Capital New York
February 9, 2015
New York's Leading Health Systems Differ on Growth Strategy
By Dan Goldberg
New York’s leading health care systems have split into two opposing camps on the question of preparing for a long-term future in the industry.
One camp, consisting of North Shore-LIJ, Montefiore and Mount Sinai, believes in aggressive up-sizing. These systems have pursued expansion through mergers with other systems and acquisition of satellite campuses, in the service of achieving administrative efficiency, increasing bargaining power, diversifying revenue and, crucially, gaining the ability to act as their own insurers.
The other camp, comprised of New York-Presbyterian and NYU Langone, is far more cautious. These systems have been wary of affiliating with other brick-and-mortar hospitals in an era of declining utilization rates. (NYU has shied away from affiliations outside the city; New York-Presbyterian isn’t affiliating at all.) They have instead made strategic investments and focused on ambulatory care and their traditional role as teaching hospitals. They have steered well clear of the insurance business.
The starkly differing views say a lot about how the administrations of these big five systems see the future of health care, and also about the lessons they’ve learned from their past.
NYU and Mount Sinai, for example, had their own messy divorce during the last decade, which is one reason NYU officials are slow to make new alliances.
“We’re very wary about hospital mergers,” said NYU Langone chief clinical officer Dr. Andrew Brotman. “Part of that is our history, having had a hospital merger that didn’t go so well.”
Meanwhile, Mount Sinai seemed to draw the same conclusion about mergers, even as it placed a bigger bet on growth, choosing to buy Continuum Health Services instead of merging, a move NYU Langone had also been pondering. It was effectively an anti-merger; Continuum’s top brass were removed or resigned.
One thing all five hospital groups agree on is that major strategic adjustments are in order, as the Affordable Care Act, the state’s Medicaid reforms, the city and state’s shifting demographics, and Medicare’s A.C.O. models and payment penalties create a heavy incentive for them to treat more patients but also, somewhat paradoxically, to provide less in-patient service.
The old model was about getting fees for services. Having more patients was important because it meant more work, and more work meant more revenue, particularly if those patients had commercial insurance or Medicare. A small number of patients, the chronically ill, were great for business and health was, perversely, bad for the bottom line.
In the new one, shaped by the government payers Medicare and Medicaid, the systems are paid a set amount per patient or per service, and if providing for that patient costs more than the set amount, health systems eat the loss. So the health systems need more patients, and also need to care for them more efficiently, which is why there is such competition to merge, purchase and affiliate.
The high volume of patients guarantees that a few expensive outliers do not become too costly to bear. It’s a business model that insurance companies have been using for decades.
Health systems that treat a higher percentage of Medicaid patients, such as Montefiore and Mount Sinai, are particularly eager to increase their patient volume as the state is pushing Medicaid recipients into managed care models. These hospitals want to be involved in population health because they see it as a way to manage their own risk.
That’s why providers in New York and across the nation are bringing back the house call. But it’s not for when a patient is ill. These 21st century house calls are for before an exam and after a procedure.
“Your ability to take care of patients when they are not sitting across from you in the examination room becomes key,” said Montefiore Medical Center chief medical officer Dr. Andrew Racine. “We have visiting nurses out there all the time.”
The fact that the paradigm is changing at a glacial pace doesn’t seem to shake anyone’s confidence that it is in fact irrevocably changing.
“We have a sense of inevitability,” said Racine. “This is not a pendulum swinging back and forth. This is a freight train going forward in one direction.”
But not one track.
North-Shore LIJ has been the most aggressively expansionist of all the systems. Some of that reflects the personality of C.E.O. Michael Dowling, a self-described businessman, who is brash and ambitious. He is politically experienced, having worked in the Mario Cuomo administration, and was a member of Andrew Cuomo’s Medicaid Redesign Team.
LIJ, which is now the largest private employer in the state, announced partnerships with The Cleveland Clinic, started its own insurance company (called CareConnect), offered help to other health systems converting to the ICD-10 disease classification system, taken over Lenox Hill, turned the former St. Vincent’s into the city’s first freestanding emergency department, announced a plan to open 50 ambulatory clinics across the state and finalized an agreement with Phelps Memorial and Northern Westchester Hospital, giving it a presence in Westchester County.
Dowling told Capital that his expansion could go as far north as Canada, and it was hard to tell whether he was entirely joking.
