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Healthcare’s Strategic Mis-adventures: A Trilogy – Act 1 The Hospital Systems

This is a somewhat arbitrary starting point, but given it’s scale, a reasonable place to begin none-the-less; but first a little context.

Luke…there is a disturbance in the force!

In the post ‘HMO Act’ era, circa the Nixon’s administration’s health care cost containment and quality promotion efforts, the antecedents where laid to transform health maintenance organizations (HMOs) from their cultural roots as ‘sleepy’, non-profit, community based entities, into aggressive for profit regional and national players, with a developing thirst to roll-up via acquisition a very fragmented yet profitable ‘cottage’ industry.

As the most promising of private sector disruptor’s and/or transformational agents of the status quo, HMOs with market scale and share clout had the ability to literally penetrate, and fundamentally amend the traditional fee for services payment paradigm upon which the giants of the hospital industry were so dependent. This was a ‘on the come’ threat, though with a 5-7% market share, not yet a real one. However, this early industry movement got the attention of the C-suites of the major for profit as well as their ‘non-profit’ (ahem, I mean tax exempt breatheren) hospital chains.

Given publically traded HMO’s improved  access to capital, and the emerging ‘gravitas’ of Wall Street backed health care ventures, their portrayals of an industry vulnerable to takeover was quite a compelling story, and many were soon to fall in line via ‘me too’ attempts at strategic positioning (this will be a subject of Act 2’s post on The HMO Industry) in the binge of acquisitions that soon followed. Further, with Sanford C. Bernstein’s prediction that non profit hospitals/health systems would not exist by 1990, the for profit hospital management companies became the coveted talk of the town, and were worshiped on Wall Street. As a result, they attracted the best and the brightest from graduate MPH, and MBA programs. Some even offered their own version of internal ‘corporate colleges’.

Shortly thereafter these HMO insights began to register, the PPO movement, an ‘HMO lite’ version that seemed more amenable to mainstream medicine and therefore their aligned hospital operators, was introduced to the national psyche first in California.  The idea of selectively contracting via a ‘preferred panel’ of participating hospitals was more palatable than a more aggressive HMO model, and therefore attracted considerable attention and support from the hospital community.

The major name plates back then included the ‘big three’: Hospital Corporation of America (HCA), National Medical Enterprises (NME) and American Medical International (AMI).

Herein lies the first mis-adventure that kicks off two decades of strategic misfires by the brain trusts of major corporate health care concerns (both for profit and tax exempt).  All correctly saw the threat posed by entities that could minimally redirect admissions, if not more aggressively manage inpatient utilization, compress lengths of stays, and shift care management from inpatient to outpatient alternatives.

All also correctly foresaw the ‘upside’ of aligning with, joint venturing, if not owning, the insurance vehicle as a market management tool. Here the path begins to get considerably more opaque and ladened with unfamiliar risk. Hospitals are in the business of providing inpatient and outpatient services, not underwriting, marketing and managing the risk associated with a range of group health or individual insurance products. So, being rather preoccupied by there own successes, i.e., growth in scale and market dominance, in the ‘buy’ vs. ‘make’ equation, they decided to make their own insurance companies, vs. partner with or find some other way to co-venture with a partner who actually knew how to do those things that insurance companies do.

In the frenzy of activity that followed: HCA formed Equicor in association with the Equitable. AMI built AMICARE; and NME launched AVMed, and lest we forget VHA, representing the non profit sector rolled out Partners National Health Plan, with Aetna somewhere in that picture. In all of these cases, though HCA and VHA approached more of a partnership than direct competition with the payors, each hospital corporation basically went head to head with the then indemnity market leaders, and early progenitors of PPOs including Aetna, United Healthcare, Prudential, the Blues, etc.

Instead of collaborating with the payor class, i.e., how can we work better together? What might an aligned interest relationship look like? How can we re-tool to make your/our/our clients lives better did not drive decisions. Instead, mostly arrogance, and market short sightedness drove poor choices as literally all of these entities were discontinued, sold off or merged with other entities as their market objectives were not realized.

Act 2 will feature the ‘HMO bonanza’ which attempted the rather aggressive roll-up of the aforementioned cottage industry – and no better trophy venture can illustrate the house of cards that ultimately had to tumble taking many with them, than Maxicare’s attempt to coral mainstream medicine into the business of HMO’s via independent practice associations (IPA’s) – anybody remember ‘the window project’?

Act 3 will conclude this treatise and focus on the rise and fall of the pyramid scheme also known on Wall Street and in health care management domains as physician practice management companies.

As always, your comments and thoughts are invited.

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2 thoughts on “Healthcare’s Strategic Mis-adventures: A Trilogy – Act 1 The Hospital Systems

  1. Hey Gregg,
    Great summary, though I would take exception to your view of PPMs as a pyramid scheme. Yes, we purchased the assets of physician practices to some extent with stock, but this is typical in most industries.

    Thanks for the primer.

    1. Thanks for your comment Alex. Perhaps the more appropriate characterization might be a ‘ponzi’ scheme analogy.

      When the music stopped, and the acquisition trail ended, the promised ‘value’ of superior management, more efficient (group) purchasing and better deals from payors due to increased market leverage, and in some instances, better management of risk, was not adequate to offset another mouth to feed.

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