Integrated Health Delivery Systems

This article provides an introduction to the development and growth of integrated health delivery systems. The article examines how the pressures of cost control, access, and quality of care have driven the structure and organization of integrated systems. Included is a consideration of how integrated systems have succeeded or failed to deliver on the anticipated outcomes they were established to achieve. Finally, the future of integrated systems is briefly reviewed.

Keywords Fee-for-service; Horizontal Integration; Integrated Delivery Systems; Managed Care; Vertical Integration

Health Care Management > Integrated Health Delivery Systems

Overview

An integrated health delivery system is an arrangement of health professionals and health care facilities that provide health services within a seamless organization of delivery. To best understand integrated delivery systems (IDS), it is helpful to contrast the IDS model with health service delivery under the traditional fee-for-service (FFS) arrangement. In FFS, a patient would see his or her physician and then be billed for a patient visit. If the patient's presenting problem required hospitalization, the patient would receive a minimum of two separate bills, one from their physician for medical consultation during the hospital stay and one from the hospital for the use of hospital services. If the presenting problem required additional diagnostic procedures or multiple therapeutic interventions, the patient would receive a bill from each consulting physician as well as charges for all ancillary services used, such as pathology laboratory, radiology, etc. Each time the patient sees a different physician or other provider, he or she has to re-tell the story of the presenting problem. From the provider standpoint, he or she has to follow-up on each additional consultation.

Once discharged from the hospital, the patient is confronted with a confusing array of bills and charges for each physician consultation and hospital service provided. This process of separate and individual billing is entrenched in health service delivery because under this arrangement, both physicians and hospitals (or other health service facilities) can maximize their individual billing and maintain tight control over their revenues.

In an integrated delivery system, a patient receives one bill from the health system detailing all charges and then writes one check for payment. Or, more likely, the patient's health insurance company or managed care provider receives the bill and makes the payment. In either case, paperwork and the management of paperwork is greatly reduced, resulting in considerable cost savings. Also, frustration is greatly reduced because in the event of mistakes in charges, the payers (either the patient or the health plan) can deal with one billing entity rather than multiple entities.

In the late 1980's and early 1990's, payment arrangements for health care began shifting away from traditional FFS and indemnity plans toward capitated managed care and health maintenance organizations (HMOs). Integrated delivery systems emerged as the next evolutionary phase for health system organizations. They were touted as being more efficient, more cost effective, and better able to deliver a higher quality of patient care through the use of information technologies and centralized management operations and procedures. How such systems function and whether they have delivered on the promise of reduced cost and better patient care is the subject of this essay.

The Evolution of Integrated Delivery Systems

As technology in the practice of medicine has increased, the number of medical providers and the facilities and ancillary services required for diagnosis and treatment have increased correspondingly. Gone are the days of the general practitioner who carried out both diagnosis and treatment in the office or at the bedside in the hospital. For example, a simple uncomplicated broken bone now encompasses a visit to a primary care physician for initial diagnosis and referral. Referrals include a trip to the radiology center for x-rays and a visit to an orthopedist, who will confirm the diagnosis and have a technician put on the cast. There will be several follow-up visits to the orthopedist to ensure the bone is setting correctly. Once the cast is off there will likely be treatment by a physical therapist to restore the now healed bone to full function.

Where once one provider was responsible for treatment and subsequent billing, in this broken bone example, there are six providers (the primary care physician, the radiology technician who takes the x-ray, the radiologist who writes the radiology report, the orthopedic specialist, the orthopedic technician, and the physical therapist). In addition, there are four provider facilities involved — the primary care physician office, the hospital or radiology center that houses the radiology equipment, the orthopedist's office, and the physical therapy center. Each provider submits charges, and each facility submits charges. In this arrangement, each provider and each facility will have billing policies in place to maximize revenue from each patient encounter. Each provider and each facility will have its own method of maintaining patient records, its own operating procedures for billing and collection, and its own business management system for personnel, accounting, maintenance and custodial service, and record keeping.

In our hypothetical broken bone example, it is important to consider the economic, geographic, and health care markets where this medical event took place. Assuming the patient with the broken bone lives in a mid-size metropolitan area, he or she will likely have a choice of which primary care physician to see for the initial consultation. This primary care physician will have established his or her own network of referral physicians for his use. In this metropolitan area are multiple health care facilities that compete for patients and physician referrals, for broken bone patients as well as the entire spectrum of health and medical conditions. Each provider and facility submits bills to payers for each patient encounter based on the need to cover operating expenses and, in some cases, make a profit.

