When not-for-profit HealthSpan Health Systems and for-profit Medica Health Plan completed their merger in July 1994, they chose the name Allina Health System to emphasize the alignment of incentives they believed was inherent in an integrated healthcare system.
Now, the hospitals and the health plan are clearly out of alignment.
The healthcare reform that the merger anticipated never came to fruition. Consumers in Allina's Minnesota base and all over the country have been demanding choice and open networks, the opposite of why Allina was created. To those factors, add the scrutiny of Allina's management practices by the Minnesota attorney general's office.
Faced with such pressures, the Minneapolis-based system announced it would split Medica and its 1 million enrollees from its hospital operations by year-end.
Medica, the focus of the attorney general's probe, will become an independent not-for-profit organization, leaving Allina with 18 hospitals and more than 40 clinics. Allina earned $43.9 million on about $2.9 billion in revenue for 2000, a profit margin of just 1.5%. The hospitals division was ranked 45th in Modern Healthcare's 25th annual Hospital Systems Survey (June 4, p. 36) with nearly $1.3 billion in net patient revenue.
Allina President and Chief Executive Officer Gordon Sprenger, 64, has agreed to delay his retirement, scheduled to take effect this month, to oversee the breakup. David Strand, 44, Allina's chief operating officer and the intended replacement for Sprenger, has decided to leave Allina after a transition period.
"We were never able to achieve greater than 25% to 30% overlap in Medica members using our physicians and hospitals, and there was no way to increase that overlap without restricting the choice," Sprenger said. "In the five-year view, it didn't appear there would be a (public policy) reform that favored the integrated model, and there wasn't the appetite among consumers locally (for a closed network) that would get us to the 70% to 75% overlap that is needed to reap the benefits of integration."
Sprenger contended the decision wasn't prompted by the audit, but the scrutiny of Medica's business practices, particularly its relationship to the hospital division, did speed up the announcement of the decision.
Does Allina's decision sound the death knell for integration? Vernon Weckwerth, a professor of healthcare management at the University of Minnesota, Twin Cities, wonders when the concept was ever alive.
Weckwerth said most integrated systems are stools supported by only two legs-providers and insurers. However, only a three-legged stool-with enrollees as the third leg and with a share of the decision-making power-could work. Because enrollees don't have that clout, they want choice of providers, Weckwerth said. "The models then say, these docs and these hospitals belong to us, and you will go there. That's what Allina tried. Guess what? It didn't work."
Richard Davidson, president of the American Hospital Association, doesn't expect integrated systems to disappear, but he agreed that consumers want choice and acknowledged the contradictions integrated systems face.
"The competition for resources among plans and hospitals becomes very complicated, and that's what we're seeing," Davidson said. Some integrated systems have succeeded, he said, such as Sentara Healthcare, Norfolk, Va., and Henry Ford Health System in Detroit. But even the successful conglomerates have "had their problems in managing two different kinds of businesses that are often at loggerheads with each other," he said.
Minnesota Attorney General Mike Hatch has sharply criticized Medica's managers for what he asserts is an over-reliance on expensive consultants and lavish spending on corporate outings and other perks (March 26, p. 4). Hatch went to court to have a judge oversee his audit of Allina's and Medica's administrative spending.
The Minneapolis Star-Tribune reported earlier this month that Hatch told the board of not-for-profit Allina that he wanted the health plan split from the hospital division. The board overseeing Medica is a subcommittee of the Allina Health System board, and Hatch reportedly found it to be a conflict of interest that did not serve policyholders, arguing that Medica needed an independent board that would look out for its interests. In court filings, Hatch argued that the accounting between Allina's units was so complex that it allowed manipulation of where revenues were recorded, and the manipulation often came at the expense of Medica policyholders, Hatch reportedly told the Allina board.
Hatch's spokeswoman, Leslie Sandberg, would not confirm that Hatch called for a split, but she did say in reaction to Allina's announcement: "Our office has had discussions with the company, and we were pleased to see that the company was attempting to address some of the concerns that we've brought to the surface."
After the Star-Tribune's report, Allina's board issued a statement that said the board has been contemplating various strategic changes since November 2000. The breakup plan was announced two days later.
Allina has defended its use of consultants and corporate outings as consistent with good business practices. Sprenger said the governance structure was a "byproduct of the integrated model." Sprenger contends that Hatch's qualms about the structure are really about his belief that there is too much integration between providers and plans in Minnesota.
Medica will keep its name, which predates the Allina system, but likely will use a new logo, because the current logo incorporates a large "A" to signify the link to the system, Medica spokesman Larry Bussey said. The hospital division plans to use the Allina name and logo, Sprenger said. Allina said it expects to have new CEOs for the separate organizations by the end of the year.