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As she prepares to depart from her senior leadership role at MMG, Ms. Olsen has asked your team for recommendations on the key issues she should identify for her successor.
•Recommendations for overcoming Key Issues
CAN THIS RELATIONSHIP BE SAVED? by Rhonda Engleman and Jisun Yu under the supervision of Professor Andrew H. Van de Ven. Reproduced with permission of Professor Andrew H. Van de Ven in the format post in a course management system.
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Carlson School of Management 321 – 19th Avenue South Minneapolis, MN 55455 Strategic Management Research Center Minnesota Healthcare Organizations Study Voice: 612-624-1864 FAX: 612-625-6822
CAN THIS RELATIONSHIP BE SAVED? THE MIDWESTERN MEDICAL GROUP’S 1 INTEGRATION JOURNEY Forthcoming in P. Ginter, L. Swayne, and J. Duncan, The Strategic Management of Health Care Organizations, Fifth Edition, New York: Blackwell Business, 2005. (Current draft 10-7-04)
INTRODUCTION On a snowy January evening, the MMG management team held a retirement party for Judith Olsen, president of Midwestern Medical Group (MMG). During the evening, Olsen reflected back on the years she had worked for the MMG with mixed feelings about her experience. During their eight-year integration journey within the Midwestern Health System (Midwestern), the MMG management team experienced many encouraging moments, achievements, and successes as well as many struggles, disappointments, and conflicts. She was scheduled to meet with the board chair the next day to talk about the major issues her successor would need to address as president of the MMG. Knowing this might be her last contribution to the MMG before she retired, Olsen wanted to provide the board chair with helpful advice to pass on to her successor. This case focuses on the historical events in the MMG’s integration journey that Olsen pondered as she thought about what to say in that meeting. BACKGROUND Midwestern Health System (Midwestern) was established in July 1994 through the merger of Health Systems Corporation and Midwest Health Plan, making it the largest healthcare organization in its region. Health Systems contributed hospitals, clinics, nursing homes, a home health agency, and other healthcare services while Midwest Health Plan contributed health insurance products and relationships with physician groups. The vision guiding Midwestern’s development was to “offer an integrated healthcare system to affordably enhance the health of
This case was written by Rhonda Engleman and Jisun Yu under the supervision of Professor Andrew H. Van de Ven of the Carlson School of Management at the University of Minnesota. We also appreciate the editorial assistance of Julie Trupke and useful comments of Gyewan Moon and Margaret Schomaker. We gratefully acknowledge Stuart Bunderson, Shawn Lofstrom, Russel Rogers, Frank Schultz, and Jeffery Thompson who assisted in collecting data during this eight-year longitudinal study of MMG’s integration journey. The case was prepared to promote class discussion and learning. It was not designed to illustrate either effective or ineffective management.
people living and working in communities we serve.” This vision implied two priorities: the commitment to build an integrated healthcare system and the goal to improve community health. The MMG was founded in 1994 with an initial network of 340 employed physicians working in 20 clinics previously owned by Health Systems Corporation hospitals at the time of the merger with Midwest Health Plan. Hal Patrick was selected as the first MMG president. Under Patrick’s leadership, the MMG grew rapidly during its first two years, acquiring 30 additional primary care clinics in strategic locations across Midwestern’s geographic market. By mid-1996, MMG’s management attention shifted from growth by acquisition to management and organizational development of its now 50 clinics with 450 physicians and over 3000 employees. The MMG experienced many challenges during these formation and establishment periods within the Midwestern system. Managing the multi-faceted nature of the MMG-system integration process proved complex, involving many interdependent change initiatives. The initiatives included: 1) creating a large integrated group medical practice from formerly small independent physician clinics, 2) transitioning the identities and roles of physicians from being principals of private clinical practices to becoming agents and employees of healthcare companies, 3) building an organizational culture that aligned incentives and motivated commitments of clinicians with the MMG and Midwestern system while maintaining their commitment to the medical profession, and 4) developing an integrated system of healthcare for patients by linking the MMG’s clinical and business services across with other Midwestern units including the hospitals and the Midwestern Health Plan. In July 1997, Patrick was promoted to system vice president of clinical services for Midwestern. Midwestern leaders appointed Lief Erickson as the new MMG president. Erickson represented a strong voice for MMG physicians and patient care and had worked as an MMG manager since its formation. Despite continuous hardships in both financials and operations, Erickson led the MMG as the group rebounded from a record loss of $41 million in 1996, decreasing losses to $22 million in 1997 and $20 million in 1998. The MMG was on track to improve its financial performance in 1999 by decreasing its losses to $17 million, still far from ideal but improvement in the right direction. Under Erickson’s leadership, the MMG developed a solid