Managed Care Plans & HMOs

As medical care technology increased, the costs of providing that care increased correspondingly. In the 1980s, managed care plans and HMOs emerged to contain the rising costs of health care. In many of these plans, the method of payment switched from fee-for-service to a capitation or pre-paid plan. Under fee-for-service, the physician billed each service or medical event based on his or her experience or on what was considered to be 'usual and customary' in his or her practice area. In capitation, a set fee per patient is negotiated in advance of any medical event. A physician provider or hospital knows in advance that the insurance plan or HMO will only pay for the pre-determined contracted amounts for each service delivered or each medical event treated. In this arrangement, the risk of paying for a medical event is now shared between the payer (health plan or HMO) and the provider (physician or hospital).

Under capitation, payers negotiate with individual providers for the best price. In a metropolitan area, providers are in the position of competing to offer the most attractive package of services and pricing to in order to gain market share with payers. Smaller operations, smaller hospitals in particular, found it difficult to compete with larger hospitals for patients and payers. Hospitals with sufficient capital began to buy up smaller hospitals with weaker and less stable fiscal capability in order to gain market share and achieve economies of scale in operating costs (Ruffin, 1995). This marked the beginning of integrated services.

In addition to the confusing array of billing and charges under traditional FFS is the issue of medical records. Not only does each provider do his or her own individual billing, but each provider also keeps his own medical record for each patient. From the patients’ perspective, they must tell their "medical story" to each provider they encounter. Each time they tell the story there may be variation, as different providers ask questions in different ways based on their own perspective of the problem.

The issues of separate billing and individual medical records are just two examples of what health care providers and health policy scholars call the fragmented health delivery system in the United States. From an economic and management perspective, each provider or facility entity operates as a separate business unit with its own set of policies and procedures and its own governance structure. IDS emerged as a way to coordinate health care delivery and operate the business of health care as one organization.

How Integrated Delivery Systems Work

Expanding a firm's scope of operation can be accomplished with horizontal integration or vertical integration.

Horizontal Integration

Horizontal integration refers to the acquisition and merger of firms at the same level of the value chain ("Horizontal integration," 2007). Hospitals buying up other hospitals is the most common form of horizontal integration.

Vertical Integration

Vertical integration is the degree to which a firm controls processes and operations up and down the value chain ("Vertical integration," 2007). Vertical integration of health delivery services began as hospitals began to buy physician practices, especially primary care physician practices. Physicians with the most interaction in hospitals are specialists who see patients referred by primary care physicians. This is especially true in academic health centers, where medical student training and research endeavors require a broad base of many specialty physicians. When a hospital buys a primary care practice, it gains automatic access to an established patient base for referrals.

Integration Success

Ruffin (1995) identifies seven factors that he believes are critical to the success of integrating health delivery systems. These are: the ability to attract and retain physicians; disciplined governance; integration of care; conservation of capital; strategic growth; cost control; and the ability to be proficient at processing information.

Attracting & Retaining Physicians

Attracting and retaining physicians is the base from which integrated systems are constructed. There are numerous advantages for a new physician to enter into an integrated system rather than starting up a solo practice or even entering a small group practice. First, the IDS will most likely have the same advanced equipment technologies available that the new physician trained with in medical school. The income guarantee plus the possibility of performance incentives that an IDS can provide is attractive to physicians with considerable school loan debt. Finally, the IDS manages all the administrative operations of running a practice, which leaves the physician to do what he or she does best — practice medicine.

Comprehensive Governance

Many health providers have loosely aligned in what they may call an integrated system, but Ruffin cautions that without disciplined governance these loose associations fail to operate efficiently and effectively from either a clinical, fiscal, or management perspective. To succeed, policy, procedures, and operations must be standardized across provider organizations to achieve cost control, effective communication, and quality of clinical services. In an IDS, this standardization comes from a strong central management organization and a governance entity that unites the system.

Integration of Care

Integrating care means establishing communication, procedures, and information systems across the continuum of patient care. One of the mechanisms of integrating care are electronic medical records. With electronic medical records there is standardization of data collection and reporting that is consistent throughout the IDS. This results in faster, clearer, and more effective communication among the various providers in an IDS.

Conservation of Capital

Many IDSs have evolved from not-for-profit hospitals or provider groups. Because of their non-profit status, they don't have easy access to equity capital for investment in expanded operations and equipment (Ruffin, 1995). Add this to the shift from FFS to capitated payment plans, and the only way that most IDSs can increase available capital is through savings and debt reductions. Conserving capital through prudent management and cost savings at every level of operation is the fourth critical factor that Ruffin argues is essential to the success of an IDS.

Strategic Growth

Closely tied to conserving capital is strategic growth. Ruffin states that this means thinking beyond traditional hospital and physician services and investing in strategic business enterprises that broaden the scope of the IDS in the continuum of health care services. The University of Pittsburgh Medical Center (UPMC) exemplifies this kind of strategic thinking. UPMC has capitalized on existing clinical and management expertise as well as emerging medical technologies through its Strategic Business Initiatives. These include venture partnerships to transform cutting edge research into viable commercial applications.

