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California: shaking things up

Sharp struggles to overcome flawed integration strategy

From the April 1996 ACP Observer, copyright © 1996 by the American College of Physicians.

By Deborah Gesensway

SAN DIEGO--Sharp Healthcare has a dilemma: How can it offer enough hospital beds in all the right areas to attract patients and payers? But at the same time, how can it shed many of those same beds due to the cost realities of managed care?

Sharp also needs to make sure thousands of primary care physicians remain committed to feeding its surplus of specialists and filling its wards, while as a non-profit institution, it cannot afford to spend as much as its competitors in acquiring or compensating these providers.

"Sharp Memorial has always been an extremely successful hospital, but in 1995, our net reimbursement per patient-day fell 10%, so our bottom line was wiped out in one year... not because we didn't manage our expenses, but simply because to get the [HMO] contracts we had to take a lower rate," said James M. Schibanoff, MD, a pulmonologist who is now CEO of two of Sharp's hospitals.

This, he said, is because San Diego is one of the most competitive health care markets in the country. Although the region's population totals about 2.5 million, some estimate the health care system is large enough to support a population of about 4 million.

So Sharp Healthcare--which in recent years had developed into a much-touted model of the new integrated delivery system of 21st century, managed American health care--is finding it must transform itself yet again. It is merging its hospital licenses, pushing its individual practice association (IPA) to function more like a group truly capable of managing full capitation and, perhaps most dramatically, is entering into merger negotiations with Columbia/HCA, the Nashville, Tenn.-based, for-profit hospital corporation behemoth.

"It was a flawed strategy to build an integrated delivery system by acquiring hospitals, but realistically I don't know any other way to do it," Dr. Schibanoff said. "And now our strategy is being repeated throughout the country."

"Instead of acquiring the beds and then trying to acquire the contracts and physician groups to fill the beds, which is what we did and which is what everybody else is doing," he explained, "you need to do it the other way around. You need to have the contracts and the physician groups lined up and signed up and then create the number of beds to meet that need." There are few successful examples of this approach.

This explains why the seven-hospital Sharp system is pursuing a joint venture with Columbia/HCA. "We expect to achieve a competitive advantage in our marketplace," said Peter Ellsworth, Sharp's president and CEO, speaking at a recent conference on health care winners and losers in Southern California. Specifically, he said, being in league with a company that already owns nearly 350 hospitals and tallies about $17 billion in revenues means Sharp will be able to spread its costs over hundreds of hospitals rather than seven.

Columbia's muscle and reputation will help Sharp bite the bullet and close hospitals it no longer needs, he said. Across the country, Columbia consistently makes hospitals it acquires leaner by paring staff, shutting down duplicate services and, in towns where the number of hospitals exceeds the need, simply closing them down. The company has also developed a reputation for spending huge amounts of money to upgrade hospital information systems and equipment.

"We are talking about the availability of capital in a way that we simply could not access on our own." Mr. Ellsworth continued to list advantages to a Columbia/HCA deal. "We eliminate our debt service, which will allow us to reduce our prices. We will have money to compete in the MD market, which we need. We think we will be able to do considerably better in buying supplies. We also believe that it is important to talk about the discipline and the incentives of a for-profit business. ... When you go to sell your house, you start cleaning it up. We have had to clean up our act."

For Sharp's doctors, this housecleaning has meant more confusion, chaos and change, all of which they have seen plenty of during the decade of building up the integrated delivery system. Two-thirds of the system's managed care business now comes from just two for-profit HMOs--HealthNet and PacifiCare--both of which have been slashing premiums to gain market share, leaving providers with less to do more.

Bitter battles with specialists about capitation rates have further eroded physician morale. For example, the system's physician groups recently almost dropped their long-term affiliation with an anesthesiology group, Dr. Schibanoff explained, because the Sharp anesthesiologists would not accept the subcapitation rate being offered by the medical groups. The dispute went all the way to a bidding process. The Sharp doctors ultimately won the bid and kept the business, Dr. Schibanoff said, but there were significant reductions, and bad feelings still run deep.

"Specialists are having a very hard time," Dr. Schibanoff said. "A lot of them are leaving town, retiring prematurely or are just underemployed. That creates a whole litany of behavioral responses."

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