It's easy to understand why health systems maintain prestigious specialties such as neurosurgery. After all, a single procedure can cost more than $40,000 and can each yield profits of $10,000 or more. In reality, however, health systems are often chasing a pot of gold that would be easier to reach by collaborating rather than competing with other nearby practices.
Neurosurgeons typically deliver more than $1.6 million each in revenues annually, and with an aging population, there's growing demand for brain surgery; by 2030, chronic subdural hemorrhage will be the most common adult brain condition in the United States needing neurosurgical intervention. However, data from healthcare consultant Merritt Hawkins reveals that maintaining tertiary service practices can bring a huge cost — the average neurosurgeon earns about $670,000, making them the best-paid medical specialists. Unless those practices run at high levels of efficiency, many often lose money. Indeed, many health system managers I've spoken to complain of losing more than $200,000 per physician annually.
It's easy to see why. Hospital systems often compete with almost identical clinical offerings with competitors operating in the same geographic area of their practice. They compete not only for patients but also for physicians and specialized nurses. As a result, these practices often use their facilities less than what's needed to turn a healthy profit and end up losing money, often 10 percent or more.
But some organizations are combatting these lose profits by consolidating. Take for example Partners HealthCare and North Shore Medical Center in Massachusetts, which are planning to consolidate Salem Hospital's cardiac surgery program with Massachusetts General Hospital's in Boston. Improvements in angioplasty, cardiac care and prevention efforts have led to a 40 percent drop in demand for cardiac surgery in recent years, meaning neither facility is operating profitably. The two operators hope they can return to profit by combining their well-respected practices..
Another trend paving the way for consolidation is the shift in America's healthcare system away from fee-for-service and toward rewarding quality and outcomes. Improving outcomes and potentially offering guarantees to patients will require collecting patient data so that providers can monitor results. That will add costs to practices, adding further pressure to operations that aren't running at good profit margins. With the average hospital turning a profit of 3 percent and a well-run hospital earning profit margins of 10 percent, the only tertiary practices that can justify continuing their current operations are those that earn a reasonable profit margin. Others should consider collaboration or setting up a joint venture with another system within the same geographic location to gain efficiencies that can only come with scale — particularly those specializing in neurosurgery, oncology, urology, thoracic surgery and vascular surgery, which are only really profitable when certain volumes are attained, like factories that must be used for the vast majority of the time to be worth maintaining.
The reality, however, is that these decisions are often based on emotions rather than pure economics. Many hospital managers fear that if they give up certain specialties, they'll no longer be considered a full-service facility and their brands will suffer among patients and regional medical professionals. However, collaboration can improve the reputation of a health system by adding the creation of a center of excellence that follows a unified clinical approach. It's an approach that can benefit not just two competing health systems, but also competing hospitals within a single, large health system.
Of course, health systems considering collaboration must make sure not to fall foul of antitrust rules. The key to avoiding antitrust concerns is ensuring that any joint venture focuss on improving patient outcomes by pushing for innovation. The benefits of collaboration include reducing the costs associated with health information technology and setting common clinical protocols that can yield measurable, improved outcomes.
In Phoenix, Arizona, Banner Health's $1 billion acquisition of the University of Arizona Health Network is an example of effective collaboration on a large scale. Those assets are now being realigned as a series of more than a dozen institutes for specialty care rather than assets that compete with each other. Now, doctors will follow the same clinical approaches and the health system will work on cutting costs and capturing efficiencies while also modernizing facilities.
These days too many health systems operate these practices at a loss, unwilling to concede the prestige of maintaining these operations and foolishly hoping that competitors will exit the business. Collaboration on tertiary practices can improve profits and lead to better outcomes for patients, and that's a win-win for everyone.
(Tony Colarossi leads Plante Moran's acute healthcare consulting services.)
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