Bond passes, hospital stabilized: what next?

At a recent Strategic Planning Committee meeting, Sonoma Valley Hospital officials took a hard look at the future. With the passage of the $35 million bond measure, they can get the hospital into ship-shape condition, but the health care seas are stormy and the economic climate is foreboding. Community hospitals, physicians and individuals are all struggling to keep their boats afloat. With Kaiser – the hospital, medical center, insurance giant – commanding the only safe ground, what course must SVH now chart to survive?
According to CEO Carl Gerlach, as he has said many times and inscribed in his business plan, the answer lies in affiliation. “That is where the world is going,” he said, when asked about the future of the hospital. He explained that a major first step is attracting primary care physicians. “Right now, the way things are, they’re are not coming to work for us,” he said. “It’s true in the entire region. It’s almost impost impossible to recruit primary care physicians.” That makes recruiting specialists even more difficult. “If there aren’t enough primary care physicians, specialists are not interested because without the primary care physicians, there’s no referral base.”
This is a problem not particular to SVH alone, but reflects the overall landscape of health care today. Chief Financial Officer Jim McSweeney, when asked to explain, drew a clear picture in figures: “In 1995, Kaiser had 4,500 Medicare beneficiaries in their HMO program and [Health Care of the Redwoods] HPR and Pacificare had 14,000. By the end of 2005, HPR was out of business, Pacificare had abandoned the market and Kaiser had 20,000 beneficiaries.” In 10 short years, 15,000 who might have been going to Sonoma Valley Hospital and Memorial and other non-Kaiser hospitals went over to Kaiser. The loss in dollars, McSweeney said, would be upwards of $70 million.
According to Dr. J. Nevin Smith, Kaiser, the competitor, is also a model. “They don’t have hospitals in every community,” said the long-time Sonoma practitioner. “They have to have 100,000 people in a service area before they even start thinking about a hospital. Why? The economics. The hospital’s economics depends on patient volume.” At one time, that sense of low-cost, high-volume, economy product reflected poorly on Kaiser as a place for quality health care. “It was like Japanese cars,” said McSweeney. “At one time they were just thought of as tin.” Now they’re standards for quality and efficiency. Smith agreed. “Kaiser is a closed system. In the past, they didn’t have top-notch docs, but they do now.”
Gerlach described Kaiser as a “three-legged stool” that integrates the health plan, the hospital and the medical group all under one umbrella. The “vertically integrated” structure creates internal efficiency, which works for the patient as well.
“So if they said, ‘We’ve looked at our data and we’re spending a huge amount of money on our diabetic patients. What can we do about this?’, then people from all three legs get together. They all share the same payment per month for health care.” What works for the whole works for the individual – and, said Gerlach, that works out for patients. “It’s almost always true that if you focus on that, you’re going to go to the preventative side. You want to keep people from being sick; you want to help them stay healthy; you want to do just the right amount of health care. And that’s their model.”
The model creates a kind of cooperation not far removed from that experienced in Sonoma back in the ‘90s when the Health Plan of the Redwoods was thriving. According to Shari Glago, who had been vice president of HPR, the Valley of the Moon Independent Physicians Association (IPA) and the SVH were tight knit and managed the care and the dollars well and had a culture of cooperation and transparency. It was in everyone’s interest to cooperate since they had banded together to compete with the new – big – kid on the block, Kaiser.
When things started to go wrong, it was, as Glago said, “a perfect storm.” Originally, she said, HPR had relationships with doctors and hospitals in which they were paid a regular PMPM – per member per month – basis. This enabled them to keep a steady course. “If you’re a health plan and you can predict your expenses, then guess what? You know what you need in revenues to survive, and you can price your premium to the employer competitively.” Under that agreement, the hospitals and doctors received a steady payment and took the “risks” for rise and fall of the services they were being paid for. The health plan received a steady payment from employers, whose contracts would remain in place, defining the health plan’s income, for sometimes two years.
All was fine until participating hospitals and doctors decided to reject PMPM, and required a “fee for service” contract. In 2002, HPR ended in bankruptcy.
“It was a major tragedy,” said Gerlach. “My associates from those days tell me, ‘Hey, Sonoma. That’s the Bosnia of managed care!’ It is known as a case study in a regional meltdown of managed care where people didn’t set aside enough cash to pay off their debts when the money stopped coming in the front door.”
Gerlach explained, in a simplified version, that if regular revenue comes in at a fixed amount, but expenses for that month are less, and this happens for a few months, things can look very bright. “But you didn’t look at your division of responsibility,” he said. “And didn’t notice you’re responsible for neo-natal intensive care and liver transplants.” In a “pay-for-service” model, these would have to be paid for up front, not averaged out over monthly payments. “What accounting has been trying to do is basically say things like, ‘What you want on your balance sheet is what happens if the door shuts and you have to pay cash.’”
The picture can get even worse. “The nature of health care is that if the service is conducted – if it doesn’t require prior authorization from the health plan – the health plan doesn’t know that service has been incurred until after they get a bill,” Glago said. “So you’re doing a lot of actuarial estimation.” Meanwhile, the employers, those who have bought the premiums, enjoy their original contract, whether the health plan’s expenses have spiked or not. If employers, or Medicare, wouldn’t renegotiate, and the hospitals and doctors would not bend, the health plan was stuck.
Gerlach sums it up in currently familiar terms. “HPR became subject to some of the same problems of the insurance companies that just crashed. They spent the money as it came in the door. They didn’t set their reserves aside. They overestimated their receivables and they underestimated their liabilities.” So HPR went down, nothing filled its place and Kaiser took over the turf.
Now, for Sonoma Valley Hospital, there is a lesson learned, a model standing, a vote of confidence from the community and a future open to creative leadership.
“When I was working with Sutter,” said Gerlach, “I could legitimately go talk to a non-Sutter doctor and say, ‘Would you like to join Sutter, and how would you like to get the following percentage of Medicare for your work? Because I know now you’re getting a much lower number.’ And I could look them straight in the eye and say, ‘This is what you would get. Oh, and in addition to that, in addition to the revenues, we do all kinds of good things with electronic medical records, and reduce the cost of your office, etc.’ Usually the first thing was all you needed to say: ‘We negotiate on a statewide basis and we get really good rates for our doctors.’ That’s what we’re trying to do.”
McSweeney agreed. “We’ve got to figure out how to compete or we’re not going to be there much longer. But I think it’s doable.” Nobody suggests, even with the bond measure resolved, the way ahead will be easy.
“The gate is closing, and if you don’t get through it, you die. Worst case,” said Gerlach, laughing, “I can go down in action or sit here and cry.”