Question

Carilion Clinic

Case History/Background

Nestled in the Commonwealth of Virginia between Salem and Vinton is the city of Roanoke, whose population was approximately 98,000 in 2010. The metropolitan area population was about 309,000. Bisected by the Roanoke River and circled by the Blue Ridge Mountain Parkway, Roanoke is the commercial and cultural hub of western Virginia and southern West Virginia.

The community that became Roanoke was established in 1852. Early economic development of Roanoke resulted from its importance as the junction point for the Shenandoah Valley Railroad and the Norfolk and Western Railway. These railroads were essential for transporting coal from western Virginia and West Virginia. Roanoke’s service area includes a regional report, shopping malls, a regional hub for United Parcel Service, and manufacturing plants for General Electric, Yokohama tires, and Dynax, a maker of friction-based automobile parts.

Carilion Clinic

Carilion Clinic employs almost 12% of Roanoke’s population. The clinic includes 9 freestanding hospitals, 7 urgent care centers, and 220 (and increasing) practice centers, and it employs over 650 physicians in more than 70 specialties. The clinic has 1,026 licensed beds, not including 60 neonatal intensive care unit beds. The clinic had 48,659 admissions in fiscal year 2014-15.

The clinic’s joint ventures and related companies include the following:

Carilion Clinic Physicians, LLC (real estate holding company)

Carilion Emergency Services, Inc.

Carilion Behavioral Health, Inc.

In March 2010, the same month and year the Affordable Care Act became law, the clinic was ordered by the Federal Trade Commission to divest itself of an outpatient surgical center and an imaging center. Both had been acquired as it sought to re-create “The Mayo Clinic” medical delivery model.

Led by Edward G. Murphy, M.D., from 1998 to 2011, Carilion Health System became Carilion Clinic, a vertically integrated health-care system. During Murphy’s tenure the system expanded to include graduate and undergraduate medical education programs, a school of medicine (through a partnership with Virginia Polytechnic Institute and State University Virginia Tech), and, perhaps most impressively, Carilion established an accountable care organization in partnership with Aetna insurance company.

Dr. Murphy’s total compensation was almost $2.3 million in 2007. Nancy Agee, the clinic’s chief operating officer at the time, earned the next highest salary of about $800,000. When Murphy resigned in 2011, Ms. Agee was promoted to president and CEO. In fiscal 2014, Carilion Clinic net revenue was $1.5 million. Agee’s salary was $1.9 million.

CONTROVERSY IN ROANOKE

Despite its philanthropic mission and positive effect on Roanoke, Carilion Clinic has not always enjoyed a good relationship with its community.

   In May 1988, the U.S. Justice Department’s Antitrust Division sought to prevent the merger of Roanoke’s two hospitals: Memorial Roanoke Hospital and Community Hospital of Roanoke Valley. The lawsuit sought to block the merger because of the monopoly it alleged would result. Less than one year after the suit was filed, the Fourth Circuit U.S. Court of Appeals found for defendants Memorial Roanoke Hospital and Community Hospital of Roanoke Valley.

   The merger between defendant hospitals would not constitute an unreasonable restraint of trade under the Sherman Act $1. The merger would strengthen the competition between the hospitals in the area because defendant hospitals could offer more competitive prices and services.

In the two appeals that followed, courts found for defendant hospitals, which then merged and were named Carilion Health System. The decision provided legal basis for what is now the Carilion Clinic.

IN A MARKET: WHAT CONSTITUTES A MONOPOLY?

A monopoly occurs when one or more persons or a company dominate an economic market. This market domination results in the potential to exploit or suppresses those in the market or those trying to enter it (supplier, provider, or consumer).

   During the 19th century, the U.S. government began prosecuting monopolies under the common law as “market interference offenses” to block suppliers from raising prices. At the time, companies sometimes sought to but all supplies of a certain material or product in an area, a practice known as “cornering the market”.