management team of administrative and physician leaders as the MMG moved from a culture of survival to a culture of performance. The MMG had faced many challenges since its formation in 1994, but Erickson and his management team weathered the storm to establish the MMG as an integral part of the Midwestern Health System. The MMG management team still faced many tensions in their relationships with others in the Midwestern system, but Erickson was confident that his team had demonstrated the MMG’s value to Midwestern and would continue their journey to lead the MMG to even better results in the future. ARRANGED MARRIAGE OF EQUALS The Midwestern Health System experienced escalating financial pressures in 1998 and 1999. Since Midwestern’s formation, the system had not achieved its overall financial performance goals. Johanson, CEO of Midwestern, anticipated that the system would experience reductions of $50 million in Medicare reimbursement over the next five years due to changes in the program made in the Balanced Budget Act of 1997. Reimbursement rates from other commercial payors
were also declining. Johanson feared that Midwestern could not survive without major systemwide changes to improve the organization’s financial performance in patient care services. Meanwhile, Midwest Health Plan had achieved stellar results with the Market Business Segments (MBS) business model. In 1997, Midwest Health Plan was experiencing significant financial losses. Midwest Health Plan adopted the MBS business model, moving from a structure with staff organized by major functions such as marketing, member relations, and product development to a structure with staff organized around Midwest Health Plan’s major customer segments such as government payors, small business, and other commercial payor groups. The move to the MBS business model allowed Midwest Health Plan leaders to streamline the health plan’s organization structure and develop products and pricing systems tailored to customer needs in each business segment. As a result, Midwest Health Plan improved its financial performance, moving from a significant financial loss before the MBS to a sound financial gain after its implementation. Johanson decided to extend the MBS business model to the rest of the Midwestern system, anticipating that the hospitals and the MMG could achieve financial results similar to Midwest Health Plan’s and allow Midwestern to improve the performance of all its individual units. In February 1999, Johanson officially unveiled the plan to implement the MBS business model in the Midwestern hospitals and MMG. Johanson announced that in the MBS business model, Midwestern would move from three divisions–Hospitals, MMG, and Health Plan–and reorganize as two divisions–the Health Plan division, and the Hospitals & Clinics division. Midwest Health Plan would continue with the MBS business model as previously defined and implemented. The Hospitals & Clinics division, including the Midwestern hospitals and the MMG, would define and organize around its own market business segments. These two divisions would be assigned accountability and responsibility to become the leader in their chosen market business segments. Johanson stated that the MBS model signaled a short-term move away from system-wide integration. The old Midwestern business model assumed that individual units shared one customer and attempted to provide a single “Midwestern experience.” The MBS model acknowledged that the old view was inadequate because each division served unique customer groups. Midwest Health Plan’s customers were health plan members, corporations, other purchasers, and insurance brokers. The MMG’s primary customers were patients. The Midwestern hospitals’ primary customers were physician specialists. While the mission and vision of Midwestern would remain the same, the system would back off from tight integration and pursue high impact integration in a few selected areas to meet the unique customer needs of each division. Johanson charged each division to maximize its financial and patient care performance within certain “rules of the game” including open communication between divisions and “no tolerance for badmouthing other parts of the organization.” Johanson declared 1999 as the year of “freedom to act.” He expected the units within each division to coordinate their activities, but each division would be free to define and manage its own unique set of market business segments. Johanson purposely designed the MBS business model to force the hospitals and the MMG to resolve their tensions and conflicts by combining them into a single division. According Johanson, “We’re learning more about integration. We used to assume that if we put them all
together, they’d see the need to talk and automatically coordinate. They don’t, it’s not natural. Our new model acknowledges that and encourages integration more directly.” Johanson expected and looked forward to watching these tensions unfold and play out between the hospitals and MMG in the move to the MBS model. WE DON’T KNOW HOW THIS WILL GO, BUT LET’S HOPE FOR THE BEST After the announced restructuring, Erickson expressed mixed feelings about the MBS model when he discussed the change with his MMG management team. Erickson expected that the MMG would have an equal voice in the MBS implementation process with representation on a new board established to govern the Hospital & MMG division. He welcomed the freedom to act that Johanson had given the hospitals and the MMG to establish their own business market segments. Johanson promised that if the MMG decided that improving patient care was one of their most important goals, then his