Metro Detroit’s large, nonprofit hospitals get an infusion of private sector competition
Detroit-area hospitals got notice that a tough new player was coming to town last March when Michael Duggan, president and CEO of the Detroit Medical Center, carefully explained why a $1.3-billion deal to sell the eight-hospital system to the for-profit Vanguard Health Systems in Nashville, Tenn., was the only option for the cash-strapped hospital network.
It’s the “largest investment in the history of the city of Detroit,” Duggan said at the time. And it was the only thing that would give the DMC access to the capital it needed to compete with other better-financed health sysems. As part of the pact signed in early June, Vanguard agreed to pour $850 million into the DMC to upgrade its hospitals, add facilities, and outfit the system with the latest medical equipment and technology.
The agreement is expected to be a game-changer for the nonprofit DMC. A scant seven years ago, the system was on the razor’s edge of insolvency. A state bailout kept the system afloat, enabling it to continue servicing a patient population that includes some of the nation’s poorest. Duggan came on board in January 2004 and quickly streamlined patient services while aggressively marketing the system’s nationally ranked programs in cardiac care, neurology, and pediatric services. But the turnaround left little room to invest in the types of facilities that attract paying patients to the Midtown campus.
The deal with Vanguard — expected to be finalized soon — would change that, Duggan says. Vanguard’s history, he says, “is building in urban areas. They have the opposite strategy of most for-profits.”
In turn, analysts contend the move is ramping up competition in the region, as other hospital systems undertake bold new expansions to retain market share and prepare for national health care reform. Across the area, hospital management companies believe the upgrades will boost efficiency, lower costs, and translate into better outcomes for patients.
DMC’s improvements include a $170-million patient tower at Children’s Hospital, a $33-million pediatric specialty center, and a $136.4-million overhaul of Harper-Hutzel Hospital, including a new $75.1-million Cardiovascular Institute.
Among metro Detroit hospitals, there are no small plans; eight large health care systems have started or will soon begin work on a combined $2.5-billion expansion portfolio. “It’s a catfight out there,” says Jeff Lutz, a principal in the Detroit office of Deloitte Consulting. “The amount of capital investment in (metro) Detroit for a shrinking market is incredible.”
Among the improvements:
•Henry Ford Health System in Detroit is planning a $500-million expansion to its flagship hospital at the Lodge Freeway and W. Grand Boulevard. In turn, investments would be poured into the surrounding neighborhood, including a potential medical research park in partnership with Wayne State University. Nancy Schlichting, president and CEO of Henry Ford, says that, over time, the total investment could top $1 billion. The plan comes on the heels of a recent $300-million renovation and the opening of Henry Ford’s $360-million medical center and hospital in West Bloomfield Township.
•Warren-based St. John Providence Health System recently opened Providence Park Hospital in Novi at a cost of $224 million, and invested an additional $300 million in upgrades to its east-side Detroit hospital at Mack and Moross. In addition, a technology and neurosciences center was added in Novi.
•In 2007, Royal Oak-based Beaumont Hospitals bought Grosse Pointe-based Bon Secours Hospital. Next year, Beaumont will open a new medical school with Oakland University in Rochester Hills, and it is finishing up a $230-million expansion of its Troy hospital. The improvements include the addition of an emergency center, a critical care tower, and an outpatient services tower that’s attached to the hospital via an elevated walkway.
•Dearborn-based Oakwood Healthcare System recently dusted off plans to build on a 144-acre plot at Beck Road and Michigan Avenue in Canton. System spokesperson Paula Rivera-Kerr says the four-hospital system is looking at all options during a two-month planning process, including a hospital.
“We’re exploring all options,” she says. “If the site does eventually require beds, then we will be prepared for that.”
•St. Joseph Mercy Health System in Ann Arbor, a subsidiary of Trinity Health in Novi, opened a $294-million patient care tower in Ann Arbor in May and has another $161 million in projects under way, including a $43 million surgery center in Canton, a $60 million renovation to Chelsea Community Hospital, and a new diagnostic imaging center, and a new emergency department.
