Integrated Health Care Economics

Transcription

1 Original Research Integrated Health Care Economics Part 1: Are Specialty Physician Services Revenues Reliable Predictors of Community Health System Financial Performance? By Daniel K. Zismer, PhD, Jeffrey McCullough, PhD, Peter E. Person, MD, MBA, Colleen Renier, MS, and David Knutson, MS In this article A new study finds that specialty physician services revenues are not necessarily good predictors of overall health system financial performance. Clinical service line strategies are popular in community health system business development planning and management. Specific clinical service lines are indentified for growth, development and strategic investments such as specialized facilities and clinical and information technologies. Physician recruiting plans are developed along specialty service lines to support these strategies; e.g., cardiovascular, cancer care, orthopedics, neurosurgery and other surgical and procedural specialties are often emphasized in specialtyfocused strategic plans. Strategic and related business and financial assumptions are that physician services drive downstream inpatient and outpatient revenue that translates reliably to both service line and health system profits. It is often assumed that incremental dollars generated on relatively fixed cost structure are reliably profitable. Consequently, increased physician professional services dollars (i.e., physician services production) are expected to generate these downstream profits. In other words, an incremental, busy physician specialist in a key strategic clinical service line is always a profitable investment. Not an all together unreasonable assumption given the conventional wisdom driving strategic service line strategy and management for today s community health systems. Purpose of the study This study was undertaken to determine how strategic physician productivity affects community health system financial performance for one integrated health system. Specific questions included: 1. Is physician service productivity (i.e., professional services production) alone a good predictor of overall health system financial performance? In other words, if a clinical service line is strategic and assumed to be profitable, is physician services production a reliable predictor of profitability of the entire service line? 2. Which physician specialties (and related professional services production) contribute more or less to overall community health system financial performance; are all strategic physician services good predictors of profitable financial performance? Study setting and rationale This study was conducted using financial information from a fully integrated health system. For purposes of this study fully integrated health system is defined as one that employs most, if not all, physicians required to meet its mission and strategic and financial goals. Integrated systems own, aggregate and analyze the requisite health system and physician financial data to conduct such a study. A supporting rationale for integrated health system financial data utilization is the assumption that market forces and related U.S. health care economic dynamics will exert pressures on the more conventional community health Editor's Note: Some PEJ readers have requested that ACPE begin publishing more scientific studies and research. In response, this is the first article of a new occasional feature focusing on original research. 26 PEJ may june/2009

2 Table 1. System and physician services net operating revenues by year Period Total net operating revenues MD net operating revenues MD share of total net operating revenues Months 1-12 $215,407,898 $128,274,588 60% Months $229,721,528 $127,620,697 56% Months 25-33* $185,664,127$ $98,997,785 53% * Denotes short year with only 9 months Table 2. Physician net operating revenue, by service line and month Physician service line Average net operating revenues Share of total net operating revenues PCP-Regional $1,866,314 10% Ortho $1,420,783 7% Cardiology $1,391,706 7% PCP-Main $1,287,580 7% Radiology $1,147,528 6% OB GYN $719,946 4% Neurosurgery $599,870 3% Gastroenterology $557,092 3% General Surgery $502,801 3% ENT $331,137 2% Urology $327,708 2% Oncology $303,610 2% Cardiothoracic surgery $298,260 2% Table 3. Effect of service line net operating revenue on total net operating revenue, multivariate results Covariates Coefficient estimates Model 1 Model 2 PCP, Regional 4.33** 3.94* Ortho 1.61* Cardiology PCP-Main Radiology OB GYN Neurosurgery Gastroenterology General Surgery ENT Urology Oncology Cardiothoracic surgery Constant *** *** Adjusted R squared 23% 21% * denotes significance at p=0.10, ** at p=0.05, and *** at p=0.001 ACPE.org 27

