference to administrative leaders.[vii] 
• Profit-driven and power-driven leadership can drive out the medical ethic. 
• Clinicians in large groups may seek approbation from colleagues rather than patients.[viii]
• Patient service can become a bureaucratic afterthought
• IS physicians benefit financially from in-network referrals, which may violate kickback norms

A seminal paper warned against VI, asserting that the difficulty of management usually trumps the advantages, and observing that VI usually seeks increased market power rather than improved performance and efficiency.[ix] 

For decentralization

The conservative American Medical Association was the earliest defender of the decentralized status quo, citing a better doctor-patient relationship and the positives of professional dominance.  In 1971 a brilliant article by physician Michael Halberstam surprisingly supported the AMA anti-corporate position from the Left, citing authentic person-to-person relationships in smaller organizations.[x]  Today, a contemporary business theory supports decentralization in the form of the Centers of Excellence (COE) model.[xi] 

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 the Patient Centered Medical Home (PCMH) version of this model, for instance, the patient and primary care provider (PCP) would together choose referrals among competing specialists, procedural centers, and hospitals, rather than being tied into a mandatory network.  This model overcomes the medical market problem of poor patient knowledge, and enables clinicians to best serve their medical-fiduciary responsibility of seeking the best for their patients.   

The hope is that smaller units may:

• Reduce bureaucracy and administrative overhead, substituting modern information and communication technology
• Expose all units to true competition
• Improve quality of implementation by each unit’s having a narrow mission
• Incentivize professional and financial performance by ownership
• Allow unfettered innovation
• Increase the quality of personal connections for both employees and patients
• Improving the caring function
• Fostering patient centered care
• Easing communications
• Enhancing personal understanding

  

Against decentralization

The fear is that smaller units may:

• Become isolated and adopt new knowledge slowly
• Have less capital available for investment in innovation
• Administer inexpertly
• Enhance quality inexpertly
• Be unable to promote and retain excellent staff
• Indulge in poor medical practices to maintain popularity
• Refer on other bases than quality and cost
• Communicate poorly if there is no EMR inter-operability
• Be unable to muster leadership in the practitioner community
• Suffer from lack of market power.

Theory vs. Reality

The point is this: no model is preordained to be ideal.  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.  Most local solutions will probably be hybrids, often using intermediate organizations such as IPAs in variable combinations, and building on strong organizations with favorable cultures and capable leaders where they are found.[xii]  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.  If patterns are allowed to vary from place to place, that will be a very American solution. 

Policy Implications

Since no single model is ideal, government should facilitate development of these varied models by leveling the competitive playing field, and focusing on outcomes that promote the Triple Aim. 

Acknowledging, refereeing, self-assessing

The first policy step is clear: government should openly declare itself neutral of the question of scale and scope of organizations.  Implementing this policy will be difficult, as government will need to:

• Resist efforts of entrenched interests to predominate
• Resist its own tendency to favor large size
• Continuously monitor and referee the competitive marketplace
• Regulate concentrated markets

Government should then adjust its own current policies accordingly, for instance:

 

• Balance ACO encouragement of large institutions with equal funding for decentralized solutions. 
• Adjust Medicare APM programs that currently reward larger practices over smaller ones.[xiii]
• Adjust Federal Trade Commission and state agency policies that allow concentration of hospitals and insurance companies which can then overwhelm decentralized clinical practices. 

Government should also adopt policies to ensure neutrality of future programs.  New programs or policies should be required to develop an agglomeration impact statement prior to adoption, and an oversight group should assess periodically whether or not overall balance has been achieved.

Distinguishing centralized effectiveness from market power

Operational advantages of size – such as economies of scale, administrative specialization, improved internal coordination, investment in innovation, etc. – may benefit both the company and the public.  Market power advantages of scale, however, may confer advantage only to the company.  Governmental regulation needs to retain the former and abolish the latter. For example:

Clinical service pricing

Large “must-have” hospitals extract higher payment rates than independent practices providing the same services can (plus “facility fees”).  Federally Qualified Health Centers are similarly advantaged.  These economic rents are translated not only into profit and high administrative and clinical salaries, but also into inducements for independent entities to be acquired and for new clinicians to seek employment at these larger facilities (clinician capture). 

