The challenges facing independent community hospitals are well-documented and have been accentuated only by recent (and still unfolding) industry transformation. Yet, a number of independent hospitals have survived — even thrived — absent a full affiliation with a larger health system.
We studied a number of such high-performing independent hospitals to find what it is that allows them to remain independent through periods of industry change. Our findings also revealed, consistent with our assumptions, that some of these stronger independents were able to fare well if they chose to affiliate and, in some cases, even become market aggregators.
David vs. Goliath
From 2006 to 2012, more than 500 hospitals were acquired or merged, according to the American Hospital Association and the Center for Healthcare Economics and Policy. Rationales for affiliating are many, including care coordination, physician recruitment, economies of scale, contracting capabilities, capital access and response to competition. Other independents have affiliated under less intentional circumstances. These include hospitals that have tripped bond covenants, had an unexpected turnover in leadership, experienced employer or physician migration from the community, or simply failed to maintain the market clout that commands reimbursement rates sufficient to reinvest in the enterprise.
But, what about the community hospitals that have remained independent through these tumultuous times? Are there common threads among them? Our observations suggest that there are, and we explore five prominent factors below.
Geography and demography. Undoubtedly, many of today's independent hospitals have benefited in some way from a unique feature such as an affluent community, a geographical barrier impacting competition or outmigration (such as a mountain range, river, highway or county line), distance to the next largest city or hospital, unique state or local political support or other factors.
However, a favorable market alone is not enough to remain independent. For these high performers, maintaining independence is as much about strategy, execution and culture as it is about location.
Leadership. Our study indicates that strong, sustained leadership is a key component to an organization's ability to maintain independence. This often starts at the board level, including ties to the community and dedicated expertise (e.g., a savvy banker on the finance committee, or an information technology executive challenging management to justify return on investment of a new system implementation).
Invariably, it involves strong administrative leaders — not just the CEO, but throughout the organization: talented CFOs, CNOs and department administrators. Just as important is coordination among these leaders. The history of sports proves that a group of all-star players does not necessarily yield a championship team — they need to play well together and recognize each other's strengths, limitations and unique personalities. Trust enables strong teams.
In these organizations, leadership is more than rhetoric. Leadership is expressed through actions, some of which are difficult but necessary, such as:
- making sensitive personnel changes to ensure cohesion among administrators;
- making deliberate service prioritization decisions (e.g., focusing on high-impact programs, shuttering other programs, not trying to be "all things to all people");
- opting out of certain payer networks or contracts inconsistent with the hospital's financial strategies and desired terms.
Data-driven decision-making. Another distinguishing feature of these high-performing independents is their use of data-driven analytics, allowing them: (1) a more robust information set upon which to make decisions, and (2) documentation and support for decisions when held accountable by stakeholders (e.g., physicians, patients or community interests).
The following examples illustrate how hospitals applied analytical rigor to make key decisions:
- a community-needs analysis to guide physician recruitment and to respond when established physicians resist "new blood" threatening the status quo;
- business plans for new ventures (e.g., campus expansion, new outpatient locations) that are thorough and vetted by an independent third party;
- critical assessment of capital investments (e.g., asking whether the new equipment requested by physicians will in fact produce better outcomes, efficiencies and a return on investment).
True patient focus. Patient-centered clinic care is a focal point of the current health care reformation, but these high-performing independent hospitals have long exhibited patient-focused decision-making — not just in treating patients — but in the organization's overall service configuration, strategies and culture.
Some interesting examples expressed by one or more of this group include:
- investing in "next-level" services that are not necessarily standard in community hospitals, but are a good fit in a particular community and produce downstream visits and revenue;
- cultivation of "community champions," such as board members or other pillars or influencers in the community who "stay local" for care and talk to others about their experiences.
Relationship building. High-performing independent hospitals often have deeply entrenched relationships with external organizations that function more like partnerships than transactions. These often produce wide-ranging benefits such as leading market share, in-network status in major health plans, sustainable reimbursement rates, and support and trust of the community.
Some examples we observed include:
- developing service line partnerships with leading national institutions (e.g., cancer care with access to training and clinical trials);
- collaboration with payers to develop innovative reimbursement programs (e.g., shared savings, narrow networks);
- establishing seamless continuum of care relationships with post-acute providers;
- partnering with large local employers for agreed-upon pricing services, on-site clinics or both.
The nature of, and level to which, these five factors are expressed in the high-performing independents we studied are as unique as the hospitals. Yet, each hospital in our study prominently expressed some form of each attribute, which has been integral in its determination to maintain its independence.
Without exception, high-performing independent hospitals have been approached by larger health systems regarding affiliation. Even some of the most independent-minded of the group may, at some point, find they want or need to seriously consider such offers. This should not be viewed as a failure. Independence should not be an objective within itself, but rather one potential strategy to achieve what is best for the organization's stakeholders.
If an independent hospital finds itself seriously considering affiliation, we recommend engaging in a thorough, strategic approach to addressing such questions as:
- What are our long-term objectives and goals for the community(ies) we serve?
- Will there be any repercussions from stakeholders if we limit our conversations to a few potential partners instead of issuing a request for proposal?
- What guarantees can we negotiate for services provided locally?
- What is the capital allocation process of the partner system?
- What is the potential partner's governance structure, and what reserve powers will we have?
- Which partner organization represents the best cultural fit for our organization?
There are many in the health care industry who are convinced that the wave of hospital consolidation will be ubiquitous — that no independent hospitals will be able to survive and that we will soon just have a handful of regional megasystems. We believe consolidation will not be so absolute, nor will it be orderly. We expect a number of high-performing independent hospitals to meet the coming challenges and either maintain their independence or affiliate on their own terms from a position of strength.
Ryan E. Ross is a senior director in the Health Solution's strategy and planning practice of FTI Consulting, Indianapolis.