What separates LIJ from the other four major health systems is that it is the only one not to have an academic medical center. (Hofstra and North Shore-LIJ recently opened an allopathic medical school, but it is a small part of LIJ’s world.)
LIJ is also the only private system to offer a health insurance option on the state’s individual exchange, which was created by the Affordable Care Act. And that, in turn, influences its strategic investments.
Affiliations not only spread the LIJ brand, they help spread the reach of CareConnect, which is now being offered in Manhattan, Bronx, Brooklyn, Long Island, Staten Island, Queens and Westchester.
Insurance regulations require that a minimum of two hospitals be in-network in any geographic area. Because CareConnect is relatively new, its leverage with independent hospitals is not particularly strong. If LIJ reaches an affiliation agreement with those hospitals, it becomes easy to expand the insurance offerings as well.
The multi-million dollar bet is that the North Shore-LIJ brand, which has lot of cachet on Long Island, will translate to Westchester County where the name is not as familiar, and where the competition is far more fierce.
That’s why it was so important for LIJ to expand its brand through some highly publicized strategic partnerships with nationally known players. The Cleveland Clinic, for example, partnered with LIJ for cardiac care. This raised LIJ’s profile and also gave it an additional chit with large self-insured employers looking to negotiate insurance contracts.
In November, LIJ announced SkyHealth, a partnership with Yale-New Haven Health that will helicopter patients with major trauma to an appropriate hospital. This will only be used by a few hundred patients a year and LIJ invested a modest $13.5 million in the program, but it serves to enhance LIJ’s brand in Westchester and Rockland and could be a prelude to future partnerships with Connecticut’s leading system, as LIJ faces stiff competition from one of New York’s most successful health institutions.
Montefiore Medical Center, in the Bronx, is also looking to the north, partnering with White Plains hospital in Westchester and Nyack Hospital in Rockland County. It also bought Sound Shore in New Rochelle and Mount Vernon Hospital in 2013.
Like LIJ, Montefiore is offering its own insurance product. The Montefiore Insurance Co., launched in January 2015, will offer coverage to small businesses.
The advantage Montefiore has over its competitors is that it has a long and successful track record of providing care to low-income patients, having dealt with a payer mix dominated by the federal government since the creation of Medicare and Medicaid in the mid-60’s.
“We have been living in a single payer system since 1965,” Racine said. “This is the poorest urban county in the country. As a result, our margins have always been modest.”
Montefiore was one of 32 health systems across the country to implement Pioneer Accountable Care Organization as part of the Affordable Care Act. And it is one of a handful of few success stories, achieving costs savings of 7 percent during the first two years. ACOs set payment limits and force hospitals to provide care at a set cost. They function well with large patient volume.Montefiore currently manages about 300,000 patients in these types of managed care arrangement.
“The goal is 1 million lives,” said Racine. “We’d prefer to have all of it as complete capitation. We are on the road to doing that, so scale becomes very important.”
Their gamble is that their success at managing large populations in the Bronx can be replicated in the Hudson Valley where the physicians are independent contractors used to a certain freedom to practice as they see fit, not direct employees of Montefiore.
Nyack had been affiliated with New York Presbyterian, as had The Brooklyn Hospital Center, which earlier this summer announced it would be affiliated with Mount Sinai. Mount Sinai is also affiliating with Valley Hospital in New Jersey, which ended its relationship with Presbyterian at the end of 2014.
New York-Presbyterian’s recent approach exemplifies the alternative, consolidationist attitude that has set it apart in recent years from North Shore-LIJ, Montefiore and Mount Sinai.
Its recent history is filled with examples of retrenching, allowing community hospitals affiliate with other systems while focusing greater attention on core assets such as New York Downtown Hospital in Manhattan or New York Methodist in Brooklyn. That has in turn allowed the people who run New York-Presbyterian to maintain greater control of all the elements of their system. They aren’t interested in affiliations; they want asset-based mergers.
“They own you hook, line and sinker,” said Patricia Hennelly, a director in the New York City-based CohnReznick Advisory Group. “A lot of hospitals don’t want to give up that control.”
New York-Presbyterian took over Lawrence Hospital Center in Bronxville in July. And in November, the state approved its takeover of Hudson Valley Hospital Center in Cortlandt, which will now be known as New York-Presbyterian/Hudson Valley Hospital. The Journal-News reported that the board of the Westchester hospital, which has the authority to hire and fire officers, will be controlled by New York-Presbyterian.
