With new partner, PeaceHealth moves to control costs

As details fell into place in an agreement that would create a new health care system spanning the Pacific Northwest, executives from both organizations said it is clear their industry is transforming.

“Health care economics aren’t sustainable in their current forms,” said John DiCola, Catholic Health Initiatives’ senior vice president of strategy and business development, of his organization’s agreement with PeaceHealth. “I think provider systems have recognized that they need to change.”

The two nonprofit, Catholic systems signed a nonbinding letter of intent in August to form the new system by June 2013. Both hope the effort would cut costs with an approach to medical care that DiCola said would emphasize value over volume.

The alliance would combine seven CHI hospitals and additional care facilities in Washington and Oregon with PeaceHealth’s eight hospitals in Washington, Oregon and Alaska. With about 26,000 employees and nearly 950 doctors, the new system could generate annual revenue close to $4 billion, according to PeaceHealth and CHI.

Both organizations would be equal partners in the endeavor.

Vancouver, Wash.-based PeaceHealth, which operates St. Joseph Medical Center in Bellingham, plans to open another hospital in Friday Harbor in November. The new facility would also be included in the partnership.

Kevin Lamb, PeaceHealth’s assistant manager of marketing and communication, said few changes would likely be felt at the local level as the two organizations begin a due diligence and final approval process.

“For the time being, nothing changes,” Lamb said. “At this point, there’s no planned layoffs, there’s no planned changes in operations.”

For Bellingham’s hospital, which is one of Whatcom County’s largest employers with more than 2,700 workers, the next year should be “business as usual,” said Peter Adler, a senior vice president and chief strategy officer for PeaceHealth.

In statements, CHI president Kevin E. Lofton and PeaceHealth president Alan Yordy both noted the shared institutional values between the two Catholic systems as a key factor in the deal.

“We see this as a natural evolution—a perfect way to share economies of skill and scale, improve health services and reinforce our common mission to create and nurture healthier communities,” Lofton said.

The larger system should be able to exert better bargaining strength with medical suppliers, executives said.

CHI, with headquarters in Englewood, Colo., operates hospitals and other care facilities in 19 states. With annual revenues of more than $10.5 billion, it is one of the largest Catholic health systems in the nation.

John DiCola of CHI said the organization has a long history of linking up with regional providers. Partnerships between care systems are becoming common across the nation, he said.

With PeaceHealth, DiCola said CHI’s hope is to revamp the traditional strategy that emphasizes the amount of care a doctor provides over the actual value of care patients receive. The economic downturn and a decline of medical-care reimbursements to providers make it impossible to justify such a model, DiCola said.

For value-based care to work, he added, doctors must focus on giving patients the right treatments at the right times. A larger, regional system could make financial risks of an operational shift easier to manage, he said.

“We think we should be in a position to take risks for the outcomes we say we want to produce,” DiCola said. “We are going to have to find a better way to deliver care. It’s going to take some time and effort, but it’s certainly the right thing for our communities.”

The partnership could also help PeaceHealth’s expensive effort to overhaul its electronic health records system, senior executive Peter Adler said.

Adler said both PeaceHealth and CHI are seeking lucrative incentives—part of the 2009 federal stimulus package—for providers who use electronic records. Infrastructure improvements, including new information-technology systems, could be made more efficiently within a larger organization, he said.

“We are now at the place where we are needing to upgrade, and in some cases replace, some of our record systems, and we are seeking the incentives to do so,” Adler said. “[CHI is] on the eve of installing the same very expensive medical record systems. Spending less on IT systems means there’s more money to spend on care.”

As transformation in the health care world continues, frugality will likely be a key theme for providers and patients, executives and managers from both organizations said.

PeaceHealth and CHI are betting the move toward integration will put them on the right path for the future.

“We need to figure out how to save money,” said Kevin Lamb of PeaceHealth, “how to provide health care more efficiently and more cost-effectively.”

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