CHI seeks integration in all directions, including insurance

Among not-for-profit healthcare delivery systems, Englewood, Colo.-based Catholic Health Initiatives stands out for its simultaneous pursuit of horizontal and vertical integration—expanding its presence in some markets, while taking on new business lines in others. Modern Healthcare editor Merrill Goozner recently asked CEO Kevin Lofton, who has run the $11.3 billion, 74-hospital system since 2003, to explain the strategic thinking behind CHI's recent acquisitions.

Modern Healthcare: You acquired St. Luke's Medical Center in Houston. You've unified your presence and merged with some organizations in Kentucky. What are you looking for with these mergers?

Kevin Lofton: It is all about scale within a region, within a market. The market might be defined as one city. It might be a larger region. And in some cases it's the entire state.

We need to make sure that all of our local ministries have critical mass sufficient to make sure that they are a player in that local environment.

Some of those are wholly owned by CHI. Some of those are in partnership. We feel that if you are not sufficiently positioned from a regional perspective, then at the end of the day it is going to be very hard to play in the population-health management arena that we are moving toward.

MH: Are there some markets where you have historically had a presence where you are a third- or fourth-tier player and might consider getting rid of those assets?

Lofton: We have done that as well, probably more than any other system in the country. The two most recent were St. Joseph Medical Center in Towson, Md., and also St. Mary's Hospital in Pierre, S.D. Maryland has consolidated down to three systems basically—Johns Hopkins, University of Maryland and MedStar. We had a single hospital, a very nice suburban location with excellent outcomes.

But the long-term impact was that we saw that we really could not grow there, and so we felt that the best thing for the future of the hospital would be to secure a place for them in a larger organizational structure. In that case, we transferred ownership to the University of Maryland Medical System.

MH: What are the challenges in integrating acquired hospitals, and how is it going with your most recent acquisition in Houston?

Lofton: St. Luke's in total revenue is about $1.3 billion. It's a six-hospital system, which in many places would be a lot. But in Houston, that is only an 8% market share. So, we knew going in that we would also have to grow, both in Houston and in the region. We think this will help all of those entities because they can go to the market as one organization.

The integration is going well. We had a big announcement in January where we formalized agreements with the Texas Heart Institute and with the Baylor College of Medicine. We think that is very important. Baylor has an invested stake now in our Texas Medical Center, the main St. Luke's Hospital. So its teaching programs are aligned with us and overall we are moving in lockstep. We think that those kinds of alignments are going to position St. Luke's to be a major healthcare deliverer in the future.

MH: You, along with some systems around the country, have gotten into the insurance game. What is your strategy in expanding your presence in insurance?

Lofton: It's a lot about the portfolio. At CHI historically, when you thought about healthcare, the hospitals were the major component and everything was hospital-centric. (Now) we are looking at everything from a continuum of healthcare, and the fact that our role in the future will be to keep people healthy. In order to do that, we have diversified in a number of areas. We acquired a home-care company. We have an invested stake in a reference lab company, as two examples. More recently, we acquired QualChoice, a commercial health plan out of Little Rock. We previously had an invested stake in a Medicare Advantage Plan. It really is just more tools in a toolkit.

We want to look for CHI to move upstream. We are not saying we are going to compete in every market as a health plan. That's really not feasible.

We operate in over 70 communities in 18 states. But what it does say is that in certain markets, it will be beneficial to us to have a health plan as part of what we can bring to the market. You are going to continue to see more direct contracting with companies, and in that case, you really would then be using the insurance company for third-party administration. We now have capabilities in that area to do that.

We also look at our own workforce. We have 90,000 employees. We are self-insured, but yet we pay Blue Cross to be the third-party administrator.

So we will continue to look to have great relationships with the payers in all of the markets that we are in, but at the same time, when it is appropriate or needed, we would be able to introduce our own plan. We currently are processing to have licensures approved in five states.

MH: Do you foresee using insurance to develop a fully integrated delivery system along the lines of a Kaiser Permanente or Geisinger?

Lofton: We have established that in every one of the markets we are in, we will either lead and develop a clinically integrated network (CIN), or become part of one. The key thing is you don't have to own everything.

So, if you take Tacoma, Franciscan Health System is CHI's affiliate up there. We have established a CIN. We have 500 employed physicians in the Franciscan Medical Group but now, through the CIN structure, we have another 500 physicians that have signed up to be part of our integrated network. So we can go to face the market now with 1,000 physicians at multiple hospital sites. We don't have the insurance product, but commercially we do have a Medicare Advantage plan up there.

MH: But is the idea to introduce an insurance product at some point?

Lofton: We don't think that we would have to have an insurance product in every market. In some markets, we are going to have great relationships with the current payers. The key is to switch the model from volume payment to value payment. If we could work those things out with the current payers in the markets we are in, to me, that is the best of both worlds, because we both benefit from keeping people healthy.