   In 1887, Congress passed the Interstate Commerce Act in response to railway companies’ monopolistic practices in small, local markets. This legislation protected small farmers who were being charged excessive rates to transport their products. Congress addressed monopolistic practices further by passing the Sherman Antitrust Act of 1890, which limited anticompetitive practices of businesses. The act blocked transfer of stock shares to trustees in exchange for a certificate entitling them to some of the earnings. The Sherman Act was the basis for the Clayton Antitrust Act of 1914, the Federal Trade Commission Act of 1914, and the Robinson-Patman Act of 1936, which replaced the Clayton Act.

   Antitrust or competition laws address three main issues:

Prohibit agreements or practices that restrict free trade and competition among business entities.

Ban abusive behavior by a firm dominating a marker, or anticompetitive practices that tend to lead to such a dominant position.

Supervise the mergers and acquisitions of large corporations, including some joint ventures.

The Herfindahl-Hirschman Index (HHI)helps implement these laws by providing a mathematical method to determine market “density”, or the concentration of the market. Antitrust laws and methods of calculating market density, such as HHI, are imperfect and can leave gaps that may be exploited.

   Since its establishment, the mission of the Federal Trade Commission has remained largely unchanged. Laws affecting private enterprise and government agencies have not. It is possible this mal juxtaposition underlies many of the difficulties in the healthcare industry.

VERTICAL INTEGRATION: THE MAYO CLINIC MODEL

The Mayo Clinic is the leading example of vertical integration in the delivery of healthcare in the United States. Founded in Rochester, Minnesota, in 1863, the Mayo Clinic began as the medical practice of William Worrall Mayo and his two sons, who were also physicians. It grew to include a comprehensive array of specialties. Mayo developed different levels of care across the health services continuum. The result was a vertically integrated health system. Mayo physicians are salaried at market levels, and they control the management structure.

   Mayo Clinic is headquartered in Rochester, Minnesota; it has satellite clinics elsewhere in the United States. In addition, Mayo and various medical centers worldwide have consulting and referral relationships. Mayo provides excellence and dedication in delivery of services with a constant, and self-admittedly stubborn, commitment to core values, which include that the needs of the patient come first, the integration of teamwork, efficiency, and mission over profit.

   Mayo has been long recognized for high performance, research and innovation. It has ranked at or near the top of “Honor Roll” hospitals through the history of U.S. News and World Report’s best-hospital rankings. In 2015 - 2016, Mayo clinic had more number one rankings than any U.S. hospital or system. Eight specialties ranked number one: diabetes and endocrinology, gastroenterology and gastrointestinal surgery, geriatrics, gynecology, nephrology, neurology and neurosurgery, pulmonology, and urology.

FORESHADOWING A MAYO CLINIC CLONE

Even before Murphy took the helm in 2001, Carilion Health System actions had stirred significant, but manageable, controversy in the community. Much of the controversy resulted from the antitrust case in 1988. After the court ruled that the merger did not violate federal law because it posted no threat of monopoly, the hospital continued its previous work in the community.

   After becoming CEO, Murphy began to vertically integrate the Carilion Health System. His formal plan was presented in fall 2006. Part of evolving to a Mayo-style organization included acquiring physician practices in the community; some were closed after acquisition.

WHO IS EDWARD G. MURPHY, M.D.?

Edward. G. Murphy earned his BS from the University of Albany, New York, and his medical degree (with honors) from Harvard University Medical School. Although he never practiced medicine. Murphy was a clinical professor at the University of Albany School of Public Health and an adjunct assistant professor at Rensselaer Polytechnic Institute School of Management. Before leaving New York state he was also a member of the New York State Hospital Review and Planning Council, and he served on its executive committee as the vice chair of the fiscal policy council.

   From 1989 to 1991, Murphy served as the vice president of clinical services at Leonard Hospital, a 143-bed facility north of Albany, New York. In 1991, he was promoted to president and CEO of Leonard Hospital until it merged with St. Mary Hospital fo form Seton Health system in 1994. Murphy became president and CEO of that new health system and stayed with Seton until 1998, when he relocated to Roanoke to head Carilion Health System.

