Alliances: Pathways to an ACO

October 14, 2011

By Philip Betbeze, for HealthLeaders Media
October 13, 2011

Federal regulations, especially surrounding accountable care organizations, get plenty of attention these days. But many in the industry are wary about what CMS has in store, and those looking to develop commercial models recognize that a full-scale ACO could be years away. There’s an intermediate step for most organizations that is a prerequisite to ACO creation. In fact, in the HealthLeaders Media Intelligence Report, The Leap to Accountable Care Organizations, while 64% of leaders surveyed say they are planning to implement an ACO structure in the future, about half (52%) have not set a date for when it would be operational. The others (48%) expect that to come within the next three years.

In the meantime, many hospitals and health systems are working on a necessary prelude to ACO creation: scale. They’re doing it in a variety of ways—from mergers with former competitors to joint operating agreements with similar organizations in different markets to bundles of small acquisitions—as is evident in the constant stream of headlines detailing the latest acquisition or joint operating agreement struck between formerly independent entities. Not only could such agreements pave the way for ACOs, but they arguably allow the new entities to save by reducing duplicative services and by reaping additional economies of scale.

Three recent deals that increase scale deserve attention in that they are all a little different, yet seek to achieve the same stated goal: better, more coordinated patient care at a lower cost. You may not hear it from the participants themselves, but market share increases are a seldom-mentioned side benefit. 

Duke/LifePoint Combining core competencies

Their relationship began in Danville, VA, at a small hospital in the southern part of the state: Danville Regional Medical Center, where Duke University Health System was working jointly with the hospital leaders to develop a program focused on cardiac diseases. Danville Regional, one of a network of regional referral hospitals for Duke, is owned by Brentwood, TN–based LifePoint Hospitals, which owns more than 50 hospitals around the country.

If that relationship was a peashooter, what blossomed afterward was a cannon shot. Together, they formed DLP Healthcare LLC, a holding company jointly operated by the two that is aimed at doing acquisitions, long-term leases, and joint ventures with community hospitals in North Carolina and, in the future, adjoining states.

The idea germinated when William J. Fulkerson Jr., MD, Duke University Health System’s executive vice president and a professor at Duke’s school of medicine, was fielding calls from regional partners about pressures they were beginning to see for independent hospitals around their performance, pressures in reimbursement, cost containment, and program development.

“Our core competency is not operational excellence in small hospitals in small communities,” Fulkerson says. “We don’t have the capability of local physician recruitment, but we can develop clinical programs that are appropriate in small communities and can extend affiliation to physicians there.”

To forge any bigger relationship than serving as a program affiliate or as a tertiary partner for referrals with small community hospitals, Fulkerson and Duke needed a partner that was expert at operations as well as quality and safety programs at such hospitals. That’s where LifePoint came in, he says.

“The secret to success is delivering the highest possible quality at a competitive cost,” he says. “If we can’t do both, we won’t be successful.”

DLP, which both entities refer to as Duke/LifePoint, does not have employees, per se. Instead, both Duke and LifePoint have representation on its board of governors, which will focus on strategic decision-making and long-range planning. That group makes major decisions for DLP, including decisions about capital allocation. That board works with local hospital boards on decision-making and planning. Each local hospital continues to have its own governance and board of trustees, but DLP will have representation on local hospital boards. Also in DLP’s structure is a quality oversight committee, which reports to the board of governors and is made up of clinical experts in both organizations.

“That’s where Duke will have significant input and influence,” says Fulkerson.

LifePoint Hospitals Chairman and CEO Bill Carpenter says the partnership with Duke makes sense because community hospitals have a dire need for the clinical expertise of a highly respected academic medical center like Duke, but also have a similar need for expertise on navigating the quickly changing world of healthcare reimbursement and regulatory compliance that may otherwise be too much to handle and may require bigger capital investments than they can swallow on their own.