3 Multivariate analysis of revenues Variable Total Revenue Inpatient Revenue Outpatient Revenue RVUs, Outpatient 332*** (56) 368*** (100) -34 (94) RVUs, Inpatient -53 (41) 89 (74) -134* (67) Surgeries, Outpatient 8949** (4216) 554 (7773) 9466 (6666) Surgeries, Inpatient 19925*** (5745) (10018) (9228) Constant ** ( ) ( ) ( ) R-Squared * Denotes significance at p=0.10, ** at p0.05, and at p=0.001 Formally, we regress revenues on RVUs, surgeries, lagged revenues, time and time squared The model was estimated via OLS system delivery models (i.e., not-forprofit community hospitals and independent physicians) to consolidate, resulting in an increasing number of comprehensive, fully integrated health systems. If such consolidation occurs, then the physician services strategy becomes a significant factor in overall community health system strategic planning and financial performance management. Study data were provided by Essentia Health System, Duluth, Minnesota, from its affiliated St. Mary s Duluth Clinic Health System (SMDC). Essentia Health operates integrated health care systems employing over 700 physicians, serving 14 hospitals in Wisconsin, Minnesota, North Dakota and Idaho. Essentia Health also participates in health services partnerships with the Great Falls Clinic in Great Falls, Montana. SMDC is based in Duluth, Minnesota. It employs over 400 physicians and owns four hospitals. Its regional reach covers 400,000 square miles in Minnesota, Wisconsin and the Upper Peninsula of Michigan and serves a large number of rural communities. SMDC provides physician services in more than 50 clinical specialties. The study focused on the effects of key strategic physician specialty professional fee production on overall health system operating cash f low performance. Empirically, the study focused on 13 physician specialties Descriptive Statistics, monthly averages Variable Mean Profit $936,038 Total Revenue $65,799,916 Inpatient Revenue $57,863,524 Outpatient Revenue $7, RVUs, Outpatient 85,136 RVUs, Intpatient 78,333 Surgeries, Inpatient 753 Surgeries, Outpatient 935 Wages $32,450,198 identified by the health system as key strategic clinical service lines. The 13 identified are commonly identified by other community health systems as strategically important. Specific specialties include: 1. Cardiology 2. Cardiothoracic surgery 3. ENT 4. Gastroenterology 5. General surgery 6. Neurosurgery 7. OB/GYN 8. Oncology 9. Orthopedics 10. Radiology 11. Urology 12. Primary care 13. Regional clinics and primary care local clinics (based in Duluth, MN) These physician specialties were identified by management as those expected to most inf luence overall financial performance of the health system. It is important to note that for the regional primary care clinics most of the affiliated hospitals are independent, smaller critical access designated organizations; i.e., SMDC employs most, if not all, the physicians at these sites, but does not own most of these hospitals. Thirty-three (33) months of data were examined; all of fiscal year 2005 and 2006 together with nine months of fiscal year In the analysis physician net operating revenues (net professional fees only) were analyzed, by clinical specialty, for their effects on total, integrated 28 PEJ may june/2009

4 health system operating cash flow margin ( modified ); defined as total health system net operating revenues; i.e., total gross charges less all related contractual adjustments less all direct operating expenses, including direct labor expense, but before allocation of indirect operating expense. The goal in the analytics was to isolate the effects of physician net professional services revenue production, by clinical specialty, on overall community health system financial performance in hopes of discerning if the productivity of physicians, within key strategic specialties, has a predictable effect on overall health system financial performance. In other words, determining if physician services productivity alone is a reliable predictor of overall health system financial performance. Methods and results For the 33-month period studied, SMDC earned a total of $630,793,553 in operating cash f low margin as defined. For the same period, SMDC generated $354,893,070 in physician services net operating revenues for the 13 specialties identified (a 1.78:1 ratio). Table 1 describes these margins by year. Physician service lines average monthly contributions are described in Table 2. These differences reflect management s balance of physician specialty services; an attempt to maintain a viable proportion of physician services, by specialty, within a fully integrated multispecialty medical group practice in an integrated health system; i.e. a marketbased and mission-focused supply and demand balance. The study measured the effects of net physician services revenues (by clinical specialty) on total health system modified cash f low margin using regression analysis. Specifically, the approach regressed health system modified cash f low margin at time + on each physician service line s contemporaneous net operating revenue. Formally, we estimated. y t =a+bx t +e t Where yt demotes health system modified cash f low margin and Xt is a vector of physician service line net operating revenue. Furthermore, a is a constant, intercept term, and e t is an error term ref lecting unobserved variation across time. In this context, B represents the effect of physician service line revenue on total health system modified cash flow margin. Results are reported for two different analytic models. Model one ACPE.org 29

