Financial results for four large and sophisticated IDNs illuminate some of the challenges these organizations face as they deepen their integration and simultaneously cope with changing reimbursement models.

Banner Health, Sutter Health, and Highmark Health all reported sharply declining earnings for 2015 compared to 2014, despite increasing revenue, while Partners announced a steep decline in the first quarter of its 2016 fiscal year. Reasons were varied but several key themes emerged, including losses on risk and expenses that rose faster than revenues.

 

                                      2014 to 2015
Operating Revenue Operating Margin
Banner Health +29% -51%
Sutter Health +10% -81%
Highmark Health (incl. Allegheny) +5% -323%
Partners Healthcare (Q4 2015 vs. Q4 2014) +6% -83%

Source: Becker Hospital Report, 2016 and audited 2015 financial statements (Sutter)

 

Risk

Banner, Partners, and Highmark all suffered losses in their risk businesses. Highmark and Partners lost money through their insurance offerings while Banner lost $49 million in its ACO through out of network costs and losses on a fully-capitated Medicare Advantage plan it operates in partnership with BCBS Arizona.

Expenses

IT expenses for installing the EPIC EMR were highlighted by Partners, who expect to see margins decline by $200 million over three years due to expenses and revenue losses during implementation.

Salary and other expenses rose in all four organizations for a wide variety of reasons, all of which suggest that operational synergies have yet to be exploited.

Proximity’s View

Financial results are a useful metric, and positive margins are necessary for sustainability. The results from these four leaders illustrate the difficulty in effectively integrating and achieving economies of scale: A key point to note is that these are system-wide results. Many IDNs have not yet integrated to the point where tracking financial performance at the system level is possible; we can anticipate that these less-evolved organizations are experiencing similar challenges in at least parts of their networks.

Our view is that five attributes are critical to success in the medium to long term:

  1. Shared Incentives

Inpatient volume is likely to decline despite our aging population while home-based and outpatient care for medically complex patients will rise. Successful IDNs must have a business model which effectively funds care delivered in all settings, and generates margins at both system and individual provider levels. Shared incentives, based at least in part on the IDN’s overall performance, discourage entities within the network from seeking to optimize their own performance, potentially at the cost of the system.

  1. Integrated Financial Results

Tracking financial performance at the IDN-level is critical to ensure that integration produces the results intended, including; achieving economies of scale, sharing incentives based upon system-level performance, and obtaining a sustainable and dominant market position in the IDN’s region.

A system-level financial management organization facilitates efficient capital budgeting and payer contracting.

  1. IT systems

IT represents both a threat and an opportunity. Spending on IT can be difficult to control; at the same time any IDN needs to be able to track patients, costs, and productivity across the network. Managing full risk and bundles requires the ability to share information and guidelines among providers to ensure that quality and costs of utilization are appropriate.

In the short term IDNs must gain insights into which service lines and operational sites are producing positive margins and which are producing losses. Providing a clear example, Mayo recently acted on this type of information and closed its Colfax, Wisconsin clinic, transferring patients and some staff to other Mayo sites nearby.

Building a thriving IDN requires the ability to experiment with new structures and processes; strong IT is critical to identifying which experiments work and which need to be ended.

  1. Clinical management

Clinical costs in the form of provider salaries, outside expenses, drugs and supplies are the largest source of expense for an IDN, and also its sole source of differentiation through building programs with high quality reputations. Managing quality and utilization across a network that may include multiple hospitals and potentially hundreds of clinics, medical offices and alternative care sites is pivotal to success. Providers must agree on standards of care and implement these standards through guidelines and pathways, and must consent to having their individual and collective performance assessed.

  1. Cultural alignment

The staff of any provider organization, including IDNs, needs to buy into a mission. IDNs can be especially challenged to accomplish this as their MD and managerial staff include a wide variety of participants. Any large IDN will find that its physicians, for example, are likely to be a mix of KoLs, organizational leaders, economic refugees, and practice-focused physicians who shun duties beyond their exam rooms. Building cultural alignment requires that physicians gain buy-in to larger organizational priorities through participating in governance activities, quality improvement initiatives, and clinical effectiveness programs.