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News and Features
Are integrated systems the cure
for health costs?
For hospital profits and quality, more can mean better

by Kathleen F. Phalen

Call him the virtual doctor. Dr. Gene Burke thrives in a pressure cooker of a job, making life-and-death decisions for two hospitals and four intensive-care units — all on the same shift. The Norfolk physician, who cares for the intensively ill, just logs on. With real-time audio and video he can monitor vital signs, check machines, charts and lab results. "Two hospitals, 20 miles apart can funnel me 36 patients from four ICUs," says Burke, who serves as medical director for Norfolk-based Sentara Healthcare, which operates the only electronic intensive care unit — an "eICU" — in the country.

David L. Bernd, CEO of Sentara Healthcare and arhcitect of the top integrated health system in the U.S. Photo by Mark Rhodes

Sentara’s cutting edge eICU is just one part of a promising health care trend that is helping some hospitals prosper in the face of punishing market conditions. Reaping the rewards of a buying binge that began 15 years ago, Sentara Healthcare has won national recognition as the top "integrated health system" in the country. Delivering a cross-section of health services at 70 different sites around Hampton Roads — hospitals, outpatient facilities, nursing centers, home health, physical therapy, medical transport, diagnostic vans and fitness centers — Sentara has eliminated many of the inefficiencies inherent in America’s fragmented health care system.

Finding new ways to cut costs is critical in an industry in which more than half the business — the federally funded Medicare and Medicaid programs — is marginally profitable or downright unprofitable. Not only does Sentara have the resources to push innovations such as the eICU, which addresses a segment of medicine that accounts for 25 percent of inpatient hospital costs, it can spread its administrative overhead over more operating units. A central billing office, for instance, serves five hospitals. "This gives us lower cost and better collection," says Chief Financial Officer Rob Broermann. A reorganization of accounts receivable has reduced late payments by 43 percent and slashed credit balances by more than $1 million. Stand-alone hospitals, no matter how efficient, can’t match these administrative savings.

The quality of medical care also benefits. Sentara’s eICU has reduced patient mortality by 25 percent. "These are unstable patients and there is a potential for catastrophe," says Dr. Burke. "We can readjust (with eICU) every hour or every minute if necessary. We see things early and respond early… Everybody wins. It saves lives. It saves dollars."

Bucking a national trend of declining profitability in health care, Sentara hospitals enjoy operating margins far more robust than the national average of 2.8 percent. Sentara’s Leigh Hospital recorded a 16.2 percent operating margin, making it one of the most profitable hospitals in the state. Virginia Beach General generated a 13.2 percent operating margin, and Norfolk General racked up 11.3 percent. Because Sentara is not for profit, it plows its earnings back into the system instead of paying it out to shareholders. The extra money plugs revenue gaps at unprofitable operations such as Optima Health Plan, a senior program and their medical group. Says Broermann: "We use the margins from the more profitable segments to offset the others and put services back into the community."

Indeed, Sentara could be a trendsetter for health care in Virginia, where much of the industry has consolidated in large regional health systems such as Inova in Northern Virginia, Centra in Lynchburg, Carilion in Western Virginia and Columbia HCA and Bon Secours in Richmond. Even though 34 percent of all acute care hospitals nationally lose money, only a quarter of Virginia’s are bleeding red ink. Hospitals don’t have to belong to an integrated system to stay profitable — a survey of Virginia hospital profits shows a number of highly profitable independents — but it sure does help. The ranks of the most fiscally stressed facilities include many free-standing hospitals or inner-city wards with high rates of charity care.

Industry gurus have been preaching the virtues of integrated health systems for more than a decade, but it took years of tinkering before anyone figured out how to make it pay off. At last the winning strategies are coming into focus. Strong integrated systems mesh physicians, hospitals, outpatient services and home health services to ensure that patients are treated in the most appropriate setting. They create a culture in which doctors and bean counters are held accountable to both clinical quality and the bottom line. They exploit market power to leverage better deals with suppliers such as pharmaceutical companies

Another Virginia provider where those philosophies are taking root is Inova Health System in Falls Church. Along with Sentara Health Systems, Inova was recently rated among the best-integrated systems in the nation by SMG Marketing, a Chicago-based healthcare and information marketing company. Sentara was first; Inova third. SMG analyzed data (services and access, hospital utilization, physician integration, financial stability, outpatient utilization and contracts) from 532 non-specialty, regional integrated health systems nationwide.

