4. An Orthopedic Group Decides to Construct a Specialty Hospital
The “About Us†web page of OrthoIndy, an orthopedic group practice based in Indianapolis, Indiana, states: “With over 80 physicians providing care to central Indiana residents from more than 10 convenient locations, OrthoIndy provides leading-edge bone, joint, spine, and muscle care.â€
OrthoIndy has adjusted its practice over time. For years its physicians took patient emergency calls for all hospitals in the area and provided services to all types of patients. As the market became more competitive and the physicians’ incomes declined slightly, OrthoIndy decided to reduce calls and cover only key facilities (Methodist Hospitals based in Gary, Indiana, and Indianapolis-based St. Vincent Health) and stopped treating Medicaid patients. This decision upset most of the hospitals in the area, as well as orthopedists who were not affiliated with OrthoIndy. Some of OrthoIndy’s partners were concerned about the ethical and political ramifications of the decision, but ultimately all parties agreed with it. Although these choices improved the income and lifestyle of the practicing physicians, they wished to augment their salaries further. The group practice already owned a large, profitable surgical center.
The OrthoIndy group had always been supportive of community activities, especially sports. It served more than 15 teams, including professional football, basketball, and racing teams, as well as high school teams. OrthoIndy’s patient commitment is stated on its website (Revolvy 2017):
The physicians and staff at OrthoIndy and IOH are committed to our patients. The following is our commitment to YOU:
At OrthoIndy, our physicians set out to create a patient experience unlike any other in Central Indiana. The result, the Indiana Orthopaedic Hospital [is] one of the highest ranked facilities in the country for patient satisfaction.
Our patients are at the center of everything we do, and their collective experience—both clinically and personally—is the result of every interaction they have with each person in our hospital. And that’s why we strive to treat our patients as members of our own family in a like-home environment. At OrthoIndy and IOH, our highly-skilled physicians and staff are committed to our patients’ health, safety and the comfort of their individual orthopaedic care.
The opening (or impending opening) of four specialty heart hospitals in the Indianapolis area caused OrthoIndy to analyze the potential for a joint-ventured orthopedic hospital. From many of the physicians’ perspectives, the cardiologists working at the new heart hospitals were gaining a new stream of revenue and, along with their partners, would be able to provide new, beautiful facilities and equipment to attract better-paying patients. Following lengthy and somewhat heated arguments, OrthoIndy decided to proceed with a for-profit, partnership-style organization—a state-of-the-art hospital that would specialize in musculoskeletal care. Only members of the group could become partners in the new Indiana Orthopaedic Hospital. Those with ethical or other reservations could distance themselves from the venture.
The plan was to fast-track the opening of Indiana Orthopaedic Hospital by shortening its construction time by six to ten months. OrthoIndy’s leaders justified the venture by asserting that their stand-alone, state-of-the-art facility owned and operated by OrthoIndy physicians would provide patients higher-quality care and better treatment options.
By offering various services, OrthoIndy aimed to differentiate the new hospital from the other general hospitals practicing orthopedics in its market area. From admission to discharge, patients would enjoy a “like-home†atmosphere, complete with satellite television and access to e-mail and the Internet. Patient rooms would be spaciously and well appointed and would include a work or reading nook for friends and family members. After discharge, patients would enjoy additional conveniences, such as coordinated postoperative appointments with their physician’s office and referrals to the state-of-the-art, on-campus physical therapy center.
With great effort, construction crews completed the hospital on time. The following announcement was published on its opening day (PR Newswire 2005):
INDIANAPOLIS, March 1—OrthoIndy announced today the opening of the Indiana Orthopaedic Hospital, central Ind.’s first and only orthopaedic specialty hospital located at I-465 and West 86th Street. Spanning 130,000 square feet, the hospital represents a $50 million commitment to the city of Indianapolis, its residents and to the patients who will receive care at this state-of-the-art facility….
