This isn't how it was supposed to be. A new survey shows that though many healthcare systems increased their market share and revenue during the last three years, that success hasn't translated to handsome profits.
In spite of the growth, more than one-third of the systems surveyed said they lost money on operations in their latest fiscal year. More than half of the systems said they broke even or were able to eke out an operating profit of less than 4%. Only a small percentage of systems--12%--said they had operating profit of 4% or more.
Those are among the findings in the fifth annual survey of chief executive officers at integrated delivery systems conducted by Arista Associates, a Northbrook, Ill-based consulting firm. Fairfax, Va.-based Decision Support Systems and Services tabulated the results.
With a 28% participation rate, the survey includes responses from 132 CEOs.
Given the systems' less-than-stellar financial performance, it's ironic that operating cost savings and enhanced market share are among the chief benefits associated with developing an integrated health system.
"There's a huge disconnect between achieving critical mass and attaining financial success," says Morley Robbins, a principal at Arista.
For most systems that's due to pullbacks in reimbursement by both the federal government and managed-care companies, Robbins says.
When systems compared their financial performance to the prior year, they reported a marked decline with 62% of systems saying their operating margins had fallen.
The survey represents a broad spectrum of health systems from around the country, although the majority--66%--are organized regionally and concentrated within a single state.
Virtually all of the systems described themselves as not-for-profit--religious or otherwise--with the exception of three systems that are investor-owned and another six that are federal or municipal systems.
The systems range in size from less than $100 million in annual revenue to more than $2 billion. The largest revenue group--27%--have revenue between $250 million and $499 million.
Like all surveys, this one comes with a few disclaimers. The most important is that the survey relies on self-reported data and is therefore at the mercy of different accounting and reporting methods.
Also be aware that the number of respondents to each question varied.
Not surprisingly, financial issues were mainly to blame for 41% of the systems thinking about shedding or having recently shed part of their system in a process known as "disintegration."
The most popular item that systems shed were physician groups, followed by hospitals, health plans and skilled-care facilities.
For those systems just contemplating disintegration, the most likely component to get the ax is a home healthcare company.
However, these divestitures come with a price.
For 39 systems, shedding parts will mean a loss of less than 10% of their revenue; another two systems reported that they will see their revenue drop by more than 25%.
One of the systems surveyed that has actively shed money-losing components is the Baptist Health Systems of South Florida in Miami.
In fact, the four-hospital system expects a return to profitability this year because of in large part this strategy. Last year, Baptist posted an operations loss of $8.7 million on revenue of $600 million for the fiscal year ended Sept. 30, 1999.
Brian Keeley, Baptist's president and chief executive officer, can tick off a laundry list of things the system recently has shed:
* Employed physicians.
* Full-risk managed-care contracts.
* Ownership in an HMO.
Baptist, Keeley says, also has terminated HMO contracts that weren't reimbursing the system at above their cost of care.
Keeley says the changes needed to be done.
"We had a very strong year in market share . . . We grew everything," Keeley says. "We were turning back patients and we lost money, and I said, `How can this happen?' "
The system has another plan in the works to further improve its operating performance.
Baptist hopes to lease its money-losing 100-bed Homestead Hospital in southern Miami-Dade County to the Public Health Trust, Miami-Dade's mammoth publicly funded healthcare system.
Keeley says the hospital, which is expected to lose as much as $7 million this fiscal year, is the No. 1 drain on Baptist. The system has blamed the hospital's losses on large numbers of uninsured patients in southern Miami-Dade County.
The boards of both Baptist and the Public Health Trust are discussing the potential for a lease agreement.
In spite of the challenges facing integrated systems, the majority of CEOs still strongly believe that organizational integration with physicians is critical to success. To achieve this, 73% of systems--a total of 93--said they were using a model of physician employment with incentives.
But of the 124 systems that said they were losing money in the operation of their physician practices, 58% said they were trying to correct the situation by changing physician compensation.
Ironically, while integration with physicians was seen as key to a system's success, physicians continue to be regarded by a majority of system CEOs as a significant barrier to clinical integration.
The survey also looked at system governance.
The majority of systems--63%--had a system or corporate board where physicians made up anywhere from 10% to 39% of the members.
The majority of CEOs felt that the number of physicians serving on their board was appropriate.
Not surprisingly, the vast majority of system CEOs believe the Internet will effect a fundamental change in how services are delivered to patients within the next five years.