Framing the Issue:

• Independent hospitals are confronting a period of rapid change by considering a variety of partnerships and collaborations to improve clinical and financial performance. Some are actively affiliating with larger systems, while others are remaining independent but engaging in more partnerships with regional providers.

• Experts advise hospitals to carefully assess their capabilities in several core areas — from IT to supply chain to operational productivity — before reaching out to potential partners.

• The further along hospitals are in transitioning to a new delivery system, the more likely they will be sought out for ACOs and other care integration arrangements — and the more likely they will remain financially independent.

When Rachel Gonzales, CEO of Madison Memorial Hospital in Rexburg, Idaho, ponders the future of her institution, she has plenty of reason to be optimistic. The 69-bed hospital, located in southeastern Idaho, boasts a low uninsured patient population, a strong local economy and population growth linked to nearby Brigham Young University–Idaho.

But as an independent hospital, keeping up with the current pace of change is a demanding, never-ending task. Increasingly, Gonzales is looking beyond the four walls of her institution and closely collaborating with other regional providers, from a nearby critical access hospital to two larger tertiary centers.

For now, those conversations have not led to formal partnerships for a variety of reasons — for instance, Medicare's shared savings accountable care initiative isn't an option in southeastern Idaho because of the program's minimum population requirements. Still, Gonzales and leaders from several nearby hospitals meet regularly to discuss the future of health care in their region.

"All of our discussions are about how we keep our foot in this basket while at the same time planning for the future," Gonzales says.

Nationally, many independent hospitals find themselves in similar scenarios, as their leaders look to build the operational efficiencies needed to compete in a climate of reduced reimbursement, a move toward global payment, greater integration and more attention on quality performance. For many hospitals, going it alone may no longer be a viable option.

Many providers are answering that challenge by joining larger systems outright or creating informal collaborations with other providers or payers. And in some instances, there may be few options for long-term sustainability, says Mike Williams, CEO of Community Hospital Corp., a group of not-for-profit and community-owned hospitals whose mission is to "help hospitals remain community-owned and operated."

"We've had to say to some organizations, 'There is no future and you should close your doors,'" Williams says.

But not all hospitals will need to shut down or even structurally align with their partners. Bruce Henderson, the national lead of integrated solutions for Aetna's ACO Services, says in smaller markets, savvy, leading-edge hospitals will be able to remain competitive by aggressively taking on new challenges and looking for more informal partnerships that provide the benefits of collaboration with the freedom of independence.

"We have organizations like that as current partners," Henderson says. "I still think there is a place for many different kinds of organizations to survive."

Once hospitals closely assess their current place in the market and their future viability, experts say, they can determine whether independence is the way forward — or whether an affiliation or partnership with a larger provider makes sense.

Rich Umbdenstock, president and CEO of the American Hospital Association, argues that hospitals should refocus their energies on the question of delivering integrated, connected care instead of focusing on the financial independence of their institutions. But that doesn't mean they have to lose their independence, he adds.

"If you're independent today and you meet the test of coordination and effectiveness, terrific," Umbdenstock says. "It's a matter of the right balance."

Stepping up, before reaching out

For hospitals looking to remain independent, many experts recommend improving clinical, operational and IT performance before engaging other institutions about potential partnerships and collaborations. Aetna's Henderson says hospitals need to develop new competencies in several key areas, from financial alignment to robust data systems, to successfully make the leap to the next delivery system.

"The biggest challenge is how to move from the current model to [a] future model effectively and as quickly as possible," he says. "Being in the middle between fee for service and fee for value is a huge challenge."

Smaller hospitals that are in a position of strength will be attractive partners, says Mickey Bilbrey, vice president of eastern operations for Quorum Health Resources. "We advise our hospitals that if you're going to have a strong affiliation and sustain it, it has to be a two-way street," he says. "The smaller community hospital has to be able to say, 'If you do the affiliation, you get something in return.'"

To reach that point, hospitals should start by carefully analyzing their current cost structure and determining which services are sustainable in a future of projected declining reimbursement and the transition of some services to other community providers. Small hospitals that can analyze and execute forward-thinking strategic plans successfully will be highly attractive partners for ACOs and other models of integrated care delivery, Bilbrey says.