“Hospitals in smaller communities are considering their alternatives because the world is changing so fast,” he says. “Recruiting, capital improvements, technology, meaningful use, compliance, and reduced reimbursement are all things that smaller community hospitals are trying to deal with, and they need the long-term security that a well-funded partner can bring to them.”

Both Duke and LifePoint plan to take the first year or so slowly, although they are open to many different deal structures. They launched the LLC with a joint venture between DLP and 102-licensed-bed Maria Parham Medical Center in Henderson, NC. The deal means DLP takes an 80% ownership stake in the hospital, proceeds from which will be used to fund a community foundation in Henderson and retire all MPMC debt, while allowing MPMC to retain 50% representation on the 10-member board of the hospital. In return, $30 million will go to the foundation, and DLP agrees to make $45 million in capital improvements to the hospital over the next 10 years.

That model isn’t new. It’s been used successfully by Triad Hospitals, but growth of the model was stunted when Triad was acquired by Nashville’s Community Health Systems in 2007. Though it was a main pillar for Triad, CHS gradually divested itself of such deals and didn’t do new ones. Triad’s management team subsequently launched LHP Hospital Group LLC, which has continued the model on a smaller scale.

DLP also plans to do outright acquisitions, and did so in August with the acquisition of 110-licensed-bed Person Memorial Hospital in Roxboro, NC, which had been managed by Duke alone for the past 13 years. It also acquired MedCath Partners LLC’s nine North Carolina heart labs for $25 million.

Fulkerson notes some reticence on the part of those at the recently acquired organizations regarding the nature of the Duke and LifePoint partnership.

“Six months ago, we were brand-new and the local folks at the two hospitals were uncertain of where this was going,” he says. “My response to Maria Parham was, if you’re the first, we’re going to be damn sure this is a success. We have been talking about this for two years and we have a good idea of what our capabilities are.”

He says an overriding positive for the two hospital boards was that they were assured that DLP wasn’t interested in driving all possible procedures to the main campus in Durham.

“When we talk to local trustees and physicians about this, it’s a compelling story about the value proposition for the hospital,” Fulkerson says. “Our first interest is in developing locally and making sure the kind of services that should be performed in Henderson or Roxboro are.”

The partnership isn’t necessarily limited to Duke’s traditional sphere of influence. LifePoint’s more than 50 other hospitals in 17 states will also benefit, he says. Besides, the future of the partnership most likely extends beyond North Carolina.

“We are pursuing other joint ventures in targeted regions,” Carpenter says. “Having said that, I am so excited about our partnership with Duke and what it brings to clinical program development and support for quality outcomes. We’ve not had extensive discussions yet, but Duke has a sphere of influence that is well beyond Durham and North Carolina.”

Poudre Valley Health System and University of Colorado Hospital
Building a bigger system

The relationship between Poudre Valley Health System and the University of Colorado Hospital could be categorized as permanent. What’s interesting is that the systems are building a new health system through a joint operating agreement. Although for now, they are operating under a letter of intent, the combination of the two geographically separate (by 50 miles) systems is aimed at presenting the combined organization to a much larger patient base. Its strength will come from combining a community-based system with an academic medical center to better coordinate care, says Poudre Valley CEO Rulon Stacey. Key to the deal is that both systems come to it from a position of strength, he says.

“We didn’t feel driven to do anything—we’ve had three bond rating upgrades in three years, and a Baldrige award for ourselves, but there’s an argument that organizations that affiliate in this way will better be able to meet the criteria under healthcare reform,” says Stacey.

Though the move won’t be a merger per se—as governmental entities, neither is statutorily authorized to merge its assets—they will combine organizational structures and issue one combined income statement. In other words, it’s a merger of operations, management styles, and mission, if not of assets.

The new system is undergoing a full review on the services that each partner offers that will complement the other. Stacey says, for example, that the University of Colorado Hospital offers transplant services that are unavailable anywhere else in the state and that Poudre Valley will contribute its system-owned medical group that has more than 20 clinics in three states.

“We’ll work to expand that,” he says, adding that branding is still to be determined.