The Indiana Orthopaedic Hospital was built when OrthoIndy physicians saw an increasing need to deliver specialized orthopaedic care in a patient-focused environment. Approximately 60 physicians from central Ind. will practice at the hospital that will focus on complex surgical procedures, including total joint replacements and spinal cases. Amenities include 10 spacious and technologically advanced operating suites, 37 patient rooms, 39 pre and post-operative rooms, 16 post-anesthesia care unit (PACU) rooms, an imaging center with digital radiography, Magnetic Resonance Imaging (MRI), and CatScan (CT) availability, in and outpatient therapy services, a pharmacy and cafeteria. Additionally, each patient room features a workspace area for guests and is equipped with the GetWellNetworkâ„¢ which provides patients with an Internet connection, satellite television and access to patient educational materials.
Interestingly, about a year later, one of the larger hospitals in the area—St. Vincent Health—spent $9 million to improve its orthopedic services by forming a 61-bed orthopedic center and to create “something that will be the best in the Midwest for orthopedic care.†Other area healthcare leaders were expected to respond to St. Vincent’s investment in orthopedics and increase the competition in this market (Murphy 2006).
Questions
What strategy perspectives did OrthoIndy employ in determining to build its own hospital?
Do you believe OrthoIndy’s strategic tactics worked? Why or why not?
Was the strategy congruent with OrthoIndy’s mission? Why or why not?
What effect do you think the new construction had on consumers?
Do you think that a specialty hospital such as Indiana Orthopaedic Hospital would increase or decrease the costs, quality, and availability of care for consumers?
How were the general hospitals near the specialty hospitals affected? Why did St. Vincent Health create its own orthopedic center?
How did OrthoIndy’s business model differ from those of other competitors?
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5. The Struggle of a Safety Net Hospital
The costs of caring for uninsured and underinsured patients are shouldered by both public and private organizations but often fall primarily on older, publicly owned facilities. The cost pressures and demands for care often far exceed the budgets and resources of many public providers.
Wishard Health Services, located in Indianapolis, Indiana, is an example of a public provider that has struggled to position itself strategically to achieve its mission to care for the poor of Marion County. Its mission, vision, and values are as follows (Wishard Health Services 2013):
Our Mission
The mission of Wishard Health Services is to:
Advocate
Care
Teach
Serve
with special emphasis on the vulnerable populations of Marion County.
Our Vision
Wishard Health Services will enhance continuously our ability to meet the needs of the underserved and all people of Marion County, will be sound economically, and will lead innovatively in clinical care, research, education, and service excellence.
Our Values
Professionalism
Respect
Innovation
Development
Excellence
By 2003, Wishard was under tremendous pressure. The hospital was owned and operated by the county and, as noted, had a mission to care for the vulnerable and underserved population of the county. Although there were almost a dozen other hospitals in its service area that provided some care to the indigent, the county hospital was seen as the main provider for this segment of the population. Although the other hospitals did not refuse to provide emergency care for the poor, most elective Medicaid and indigent patients were routinely sent to Wishard’s facilities. Almost 90 percent of its patients were covered by a government program or had no insurance coverage. As a result, revenues were always short, operating losses had to be subsidized by tax revenues, and capital projects were constantly deferred. With no funds to expand or refurbish its facilities, Wishard Hospital and Wishard’s clinics were extremely crowded and looked old and worn. The facilities’ condition, coupled with their location in a poor part of Indianapolis, Indiana, discouraged the patronage of insured patients.
In 2003, the situation seemed to be worsening further. Wishard was in deep financial trouble, and its executives discussed ways to reduce the system’s losses. Wishard’s CEO publicly stated a deep concern about the 144-year-old institution’s future. Wishard Health Services included its 492-bed hospital, six community health clinics, and Midtown Community Mental Health Center, which together served about 800,000 patients per year. According to Dr. Robert B. Jones, the hospital’s medical director, 50 percent of those patients were insured by Medicaid or Medicare, and 40 percent had no insurance.
City officials also were worried about the financial health of Wishard and talked about a potential shortfall of between $20 million and $80 million out of a $385 million budget. The best estimate was that Wishard was on track to end the year with spending at $35 million, but it could turn out to be much worse. The hospital did have cash reserves that could cover this deficit in 2003, according to Wishard’s president Matthew Gutwein. But if the deficit continued and worsened in 2004 as expected, this reserve would be completely empty, and Wishard essentially would be broke by the end of 2004 with even worse years to come.