"You've got to examine what your core competencies are," he says. "If you do that, the ACOs will come after you. If you've gotten your costs in line and you've got great quality, those are the types of organizations that will be sought after by these models to be a player."

Art Blank, CEO of Mount Desert Island Hospital in Bar Harbor, Maine, is in that position, helming a 25-bed critical access facility that caters to a population of 11,000 year-round residents that quadruples during the summer.

Blank is also concerned about the future of the critical access hospital program [see sidebar on page 29], but runs an institution with a relatively low Medicaid population that boasts key partnerships with several tertiary providers, including Eastern Maine Medical Center in Bangor. Mount Desert Island is joining Eastern Maine's Pioneer ACO as part of its provider network.

"We have a number of clinical collaborations ongoing," Blank says.

Operating as a medical home, bolstered by key statewide efforts around medical homes and a health information exchange, has helped to solidify Mount Desert Island's future as an independent, but well-connected provider. "I don't think any hospital can operate in a vacuum today," he says. "None of us, but particularly small rural hospitals, can meet all of our patients' needs on our own."

Capital vs. control

Following an internal assessment, CHC's Williams says, hospitals need to determine whether their performance in four key areas — operations productivity, revenue cycle, supply chain and IT — positions them for an independent future or one more tightly linked with another institution.

For leaders who often see their hospitals as durable community institutions, the notion of relinquishing some or all financial or governance control over operations can be daunting. But some providers may have no other choice.

"I say to smaller institutions, the more money you need to be successful in the future, the less control you're going to maintain in local governance," Williams says.

QHR's Bilbrey says that while retaining independent status is an achievable goal for many providers, there are situations where joining a larger institution makes more sense for the hospital and its community. "There are certainly hospitals where the community could benefit from their being acquired or merging, for compelling capital access or facility reasons," he says.

The power of partnership

For hospitals that decide to work together but remain independent, crafting an understanding that benefits both parties is key. For smaller hospitals, the branding power of a well-known tertiary center may be the draw; for the larger hospitals, the opportunity to expand its market and referral network to a stable community provider is often the lure.

Several years ago, St. Mark's Medical Center in La Grange, Texas, found itself struggling with reimbursement issues, recalls former board member Linda Adkins.

Ultimately, St. Mark's decided to build a partnership with St. David's HealthCare, a seven-hospital system in nearby Austin. For St. Mark's, the partnership brought the power of a larger system's brand and the ability to more easily transfer patients from the emergency department. For St. David's, it brought the power of the new referral network.

Adkins says win-win relationships of that nature are key to the success of small hospitals. Several competitors have closed in recent years.

"I think it's the best way to go," Adkins says. "We didn't want to sell the hospital. The community was really unhappy with that prospect."

Williams, whose company worked closely with St. Mark's to identify opportunities prior to the affiliation, says the nature of the arrangement is also beneficial for larger hospitals that may not want to take on the risk of buying a smaller institution, but are interested in furthering the reach of their brand.

"It's about the ability of a tertiary center to create a presence without taking on liability of a hospital fully," Williams says, adding that larger institutions are no longer focused on "how many small hospitals we can gobble up. Now, they want the referrals, but they don't want liabilities."

Independence, or a 'better system of care'?

After all is said and done, can institutions remain largely independent and still provide top-notch care?

"I'm not sure independence is the issue," Umbdenstock says. "The issue is a better, more connected system of care."

CHC's Williams agrees, arguing that for some institutions, the desire to remain independent may be unrealistic. "When a hospital is so far down the road that it doesn't have market power, you're going to have to cede control to access the cash infusion from the tertiary entity," he says.

Despite the strategic challenges in the years ahead, observers say strong independent hospitals can chart out a future that retains local control while adding key affiliations, partnerships or other joint ventures.

Doug McMillan, CEO of West Park Hospital in Cody, Wyo., says his institution is engaged in clinical partnerships with several nearby tertiary centers on everything from medical oncology to the construction of office space. However, its CAH designation and its status as the main regional medical center in northwest Wyoming means that tighter affiliation is an unlikely option.