New York-Presbyterian has shown little interest in the kinds of capital investments that community hospitals often require. Nyack has razor-thin profit margins and was in the red as recently as 2007. The Brooklyn Hospital Center emerged from bankruptcy in 2007 and while its finances are better now, its margins aren’t as healthy as Brooklyn’s New York Methodist, which remains part of the Presbyterian health system.
New York-Presbyterian also divested from its insurance companies, getting rid of SelectHealth in 2012, and its Community Health Plan, a Medicaid managed care plan, in 2009. That gave it less of an incentive to branch out. While it still needs volume and administrative efficiencies, it doesn’t need a million customers like Montefiore does, because Presbyterian’s payer mix is so much wealthier, or like LIJ does, because Presbyterian has no insurance company to peddle.
None of this means New York-Presbyterian is immune from the changes in the industry. Despite offering a wealth in-demand of sub-specialty care, the system has seen declining in-patient utilization rates, which is why it has embarked on a $2 billion capital campaign, supported by a $100 million gift from businessman-activist David Koch, to build an ambulatory care center on York Avenue less than two miles north of NYU Langone, and about two miles south of Mount Sinai.
NYU Langone has taken a similar tack.
“Hospitals are in no way shape or form the primary strategy,” Brotman said. “It’s not that you can do without any hospitals but we are extremely selective in thinking about relationships with hospitals.”
Executives at Langone don’t believe that adding more brick-and-mortar hospitals to the portfolio will pay off in the long run, they said.
“The need for hospital beds is dropping rapidly and being in a state where it’s not so easy to close or modify a hospital, and the notion of acquiring X hospitals and assuming that you are going to be able to take out 50 percent of the physical assets and repurpose them for something else, we think is a very expensive, highly risky proposition,” Brotman said. “So that’s not to say you won’t need hospitals [but] to get covered lives by acquiring large numbers of hospitals, we don’t think is the way to get there.”
Dowling estimates that 30 percent of people who use a traditional emergency department shouldn’t be there.
“They create overcrowding, people are unhappy, and it’s kind of ridiculous to be in a place and unhappy when they don’t need to be there,” he said.
NYU, for now, has no interest in operating as an insurer, which means they have one less incentive to affiliate across the state.
“We haven’t bought into, and time will tell whether we’re right or wrong, the notion of having to have our own insurance product,” Brotman said. “We feel it’s not our core competence. … What we are interested in is moving the in-patient setting to the ambulatory setting and we’ve moved rapidly in that direction.”
Brotman explained that somewhere between 52 percent and 57 percent of NYU Langone’s revenue is now in ambulatory care. Only one-third of NYU’s 42,000 surgeries are classified as in-patient.
“Five years ago, it wouldn’t have been that way,” Brotman said. “People who have a stent [all] were in-patients—18 months ago!—and now 75 percent are ambulatory.”
Brotman’s response to decreasing utilization rates and declining lengths of stay is to focus on out-patient ambulatory care centers, and NYU has opened nearly three dozen during the past few years.
NYU Langone made a concerted effort to acquire Continuum Health Services, which would have added five brick-and-mortar campuses. But it also would have provided 6,600 primary and specialty care physicians, 12 free-standing ambulatory surgery centers and more than 45 ambulatory practices in the city. Despite Continuum’s financial trouble, and its portfolio of physical assets that need extensive capital improvement, its physician practices made it attractive to NYU.
That explains why NYU Langone was keen to affiliate with Lutheran Hospital, which has a robust out-patient network, including 28 school-based health centers and relationships with several federally qualified health centers.
Part of the hospital systems’ decision-making is guided by the simple question of how much faith they have in the ability of affiliated doctors and institutions to act efficiently as brokers.
NYU Langone, for example, is heavily focused on affiliating with physician practices and medical groups, and counts on physicians to manage the primary care and refer patients back to them for anything major. That gives them the advantage of a referral service without the financial commitment of a community hospital.
“The question then becomes who does the patient see as their captain of their ship?” said Richard Donoghue, NYU Langone’s senior vice president of strategy, planning and business development. “We think it’s the doctor, not the hospital. So if a doctor in Queens, one of our doctors, says to a patient, ‘You need a cardiac cath, I want you to go to NYU,’ or, ‘You have pneumonia, I want you to go to New York Hospital Queens right down the road,’ we think that patient is going to agree.