•The largest expansion of all is under way at the University of Michigan Health System, with 3 million square feet of new clinical and research space, including a new hospital for children and women, a cardiovascular center, a depression center, and an eight-story addition to the Kellogg Eye Center.
And those aren’t the only items on the drawing board at U-M. The medical center is exploring new ways to expand its presence outside the region over the next five years. “Future investments will really be throughout the state. We’re talking across the board,” says Ora Hirsch Pescovitz, CEO of U-M Health System and executive vice president for medical affairs. “It could span from partnership relationships with physician groups, to joint ventures, to, potentially, facilities. One shift in our thinking is that we have been more Ann Arbor-centric in the past than we will be in the future. It’s a more collaborative, flexible model of expansion.”
•To the north, Flint-based McLaren Health Care has aggressively expanded into the southeast Michigan market. In 2006, McLaren acquired Mount Clemens Regional Medical Center and, nearly one year later, the POH Regional Medical Center in Pontiac.
McLaren also built a large medical campus in Independence Township in northern Oakland County, including a 135,000-square-foot medical office building and a 42,000-square-foot cancer center costing around $350 million. Future plans call for a 200-bed hospital — something that would require state approval or a legislative exemption.
Other hospital groups are busily developing cancer centers and medical office buildings, and upgrading aging patient towers and other facilities. There’s little choice, analysts say.
With an aging population, a flattened economy, and a wave of national health care reform that will hit by 2014, “Incrementalism isn’t going to get you there,” says Henry Ford Health COO Robert Riney.
In the recent past, as the region’s uninsured population grew, hospitals streamlined operations and cut waste with lean programs borrowed from automakers. They also tightened spending and boosted quality. But the challenges now confronting hospitals require a different take.
At least part of the promise of health care reform was that, by 2014, hundreds of thousands of new patients in the state would be covered by commercial insurance plans. That should spark demand for health care services that were delayed or never considered by area hospitals.
“Hospitals will be in good shape to benefit, but they have to have invested to keep specialists happy and make themselves attractive to patients,” says Allan Baumgarten, a Minneapolis-based health analyst familiar with the Michigan market.
That’s particularly important in a region where there are no clear market share leaders. In a metro area that’s been shrinking for some time, the eight large health care systems are vying to protect their turf.
According to a recent report on Michigan’s hospitals from Baumgarten, Beaumont Hospitals claims 19.3 percent of the region’s market share, based on inpatient days in 2008 — the latest numbers available. Not far behind is St. John Health, with 17.6 percent; Henry Ford, with 17 percent; and the Detroit Medical Center, with 16.1 percent. Oakwood claimed 11.3 percent; Trinity Health, 6.4 percent; and McLaren, 3.7 percent; with 8.6 percent going to independent community hospitals and other systems. Not included in Baumgarten’s analysis are Ann Arbor hospitals.
The DMC-Vanguard arrangement could usher in consolidation as systems try to leverage size to compete, Baumgarten says, pointing to Cleveland as an example of a market that bulked up to two mega-systems in response to the introduction of a for-profit. “In a lot of markets, when you’ve had [the] entry of for-profit systems, the response has been consolidation and system-building,” he says.
About 20 percent of systems nationwide are for-profit. Until now, Michigan’s hospitals have nearly all operated as nonprofits. The one exception is Doctors’ Hospital of Michigan in Pontiac. In 2008, the former North Oakland Medical Center was bought by a group of physicians, with McLaren Health Care as a minority partner, to prevent the safety-net hospital from closing its doors.
But for any hospital network to gain market share, “it will have to come at the expense of other systems,” Baumgarten says. And in Detroit, that’s easier said than done.
Metro Detroit’s hospital systems have shown unanticipated toughness in hard times, says Lutz, of Deloitte. If the rest of the nation’s hospitals started to feel the pain of recession two years ago, those operating in Detroit have been managing hard times for eight years. As a result, the region’s health care providers have become savvy operators.
