I don’t get it! We switched St. Luke’s from a profit center to a standard expense center, and yet they continue to encourage the PCPs to admit patients that we all know could be treated as outpatients. What’s going on? Maybe we should just switch back to profit centers and be done with it.
The speaker was Gus Mahler, Chief Financial Officer of Converse Health System (CHS). He was speaking with Rob Shuman, M.D., CHS’s Senior Vice President for Medical Affairs, about his concern that, despite a change in the control structure and incentive system at one of the system’s hospitals, many primary care physicians (PCPs) were continuing to admit to the hospital patients who could be treated appropriately in a less expensive setting. He wanted to enlist Dr. Shuman’s help with the problem.
BACKGROUND
Converse Health System began through a merger of St. Luke’s Hospital and Medical Center with HealthGroup. St. Luke’s was a 283-bed tertiary care facility located in downtown Mansfield. HealthGroup consisted of two hospitals: Mansfield Memorial Hospital and Lakeview Medical Center. Mansfield Memorial was a 454 bed tertiary care facility located approximately 2 miles from St. Luke’s. Lakeview was a smaller hospital about 2 miles from Mansfield and St. Luke’s.
The merger also involved a large visiting nurse association and several smaller providers, including an occupational medicine group practice, two urgent care centers, a sub-acute care hospital, a skilled nursing facility, a birthing center, and a mortuary.
Some two years later, the management and medical staffs at Mansfield, St. Luke’s, and Lakeview were consolidated. For the next two years, the three hospitals, plus the other providers and several physician group practices that had been acquired, were run as Affiliated Health Care. Two years after that, Affiliated was acquired by SecureHealth, a large (150,000 member) health maintenance organization. The resulting entity was named Converse Health System in memory of the board member who had initiated the acquisition and who had died shortly before its consummation.
During the next two years, SecureHealth’s enrollees doubled, slightly exceeding 300,000. In addition, Converse acquired several more physician group practices, and became, in the words of Kerry Johnson, its CEO, a fully-integrated and exclusive integrated delivery system. That is, with a few exceptions, patients received all their care within the system, and the system’s operating entities provided care only to the enrollees of SecureHealth.
Mansfield Area Market
Approximately 85 percent of the Mansfield metropolitan area population was enrolled in . . .
Assignment
- Be sure you understand how Exhibit 6 was prepared. Do you agree that a change in case mix can lead to the kind of results shown here? Do you agree with Mr. Bach’s assessment of how St. Luke’s would prepare its budget under these circumstances?
- What is your assessment of the way Mr. Bach has structured Exhibit 6? What is the value of having fixed and variable costs separated in this way? Is the Exhibit 6 analysis an improvement over Mr. Strauss’ analysis in Exhibit 5? Can an analysis of this sort be done in the real world?
- What changes should Mr. Mahler make to the management control system? Be sure to address (a) whether St. Luke’s should be a profit center or a standard expense center, (b) how transfer prices between the HMO and the hospitals should be set to encourage behavior by a hospital’s senior management and physicians that is in the best interest of CHS, (c) how, if at all, the structure of information in Exhibit 6 can be used for management control purposes, and (d) what role physicians might play in the control system.