Wishard’s ability to survive and fulfill its mission was seriously challenged. The primary factors contributing to the deep losses included the following:
Declining reimbursements from the Medicare and Medicaid programs for the elderly and poor (For every $1 in hospital bills submitted to the two federal programs, Medicare paid just 82 cents, compared to 89 cents four years earlier. Medicaid paid 70 cents for every dollar of service, down from 90 cents.)
Increasing numbers of patients without insurance to pay their bills (Nationwide, the number of uninsured had reached 43 million residents, 700,000 of whom were in Indiana.)
Continual hikes in the prices of drugs and new equipment and in wages for nurses and specialists, who were always in short supply
Stiff competition from specialty hospitals and surgery centers that appealed to well-off, paying patients, whom mainline hospitals depended on to earn their profits
A weak stock market that sent hospital endowment investment income plummeting
Something had to be done, and Wishard was seriously considering almost all of its options, including these:
Closing Wishard’s heavily used and highly respected emergency department
Merging with Clarian Health, which operates Indiana University, Riley Children’s, and Methodist hospitals, or entering joint ventures, potentially involving construction projects
Building a hospital to replace Wishard facilities, some of which had been built in 1914
Increasing copayments for outpatients to reduce unnecessary outpatient visits
Wishard’s CEO stressed that construction of a new hospital would not be likely for another 5, 10, or even 15 years, depending on the pace at which fundraising set aside sufficient monies for construction or on the ability to pass a county bond to fund the construction. The construction would be very expensive; replacement of the whole facility could cost up to $750 million.
While Wishard was struggling to decide what to do, a construction boom occurred and competition increased among area hospitals. Hospitals around Indianapolis were spending lavishly, investing more than $700 million in new or updated facilities, most with interior decor and lobbies fit for luxury hotels. These elaborate new facilities made Wishard appear even worse off.
This new focus on consumerism and profligate spending in the hospital business gave rise to what Daniel Evans, president of Clarian Health, called “mindless competition.†For example, the $60 million Heart Center of Indiana in Carmel, which opened in December 2002, offered cooked-to-order meals. City-focused Clarian, the largest healthcare system in the area, expanded its market to the suburbs by building a $150 million hospital in Hendricks County and a $235 million hospital in Carmel. The Hendricks County Medical Center was situated in a parklike setting that included a half-mile of walking trails in a serene environment intended to reduce the stress of a visit or stay in the hospital. To keep patients and attract new ones, both St. Vincent and Community Hospital took on physician groups as equity partners in their heart hospital projects, while Clarian sought to partner with physicians at its two for-profit suburban hospitals. St. Vincent opened a $24 million children’s hospital in 2003, becoming the first facility to compete head to head with Clarian’s Riley Hospital for Children, previously the only children’s hospital in central Indiana. St. Vincent also opened a $15 million cancer center, complete with a serenity garden and an indoor waterfall, while Clarian planned to counter with an even larger cancer center near IU Hospital.
Area hospitals’ struggle to compete was compounded by the market entry of national for-profit providers. For example, almost all local hospitals offering cancer care lost business to an aggressive for-profit operator, U.S. Oncology, which opened four cancer treatment centers in the Indianapolis area in the previous six years under the name Central Indiana Cancer Centers. These freestanding centers were projected to treat more than 43,000 patients in 2003. The cancer centers could handle patients at a lower cost because they lacked large hospitals’ overhead stemming from their big maintenance staffs, parking garages, and building needs.
The hospitals also faced competition from OrthoIndy, a large orthopedics practice that was building a $30 million orthopedic hospital, and the 60-room Heart Center of Indiana, which featured a highly trained staff, one of the first all-computerized patient record systems, and furnishings befitting a Fortune 500 firm. Other hospital sites also demonstrated opulence. Clarian’s futuristic $40 million People Mover was designed to ferry doctors and staff over city streets to its scattered hospitals, and the lobby of Clarian’s two-year-old, $30 million cardiovascular center featured a terrazzo stone floor.