“Hospitals and doctors have been pretty darn resilient,” Lutz notes. Overall, “they have strong balance sheets ... which has allowed them to go through this difficult period without going out of business, and go through this awful economy with extraordinary amounts of investments.”
Nonetheless, Lutz says, “just putting capital into the market won’t guarantee market share.”
It’s a particular quirk of Detroit that, despite being mired in ongoing economic upheaval, the city is home to some of the nation’s best health care providers — many born when Detroit was symbolic of American innovation. Detroit-based Henry Ford Hospital was financed and developed by automotive pioneer Henry Ford on the same model as the Mayo Clinic. The DMC’s Harper Hospital was founded in 1863 and, in 1952, it was the site of the first open-heart surgery — using a mechanical heart designed by a General Motors engineer and hospital physicians. Over the years, hospitals and engineers introduced dozens of other innovations and medical devices.
What’s more, half of metro Detroit’s eight systems ranked in the top 30 nationwide of U.S. News and World Report’s 2009-2010 list of best hospitals, across specialties including cancer, neurology, cardiac care and heart surgery, and pediatrics. The University of Michigan ranked 14th in the nation, overall.
In turn, Henry Ford Health System’s West Bloomfield hospital has been held up by business author and Fast Company co-founder William Taylor as the hospital of the future. One reason is because the hospital sought to create a healing environment that is centered on wellness and holistic health care. “West Bloomfield was a huge opportunity,” Schlichting says. “You don’t get to build a new hospital very often. We want to think as innovatively as we can and set the pace for health care.”
The emphasis on preventive care may have been prescient. As strong as the competition is to attract patients, another promise of national health care reform — better, but cheaper, care — is stoking competition on another front. “With health care reform, the focus is on costs,” says St. John Health President and CEO Patricia Maryland. “The question becomes, how do you organize your system to provide the most value? There will be more competition, but more on the cost side.”
Health care reform will not only focus on primary care and prevention but, Maryland adds, it will also boost efficiency, lower costs, and produce better patient outcomes by making disparate health care providers — personal physicians, specialists, and hospitals — work together as a team to provide the right care for each specific patient.
To that point, nearly 80 percent of the $2.5 trillion spent on health care nationwide last year went to managing chronic illnesses such as diabetes, hypertension, cancer and heart disease, and related illnesses. The idea of health care reform, supporters say, is to funnel more patients to primary care physicians to emphasize preventive care, but also to better manage patient care across all providers.
“It’s like an air traffic controller — managing and tracking a particular patient, from primary needs to specialists,” Maryland says. “It’s about providing the right care in the right setting.”
Such an approach could help drive down spiraling health care costs by avoiding duplication of costly medical tests, and eliminating prescription drug errors and treatment of patients in expensive emergency rooms for long-festering illnesses that could have been caught early on, providers say. “The better the communication is, the better the outcome [for the patient],” says Brian Connolly, president and CEO of Oakwood Healthcare System in Dearborn. “There’s no days missed and there’s no dropped balls when there is much more effective communication along the continuum of care. It’s good now, but more improvement is needed.”
The effort to integrate care between hospitals, physicians, specialists, long-term care facilities, and other providers is being codified with the creation of a new kind of legal entity. The so-called Accountable Care Organizations (ACOs) — something allowed under one of the provisions of the Accountable Care Act of 2010 — are sprouting across southeast Michigan and the nation.
The provision allows ACOs to receive bonus payments for delivering higher-quality care at lower costs. Hospitals are pushing to create the organizations. In June, Oakwood announced its ACO — something Connolly says would provide “a new framework” for the system to “partner more closely with physicians to provide high-quality, cost-effective care.” In the same month, Henry Ford Health System announced the creation of its Henry Ford Physician Network, a physician-led subsidiary that includes involvement from private practice doctors as well as the system’s employed medical group.
The University of Michigan Health System, St. John Health, and the DMC are also in the process of creating ACOs.
