The Southeast Medical Center case study

Review the Southeast Medical Center case study. The following recommendations selected below are considered to be the highest priority/most important to the case. Justify your reasoning.

  • Governance at the corporate level should be strategic in nature, whereas governance at the
  • Each system should develop an organizational structure that is simple, lean, flat, responsive, customer-driven, risk-taking, and focused.
  • Systems should align physician incentives and achieve clinical integration.

The paper must be three to five double-spaced pages. Utilize a minimum of three scholarly and/or peer-reviewed sources that were published within the last five years.

In-depth case Study: SoutheastMedicalCenter
The following
case study involving a large organized delivery system exemplifies many of the issues described earlier in
this chapter.
History and Evolution
SoutheastMedicalCenter (SMC; a pseudonym) was established as a public hospital in the 1920s, just bef
ore the Depression. Located in the southeast, a $1 million bond financed the 250bed facility. Major expansion projects in the 1950s increased the hospital’s size to 600 beds.
Formal affiliation with the local university’s College of Medicine residency program in the 1970s further
expanded capacity. Thus, SMC became a public academic health
center and subsequently assumed multiple missions of patient care, teaching, and research. Capital
improvement programs were conducted during the 1970s, and in 1982, a massive renovation and constr
uction project ($160 million) added550 beds to the facility. In the 1980s, a 59bed freestanding rehabilitation center was opened adjacent to the hospital, and a physicians’ office
building was constructed next to the hospital.
Medical helicopters were also acquired in 1989, expanding SMC’s trauma services. In addition
to serving as a regional provider for trauma, SMC also furnishes burn, neonatal, and transplant care for t
he region.
Responsibility for the
governance of SMC has shifted over the years. In the early years of operation, a hospital board ran SMC.
In the 1940s, the
city was given direct control over the hospital. In the 1980s, the state legislature created a public hospita
l authority (to be appointed by the
county commission) to govern the hospital. In the 1990s, the hospital’s board of trustees voted to turn o
perations of the hospital over to a private, not-for-profit corporation (501c3), the SMC Corporation. However, oversight for charity care remained with the county’s hospital
authority. The SMC Corporation is directed by a 15member board of directors and essentially manages the organized delivery system
through a lease arrangement with the county hospital authority.
Today, SMC is a private, not-for-profit academic health
center that is accredited by JCAHO. It also serves as the primary teaching hospital
for the local university. Approximately 1100 private and universityaffiliated attending physicians and more than 400 resident physicians in
the university’s College of Medicine residency program serve the community
medical needs. SMC also serves as the clinical site for associate,
baccalaureate, and graduate nursing programs for the university and community colleges.
SMC serves as a regional and international referral service with more than 800 acute care beds. SMC has
established community centers in
a variety of locations, which has created increased access. In addition to specialized
medical services, SMC is committed to providing
community resources for education, information, and programs aimed at helping residents stay fit and h
ealthy. Four out of ten patients that passed through the SMC’s door came from outside the county.
SMC also operates an HMO health plan for charity care patients. In 1991, the County Commission establi
shed the SMC Health Plan to
operate as a Medicaid HMO or insurance healthcare plan for the poor. The plan reimburses SMC on a
case-by-case basis for medical services,
but it also negotiates discounted rates and costs with the hospital. During the early 1990s,
SMC’s payment from the health plan dropped
substantially. In 1996, the program was under a freeze by the state and could not enroll participants for
more than a year.
Thus, SMC is not just the hospital—
it is a comprehensive organized delivery system that also includes facilities distinct from the hospital(i.e.,
SMC Health Plan). In addition, SMC ambulatory care centers are located throughout the county. SMC w
as the only public hospital in a
metropolitan area with a population of one million or more that received no public subsidy. Most citizen
s believe that SMC was subsidized by
their taxes. In 1971, the County Commission agreed to supplement hospital revenues with property taxe
s. In 1985, the county commissioners passed a quarterpercent sales tax to fund indigent care. The tax was repealed in 1987. In 1991, the county instituted a on
e-half percent sales tax to fund indigent care at all hospitals in the county, including SMC.
