A big Wall Street Journal article by Anna Wilde Mathews featured the latest wave of mergers affecting large health care organizations.
Large, Vertically Integrated Health Care Systems (Redux)
Call it the united state of health care.
Amid enormous pressure to cut costs, improve care and prepare for changes tied to the federal health-care overhaul, major players in the industry are staking out new ground, often blurring the lines between businesses that have traditionally been separate.
Hospitals are bulking up into huge systems, merging with one another and building extensive new doctor work forces. They are exploring insurance-like setups, including direct approaches to employers that cut out the health-plan middleman.
On the other side, insurers are buying health-care providers, or seeking to work with them on new cooperative deals and payment models that share the risks of health coverage. And employers are starting to take a far more active role in their workers' care.
This ongoing consolidation is being discussed as inevitable.
'We're seeing a marketplace reacting to an economic imperative,' says Michael O. Leavitt, a former U.S. Secretary of Health and Human Services who is now chairman of a health-information company. 'The new delivery models are far more integrated.'
The ongoing consolidation is also being proclaimed as leading to a brave new world of health care. For example,
Jim Taylor, the chief executive of the University of Louisville Hospital, says his institution's future depends on an ambitious statewide merger with two other hospital systems. Now, he has to persuade others that he's right.
These mergers often are meant to lead to the creation of large, vertically integrated health systems which may include hospitals, physicians and other health professionals (sometimes as hired help), and an insurance function.
It's All Been Done Before
"Large, vertically-integrated health care systems," of course, were all the rage in the 1990s. In fact, the WSJ also published a companion article by Anna Wilde Mathews that suggested "it has all been done before," it did not necessarily work then, and therefore, it may not work now.
One example used in the latter article :
Perhaps the most dramatic flameout was the Allegheny Health, Education, and Research Foundation. Starting in the mid-1980s, it was built from a Pittsburgh hospital into a statewide system through hospital and doctor-practice acquisitions. In 1998, AHERF, as it was called, became the U.S.'s largest health-care nonprofit bankruptcy. Its debts became unsustainable after it piled on too many money-losing assets, failed to manage the new primary-care physicians successfully, and lost money on capitated business, according to an account published in Health Affairs in 2000.
The hospitals' moves in the 1990s 'did not improve quality, they did not reduce costs. In fact they increased everyone's spending,' partly because some hospitals eventually used their bulked-up leverage to push for higher rates, says Lawton Robert Burns, a Wharton School professor and the AHERF history's lead author. 'Nobody's showed me we're going to do it a whole lot better this time....To expect that with one piece of legislation, everyone's going to sit around the campfire and sing kumbaya, forget about it.'
However, the Mathews article showed that even people who ought to have been familiar with this case seemed to think that this time things would be different. For example, it included this quote from the CEO of Humana which had problems with the integrated model in the 1990s:
'It's not like we don't understand what we are getting back into here,' said Michael B. McCallister, Humana's CEO, at an investor conference. 'But things have changed.'
Maybe so, but maybe if the enthusiasts of the resurrected vertically integrated health system model realized how badly things went in the past they would not be so optimistic.
A More Complete Version of the AHERF Story
In fact, Professor Burns' take on the AHERF bankruptcy above did not seem to reflect all that went on then. A somewhat more pointed summary of that massive failure had appeared in 2008. Then, Moody's Investor Service issued a report on the 10 year anniversary of the fall of the house of AHERF. Per an article again by Steve Twedt in the Pittsburgh Post-Gazette, who also wrote a significant series in the same newspaper summarizing the collapse of AHERF,
From the distance of 10 years, the historic bankruptcy of Allegheny General Hospital's then-parent organization still offers valuable lessons for today's health-care industry, says a new report by Moody's Investor Service.
'AHERF left such a stain, such an indelible mark on hospital management teams, they realized that if one of the big systems can fail, no one is immune,' said Lisa Goldstein, leader of the Moody's health-care team that produced the report.
On July 21, 1998, Allegheny Health and Education Research Foundation (AHERF) defaulted, resulting in what is still the largest bankruptcy ever among the 560 Moody's-rated not-for-profit health-care entities. At the time, AHERF had $2 billion in revenue and $555 million in outstanding debt, according to the Moody's report.
Analyst Lisa Martin, who wrote the report, says industrywide forces converged with 'the organization's own management and governance failures' to cause the foundation's failure.
The external forces included Medicare reimbursement cuts -- still an issue a decade later -- and highly competitive markets in both Pittsburgh and Philadelphia.
But, she added, 'we believe its ultimate downfall was driven more by decisions of the organization itself -- weak governance, poorly executed strategies, lack of refined leadership, and absence of methodical execution.'
Even that version seems too polite.
Although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. The only scholarly article I could locate on the topic that discussed the case in any detail, albeit incompletely since it was written before Abdelhak's guilty plea, was written by Professor Burns, who was quoted above, and colleagues [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. The lack of discussion of such a significant case is a prime example of the anechoic effect.
Therefore, let me repeat my 2008 summary of some of important points about AHERF not found above (see also this more detailed narrative, starting on page 5):
- AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care CEOs at the time, Sherif Abdelhak.
- Abdelhak, who started as food services purchasing manager at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (in the March, 1997, ACP Observer) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed then that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork"
- While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.
- Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): "Don’t cross me or you will live to regret it."
- As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.
- After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, he pleaded no contest to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.
The story of AHERF was not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping on the latest management band-wagons and genuflecting before imperial CEOs.
Yet since the fall of AHERF, we are still hearing breathless stories about the latest wonderful plans to save health care (think about, for example, electronic medical records, pay for performance schemes, etc), and the the need to genuflect to brilliant CEOs who may turn out to be not so brilliant (think about, for example, Dr William McGuire, the former CEO of UnitedHealth, and his back-dated stock options).
We health care professionals need to stop falling for this hype and spin. Saving health care will take clear thinking and hard work by a lot of people. The "visionaries," if we let them, are likely to depart with a huge cache of money, leaving us and health care worse off. If it is just "not done" to talk about cases such as that of AHERF, and other examples of "recent unpleasantness," how will be learn not to fall for the propaganda?
Of course, it is those who benefit from the propaganda who do not want us catching on to their game.
If physicians, health professionals, health care researchers, and health policy makers do not learn the lessons of the fall of AHERF, they will be doomed to see its repetitions.
With apologies to the Bare Naked Ladies - do not forget "it's all been done (before)"
(only live version I could find, actual song starts at about 3:00)