At the Helm

Clinical rationalization: A system’s way to avoid self-competition


With hospital consolidation on the rise, more systems are making the hard choices to relocate services from one facility to another, to remove them altogether where there’s declining market demand, or to scale back the level of service provided. Although most health systems won’t be able to avoid some level of clinical service rationalization, they must make informed decisions that meet the medical needs of the communities they serve and balance what is best for the entire network of care.

Measure twice, cut once

Recently, a health system in the northeast consolidated four hospitals, one of which is located in a smaller market than the others. Leaders determined that certain programs in that facility weren’t adequately supported by the local market, so they are now deliberating which services can be sustained locally versus those that need to be adjusted. This effort involves evaluating whether they can funnel patients into other facilities in the system and assessing how important it is for those services to be available locally.

It’s a classic example of a landscape after intense mergers-and-acquisitions activity. The immediate health system priority tends to be consolidating overhead functions, which generates significant value through cost savings and increased system leverage. Later priorities include the unavoidable and much more complex process of clinical rationalization.

But a health system can’t eliminate a service line at a local hospital based on volume trends alone. Leadership must factor in the other related services that would be affected should that unit close down.

To make these decisions with a global perspective, leaders should address the following primary considerations.

Volume. How do current usage and capacity compare with historical numbers, and if the numbers have decreased, have outcomes or quality suffered as a result? Special attention should be given to services shifting from inpatient to outpatient. Services that have shifted should not be eliminated without further analysis, but this is a good place to start spotting weak performance.

Payer mix. What is the payer mix, and are the commercially insured patients moving elsewhere? Such a trend demonstrates that proximity is not as important as other factors for patients who are able to be selective. Those factors may include a physician reputation issue or a service availability issue. For example, most expectant mothers prefer giving birth at a hospital with a strong neonatal intensive care unit.

Referrals and competition. When seeking services elsewhere, where are most patients going—to another hospital in the system or to an external competitor? The answer could offer valuable insight to the level of alignment across medical staffs in a system. For example, one system recently discovered that cardiologists at one of its hospitals were referring patients for cardiac surgery to a competitor facility—a situation that flagged the need to align the local cardiologists with network cardiac surgeons.

Another referral-related question is, Where are independent physicians in the area referring their patients? The system might need tighter referral networks that have easy coordination with aligned physicians and a seamless process for patients.

With the entire system in mind—and a handle on the competitive landscape—it becomes simpler to map out alternative scenarios that can improve efficiency and patient satisfaction while decreasing overall spend. For instance, if an organization finds itself with an underutilized children’s ward and moves its pediatric patients to a hospital with more robust pediatric capabilities, it could improve outcomes and use that space to expand another service line that the market could readily support.

Align incentives to make it work

When hospitals merge and form a larger system, rationalizing services for the “greater good” tends to cause significant political tensions among hospital administrators. One very real example: When those hospitals are still measured and rewarded based heavily on individual site performance, leaders will be highly resistant if the system decides to reduce services from any one of them and take away volume.

Instead, it is imperative to align incentives systemwide to avoid internal competition. For example, instead of specialists reporting up to their specific facility director, the medical staff should establish a systemwide governance committee for the entire service line—with incentives tied to global performance.

With collective decision making, the proper incentives in place, and the services where patients need them most, specialists and the entire medical staff across sites can get on the same page, working toward common standards of care and quality. It is a journey that takes time and requires a lot of patient maneuvering. So while the focus of newly merged systems often is on integrating operations and back-office functions, it’s important to give the same early attention to clinical consolidation and plan for a significant uphill climb.

This article previously appeared on the hfm Healthcare Finance Blog.

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