In sum, while SMC receives no public subsidy, it does receive a portion of the halfcent sales tax which depends on the preferences of the
county commissioners each year. Unlike a direct subsidy, no public money is ever guaranteed.
As an academic health
center (AHC) SMC has multiple, conjoined missions of teaching, research, and patient care. While providi
ng patient
care for approximately 40% of the nation’s poor, AHCs are struggling to find a competitive position in to
day’s rapidly changing healthcare
environment. Until recently, they have enjoyed a privileged position atop the healthcare pyramid as a ni
che provider of tertiary services. With
the growth of managed care and reductions in government funding, the ability of AHCs to compete is be
ing drastically undercut.
It is widely recognized that multiple missions of teaching, research, and patient care contribute to the pr
oduction of costly clinical services
that are inconsistent with the demand for less expensive services in today’s healthcare environment. Th
e majority of the services that AHCsprovide are now available elsewhere, such as local community hospit
als and specialty private medical practices. Furthermore, it is estimated
that roughly 70% of their clinical services can be provided elsewhere at a lower cost. It is believed, for ex
ample, that AHCs are approximately30% more expensive, on an case-mix-adjusted basis
than their nonteaching competitors.
As a result, AHCs are losing ground to other hospitals and
medical practices. They have become providers of a small number of expensive hightech services involving unique and complex care. However, they continue to be the predominant provid
ers of the nation’s charitable
care. As an AHC, SMC reflects these trends. For example, SMC’s organ transplant
center and burn unit are unique high-cost services that
account for fewer than 2% of the patients treated at SMC each year.
SMC Leadership
In October 1994, the CEO of SMC abruptly resigned. A former county administrator assumed manageme
nt of SMC on an interim basis. In1996, SMC selected a new CEO and president. The new CEO left his curr
ent job as director of one of the largest public hospital systems in theUnited States because he had oppo
sed privatization of that city’s hospitals. Nonetheless, shortly after coming to SMC, the new CEO began
laying out plans for privatization, and at a forum on the future of public hospitals, he publicly announced
that privatization was the best path for many public hospitals, including his own, SMC.
Public hospitals deliver a disproportionate share of charity care compared with their private counterpart
s. Because the number of public
hospitals is decreasing, either by conversion or closure, there is concern about where care to the poor w
ill be provided. From 1985 to 1995,
the number of public hospitals in SMC’s state dropped from 57 to 29. Eight of these hospitals closed and
20 converted to private institutions.
In 1997, the new CEO explained that SMC could only decide its ownership status after it decided who its
partners would be and whether it
wanted primarily to be a community hospital, a teaching hospital, or a county charity hospital
and “we don’t know that yet.” One month later,
he would become an advocate for privatization without identifying partners or articulating what it was S
MC primarily wanted to be.
The following potential benefits of privatization were identified prior to conversion:
• Economic freedom—Private, not-forprofit hospitals can borrow and spend money more easily than public ones, which need
government approval. Conversion could make SMC more competitive in the local market.
• Reduced tax burden—
In theory, a more competitive hospital would require less help from state and local taxpayers to stay in t
he black.
• Reduced regulatory burden—
Freedom from state public record laws would assist in strategic planning.
• Less political turmoil—
Public hospital boards often get bogged down in politics. Private boards, which operate out of the limeli
ght, generally can make decisions without such intense political pressure.
• Enhanced ability to enter into joint ventures—
Essentially, it will become legal for the private institution, SMC, to partner with others,
such as a group of doctors, to jointly develop and own ambulatory clinics and other outpatient facilities.
• Economic benefits—SMC could receive much lower interest rates from the bond market.
• Enhanced ability to raise private funds—
SMC would be more appealing to potential donors as a private, not-for-profit hospital than as an
arm of local government.
Potential disadvantages included the following:
• Change in mission—
A private SMC might not meet the community’s needs the same way a public one must. The hospital cou
ld reduce its commitment to needed services such as its burn center and trauma unit, which lose money.
• Reduced charity care—
SMC provides millions of dollars in free care to poor and uninsured residents. Some indigent patients mi
ght find medical care tougher to get if the hospital went private.
• Less public scrutiny—
Private hospitals do not necessarily have to comply with the state’s open government laws, making it to
ugher for the community to keep tabs on their successes and failures.