   During his tenure at Carilion Clinic, Murphy managed the growth of that two-hospital health system into a vertically integrated model of healthcare delivery anchored by a 500-physician specialty group practice that included nine not-for-profit hospitals, undergraduate medical programs, an array of tertiary referral services, and a multistate laboratory service. In 2007, Murphy announced plans for the Virginia Tech Carilion School of Medicine, which opened in 2010. In 2010, Murphy was paid $2.27 million ($1.37 million in salary and $900,000 in benefits).

Murphy’s other roles in the Roanoke community included memberships on the boards of Healthcare Professionals Insurance Company and Trust; Luna Innovations, Inc; and Hometown Bank. He is past chair of the Art Museum of Western Virginia. He also served in an influential position with the council on Virginia’s Future, which works to frame the growth and progress of the state, including businesses, people, and the health of the population.

   Murphy left Carilion to become chairman of Sound Physicians, a national provider of Intensivist and hospitalist services. In 2012, he became the operating officer of Radius Ventures, a venture capital firm that invests in health-related companies.

VERTICAL INTEGRATION: BECOMING A “CLINIC”

Murphy was always clear about his plans for Carilion Health System. In an August 2006 interview, “Right now...our core business is hospital services. In the new model, the core business will be physician services; the hospital will become ancillary. In a 2007 interview for Health Leaders Magazine, Murphy explained, “I’ve been enamored of this model of healthcare delivery for a long time.”

   In Fall 2006, Murphy, his staff, and the leadership board of Carilion Health System announced their plan to create a new model for Carilion management characterized by teamwork and salaried physicians and other caregivers focused on patients across the spectrum of care. Murphy explained:

   The essence of the clinic model is that hospitals stop becoming independent businesses and start becoming ancillary services to the physician practice….If hospitals eventually want to provide better and more cost-effective healthcare, it’s a necessary shift.

The transformation was planned for seven years with an 18-month phase -in of its new name, Carilion clinic. Plans for Carilion Clinic included a 50-50 partnership with Virginia Tech University in Blacksburg, Virginia, to establish a private, not-for-profit clinical research institute and a new medical school. Further, from 2007 to 2012 Carilion clinic would add four or five fellowships for physicians to support its mission.

Ground was broken for the much-anticipated university in early 2008. On July 20, 2009, the Virginia State Council for Higher Education approved the Virginia Tech Carilion School of Medicine as a postsecondary institution. It’s first class matriculated in fall 2010.

THE WALL STREET JOURNAL EXPOSE

Usually, an organization is pleased if the Wall street Journal publishes an article about it. That is, of course, unless the story ignites a firestorm that leads to separate citizen and physician coalitions working against the organization and raises the specter of a word from Carilion Clinic’s prehistory: monopoly.

“Nonprofit Hospitals Flex Pricing Power. In Roanoke, Va., Carilion’s Fees Exceed Those of Competitors: The $4,727 Colonoscopy” was published on the front page of the Wall Street Journal August 28, 2008. The author, John Carreyrou, explored Carilion’s history, including the 1989 antitrust case, its expanding”market clout,” and the strides toward its goal of vertical integration. The article suggested that some of the means used were questionable.

   Carreyrou asserted that skyrocketing healthcare costs in Roanoke were partially caused by, or possibly even led by, Carilion Clinic.

   In a press release, Carilion Clinic denied monopolistic practices or exploitative pricing and claimed it faced robust competition from Lewis-Gale Medical Center located in nearby Salem, Virginia. Carilion Clinic defended its pricing practices by noting it must cross-subsidize emergency departments and care for the uninsured.

   Unsettling to some, however, was Carilion’s practice of suing patients for unpaid medical bills. After Carilion obtains a court judgement, a lien is placed against the patient’s home. A lien on real property puts a “cloud” on the title, which prevents the owner from conveying the property with a clear title until the lien has been satisfied. Responding in the Wall street Journal, Murphy stated,

   Carilion only sues patients and places liens on their homes if it believes they have the ability to pay … If you’re asking me if it’s right in a right-and-wrong sense, it’s not...But Carilion cannot be blamed for the country’s “broken” healthcare system.