Possible solutions would be:

·         Establishing all-payer rates for equivalent services in a locality or state, allowing balance billing so that more desirable practices could benefit from the market. 

·         Allowing 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, including referrals and consultations.  It is tempting for large medical centers 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,) as well as incentivizing practices to join the network (clinician capture.)[xiv]  Enforcing the technically-feasible full inter-operability of EMRs and effectively forbidding patient steering would level this area of the playing field.

Free substitution of services

Systems protect their less-desirable in-network components by refusing to pay for out of network services.  Mandating reasonable out of network payment, even if discounted and with patient out of pocket payments – even for IS's – would advantage patients and provide incentives for progress for both independent and in-network components. 

Improving Evaluation and Feedback

Evaluating the achievements of competitive systems is essential for progress.  Government should invest far more in this mission, mandate non-disruptively obtainable standard quality and cost evaluation mechanisms, and establish regular feedback channels to professional and popular audiences.  Government also should establish a reward system for quality and cost advances that provide sufficient incentives for systems to benefit even while they lower costs, perhaps by new licensing rules for cost-savings developments (analogous to scientific advances) or a prize system for developers.[xv]

Building leadership capacity

Companies often prosper by finding leaders who are adept both professionally and administratively, and educating workforces to be participative in organizational guidance.  Health care professionals are rarely trained in organizational skills. Government should invest in training all professionals in the basic principles of organizations and organizational behavior, with enhanced pathways for potential leaders. 

Conclusion

OS is not the only influence on the performance of the health care system, but it is arguably the most significant.  Government needs to develop policies that will nurture the abilities of communities and professionals to develop systems that accommodate to local strengths.  The United States has traditionally welcomed local variation.  Government would be well advised to follow that American tradition and adopt policies that treat alternative organizational structures equally, and to focus its attention on measuring cost, quality, and service outcomes in local areas, with the aim of feeding back these findings to the areas in question, as well as identifying local solutions that can be either adopted or avoided elsewhere .

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[i] Goldsmith JC, Burns LR, Sen A, GoldsmithT. Integrated delivery networks: in search of benefits and market effects [Internet].  Washington (DC): National Academy of Social Insurance: 2015 Feb [cited June22, 2017]. https://www.nasi.org/sites/default/files/research/Integrated_Delivery_Networks_In_Search_of_Benefits_and_Market_Effects.pdf

[ii]    Cutler DM, Morton FS, Hospitals, market share, and consolidation.  JAMA 2013;310(18):1964-1970.

[iii]   Ibid.

[iv]   Alford RR, Healthcare Politics: Ideological and Interest Group Barriers to Reform.  Chicago: University of Chicago Press, 1975

[v]    Enthoven AC, Managed competition: an agenda for action.  Health Affairs 1988;7 (3): 25-47.

[vi]   Williamson OE, Corporate control and business behavior: An inquiry into the effects of organization form on enterprise behavior.  New Jersey: Prentice Hall, 1970.

[vii]  Marsh H, Do no harm, London: St. Martin's Press, 2014.

[viii] Freidson E, Profession of medicine: A study of the sociology of applied knowledge.  New York: Dodd Mead and Company, 1973.

[ix]   Stuckey J, White D, When and when not to vertically integrate.  McKinsey Quarterly, August, 1993 (Accessed June 14, 2017 at http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/when-and-when-not-to-vertically-integrate)

[x]    Halberstam MJ, Liberal thought, radical theory, and medical practice.  N Engl J Med 1971; 284:1180-1185.

[xi]   Porter ME, Teisberg EO, Redefining health care: creating value-based competition on results.  Boston, Harvard Business School Publishing, 2006.

[xii]  Shenkin BN, The IPA in Theory and Practice: Notes from the Field.  JAMA 1995; 273(24):1937-1942,.

[xiii] Casolino LP, The Medicare Access and CHIP Reauthorization Act and the corporate transformation of American Medicine.  Health Affairs 2017; 36(5):865-869.

[xiv]   Allen A, Connecticut law bans ehr-linked information blocking.  Politico 10/30/2015.  (Accessed June 14, 2015 at http://www.politico.com/story/2015/10/connecticut-law-bans-ehr-linked-information-blocking-215400)

[xv]  Kellerman AL, Desai NR. Obstacles to developing cost-lowering health technology: the inventor’s dilemma.  JAMA 2015;314(14):1447-1448.