Table 2.4 contains the results of a public opinion poll regarding the privatization of SMC. Respondents fa
vored keeping the hospital
publicly owned by a 3 to 1 ratio. However, the poll did not attempt to learn whether respondents under
stood the differences between public and private ownership.
The Strategic Plan: Move and Rebuild, 1997-2002
The strategic plan for SMC centered on privatization; that is, converting SMC to a private, not-forprofit corporation, Newco Health SciencesCenter, Inc. All other strategic initiatives were based on SMC’s
conversion to private ownership. The strategic initiatives of the plan were:
• The 1.5 million square foot facility downtown will be demolished.
• A new 450-bed hospital and research complex will be built near the university.
Approximately $100 million will be raised from private donations to fund the new construction. This wo
uld address problems of SMC’s aging
physical plant. Also, the location near the university is preferable because downtown is vulnerable to sev
ere weather disasters such as storms and hurricanes.
• The move near the university will require an estimated $100 million in private funds as well as approv
al from state healthcare officials to
transfer the Certificate of Need (CON) to the new facility. It should be noted that other growing academi
c health centers (Portland, Oregon; Birmingham, Alabama; and the
University of Florida) were unable to raise this much money in private funds.
Table 2.4 Results of a Local Newspaper Poll, conducted March 23, 1997
Opinion on Going Private
Should remain public
Favor privatization
Don’t know
Support for Remaining Public
African American
Concern about Privatization
Somewhat concerned
Very concerned
A little concerned
Not concerned
• Profits from the sale of the current SMC site downtown will be used to create and/or expand satellite
clinics around the county.
The new CEO predicted that SMC would go out of business by the year 2005 unless this plan was adopte
d. Furthermore, he projected a $14.3million profit by 2005 if the plan were implemented. The former S
MC president asked the new CEO to explain what would be a fallback plan
in the event things didn’t go as planned. The new CEO responded that none existed. Alternatives to priva
tization had been considered, but none were acceptable.
The unacceptable alternatives to privatization included:
• selling the hospital to a private for-profit corporation
• closing the hospital
• asking for a public bailout in the form of a tax subsidy
In addition, the “Shands Model” was held out as a possible future for SMC as a private hospital. The Sha
nds Model refers to Florida’s ShandsHospital, which hit bottom in the late 1970s. As a public academic h
ealth center, Shands couldn’t afford to make needed safety improvements to
hire enough talented workers. Because lawmakers never provided the money executives believed was n
eeded to run a top health center, Shands Hospital converted to a private, not-forprofit corporation in 1980. Shands ran a budget surplus that year and experienced 17consecutive years
of “recordbreaking” financial performance. Privatization was credited with turning things around because it freed t
hospital from political and financial constraints. SMC officials and board members who supported conve
rting SMC to private status used the
hands Model as a reference. However, Shands, unlike SMC, receives a substantial state subsidy of appro
ximately $10 million annually.
Financial Pressures and Charity Care
Much of the impetus for SMC’s conversion was financial. According to the new CEO, SMC was not likely t
o survive financially as a public
institution. He predicted a $31 million loss by 2001 if the hospital’s governing board failed to make the h
ospital private. The auditors, who were retained to verify the
accuracy of these figures, put the number closer to $44 million. Under a worstcase scenario, the auditors said losses
could reach $70 million. Clearly, the new CEO was not exaggerating the precarious financial future facing
SMC lost market share in the county every year since 1992 (dropping from 23.4% to 15.7%). More than
half of SMC’s beds were empty
each night, and SMC continued to see fewer indigent, Medicare, and Medicaid patients than its competi
tors. Although SMC’s revenues grew by$7 million between 1992 and 1996, expenses increased by $31 m
illion, and annual net income dropped from $14 million to a loss of $46million. Cash reserves also dropp
ed substantially.
One of the most contentious issues that surfaced in the debate over privatization was the impact on the
indigent care mission. Many
worried that SMC, as a private entity, would not retain the same commitment to care for the poor and u
ninsured. Similar fears had sunk
previous attempts to privatize SMC in 1990. This time, assurances were made by SMC’s president, officia
ls, and others that the hospitals
mission would not change because of ownership. SMC’s commitment to indigent care would remain a co
re mission and top priority.