Murphy asserted that Carilion efforts to protect its financial interests meet legal requirements, but may be morally flawed. This position appears inconsistent with Carilion’s mission that ‘Patient Care Comes First.”

WHERE WERE THE LOCAL MEDIA?

As reported by Carreyrou, Carilion Clinic complained several times to editors of the Roanoke Times regarding reporter Jeff Sturgeon’s coverage of the system. Shortly after the complaints, and mainly in response to a May 2008 article by Sturgeon, Carilion greatly reduced advertising in the Roanoke Times. About the same time, Sturgeon, the paper’s longtime health issues writer, was reassigned.

Even after Sturgeon’s reassignment, Carilion continued to be frontpage news in the Roanoke Times. Reporter Sarah Bruyn Jones covered community reaction to the Wall Street Journal article and the impetus it gave to local coalitions. Her articles included the following: “Carilion Critics Draw Hundreds to Meeting” (September 2008); “Fed Agency Looks into Carilion Purchase” (September 2008); “Carilion Footprint Expands in Deal” (August 2008); and “Carilion to Buy Cardiology Practice” (August 2008). Jone’s reporting put Carilion practices at the forefront for Roanoke’s citizens, but, as noted by Carreyrou, Carilion growth seemed unstoppable.

THE BACKLASH

The August 2008 Wall Street Journal article resulted in a community uproar and fueled physician's’ efforts to air their concerns about Carilion, including its anti competitive actions and unfair pricing, and their desire to have open referrals for patients from outside Carilion’s health network. Citizen and physician coalitions met in hotel conference rooms and community centers to discuss the “unfair practices and behaviors” ifof Carilion Clinic. One, the citizens Coalition for Responsible Healthcare, sponsored a petition that read as follows:

   To Dr. Murphy and the Carilion Health System Board of Directors:

   Please reconsider your Carilion Clinic plans. I want to keep my right to choose my doctor, even if he or she is an independent physician. Please rethink spending $100 million of my community’s money on a Clinic model that could ruin our hospitals! Monopolies are never good for healthcare.

The Coalition’s website offered copies of the Wall Street Journal article, video recordings of their meetings, information about a new forum program, and membership form for those who wished to join their efforts.

   The citizen coalitions stated they intended to focus on the negative impact of Carilion’s transformation to a physician-led clinic that they asserted will increase costs and drive out many local physicians. Murphy’s plan was to bring into Carilion as many physicians as possible; all of whom will be salaried. The concerns of citizen coalitions stemmed from the scope of the effort, which resulted in closure or sale of many physician practices. Unaffiliated physicians asserted they could not compete. Further, Carilion’s system of internal referrals, added to the purchase of existing practices, gave many specialists no choice but to leave, or stay and fight.

   Despite the controversy, Carilion has shown no signs of slowing: it has stayed the course outlined in Fall 2006.

CARILION’S RESPONSE

On August 28, 2008, less than 24 hours after publication of Carreyrou’s Wall Street Journal article, Carilion responded. Statements published in newspapers and posted on Carilion’s website, as well as press releases, stated the allegations and conclusions drawn from them were misleading and misinformed.

   In response, Carilion directed readers’ attention to the Virginia Hospital and Health care Association PricePoint Website. It showed that Carilion’s prices are comparable to surrounding hospitals and are generally lower than its closest competitor, Lewis-Gale Medical center in neighboring Salem, Virginia. To support their position on pricing,Carilion stated “Medical care in hospitals is more expensive … having staff and technology at the ready has its costs. Also mentioned was Carilion’s Lifeguard helicopter, which is subsidized service. Carilion provided $42 million in charity care in 2007 and an additional $25 million in free care (bad debt written off), thus illustrating its dedication and support of its service area. Carilion supports research and education substantial resource commitments that add major costs to the organization and provide subsidize services tiot the community.

   In explaining the policy to sue patients, Carilion stated that efforts are made to qualify patients for public programs, as needed. Further, Carilion said only “a small fraction of the nearly 2 million” patient billings each year go to court.