"Many rural hospitals, because of the ACA and other challenges, have been forced to affiliate with a tertiary [center] or forced to align," McMillan says. "We're not in that position."

Similarly, for Madison Memorial's Gonzales, the strength of her hospital and the generally positive future outlook has led to a focus on clinical partnership, rather than merging or affiliating with a larger institution, as the likely way forward. And her counterparts are in the same boat, she says.

"We're doing our best to try to coordinate and collaborate," Gonzales says. "Each player wants to maintain independence, but wants to work together."


For Critical Access Providers, Special Challenges

While all independent hospitals are struggling with the demands of the current industry environment, critical access hospitals are feeling those pressures even more acutely, with the ever-present potential of state and federal changes to reimbursement.

In 2012, President Obama proposed reducing CAH reimbursement rates by 1 percent, while prohibiting hospitals within 10 miles of another provider from receiving the CAH designation. Although no legislative action was taken, most CAH administrators expect big changes in the near future.

"We're really preparing for the day when we lose cost-based reimbursement," says Harry Geller, administrator of Othello (Wash.) Community Hospital.

Geller's hospital faces particular challenges. At Othello, a safety net hospital serving a population of predominantly migrant farm workers, 79 percent of patients are on Medicaid. Washington state legislative leaders briefly considered reducing critical access Medicaid payments in 2012, though no cuts have been enacted to date.

"Of any CAH [in Washington] we're at greatest risk of losing cost-based revenue," Geller says. "Our mission is geared toward treating the poor and finding ways to remain financially viable."

Still, Geller is moving forward and actively looking for ways to collaborate with other providers.

Othello is working with nearby federally qualified health centers to restructure services and share IT resources.

"Everybody knows that there's no more additional money flowing in," Geller says. "We have to do more with significantly less money. It's just a new world for health care. I'm pretty optimistic we can maintain and enhance quality of care and do it with as many or fewer financial resources as we're getting today."

Similarly, at Mount Desert Island Hospital in Bar Harbor, Maine, CEO Art Blank hopes that his hospital's focus on patient-centered primary care will pay off if and when changes to CAH reimbursement come to pass.

"We'll be well-positioned when they figure out how to pay for value," Blank says. "In the meantime, we just keep working hard to make ends meet." — Haydn Bush


Executive Corner

Ask the 'hard questions'

All hospitals, regardless of their size or system connections, will need to reduce the scope of the services they offer in the years to come, says Mickey Bilbrey, vice president of eastern operations for Quorum Health Resources. Bilbrey projects that for many providers, the majority of patients will come with a payment mix that resembles a blend of Medicare and Medicaid reimbursements. That means that it's imperative for hospitals to begin identifying their core services and developing a future cost structure. "Hospitals no longer can be everything to all people," Bilbrey says. "Those organizations that are beginning to look deeply, step back and ask the hard questions are going to be much more sustainable, and will survive the volatility."

Take advantage of your community

Community engagement will be a key driver of future success, says Art Blank, CEO of Mount Desert Island Hospital in Bar Harbor, Maine. Despite a remote location, the region is a popular tourist destination, which has allowed the hospital to build connections with nearby summer residents, including several physicians. Ultimately, those relationships led to partnerships with Eastern Maine Medical Center and Mount Desert Island's inclusion in the system's Pioneer ACO. "I can't overemphasize how important connection to the community is for a successful rural hospital," Blank says. "The summer community enabled us to make those connections."

Partnering comes in many forms

As accountable care really kicks in, collaboration will happen more and more outside the four walls of the hospital. For instance, hospitals and their partners may create patient-centered medical homes and partner on post-acute care services in skilled nursing facilities or patients' homes. Hospitals may become part of a "virtual network" by connecting with other hospitals through telemedicine. Moreover, partnering might not be focused just on care delivery specifically. For instance, smaller hospitals could collaborate on IT projects — including sharing technology staff — that they couldn't otherwise afford on their own.