What’s the secret? Inova balances clinical quality excellence and financial success. "There is an appreciation for both," says Jolene Tornabeni, chief operating officer. "We have learned to leverage as a system." And, as Inova becomes more profitable — one of its hospitals earned margins of 9.3 percent — it plows profits back into the system. "The ability to continue to be financially successful … means we can reinvest in services," she says. Physicians, key players in any health care system, identify with Inova and push for positive changes. "There is a sense of ownership that the physicians have to the organization," she says. "It’s a much more deep-seated feeling than I have seen anywhere else. We have the intellectual capital to perform at a level I’ve never seen before."

Another star among Virginia’s integrated system is Carilion Medical Center in Roanoke, but with a twist. While Carilion’s health care system didn’t top the nation’s best list, it does something the metro-focused Sentara and Carilion do not: Sprawling across much of western Virginia, it has integrated a large number of small, community hospitals into its system. The local hospitals feed patients to the tertiary care center in Roanoke, the system’s biggest moneymaker. The result: system-wide profit margins of 14.8 percent, which are among the best.

Community hospitals, answering to local boards that value their independence, are reluctant to submerge their identity in a larger organization. But many have no choice. Rural and inner city hospitals with high populations of Medicare and Medicaid patients cannot sustain losses indefinitely. Indeed, since 1996, eight Virginia hospitals have closed: Gill Memorial Eye, Ear, Nose and Throat Hospital, Roanoke; Wise Appalachian Regional Hospital; Norfolk General; Portsmouth General; Pentagon City; Charter Behavioral Health, Charlottesville; Charter Westbrook in Richmond; and Stuart Circle, Richmond. In 1999, one-quarter of Virginia’s hospitals were operating on negative numbers, although it looks like 2000 might be a little better, according to the Virginia Hospital and Healthcare Association. Average operating margins total statewide are down from 8.5 percent in FY 1997 to 5.6 percent in FY 1999.

While deep-rooted funding problems make it unlikely that some hospitals will ever improve significantly, benchmarks are being set for them by the best-performing ones. Systems like Sentara and Inova pioneer management practices and information technologies that others can adopt.

For example, to improve inpatient care, Sentara added a "hospitalist," a doctor who works only in the hospital, at Leigh Hospital, says Rodney F. Hochman, Sentara’s chief medical officer. Sentara tracked the hospitalist’s patient data compared to a group of other doctors caring for patients in the hospital. The hospitalist’s outcomes were excellent, says Hochman. The improved cost performance from this one practitioner was $1 million.

Take another example, in pharmacy administration. By redesigning its outsourcing relationships, Sentara held the rate of drug cost increases to half the national trend while increasing pharmacy revenue by 26 percent. A new asthma program emphasizing patient education not only improved treatment but cut expenses: 8 percent in the emergency room, 24 percent among primary-care providers and 46 percent in inpatient admissions. Total annual savings amounted to $486,000. Best of all, say Sentara officials, the quality of life has improved dramatically. Says Melanie McIntosh, an RN with Sentara Homecare in Chesapeake: "I have been able to notice a significant change in these patients."

The next revolution in health care will not come from limiting patient access and squeezing providers, as HMOs and the federal government did during the 1990s. Instead, it will result from helping patients get better faster, cutting down on re-admissions and heading off unnecessary complications. Healthy patients require less treatment.

Curing such woes as hospital errors, labor shortages, tight revenues and an aging population will require huge doses of innovation. Chris Bailey, senior vice president of the Virginia Hospital and Healthcare Association, doesn’t expect the changes to occur overnight. Successful systems like Sentara, Inova and Carilion, he says, have been at it a long time. "Healthcare is very complex, and you can’t change cultures overnight. It takes steady, patient work and good leadership."

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