Furthermore, the County Hospital Authority would legally retain oversight authority for charitable care.
Yet questions were raised about the public hospital authority’s ability to carry out the statemandated mission to serve the poor if SMC went bankrupt. The lease arrangement
was also questioned because it did not specify how good, accessible, or extensive the charity care must
Despite these unanswered questions, the county officials approved SMC’s request to become a private,
not-for-profit corporation on the
strength of the argument of SMC’s CEO that such a move would preserve the hospital’s commitment to
charity care.
Less than two years after the vote to privatize SMC, the new CEO testified under oath that caring for the
poor was no longer SMC’s top
priority. County officials now admit that they should have done more than rely on his promise—
they should have (1) created an effective
method for overseeing the hospital’s contractual obligation to treat the poor, and (2) determined what s
anctions or punishment would be
used if SMC violated the lease agreement. A private SMC, without a commitment to serving the indigent
, would place an additional burden on
the county, which is required by state law to provide health care for poor people.
The Aftermath of Privatization
Ironically, in its final year as a public institution, SMC showed a profit of more than $4 million. As a privat
e hospital, its losses have increased
dramatically from 1997 to 2000. Unexpected losses were not part of the strategic plan to “move and reb
uild.” The CEO predicted a $7.2million profit for SMC in its first year as a private hospital, but the hospita
l lost nearly $6 million in the first two months. SMC and its parent
company lost $12.7 million that first year—
$11.5 million on the hospital and $1.2 million on the health plan. Confronted with these losses, the
CEO continued to argue that SMC was on the right course. In addition, he and his staff attributed the los
ses to forces outside the hospitals
control, including the Federal Balanced Budget Act, which reduced hospital funding, and an increase in t
he number of patients served by managed care in the region.
However, it turns out that the hospital’s most significant losses were the result of the hospital’s inability
as a private corporation to retain“lien authority” and essentially be first in line to collect money from the
accident victims it treated. Lien authority did not automatically
transfer to the hospital when it converted to a private corporation. The county attorney, who now repre
sents the public hospital authority,
warned that the loss of lien authority could significantly cost SMC in uncollectable revenue—
as much as $20 million annually. The line authority matter was raised prior to conversion
but had been dismissed by the new CEO, his staff, and consultants as not being a potential problem.
SMC was now mired in financial, political, and legal problems. Employee layoffs were anticipated, but m
ultimillion-dollar losses were not.
Many critical issues remain unresolved following SMC’s conversion. For example, in order to sell the land
on which the current hospital
stands, the county would have to pay for demolition as well as removal of asbestos and hazardous wast
e cleanup. In addition, it has become
clear that many important issues had been overlooked in estimating the impact of privatization. The hos
pital’s loss of lien authority as a
collection tool has led to unexpected poor financial performance and projections of major future losses (
i.e., $20 million annually) for SMC. In
addition, because the hospital had used lien money to help cover the cost of emergency care for trauma
victims, some worried that SMC
would is forced to reduce its trauma services. SMC officials now say the lien authority is crucial to fiscal t
In addition, when SMC went private it lost the financial protection that government agencies enjoy from
lawsuits (litigation damage cap).
Although legislative remedies are being pursued in an attempt to restore lien authority for SMC, the res
olution of this issue appears elusive
for the time being. The County Commission appears unlikely to grant SMC lien authority.
Indigent care clearly slipped as a top priority for SMC and became merely one of many priorities. In addit
ion, the move near the university on hold. SMC also explored buying other hospitals, the price of which c
ould reach $200 million. How the purchase of these hospitals fit with
the strategic plan was never explained.
Finally, SMC was not able to keep its meetings secret despite conversion. There has been intense media
scrutiny, and local newspapers are
suing SMC in order to open the hospital’s records. Furthermore, the State Supreme Court recently ruled
that (1) privately leased hospitals can
not meet in secret and cannot keep records from the public, and (2) it is illegal to transfer authority from
a public to a private board in an effort to avoid the sunshine laws—essentially what SMC did.
