'Be prepared to provide high value'

The most significant merger of 2013 knitted together two of the nation's largest for-profit hospital chains—Dallas-based Tenet Healthcare Corp. and Vanguard Health Systems, with headquarters in Nashville. Unlike some other large for-profit systems, Tenet's leaders expressed their willingness to engage in delivery-system reforms and vowed to bring their expertise in managing population health to the new entity's combined 77 hospitals, five health plans and five accountable care organizations. Modern Healthcare editor Merrill Goozner recently sat down with President and CEO Trevor Fetter and Vice Chairman Keith Pitts to discuss the merger and the future.

Modern Healthcare: How is the merger working out? Are you realizing the synergies you were hoping to get?

Trevor Fetter: There is a significant trend taking place in our industry toward consolidation and integration within markets. Vanguard appealed to us because it had built an impressive portfolio with great hospitals in markets we found very attractive, such as Detroit, San Antonio and South Texas. They are also very complementary with us, with no overlap in any market. But in a state like Texas, we were able to double our revenue and make it the largest percentage of revenue in the entire company. Also, Vanguard's strategy of clinical quality excellence was very complementary to our own strategy. So there are best practices in both companies that we are migrating from one to the other and across the whole. And I couldn't be more pleased with where we are now.

MH: What is the combined company's approach to experiments in the Affordable Care Act, like accountable care and patient-centered medical homes?

Keith Pitts: We participate in five Medicare accountable care organizations. One is a Medicare Pioneer ACO and the rest are Shared Savings Program ACOs. We also have some private-pay ACO experiments going on. In addition, we've been in bundled payment for many years in San Antonio, and we are now converting over across the platform, with different bundled payment plans. Both companies have been very focused on innovation to reduce readmissions. We have learned a lot from the early stages of ACOs, because those are not like a Medicare Advantage plan where you can manage where patients go. So you really find out when you get the data what happens to patients and where they go. Our focus is on preventable admissions or readmissions. We have been spending a lot of effort learning what drives that. For example, there is a direct correlation between how fast the patient gets to their doctor after discharge the first time. If it takes longer, the readmission rate goes up substantially. So just by coordinating to get those patients in to see their primary care physician within five days after discharge, you can make a dramatic difference.

MH: Admissions are declining across the country. How does the combined system financially deal with that?

Fetter: We have invested heavily and our businesses are actually growing. Outpatient has been growing significantly. There has been migration from inpatient to outpatient. Inpatient admissions have been down year over year for maybe the past three years. We have been able to offset that at the bottom line by being increasingly efficient in the way we work and with cost reduction. But there are demographic forces out there that are pushing toward a higher rate of utilization in the future. We are very well positioned for that when it comes. I also was particularly excited about the opportunity to participate in a big way in the insurance exchanges. We have positioned our hospitals very effectively to gain market share as people enroll in those exchange-based plans.

MH: You are very active in a number of states with a high number of uninsured residents, such as Florida, Texas and California. Tell us about your activities to get people enrolled in either private plans or Medicaid.

Fetter: The first part of our strategy was to position our hospitals effectively. Literally every one of our hospitals is in network with at least one insurance product in each metal type. More importantly, 97% of our hospitals are in network with a silver-tier plan that is at the lowest- or second-lowest price point. So we are ready for these patients. We took matters into our own hands in terms of helping the enrollment both for Medicaid and the exchanges. Through our Conifer subsidiary, we set up a toll-free number that we staffed to help people. And we established partnerships with 350 local community groups that helped enroll people. We also used millions of pieces of direct mail. We are very pleased with the results so far. I think we are making a difference in these communities, and it will help us, as uninsured people convert to insured status.

MH: What is the Federation of American Hospitals' legislative agenda in the immediate short term and over the next year?

Pitts: We have interest in the continued cuts in the president's budget. We are concerned with the implementation of the Medicare two-midnights rule. The hospital industry already has been funding the ACA, so we're obviously very interested in getting some trajectory to fill that gap back in. We have over 100,000 employees who go to work every day to take care of people, so it's counterintuitive that we as an industry could be anything but supportive to try to get everybody covered. Obviously, where we have potential cuts, that's where we're trying to push back because we feel like, as an industry, we've been under a lot of pressure.

MH: What would you like to see the administration do on the two-midnights rule?

Pitts: We're still working through that with the administration. The CMS actuary said the implementation would cost the government money and took some money away from the update factor for hospitals. We believe it actually cost us money. We're still discussing that, and the CMS has been very receptive. They moved off the Medicare Recovery Audit Contractors' ability to enforce that rule.

MH: What is the future of the fee-for-service system and narrow provider networks? How do you see the payer marketplace evolving?

Fetter: It's hard to know. There's so much in play. But I do think these themes are probably here to stay—integration, care that's based on value, and people trading unlimited choice for value, which argues for narrow networks, lower prices and higher levels of quality. We plan to be very successful in that environment, because typically, our hospitals are priced lower than our competitors, our cost structure is much lower, and we are able to be very efficient by virtue of our scale. And we have high levels of clinical quality.

MH: Do you plan to broaden your base of acquisitions within markets to acquire more physician practices and post-acute care to become more of an integrated network, or will you move into other new markets?

Fetter: I think actually both. We've been very active in the outpatient area in building and buying and creating new types of outpatient centers. We have plenty of opportunity left in our markets. We're also engaging like never before in partnerships with other providers in markets, and that expands our reach without actually having to build or buy something. But I think we'll also continue to pursue acquisitions. We have very substantial economies of scale. There are benefits that we can bring to acquired hospitals.

MH: Do you think that some people in the for-profit sector are going to miss the boat on coordinated care, or do you think that there are other models that they can successfully pursue?

Pitts: The key thing is that every market is different and every company is a little bit different in terms of its evolution in that area. There are companies that are principally in rural markets and there are companies that have very large, very well-developed networks in other markets. I really have no basis to criticize. I would say this to anybody, whether you're an investor-owned or not-for-profit: Be prepared to be competitive in your markets and to provide high value.