- Geographic barriers to provider competition are a headache for payers
- By importing capabilities, specialty franchising could help reduce some of the barriers to cross-geography competition
- It is too early to tell whether the recent Sarasota-Columbia is a good example of what franchising could do given the rapid growth in capacity for high-end cardiology in the area; it may be more about preserving network status and price point
- But payers should not assume the model will be a disappointing supplement to provider leverage: Instead, consider encouraging providers with differentiated outcomes (resulting in a differentiated cost profile) to explore franchising models coupled with risk taking.
Competition and geographic arbitrage
From a payer point of view, three “iron laws” shape the geography of provider competition: (1) clinical best practices are difficult to transmit to other locations (e.g. the experience with addressing central line infections); (2) local treatment patterns can be remarkably flexible in finding ways to fill local capacity (e.g. Dartmouth Atlas findings) and (3) reimbursement rates will rise to cover the overhead of high-end care often irrespective of capacity utilization (or alternatively: consolidating providers can get pricing leverage through must have” status in network contracting – see findings in drivers of costs in Massachusetts).
Medical tourism – geographic arbitrage based on exporting the patient – can be an awkward solution for many reasons (especially given that the best care is about avoiding the need for an intense burst of intervention). On the other hand, specialty franchising – a form of geographic arbitrage based on importing skills/branding — is intriguing because it has the potential to (1) upgrade the performance of local practices; (2) making “underbranded” providers more attractive to the patient and thereby improving competitive viability and (3) does not – necessarily — add to capacity (if it is about enhancing in place local providers). As such, specialty franchising could help promote competition and preserve a viable market for contracting. (By the way, telemedicine is the other main way of importing provider skills).
The Sarasota-Columbia deal
In this context, the 5-year deal signed a few weeks ago between Sarasota Memorial Hospital and Columbia University Medical Center is interesting. Columbia describes its “HeartSource” franchise program as providing the services of a management team, a clinical team, an administrative team to improve an existing community hospital-based cardiology program or stand one up greenfield. One model offered is a Management Services Agreement (MSA) for the cardiology departments and management of cardiac surgeons (Columbia says it has MSAs with 9 hospitals managing 16 surgeons under the program – data that likely pre-dates the Sarasota deal).
The Sarasota deal is quite different from the typical HeartSource program (Sarasota Memorial is hardly a turnaround given its 65K heart patients a year) and the terms are far short of an MSA. Key elements in public disclosures are:
- $250K per year payment to Columbia
- Consults: Access to expertise and training including site visits by Columbia experts at least 4 times a year
- Technology: Access to new devices and procedures (especially minimally invasive)
- Academics: Access to research and clinical trials; further; further Sarasota physicians could get Columbia faculty positions
- Referrals: Access to Columbia’s cardiac surgery faculty and researchers for case consultation and access to Columbia Medical for procedures not performed at Sarasota such as pediatric heart surgery and heart transplants.
Competitive landscape for Sarasota Memorial
Competition for high-end cardiology in the region is boiling.
Roughly 40 miles to the north of Sarasota, there is Tampa General Hospital with 988 beds and ranked #48 in the country in cardiology.
Also in Tampa, the Florida Hospital in Tampa (part of the non-profit Adventist Health System) launched its Pepin Heart Institute in 2006 and, in this past March, formed a partnership with the USF College of Medicine to collaborate on care delivery and research on cardiology (as well as and other specialties as other Florida Hospital sites). Presumably the USF deal will help secure the Florida Hospital at Tampa GME status for Medicare reimbursement (historically worth an estimated 4-5% in incremental margin on Medicare for the average teaching facility).
35 miles to the south off I-93: In February of this year, the Peace River Regional Medical Center (owned and operated by for-profit HMA) opened the Peace River Heart Institute with 3 surgery suites, 3 catheterization labs, 19 bed cardiovascular ICU, 16 bed post catheterization unit and an 8 bed pre/post intervention holding unit.
All three sites have the potential to draw off ailing retirees in the Sarasota area (e.g. in The Villages retirement community in central Florida), threatening Sarasota’a 65K cardiology patient revenue stream.
As of the middle of last year, Sarasota had been considering funneling their patients north: at that time (following the withdrawal of Jackson Laboratories from a much more ambitious proposal) , Sarasota Memorial and USF were in partnership talks with USF College of Medicine (which eventually did the deal with Florida Hospital in Tampa). This proposal was to build a $50M heart institute in Tampa that would be operated by USF and Sarasota Memorial and pursue research and advanced treatments. Sarasota Memorial appears to have opted out of that deal (reluctant perhaps to see patients driving north for care) and instead invested in building its own capabilities in Sarasota: It is in the process of opening a hybrid operating room / catheterization lab to allow several surgeries to be performed at once on a patient and a new valve center to allow minimally invasive transcatheter aortic valve replacement (Columbia has some depth in the area given their own Valve Center and will provide support).
Exciting as the idea of specialty franchising is to promote competition, there are several reasons I am skeptical whether this particular move will serve as a good example:
The rapid growth in high-end cardiology capacity in 2011/2012 suggests that (once all on-line) capacity may exceed local demand and the financing system will end up having to support the overhead of duplicative infrastructures.
The deal seems focused access to trials, research and academic appointments, mitigating the research advantage that USF brought to Florida Hospital. That suggests Sarasota’s justification to payers for high end cardiology won’t be about outcomes (directly) or about cost effectiveness (episode or population lens) but about being just as academic as Pepin. That a form of competition we have more than enough of in many markets…
Despite the ambiguity of this deal, however, payers should not become discouraged with the model. It does provide a precedent of a proud and powerful providers (Sarasota Memorial) are willing to form a branding partnership with an out-of-market player to get skills and tap expertise.
Imagine if major providers with deep capabilities in care management and risk reimbursement models were to start franchising. A much more difficult thing to execute than the Sarasota-Columbia deal but the payoff could be great. In such a case, I expect payers would be very supportive and potentially would find ways to demonstrate that support tangibly (e.g. in network design).
And, for the expert provider, distributing franchises of this kind could add some out-year kick to an ACO business case, particularly in amortizing the cost of tools and supporting those portions of care management which could be remotely delivered.
Look for deals like that in the net 18-24 months.