Allina hasn't mastered the aligning part of alliances.
Halfway into its third year of operation, the high-profile Minnesota health system is finding it hard to act like a unit.
Part of the problem is Allina Health System must be an integrated company, an independent provider network and a separate health plan all at once to meet the demands of the Twin Cities market.
More bothersome are its difficulties in forging the most vital link in the cost-control chain-physician cooperation in capping utilization.
Its balance sheet tells the story. Allina executives said the system will record a meager profit margin in 1996, but they declined to release specific figures at deadline. They said last year's results are well below its 1995 margin of 2.6%. It got lean and mean during the holidays earlier this winter, cutting system overhead by 15%, including asking 2,000 employees to consider a voluntary severance deal.
Despite healthy hospital operations in 1995, Allina's overall profit was dragged down to $55 million by system overhead and the performance of clinics and other diversified businesses.
Allina Executive Officer Gordon Sprenger said these bloody cutbacks would take place even if Allina had never been created. Sprenger and his cohort, Allina President James Ehlen, M.D., merged their respective hospital chain and health plan in 1994 in a widely watched effort to turn payers and providers into helpmates for better, less costly patient care.
By all reports, the entire Twin Cities market suffered last year. Every health plan is complaining of rising medical expenses, and providers are also hurting, said James Reinertsen, M.D., head of HealthSystem Minnesota, an integrated system in the Twin Cities suburbs. Reinertsen said his system would break even at best in 1996. "The next thing that is going to occur here is that prices are going to go up," he said.
The performance of Allina, however, is particularly notable. Allina is an industry icon, viewed by many as a model for the future. What's more, Sprenger, a well-known hospital administrator, is the immediate past chairman of the American Hospital Association, which intends to open its membership to integrated delivery systems like Allina.
The company, based in the Minneapolis suburb of Minnetonka, draws $2.3 billion in annual revenues, operates 19 hospitals and 60 clinics, and covers one-fourth of Minnesota's residents through its HMO and PPO.
Sprenger said he still believes merging the hospital chain and health plan was the best choice for the Twin Cities market. Allina makes more than 14 million patient contacts each year, an enormous opportunity to influence the health habits of Minnesotans. And Sprenger and Ehlen decided that without merging their companies, they couldn't reach the desired level of integration.
Yet Allina still must act at times as an independent hospital chain and a separate health plan, sometimes in opposition to each unit's interests.
For example, to satisfy enrollees' demand for a broader choice of providers, Allina recently resumed a contract with rival hospital system HealthEast, robbing one of its own hospitals of admissions and revenues.
In another example, Allina's aggressive pricing to establish itself as the market's low-cost health plan set up its hospitals for a battle with a key payer.
Blue Cross and Blue Shield of Minnesota accused Allina of buttressing its health plan and clinics with above-market hospital prices. The two parties entered nonbinding mediation in January to reach a provider contract, which has been kept confidential. What is known is that Allina succeeded in negotiating terms for its hospitals as a group. The Blues, meanwhile, came away with some initiatives to improve doctors' utilization of services.
When Allina was conceived, vertically integrated systems were supposed to take over the Twin Cities market. The Clinton administration healthcare reform package pushed vertical combinations, and Minnesota actually intended to drive all payers and providers into such deals. Both reform plans ultimately were abandoned. Instead, multiple models of healthcare emerged in the Twin Cities.
The result was constant market change that distracted Allina from its integration efforts.
Another problem was that finding appropriate financial incentives for doctors proved more challenging than expected, Sprenger said.
Similar troubles plague other healthcare systems, he said. "Everybody said capitation is the answer, but capitation is less than 10% of our business," Sprenger said. "We want to help our physicians be successful, not get them into situations they don't have the skills to handle."
Allina now is trying to tighten its relationship with doctors, asking its 6,000 network physicians to become partners, associates or affiliates. Partner physicians will design best-practice guidelines and face financial risks for performance, perhaps through capitation.
Sprenger said he didn't know how many physicians would opt for each category. "Some physicians are ready to go right into partnership," he said. "More will toe the water as associates.
"The point is to get better relationships with physicians so we can determine a better way to take care of patients. We've been through this command-and-control approach. Now the physicians really need to get engaged and incentivized."