These days it seems everything touched by the Children's Hospital of Philadelphia turns to gold. What's more, the hospital broke one of the hard-learned rules in the Philadelphia marketplace book to get to this place.
In a market that crashed and burned in large part because of a frantic land rush for physician practices, Children's has successfully amassed a network spread over three states that includes 26 primary-care practices, 10 specialty-care centers and four inpatient units at regional hospitals. That network is feeding a ravenous acute-care hospital-a quid pro quo other Philadelphia hospital networks have failed to achieve.
Outpatient visits swelled to 696,000 in 2000 from 610,000 in the fiscal year ended June 30, 1999-a 14% increase. Corresponding to that, admissions at the 387-bed flagship hospital climbed 10% during the same period to 19,552 from 17,765. During winter, its busiest season, occupancy rates at Children's run at 110%. The remainder of the year, occupancy levels out at about 85%.
"We're taxed to the max," says Steven Altschuler, M.D., the hospital's president and chief executive officer. "We basically transformed this facility into one big (intensive-care unit). The concept is as technology improves, we reserve this institution for the sickest kids where it's more cost-effective."
Unlike other hospitals in the Philadelphia market, revenue and profit margins are growing along with the utilization rates. In fiscal 1999, Children's earned $13.8 million on $716 million in revenue, a 2% margin. The following year, it earned $29.5 million on $836 million in revenue, a 3.5% margin.
Meanwhile, thanks to "good financial management, appropriate reinvestment and a strong stock market," the hospital's $50 million endowment in 1987 grew to $1.3 billion today.
More to the point, while other Philadelphia hospitals struggle for the upper hand against two dominant insurers, Children's now enjoys "very reasonable and bilaterally appropriate negotiations with the insurance companies," Altschuler says with a smile.
Children's is an overnight sensation 10 years in the making. Charged with designing a strategy by then-president and CEO Edmond Notebaert, Altschuler says he looked at the situation and decided it wouldn't work. The specialty hospital was focused on inpatient services, which were inaccessible and provided by physicians who "were not concerned about service," Altschuler says.
At the time the now-bankrupt Allegheny Health, Education and Research Foun-dation and the University of Pennsylvania Health System, which supplies Children's faculty, already were several years into a strategy that bought into so-called vertically integrated health systems. The UPHS even went so far as to buy several pediatric practices, "which really irritated us," Altschuler says. But Children's instead decided to embark on
a consumer-oriented strategy focused on exporting quality service to the community.
Rather than buy practices, the hospital initially decided to enter risk contracts. At its height, the children's hospital covered about 25,000 capitated members, a number that still stands, Altschuler says. The experience did not make the hospital a lot of money, but it taught it a thing or two about quality management and resource utilization, he adds.
Spurred by the UPHS' and AHERF's buying sprees, the market eventually reached a frenzied point where other systems felt they could no longer afford to sit idle. Children's felt the same, Altschuler says.
But the difference was that Children's began setting up practices slowly in surrounding areas, enticing physicians with a generous incentive program, Altschuler says. It listened to the consultants and refused to pay a penny more than what a practice was worth. All told, the hospital eventually spent less than $10 million to buy practices. In fact, it later was able to take advantage of the AHERF bankruptcy by acquiring several pediatric practices at fire-sale prices.
Children's also was careful to select practices that were "culturally aligned" and could be depended on to refer cases to the hospital. Through its own self-insurance program, it offered physicians another carrot-insulation from skyrocketing liability insurance premiums.
"Actuarially, we control our own destiny," Altschuler says.
Though the idea that whoever owned the physician market would own the acute-care market backfired in the faces of the bankrupt AHERF and the UPHS, Altschuler is ready to take the concept a step further. Thanks to its network, Children's has access to the data from more than 400,000 primary-care visits per year. Altschuler wants to tap into the data to embark on quality studies and improve outcomes.
"That becomes a resource in its own right," he says.