A Hospital C-suite Reality Check

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A few converging issues have recently revealed a fissure in the otherwise strengthening position of hospitals and health systems in the competition for outpatient-imaging supremacy. I have written volumes about the importance of building a two-way, give-and-take model in hospital–radiology group relationships so that both parties can thrive. The emphasis has generally been placed on what radiologists need to do to understand both their vulnerability and the new requirements for treating the hospital partner as a customer: providing superior service and fully aligning with what is often their most significant revenue stream.

What, though, of the hospital C-suite executive? What is your responsibility in ensuring that you are delivering the highest levels of imaging quality at the most reasonable price, therefore fulfilling your mandate to maintain and support the best and most efficient radiology group? Yes, tensions exist in many areas of the country between hospitals and aggressive, tone-deaf radiology groups that suddenly find themselves in adversarial relationships with their hospital partners.

There are, however, just as many dysfunctional situations in which hospital COOs have declared war on longtime radiology providers, taking an approach to fixing the problem that relies on shooting first and asking questions later. This is most often true in markets where hospitals have consolidated into larger systems, and is less of an issue in the typical community hospital—although the rise in regional chains (resulting from consolidation) has affected many of these local organizations as well.

The convergence of these issues has resulted in new elements contributing to what I have often referred to as radiology’s perfect storm. The current economic advantage in the delivery of imaging services lies with the Hospital Outpatient Prospective Payment System (HOPPS) reimbursement model, so the hospital-based outpatient setting is, at the moment, the most attractive business model—no matter what the relationship is with the radiology group.

That being said, the most recent information from CMS says that despite the Patient Protection and Affordable Care Act (translation: because of the law), health-care costs are continuing to rise, and will do so at a projected rate of 6.1% per year until 2014, when they will rise by over 9%.

This necessarily changes the game. Couple it with the news from most insurers that they are raising their rates (some as much as 23% in 2011) as a result of this same law, and the pressure from the business community and empowered patients will build a groundswell of hostility directed at out-of-control costs and indefensible pricing strategies, both from the insurers and from the providers that they perceive as contributing to the problem.

This will become especially true when the full impact of the insurers’ other economic moves are manifested, including more cost shifting to employees through significant increases in the typical employee share of health-care premiums. This will absolutely jumpstart and accelerate truly consumer-driven health care.

The coup de grace—and key warning—for all concerned with building and sustaining balanced relationships that benefit the practice, the hospital, and the patient just might lie within a most interesting article published on August 26th in Bloomberg BusinessWeek concerning the evolving drama between Northern California’s Sutter Health, headquartered in Sacramento, and Radiology Associates of Sacramento (RAS).

In essence, the thesis of the article is that Sutter Health is using its market power (dominant footprint) to raise prices way beyond what similar exams cost in, for example, an RAS outpatient imaging centers; in one cited example, RAS charges 45% less than Sutter Health does for the same exam. Similarly, significant pricing disparities exist between imaging services provided by Sutter Health and those provided by competing community hospitals that are not a part of this huge system.

One of most powerful statements in the article comes from Alain C. Enthoven, PhD, Marriner S. Eccles professor of public and private management, emeritus, at Stanford University; father of managed competition; and a founder of the influential Jackson Hole Group. Enthoven says, “The pricing power of local hospital systems has received little attention in the national health care debate. In 2009, as consumer prices fell for the first time in 54 years, the US