Amid all of this change, most hospitals were receiving lower reimbursements from insurers than they had previously, and the growing demand for charity care decreased the profitability of three of Indianapolis’s four largest hospital networks. The following table shows these three networks’ revenue, earnings, and full-time equivalents in 2002 and the percentage change in revenue and earnings from 2001. The figures for St. Vincent, the fourth network, are from the first eight months of the 2002–2003 fiscal year and include its hospital in Carmel.
images
Although their reimbursements and profits decreased, all of the healthcare systems except Wishard still made money in 2002.
What Should Wishard Do?
Some believed that the days of a stand-alone Wishard were over. Dr. Brater, dean of the IU Medical School, believed that there were strong reasons to consider bringing Wishard into the Clarian network in a formal way. Few (if any) inner-city, tertiary hospitals providing high-level, specialized care could survive within a one-mile radius of each other. In 1995 Methodist Hospital merged with IU’s hospitals, which were located less than one mile from Wishard. A merger would potentially eliminate duplication of services and create economies of scale.
Would Clarian agree to take on Wishard’s massive community burden of indigent care? What effect would this liability have on the competitiveness of Clarian Health Partners, especially after the construction and financial commitments it had recently made?
Short of a merger—which was not a foregone conclusion—Clarian and Wishard discussed ways to collaborate and save money. They considered options that would be invisible to patients and the public, such as joint billing and purchasing. Collaboration on medical initiatives, even joint ventures involving construction, also was a possibility. Some collaboration already existed between the two. Wishard did not provide open-heart surgery, so it sent its open-heart surgery patients to Clarian. Wishard operated a burn unit, whereas Clarian’s local Methodist Hospital did not, so Clarian sent its burn patients to Wishard.
Wishard was recognized as an important part of the area’s healthcare system. The other area hospitals and community knew that closing Wishard would have a devastating impact on area healthcare providers in that they would have to absorb the indigent care. Indigent patients would also have a much more difficult time finding care.
Mark Mueller, a patient whose perspective on Wishard had changed with his own fortunes and health problems, exemplified the struggle of indigent people to obtain care. He counted on Wishard for almost all of his healthcare—in fact, his life depended on it. He had been diagnosed with diabetes, and his kidneys had failed. He had been unemployed for six years and lived on disability. He had lost his insurance coverage, so Wishard was the only place he could go for care. “I wouldn’t have any options,†said Mueller, a widower. “I just don’t see how the poor…well, a lot of them won’t survive if Wishard goes down the tubes†(Penner 2003a).
An Interim Solution
Wishard had to do something to stem its losses. Frustrated, Wishard’s board realized that most of the options it had considered were too long-term or impractical. However, it seriously discussed yet another option—increasing and enforcing copayments. While the overall purpose of Wishard was to care for the poor, the more poor patients it served, the greater the hospital’s losses. In an effort to reduce the number of visits by poor patients, Wishard implemented a new copayment policy on October 1, 2003, that dramatically increased copayments for patients visiting physician clinics and using emergency department services. Although revisions of this policy in 2004 decreased the amount of up-front (time of service) copayment required of self-pay patients, copayments still ranged from $35 to $120, a significant amount for most indigent patients.
Collection of copayments also became vigorously enforced. In the past, the clinics and the emergency department often overlooked it, understanding that many of their patients had little or no money. Beginning in late 2003, each clinic, hospital, and emergency department was required to collect copayments from all nonemergency patients up front.
Some board members and physicians were concerned that this policy would discourage vulnerable patients from seeking care. They speculated that pregnant women might skip physician visits and wind up rushing to the emergency department at the time of delivery. They also feared that patients with diabetes and hypertension might self-treat and seek care only in emergencies, which could increase hospital stays and the overall cost of care.
Wishard continued to struggle to find its strategic direction. The only certainty was that the future would become only more difficult for all healthcare providers, especially those like Wishard that primarily served poor and vulnerable populations.
Sources: Penner (2003a, 2003b); Swiatek(2003).
Questions
What was Wishard’s competitive situation?
Did Wishard have direct competitors? If so, in what areas did it compete?
What strategic leverage did Wishard have over the other area hospitals?
From a societal perspective, what problems occur by having a stand-alone public hospital with a primary mission of serving the indigent population?
What strategic steps would you recommend for Wishard?
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