expectation would be that the MMG will outperform their competitors in that area. Erickson reported, “Then he will go away, and wait for me to come back and tell him how the MMG did. That’s different, isn’t it! They’re not going to tell us how to do it.” Erickson hoped that the MBS model would help to improve relationships between the MMG and the Midwestern hospitals. He felt that this would be the first time that the hospitals and the MMG had a chance to test integration. The hospitals and the MMG had not yet been able to work together to prove what they could achieve together to improve patient care. Erickson reassured his MMG management team, “There is a lot of instability and uncertainty. I’m convinced, though, that the strategy is right to focus more on customers and relationships.” At the same time, Erickson wondered if the MMG and the hospitals could resolve the differences in their customer groups and approaches to healthcare delivery. “The structure by itself will not do away with those fundamental market activities that make us see the world differently and to be different. When they think of a customer, they look out the window and see the specialist building; my customer is this region because sometime those people will eventually wind up in the hospital. For the MMG, the customer is across the table. They simply have a different customer set. It’s funny how you won’t face what you have to face. Hospitals say they have patients and referring doctors, as on an equal plane. When you really look at it, though, the referring doctor is on the top of the priority list. . . . In the MMG, the patient is center, and it’s relationship based. We see customers and markets differently. And now you say you’ve got to get together in a ‘market-based segment?’ Hang on! It will be OK, but it will be another game; all those market dynamics are still in place. If we can survive it, it will be good. No matter how good a new model is if you make a change like this, the bridge in between is tough. I don’t think we’ve got many more shots at this thing.” Erickson went on to note, “If you’re the CEO and you say, ‘I expect you to outperform your competition at all costs –which is a part of this market segment idea–but then I put you in a box with these other groups who have the ability to impede you, you’re sending them a very complex message. Every day the clinics are compounded by the hospital’s needs. . . . They have a good theory, but if it’s not carried out well, it’s not a good theory. But, anyway, we’re going to try.” Erickson urged his MMG management team to send a positive message about the new MBS business model to the staff and physicians working in their clinics, “No matter which way we go,
we’re partners with the hospitals; we’ve got to coordinate, and the future’s about relationships. . . As we sell this to our clinics and our partners, we want to make it positive and build hope.” THE CHILDREN GET SEPARATE ROOMS Johanson appointed Frank Henry as Senior Vice President of the Hospitals & Clinics division. Henry formed a division management team of representatives from each unit to review options for selecting market business segments. The team explored three options. First, the group considered the status quo option with the MMG as one business segment and each of the three hospitals as a separate business segment. Second, the group explored the implications of establishing two business segments, hospital services and ambulatory care services. Finally, the group considered creating a regional model with each metro hospital forming the anchor of three separate MBSs and the clinics organized geographically around these hospitals. After discussing the pros and cons of each option, the team decided to maintain the status quo with a few additions by selecting six market business segments for the Hospitals & Clinics Division: three metropolitan hospitals, regional hospitals, the MMG, and home care. THE MMG AS THE PROBLEM CHILD In early 1999, Johanson asked the Midwestern financial management staff to compare the MMG’s performance to a best practice model developed by a national consulting group. In a study of seven health system-sponsored primary care groups, the consulting group concluded that financial losses were inevitable in such groups due to costs associated with system membership including high practice acquisition costs, additional system overhead, increased employee benefit costs, new information systems expenses, and loss of ancillary revenues to hospital affiliates. The consulting group developed a model of realistic performance expectations for health system-sponsored primary care groups given such limitations. The finance staff found that MMG gross revenues were lower than the benchmark, but the MMG compared favorably in net revenue, expenses, and loss per RVU 2 when compared to the best practice standards. The MMG also compared favorably in productivity, producing 6,428 RVUs per physician in 1998 compared to best practice benchmarks of only 6,100. Erickson summarized the significance of these findings, “What’s important is that it should eliminate the notion that the MMG can gradually move to a zero loss.” Erickson presented the MMG’s favorable benchmark comparisons to the Midwestern board. The board expressed a new appreciation of the MMG, its performance, and its value to the larger Midwestern system. They reported that this study gave them a better understanding of how to measure the MMG’s financial and operational performance, how to set benchmarks for its performance, and the need to recognize the value that the MMG contributed to the Midwestern system.

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