Question

Case Study:

In the mid-1990s, Newland Hospital sought ways to increase the number of referrals to its inpatient services. The governing body approved a number of new initiatives, one of which was to purchase several primary care practices that were owned by family practice physicians who were in solo or two- or three- physician partnerships and who had clinical privileges on Newland’s professional staff organization. Over a 2-year period, Newland purchased three practices with a total of eight physicians. In the purchase contract, Newland agreed to buy the practices, employ the physicians, and employ the clinical and clerical support staff who worked in the practices. These staff would report for administrative matters to Newland’s vice president for ancillary services and would report to the physicians for clinical matters. The contract specified that the physicians would work 40 hours a week. The physicians would, however, control their hours of work and the patient schedule. The quality of care at the practices would be reviewed by Newland’s chief medical officer. It was assumed that the practices would benefit from the improved management that the hospital would provide. In addition, it was expected that there would be several efficiencies and economies of scale, especially in terms of staffing, logistics support, and the information technology provided by Newland. The practices were financially healthy when purchased, and allowing for the problems incident to the change in ownership, it was projected that the clinics would at least break even in the year following purchase and return to profitability no later than the 3rd year after purchase. Now, the 5th year after purchase, all of the practices are losing money, with total annual losses in excess of $500,000. You are the vice president for ancillary services. The chief executive officer has asked you to prepare an analysis regarding the poor financial performance and to make recommendations regarding the actions to be taken.

Questions:

1. Describe the system that Newland Hospital created by purchasing the primary care practices. How do the concepts of optimization and sub optimization of a system apply?

2. What reasons might explain why the practices are losing money?

3. Identify the economic value of the clinics to Newland Hospital. Identify the noneconomic value.

4. Outline a plan that applies CQI principles and concepts to improve the healthcare delivery system composed of the primary care practices and Newland.

Answer 1

Newland Hospital took the first step in developing a vertically integrated system. In theory,the primary care practices will be a source of inpatients, either directly or through referrals to specialty physicians, who are also on Newland’s medical staff. To make the referral patterns of maximum benefit, Newland’s planning staff must understand to which specialists and for what medical conditions referrals are made. A referral spreadsheet will be of great assistance in this regard.Assessing the primary care practices only as cost/profit centers means that management does not understand the concept of optimization and sub optimization. The practices must be viewed in light of their contribution to the entire hospital when viewed as a system. In other words, it may be necessary for the primary care practices to sub optimize, operate at a deficit, so that the entire system (hospital) can optimize its performance. The primary care practices must be seen as part of a larger system, which includes the hospital.

The practices might be badly managed, and they may be more costly to operate than they should be. Physician productivity is an important consideration, and data should be readily available to assess how productive the physicians are, especially when compared to their pre-purchase productivity. Benchmarks and other comparative data should be used, as well.Since the physicians control their schedules, it is possible that they are seeing fewer patients than they could. It is also possible that there is less demand for primary care services because of greater competition or a change in the service area. The former is more likely than the latter.It is possible that there are low levels of customer satisfaction and that word-of-mouth information advises others not to use the primary care practices. Regardless, the practices must be studied to develop data upon which decisions can be made