“Will New York Hospital Queens try to brainwash that patient to not go back to their captain? You know, it’s possible, but we don’t think so, because that’s who the patient sees.”
LIJ executives see it a bit differently.
In a payment model that rewards population health management, they say, vertical integration is crucial.
“The big issue is care coordination,” said Richard Miller, senior vice president of payer relations and contracting. “The same systems mean doctors have ways to communicate with each other, share lab results, imaging.”
Joe Schulman, executive director of North Shore-LIJ Care Solutions, said that for the vast majority of patients it really doesn’t matter whether they are treated at an LIJ facility. But for a select few—the chronically ill, co-morbid cases that are the most expensive to treat—it matters a great deal, and if LIJ isn’t ensuring that these costliest 5 percent of patients are appropriately treated, their business will suffer.
“Many of these conditions require a high degree of care coordination,” Schulman said. “There is a level of care management and care coordination that is required to have outcomes that yield a favorable result.”
These community hospitals often need significant investments.
Montefiore, for example, recently reported that as of Nov. 14, it had loaned Westchester Hospital more than $26 million. And Mount Sinai is likely to spend hundreds of millions of dollars upgrading the Continuum sites it has absorbed.
Representatives from Mount Sinai did not respond to requests for comment.
Kenneth Davis, a psychiatrist who became Mount Sinai’s C.E.O. as the merger with NYU was falling apart, recently explained his thinking about the new health care landscape in a controversial op-ed for the Wall Street Journal.
“To mitigate that risk, hospitals need to broaden the populations they serve, and offer services that cover a larger geographical area,” he wrote. “Without that wide range, there is too great a risk that costs beyond hospital walls during post-acute care, patients who are high utilizers of medical services, will unbalance the scales. Hospitals need a large pool to survive any increased medical needs and costly care.”
Like Montefiore, Mount Sinai is beginning to blur the lines between provider and insurer. In October, the health system announced the establishment of a new Medicare Advantage plan for Manhattan residents co-sponsored with Healthfirst. Beginning 2015, Empire BlueCross BlueShield, the largest health insurers in New York, and the Mount Sinai Health System established an accountable care arrangement. The arrangement will create individualized health plans to guide Empire’s 48,000 commercial and Medicare lives attributable to Mount Sinai.
Mount Sinai’s most direct competitors is likely to be LIJ, said Hennelly, the analyst.
LIJ’s move to Lenox Hill, blocks from Mount Sinai, meant that the Upper East Side hospital had that much less leverage with private insurance companies, who could risk losing Mount Sinai in favor of LIJ.
“The fact that North Shore came into Manhattan was a shot fired across the bow,” Hennelly said. “They weren’t expecting that. Brooklyn is where you’ll see the most competition.”
That’s been true for some time because Brooklyn is a gentrifying bureau with lots of smaller community hospitals. New York-Presbyterian has New York Methodist. NYU recently announced an affiliation with Lutheran Medical Center. Mount Sinai took The Brooklyn Hospital Center.
Governor Andrew Cuomo allocated $700 million in his budget for capital construction in Brooklyn, and floated the idea of building a brand new hospital to take the place of Brookdale and presumably be affiliated with one of the major health systems.
The local hospitals see the big fish as a potential lifeline. Their budgets have always been strained, particularly those who treat a larger percentage of Medicaid patients. But if the payment model does move away from fee-for-service, these community hospitals will have an even harder time.
“It will be almost impossible for an independent hospital to stand alone,” Dowling said.
Take the Brooklyn Hospital Center. It doesn’t have the resources to cover a million people nor does it have the ability to hire hundreds of specialists devoted to managing patient health outside the hospital, yet more and more of its patient population is in some form of managed care.
It’s a recipe for financial disaster, which is why affiliating with Mount Sinai or a Montefiore makes so much sense. The larger health systems can bring the capital, the staff and the expertise todevelop and run programs specifically aimed at managing costly chronic diseases such as diabetes, or hypertension.
“The strategy we are talking about is very long in its gestation,” Racine said. “You can’t really do care management overnight. You have to spend a long time developing architecture. You make mistakes along the way.”
This article appeared in the February edition of Capital magazine.