5 includes only five of the largest physician service lines and model two incorporates all 13. Overall, findings show that physician services revenues in the 13 key strategic areas identified explain only 22 percent of total modified cash f low margin performance. Furthermore, most physician services lines identified as key and strategic have no significant correlation with modified operating cash f low margin performance. While our sample may be construed as limited (n=33 months) it is still surprising that cardiology and the surgical services lines have no significant financial effect, as measured. This suggests that while these service lines may generate extensive revenues, they also generate substantial costs. Furthermore, payer mix coupled with patient complexity may play a role in margin performance. We do, however, find that the regional primary care services have a large and positive effect on total health system operating margin. Conversely, the local primary care practices have a consistently negative, albeit not significant, correlation with health system margins. This contrast suggests that the type of referral may play an important role in the indirect relationship between primary care networks and health system finances. We further find that orthopedic revenues are consistently correlated with health system margins and the effect is statistically significant in Model 1. While many details remain to be investigated, these results cast doubt on the common perception that profitability may be achieved simply through growing key services lines, such as cardiology, surgery and others, simply by adding more physicians and letting the rest take care of itself. Rather, the profitability of strategic service lines must be carefully evaluated, understood, planned and managed. Furthermore, referral net- works (especially the regional networks ) may play a key role in overall health system financial health. Interpretations The results derived from this study suggest that for one integrated health system, individual, key strategic specialty physician services revenues are not, necessarily, good predictors of overall health system financial performance; meaning, the conventional wisdom that all physician services production in key clinical specialties are positive and profitable was not found to be true. Study results show that for one integrated health system: 1. Regional primary care satellite clinics can influence financial performance at high levels for a health system overall; i.e., a regional primary care network, in this case, has a direct and independent positive effect on health system financial performance. 2. Local primary care physicians, while an important part of an overall health system strategy, didn t appear to produce as strong an effect as compared with the regional network. Readers should not conclude that local primary care physicians are not important financial contributors to health system strategic and financial performance; it may be that the regional primary care network delivers a different type of referral; e.g., when associated with independent critical access hospitals, the referrals generated for the owned tertiary center are of particularly high value. Moreover, for SMDC specifically, the local primary care clinics treat a proportion of patients that for historic reasons may prefer to be hospitalized with a local hospital not part of SMDC. 3. The effect of orthopedics in the model is not unexpected. One could speculate that the strength of orthopedics as a predictor of financial performance at the system level could be attributed to the nature of the economics of this specialty; in excess of 60 percent of revenues generated in this specialty are on an ambulatory basis, the payer mix can be less concentrated with the governmental payers (Medicare and Medicaid), services can be more easily scheduled and there are often less co-morbidities involved, which can affect overall financial productivity of individual cases treated. 4. The results demonstrated by the physician services economics and cardiology in the analysis were somewhat surprising. It is often assumed that as cardiovascular physician production goes, so goes financial performance of the health system. In other words, CV physician services production of any type is a good predictor of downstream service demand and, thereby positive financial performance of the health system. It could be the case that cardiovascular services, overall, are and can be profitable for health systems, but physicians can be busy producing services that are more or less profitable according to other related factors, such as: payer mix, comorbidities and related case mix, length of stay and other effects of resources consumed per case (e.g., supplies, drugs, etc.). It may not be the case that growing cardiology services in general or in any direction is a good strategy. While physician services production can represent a sizable proportion of overall revenues for an integrated health system, they may explain only a small proportion of overall health system operating cash f low performance. 30 PEJ may june/2009

6 This was somewhat surprising given prevailing assumptions regarding clinical service line development and management. Furthermore the integrated environment that we studied is one where we d expect the mix of physician service line mix would be chosen to balance financial performance with mission obligations. Discussion Allowing for all limitations inherent in this study, the results shown here point to a conclusion that should be considered in the planning, development and deployment of clinical service line strategies. That conclusion is, while certain clinical specialties can be financially productive, it is not to be assumed that all physician services (clinical services production), within a clinical specialty, lead to profitable total revenue production. Said otherwise, physicians in key strategic specialties can be busy produc- Daniel K. Zismer PhD Associate professor, Division of Health Policy and Management, School of Public Health, University of Minnesota. He also serves as director, ISP; executive studies program. And he is managing principal of Essentia Health Consulting. dzismer@smdc.org David Knutson MS Senior research associate in the Division of Health Policy and Management, School of Public Health, University of Minnesota. ing services (and revenues) that may not, necessarily, lead to health system profits. How might these results be useful in clinical service line planning, development and management? As U.S. health systems become more integrated, it is assumed that these systems will have more control over clinical service line sizing, (balance) and resource (labor) deployment and management; i.e., managing the relative proportionality of clinical service line revenues as a percentage of the whole. Consequently, with the operating economics of each known, health system leaders can manage service lines for their required contribution to financial performance overall. Physician services can then be better refined as reliable predictors of overall health system financial performance (revenues and derived operating margins). The results demonstrated from this study indicate potential value in future applied research in this vein focused on: Jeffrey McCullough PhD Assistant professor, Division of Health Policy and Management, School of Public Health, University of Minnesota. Peter E. Person MD, MBA, FACP CEO of Essentia Health located in Duluth, Minnesota. Further modeling of how physician services, within specialties, affect clinical service line financial performance overall Tests of how physician services productivity across specialties are inter-correlated; i.e., how production in one clinical specialty might explain productivity in others The potential effects of health policy and related reimbursement changes in a clinical specialty of financial performance, might affect overall health system financial performance Modeling the balance (mix) of physicians by specialty, number and location within a comprehensive integrated health system strategy In summary, readers should conclude that while individual physician services specialties may be positive contributors to the financial performance of health systems, it isn t necessarily the case that any and all physician services production within a valued and strategic clinical specialty will lead to positive financial performance reliably. Such a finding could be especially important for leaders of the medical groups in integrated health systems. Special Acknowledgement: The authors acknowledge and recognize Kyle Dorow and Nikki Olson, members of the finance department of SMDC, for their work in producing financial information for this paper. Colleen M. Renier MS Staff biostatistician, St. Mary s Duluth Clinic Health System, Division of Education and Research. ACPE.org 31