The College of Medicine began to be concerned about how it would train
medical students and resident physicians if its main teaching
hospital could not survive. The patient census was dropping, employees were being laid off, and morale
was deteriorating. The hospital began
to look like a dinosaur on the brink of extinction in a hostile healthcare environment. Could a multiprovi
der teaching hospital and trauma center survive in this region?
The New Plan and New Leadership
In 1999, the physician leadership met to lay out a plan to show the community why the hospital was so e
ssential. Local political leaders and
members of the media were invited to view the hospital and its various programs one at a time. These in
dividuals came, listened, wrote, and
called their colleagues. The community became aware of the value of a robust and healthy mealprovider system. The Chamber of Commerce,
the County Commission, and the County Legislative Delegation worked together to save SMC.
After a consultant’s review, these groups spearheaded legislation that ultimately improved reimbursem
ent for indigent care for hospitals
across the state, including SMC. During that time, the SMC governing board selected another CEO with a
mandate to turn the hospital around.
This “turnaround” CEO went to work repairing morale, bringing in a new administration team, and assig
ning a broad range of tasks to
existing and talented administrators. He met with employees on all three shifts, listened, and dealt with
issues. Business practices improved dramatically. Managed care contracts were renegotiated. Patientand physician-friendly operations became the mantra.
As operations improved, more physicians and patients came and the census increased. Admissions, ER vi
sits, and surgeries all increased
dramatically. Most of the increased occupancy has been in tertiary care. The improved fiscal viability allo
wed for the development of new programs (i.e., lung transplants and liver transplants). New state-ofthe-art equipment was installed and the physical plant repaired. Finally,
the hospital has not diminished its safety net healthcare services for the medically indigent.
Lessons Learned
This organized delivery system has experienced many ups and downs over the years as SMC’s priorities h
ave shifted. The leadership team in the mid1990s tried to totally privatize the system and focused on legal and organizational restructuring rather t
han the core mission of
patient care. This restructuring was in response to pressure from politically oriented board members wh
o brought in a CEO specifically to
privatize the hospital. The privatization has been a mixed blessing, with many unanticipated negative co
nsequences. One of the major
consequences of privatization, which negatively impacted revenue, was SMC’s inability (as a private corp
oration) to retain lien authority to collect money from accident victims.
When the new leadership team arrived in 1999, it began to focus on meeting the needs of both physicia
ns and patients. The physician
became integral members of the leadership team. The focus shifted to providing highquality clinical care with high-quality service rather
than handling legal and organizational structure issues. The new CEO had been given the authority by th
e board to focus on the core mission and has done so successfully.
A second major factor in the turnaround was the successful political efforts of the new administration to
generate additional state revenue
for indigent care, which benefited all hospitals in the state. This was accomplished through a political co
alition spearheaded by SMC with support from many political and community groups.
The following lessons can be derived from this case study:
• The organizational structure, legal structure, and size of an organized delivery system may be less imp
ortant in determining organizational performance than previously thought.
• The quality of the leadership team and its ability to communicate a common mission and vision to key
stakeholders may be far more
important than organizational structure in enhancing organizational performance.
• Political decision making to benefit a small group is antithetical to organizational performance.
• A focus on internal operations to serve physicians and customers is a fundamental necessity for achiev
ing high levels of organizational performance.
Managerial Implications and Recommendations
The jury is still out on the future of organized delivery systems. It is unclear whether the many problems
and issues identified here and
elsewhere are due to a flawed strategy, flawed implementation (leadership), or both. Clearly,
multiprovider integration has not worked well either in the
American industry or in health care. The point is not to lay blame when systems struggle or collapse. Rat
her, we need to identify
managerial processes or methods that will enhance the probability that systems will survive and prosper
. The overriding goal of systems should be to provide maximum value to the healthcare customer.145
The fundamental question is, What types of systems, networks, and alliances are best able to compete e
ffectively and deliver cost-effective
care? At this time, however, there is no definitive answer to this question, because there is almost no ev
idence associating different types of of organized arrangements with successful performance or failure.
The future of healthcare systems is highly speculative, given the volatility of markets and future initiative
s for healthcare reform. As the
government’s role in health care expands, these systems become more vulnerable to shifts in governme
nt policy.
