The Changing Hospital Feeder System

The first hospital in Las Vegas, NV

The act of a major tertiary care hospital acquiring a number of smaller community hospitals is not a new concept.  In terms of healthcare business models, the industry is fairly monochrome.  Strategically speaking, the idea is to siphon or “feed” patients from hospitals that are providing a standard level of care to the more advanced facilities.  In theory, this made good business sense.  However, economists would generally beg to differ.  It turned out, in a study done in 2007, that the feeder system would only work out if it were more nuanced than an upswell of referrals to the central hospital.  Not all referrals are created equal in terms of profit margin.

However, economists hadn’t really gotten to the bottom of this concept 30 or so years ago and it expanded to not just hospitals acquiring hospitals, but also acquiring clinics.  Clinics have to refer out to specialists, laboratories, imaging, and the like, so why not insure they are sending them to your hospital instead of the one down the street?  I believe this clinic acquisition concept was pioneered by Park Nicollet in my hometown of Minneapolis, but a source unfortunately eludes me at the time of publishing this.  Regardless, this concept has spread like wildfire and spawned the major healthcare organizations that are so common at present.

In terms of business, everything has been sound.  Hospitals boards don’t tend to reject ideas that on paper, will generate more revenue.  In terms of public health though, the government has always been a little hesitant of the idea.  In 1972, the Anti-Kickback Law was put into effect that prohibited the monetization of a referral.  In other words, a physician shouldn’t refer to a specialist because they have a deal worked out.  The referral should be based on need (of the patient, not the doctor’s wallet) and availability.  This law was then updated and expanded upon in 1989 and 1995 with the Stark I and Stark II laws.  Much of this is why healthcare organizations don’t refer to their owned clinics and hospitals as “feeder” entities.  The idea is a moral shade of grey.

Despite the sweeping tide of acquisitions in the 1990s, some physicians and their clinics chose to remain independent.  They bucked the trend of the HMOs, the organizational behemoths, the healthcare vacuum cleaner centered around a gleaming tertiary care center in order to not have to be told what to do.  The acquisition organizations had long since begun to define growth to their organizations as the growing body of healthcare providers under their umbrella.  It’s the same in any industry.  Grow or die.

But now the country has a large number of healthcare organizations and space is certainly getting limited.  To combat this, organizations are dancing gingerly around the Stark laws and enticing independent physicians with subsidized Electronic Medical Records (EMRs).  There are two incentives to the clinic physician: One, the cost is mitigated and two, they can access the information in the hospital.  “Use our EMR.  All your referrals can be sent directly to the hospital electronically!  Have access to all of the patient’s information!”  A certain CIO even made it part of the EMR implementation plan that they would set up the electronic transfer of a referral (which is why CPOE is very popular) to their own hospital first and then work out the process for sending referrals elsewhere later.

It didn’t take long for the idea of Accountable Care Organizations (ACOs) to come about.  It’s another way to consolidate healthcare services and keep everything “in the network”.  An interesting part of the ACO requirements though is the need for an electronic medical record (EMR).  This long-overdue technological push comes at a time when we are changing from a society where power is based on what information someone had to how someone uses the information that is becoming more transparent all the time.  Right now EMRs can barely integrate information from a clinic to a hospital.  This works out especially well for the centralized hospital system because the information is centrally controlled.  But what happens when EMRs can send information anywhere as is glacially being dictated by Meaningful Use?  The best part of Meaningful Use is its insistence on freeing the data.  Critiques of the law are certainly justified, but this is where it gets it right.  Hopefully, it carries through.

If patient information can be sent anywhere necessary without the restrictions of an organizational network eventually, how will the hospital organizations control the data?  Control was power, but now those who can connect the data and do something meaningful with it will reap the rewards.  Could this potentially be the catalyst that disrupts the centralized nature of healthcare and introduces a stunning amount of diverse business models in the industry?  In business, as in ecology, diversity is what leads to a better environment for those who live in it.  There’s no doubt that some centralized healthcare organizations will stick around.  A lot of these provide bastions of beneficial research that have other sources of funding than just the patients’ insurance carriers.  Additionally, there are a good number of these organizations that are just very good at what they do and will thus have longevity.  The question is not when will everyone switch to a decentralized model because of an evolving industry, but how many centralized organizations will be sustainable in the future and what sorts of models will fill out the rest of the industry’s diverse ecosystem?

“Diversity is a survival factor for the community itself. A community of a hundred million species can survive anything short of total global catastrophe. Within that hundred million will be thousands that could survive a global temperature drop of twenty degrees—which would be a lot more devastating than it sounds. Within that hundred million will be thousands that could survive a global temperature rise of twenty degrees. But a community of a hundred species or a thousand species has almost no survival value at all.” 
― Daniel Quinn, Ishmael: An Adventure of the Mind and Spirit

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  1. […] organizations are built around a feeder system model.  That means the flow of patients and their information always goes in a singular direction: Up […]



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