   Court filings are a final resort, and we try to be flexible. If the judgement includes a lien on an individual’s property, we do not foreclose on the lien. The lien is satisfied if and when the property is sold.

In response to concerns about its internal referral practice, Carilion stated that referrals are sent from physician to physician in the system with the intention of sending patients to better, more-qualified physicians who have earned the referral. The “earn, not force” mentality contributes to the goal of well-coordinated care and service, which is the first choice of patients.

Carilion’s press release closed by describing a wasteful and poorly organized U.S. healthcare system that is hoped to improve with the vertically integrated clinic model of providing care. The hope is that comprehensive, high quality, and cost-effective care will put the patient first. The reader of the press release is reminded that what happened at Mayo could be replicated at Carilion.

CURRENT SITUATION IN ROANOKE

As noted, Carilion Clinic has a medical school partnership, an expanding physician practice with a robust specialty list, and its own accountable care organization, which continues to show progress and increased membership.

Three decades after the hospital merger controversy began in Roanoke, Virginia, the economic and healthcare environments have changed, the population is increasing, and healthcare costs are rising. When the antitrust case was brought in 1988, Roanoke had among the lowest health insurance premiums in Virginia; now, they are among the highest.

Discussion questions to be answered

1) Identify the problems Carilion Clinic faces as it seeks to become a comprehensive, vertically integrated healthcare provider.

2) Briefly explain the summary of the case

3) Identify the most important factors/facts of the Case study

4) Explain the critical issues that is the most important health administration problem/issue to be solved and if applicable, identified secondary problems.

5) Identify the recommended solution of the case. At least three realistic alternative solutions.

6) Identify the relevant concepts and tools for example, methods, techniques, principles,theories, and or models.

Answer 1

Ans.1) As it is mentioned, despite of Carilion Clinic philanthropic mission and positive effect on Roanoke, it has not always enjoyed a good relationship with its community. In May 1988, the U.S. Justice Department’s Antitrust Division sought to prevent the merger of Roanoke’s two hospitals: Memorial Roanoke Hospital and Community Hospital of Roanoke Valley. The lawsuit sought to block the merger because of the monopoly it alleged would result.

2.) Carilion Clinic situated at Roanoke , state of Virginia, USA. The clinic includes 9 freestanding hospitals, 7 urgent care centers, and 220 (and increasing) practice centers, and it employs over 650 physicians in more than 70 specialties. But it has not a good relationship with its community. During the 19th century, the U.S. government enacted a common law as for market interference offenses to block suppliers from raising prices.

The Mayo Clinic is the leading example of vertical integration in the delivery of healthcare in the United States. Mayo has been long recognized for high performance, research and innovation. It has ranked at or near the top of “Honor Roll” hospitals through the history of U.S.

When Edward G. Murphy became CEO of the Carilion Health System, his strategies act as same of Moyo Clinic, hence foreshadowing a Mayo Clinic Clone. In Fall of 2006, Murphy, his staff, and the leadership board of Carilion Health System announced their plan to create a new model for Carilion management characterized by teamwork and salaried physicians and other caregivers focused on patients across the spectrum of care. But in 2008, The Wall Street Journal published a report “Nonprofit Hospitals Flex Pricing Power. In Roanoke, Va., Carilion’s Fees Exceed Those of Competitors: The $4,727 Colonoscopy” on the front page which hugely tarnish the Carilion’s mission that ‘Patient Care Comes First.” Despite the controversy, Carilion has shown no signs of slowing: it has stayed the course outlined in Fall of 2006. As noted, Carilion Clinic has a medical school partnership, an expanding physician practice with a robust specialty list, and its own accountable care organization, which continues to show progress and increased membership.

3.) The Carilion Clinic has its share of controversies from very beginning of its inception and then, the wall Street Journal publishes a report oppose or expose their philanthropic mission. These are two key factors which hugely affect this whole Carilion Clinic healthcare mission.

4.) The critical issues that is the most important health administration is the economics and healthcare environment because both these two fact hugely affect the healthcare system. Health care should be comprehensive, high quality, and cost-effective care and will put the patient first.