Meanwhile, U-M Health System is finishing its participation in a five-year national demonstration project launched by the Centers for Medicare and Medicaid Services (CMS) that preceded the ACO model.
The project’s goal was to improve care and reduce costs for the treatment of Medicare patients with heart conditions or diabetes, or who underwent cancer screenings. Overall, the project included 10 groups nationwide. An August 2009 report on the project showed U-M Health System saved CMS nearly $3 million over its target by improving the coordination of care for patients who were transitioning from the hospital to home care or another setting, and reducing unnecessary treatments and readmissions.
The University of Michigan performed best overall out of all of the groups in the pilot, U-M’s Pescovitz says. “That particular pilot and others position us ideally to create an ACO.”
Insurers are also rolling out programs to support the structure. The state’s largest insurer, Blue Cross Blue Shield of Michigan, last year introduced a Patient-Centered Medical Home model. The offering designates physician practices as “medical homes” to coordinate care across all health provider settings.
It’s no small undertaking. Practices are redesigned to be more efficient, provide higher-quality care based on the latest medical evidence, and offer services like 24-hour phone access for patients. The model also requires that practices make extensive use of technology, including e-prescribing, maintaining electronic health records, and securing communication between different providers.
The Blues has designated 1,800 physicians as “medical homes” among 5,000 doctors working toward the goal, says Thomas Simmer, Blue Cross senior vice president and chief medical officer, making it the largest such program in the nation. In July, the practices that showed the best performance across the entire continuum of care received a higher set of fees. “It’s a watershed event,” Simmer says.
Early analysis of the data indicates that designated practices are showing improvements. According to the Blues, the practices have a 2.6 percent lower rate of adult inpatient admissions than nondesignated practices, and a per-member per-month cost that is equally lower.
Meanwhile, ER visits are 1.4 percent lower compared to others, while radiology usage was 2.0 percent lower and pediatric ER visits were 2.2 percent lower.
It’s too early to attach dollar savings to the lower usage rates, Simmer says, but even small percentage point movements are meaningful, as the practices cover about 2 million patients. “This isn’t a project; it’s an ambitious program,” he says. “It’s the future of health care.”
But if the future is happening now, key details have yet to be figured out, providers say. “We’re in a cross between business as usual and creating a structure for health care reform,” St. John’s Maryland says.
Sticky logistics of how, exactly, relationships between different providers will be structured to make the organizations work have yet to be ironed out, as do specifics regarding how hospitals and other providers will be paid for their services.
“You’re hearing a lot in the press — ‘We’ve created an ACO,’ ” says physician services group Medical Network One CEO Ewa Matuszewski. “You may have created a new legal entity, but you have to have many competencies in place to truly have an ACO.”
Internal operations need to be restructured, she adds, and legal regulations that govern how hospitals interact with physicians must be rethought. “How do you know that the relationship you have with a health system and other organizations is correct? The biggest [question] right now is, who is going to address concerns of antitrust, fraud, and abuse? These are legal issues that go with these ACOs, and we have to be really judicious. The window is short; Medicare has designated its program for 2012.”
And, if ACOs truly do their job, hospitals may see fewer patients enter their doors, says St. John Chief Strategy Officer Robert Hoban.
“Health care reform is bringing changing care and a changing experience for patients,” he says. “But to work, reimbursement has to change; it has to be based on care and management.”
Reimbursement for health care providers has usually centered on “units” of care: See a patient for a checkup and receive a set rate in return; send that patient for an MRI, and the radiology department will bill for that unit of care. And if it is still done that way, reimbursement is shifting toward bundling patient services together across the spectrum of care, Hoban says.
Hospitals could do well under that type of reimbursement, he adds. But how quickly the pay will catch up isn’t clear.
Lutz says 2014 is a long way away. But, he adds, “if hospitals can thrive (in the interim), they should get better with health care reform.”
At least one thing will remain constant. “There’s always heavy competition,” DMC’s Duggan says. “There are going to be a lot of changes; physician and hospital alignment is being forced by the feds. The systems that handle that well will do well.”