“There are no sacred cows. We’re going to do our due diligence and whatever makes the most sense for patients and resonates with them is what we’ll do,” he says. “The governance issue is also under review. ”

Clinical leadership must also be addressed.

“Usually when you do something like this we get negative feedback from lots of different places, including the medical staff, but we’ve received none,” says Stacey.

Texas Health Resources and Methodist
Reducing care variability

Yet another method to build scale is on display in North Texas, where the Arlington-based, 24-hospital Texas Health Resources is joining forces with four-hospital Methodist Health System of Dallas. Putting a label on the agreement is difficult. It’s not a merger, an acquisition, or even a joint operating agreement, but the two geographically separate systems believe they can work together to form an accountable care organization of some kind in the Metroplex—Dallas, Fort Worth, Arlington— and the surrounding communities.

Doug Hawthorne, THR’s CEO, is not ready to provide specifics of the accountable care structure of the partnership, but he says neither organization finds the federal Medicare ACO framework attractive at this point, and local payers haven’t yet expressed much interest in building out commercial ACO options.

“We’ve created what we call a cooperative agreement,” he says. “They’re an excellent partner with us because they fill a geography we don’t have, so we don’t really compete.”

They do have complementary parts, especially for coordinating care and driving clinical protocols. For instance, early in 2011, THR did purchase one of the area’s largest physician associations, 280-physician MedicalEdge Healthcare Group. Hawthorne says Methodist’s deep involvement in home care and a well-developed clinically integrated service line structure was an obvious advantage in filling in gaps in knowledge that THR has as well.

“As we talk to other partners about filling out some of this continuum that neither of us has, we have a chance to visit together about something that might have significantly more benefit than what we might do individually,” he says.

Cutting down on variation also is a big target of the agreement.

“There are 1,400 home care agencies in the Metroplex,” he says. “We use about 400–500 of those. That won’t work, as we see it, in a continuum where quality outcomes will be critical. You can’t have that much variation.”

Though they have no immediate reimbursement options under an ACO framework, that doesn’t mean the two systems aren’t expecting to have them in the near future, and they want to be ready. Both are participants in Premier’s ACO Collaboratives, pilot programs initiated by the membership-owned group purchasing organization.

And, Hawthorne says, the THR/Methodist agreement is not the last such partnership, even though ACO opportunities are only in the formative stages.

Both organizations will contribute senior strategy and finance representatives toward committees that will work together on the vision of the partnership. Hawthorne and Methodist President and CEO Stephen L. Mansfield will also join those conversations monthly.

“We’ll begin to assess and analyze whether we are on some tracks that will create benefit,” he says.

As they see the structures of accountable care unfold, they’ll consider whether and how to share data or certain elements of patient outcomes, and will have to work on creating certain “firewalls” so that proprietary information won’t be shared.

“We don’t have a formal plan until we get good feedback from our folks on what the opportunity might be,” Hawthorne says. “It’s kind of like opening a model airplane kit. As we look at the pieces, we’ll begin to formulate and put them together as we see the need. In a year, we will have designed something.”

Each will continue to do its own negotiations with private payers, and Hawthorne predicts that within a year the systems will know more about what payers are thinking concerning accountable care payment structures, which will allow the two systems to work in a more aligned way to create products. Hawthorne is hopeful for more deals like the one it signed with BlueCross BlueShield of Texas in 2010 that creates pay-for-performance incentives that “have great value from both parties being engaged in improving outcomes.” They’ll push that conversation with payers in negotiations, he says.

“You will see similar alignments across the country of like-minded and like-missioned organizations going forward. For us, it’s preparation for what we may begin to see in 2014 as health reform issues begin to take off,” he says. “We think of where the puck is going rather than where it is. You’ll see THR doing similar cooperative arrangements with others in the Metroplex.”

He does not expect that such arrangements will face antitrust scrutiny, either.

“We’re walking into some new waters, but we’re not uncomfortable because we’re not dividing territory or doing some other yellow- or red-flag things that would draw their attention.”