It seems likely that most multi
provider healthcare systems will emerge successfully from their “growing pains” and continue to solidify
their position in the healthcare market as long as they are virtually integrated rather than vertically integ
Health care will be purchased primarily on a local or regional basis. Quality and value will be increasingly
important to patients who once
again have a choice of provider. Fewer resources will be available to deliver care, and the delivery of hea
lth care will continue to shift from
acute care to ambulatory settings. Barry noted the importance of a system CEO being a “change agent” i
n this future environment:
Those who can understand and embrace change; those who can transform traditional but key values to t
omorrow’s environment; those who can educate their boards of trustees,
medical communities, and the community at large; and those who can “right size” the production
activities of their organizations, and provide both high quality and costeffective services will be the winners of tomorrow.146
• Healthcare executives in multiprovider healthcare systems need to allow flexibility for member institutions to respond to specific local
markets while providing a clearly articulated and well-understood vision for the system.
• Each system should develop a detailed mission statement and set of behavioral norms (i.e., culture) sh
ared by each facility within the system in order to enhance cohesiveness.
• Each system should develop a formal strategic plan for the system with input and a high degree of int
eraction among the corporate office and institutions in all geographic regions.
• Each system should develop and implement explicit measures for quality of care, patient satisfaction,
efficiency, and community benefit,
and then provide these data to purchasers and other key stakeholders.
• Each system should develop an organizational structure that is simple, lean, flat, responsive, customer
-driven, risk-taking, and focused.
• Governance at the corporate level should be strategic in nature, whereas governance at the institutio
nal level should be operational in nature and focused on local community/region needs and concerns.
• Systems should provide formal and informal education for those responsible for governance at all leve
ls in the system.
• Systems should provide a clear definition of governance roles, responsibilities, and authority among t
he system and institutional boards of its component parts.
• Systems should provide the leadership required for the individual units of a system to think in terms o
f overall system performance rather than just in terms of the particular unit’s performance.
• Only institutions that fit a particular culture and strategy should be invited to join or remain a member
of the system.
• Systems should align physician incentives and achieve clinical integration.
• Systems should develop information systems to support the integration of clinical and managerial info
• Systems should use their mission and values as a guide in making difficult trade-off decisions.
• Systems should change their incentive structures to reflect concern for the
performance of the system as a whole, not just the individual components.
• Systems should own fewer facilities and contract for most services so that they are virtually integrated
rather than vertically integrated.
• Systems should buy or contract for services only if the additions will add value to the systems’ custom
ers and are compatible with the existing mission, values, goals, and culture.
• Systems should allow the individual operating units within the system to have sufficient autonomy to
be responsive to the needs of their local customers.
• Systems should focus on core competencies rather than trying to be all things to all system componen
• Systems should not allow success to breed complacency. Each integrative step must be evaluated for s
ystemwide effects.
• Systems should focus on quality rather than the size of the program or system being integrated.
• Systems should focus on quality rather than the quantity of physician integration.
• Systems should place high-performing executives in key positions to implement their integration plan.
• Systems should target selected patient populations and payers.
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Biographical Information
Myron D. Fottler, Ph.D., is a Professor and Director of Programs in Health Services Administration at the
University of Central Florida. He has
authored or coauthored 14 books, 30 book chapters, and more than 100 journal articles in most of the
major management and health service
journals. His most recent book is Achieving Service Excellence: Strategies for Healthcare (Health Administ
ration Press, 2002). He received his
MBA from Boston University and his Ph.D. in business from Columbia University. He serves on many edit
orial review boards and is coeditor of
the JAI Press/Elsevier series Advances on Health Care Management.
Donna Malvey, Ph.D., is an Assistant Professor of Health Administration in the College of Public Health at
the University of South Florida in
Tampa. Her area of expertise is the strategic management of health services organizations. Past experie
nce includes teaching courses in labor
relations and healthcare organizations and management. In addition, she has served as the executive dir
ector of a national trade association
representing health professionals and also as a congressional aide. She has coauthored articles on a vari
ety of healthcare-related topics and is
currently a visiting assistant professor of Health Administration at the University of Central Florida. Dr.
Malvey received her Ph.D. in health
services administration at the University of Alabama at Birmingham and her master’s degree in health se
rvices administration from George Washington University.

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