Controlling Costs

Controlling costs is the sixth factor Ruffin identifies as key to IDS success. In this era of capitated payment, controlling costs and realizing savings on each patient encounter is the only means for most not-for-profit IDSs to grow revenue. Controlling costs means controlling the fixed costs of doing business. Variable costs are the costs incurred with delivery of patient services, such as supplies and staffing. Quality improvement is now a fixture for IDSs as well as traditional hospitals and physician clinics. Quality improvement studies and outcomes are fertile ground for determining where costs in patient care can be controlled or reduced. Outcome studies and research in evidence-based medicine show that spending more money through staffing level, newest technologies, or advanced procedures do not always result in the best patient outcomes (Institute of Medicine, 2001).

Processing Proficiency

Finally Ruffin states that proficiency in processing information is another critical factor to the successful operation of an IDS. This includes processing billing and payment information and the transfer of patient clinical information. As mentioned earlier, the use of electronic medical records (EMRs) is one approach to information processing. Sophisticated EMRs also integrate patient billing into their systems.

Have Integrated Delivery Systems Delivered?

There is some question as to whether IDSs have proven to be the success in health care organization that they were touted to be. Sokolov (1999) states that to determine the success of an IDS, one must first know what success looks like. Different models of IDS have emerged, reflecting varying degrees of horizontal or vertical integration as well as structural and contractual integration. The criteria for success will vary based on the integration paradigm behind each variation. Sokolov states that looking across the different structures of IDS, three elements are critical to success: income, market share, and mission.

Weil (2001) states that how IDSs will look in the future will be very different from how they look now because they have failed to achieve projected outcomes. These outcomes include reduced operating expense through economies of scale, increased access to care, and increased risk sharing. He observes that operating expenses are increasingly forcing many IDSs to divest previously integrated providers. Due to the impact of risk-sharing on operating margins, physician practices are a primary target for divestiture. Physicians have historically run their practices, including billing, collection, record-keeping, and referral relationships, with complete autonomy. In an IDS, much if not all of that autonomy is lost. Thus, if not carefully managed, the IDS and the physicians aligned with the system can result in a confrontational situation dealing not only with the issue of income and revenue but also with issues of power and control.

Overall, narrow margins at the operating level have been a major contributing factor to the financial distress and in some cases the financial failure of IDSs. Narrow operating margins translate into little or no capital to re-invest. A critical area for IDS is investment in information technology, especially electronic medical records. The use of electronic medical records integrates clinical practices, allowing physicians to send and receive clinical information in real-time. This results in savings in paperwork, reduces waiting time for lab results, enhances communication and consultation among physicians and other care providers, and is critical to implementing quality improvement programs.

The Future of Integrated Delivery Systems

The hallmark of health care and health care delivery services in the United States is change. The role of physicians, hospitals, and other providers has evolved over the latter half of the twentieth century and the first decades of the twenty-first. The development of integrated delivery systems is one step in this evolutionary chain. However, the pressures to lower costs, increase access, and improve patient outcomes is driving the health industry beyond incremental change to a new, ongoing transformation. Health care delivery, integrated or otherwise, will similarly be transformed.

Terms & Concepts

Fee-for-Service (FFS): The payment arrangement where each provider bills for each service delivered.

Horizontal Integration: The acquisition or merger of firms at the same level of the value chain.

Integrated Delivery Systems: An arrangement of health professionals and health care facilities that provide health services within a seamless organization of delivery.

Managed Care: A form of capitated health care payment used by health insurers or other health plan payers in which reimbursement for services are established and contracted in advance of service delivery.

Vertical Integration: The acquisition of firms up and down the value chain for the purpose of controlling fiscal and management operations.

Bibliography

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Suggested Reading

Carpenter, D. (2007). Visions of health care's future: Bigger, more patient-focused systems? H&HN: Hospitals & Health Networks, 81, 4–7. Retrieved December 4, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25188497&site=bsi-live

Jim Vong, K., Farmer, P., & Porter, M. E. (2013). Redefining global health-care delivery. Lancet, 382(9897), 1060–1069. Retrieved November 22, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90395124

Sterns, J.B. (2007). Quality, efficiency, and organizational structure. Journal of Health Care Finance, 34, 100–107. Retrieved December 4, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26765893&site=bsi-live

Telling the story of community benefit. (2007). Healthcare Financial Management, 61, 1–8. Retrieved December 4, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26273496&site=bsi-live

Young, D.W., & McCarty, S.M. 1999. Managing integrated delivery systems. Washington, D.C.: Health Administration Press.

Zismer, D. K., & Werner, M. J. (2012). Managing the physics of the economics of integrated health care. Physician Executive, 38, 38–45. Retrieved November 22, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=78855043