By the dawn of the millennium, Geisinger Health System based in central Pennsylvania was facing a bleak future. It had separated from its merger partner (and former competitor) Penn State/Hershey and was facing daunting operating losses in both its hospitals and physician group, and questionable performance in its health plan. It recruited a new leader, Dr. Glenn Steele, former Dean of the University of Chicago’s Pritzker School of Medicine, to lead a turnaround and a rethinking of Geisinger’s mission and focus.

By the time he retired as Geisinger’s CEO in 2015, Steele left behind a $4.5 billion regional clinical powerhouse with over $3.4 billion in reserves and a national reputation for care system innovation. How Steele and his colleagues got there is illuminated in his recently released memoirs. The actual mechanics of Geisinger’s turnaround raise a lot of questions about how integration actually works and what drives success in the Integrated Delivery Network (IDN) model.

Steele’s diagnosis of Geisinger’s problem after the dissolution of the Penn State relationship, was that Geisinger was actually too integrated – that it relied too much on its own health plan for revenues and that previous management had almost fatally blurred the lines of responsibility among Geisinger’s three principal businesses: hospital services, physician care, and health plan operations.

The key elements of Geisinger’s turn-around strategy included:

• Discarding the closed-panel health maintenance organization (HMO) model of Geisinger’s health plan, and converting it to an open panel preferred provider organization (PPO) which included virtually the entire central Pennsylvania care system of independent hospitals and physicians;
• Severing the capitated contract between the health plan and the Geisinger Clinic, the then 600 person physician group at the core of Geisinger;
• Aggressively recruiting (largely from academic medicine) subspecialty clinical leadership and procedure-oriented specialists, and incenting them through volume-based compensation to grow their practices;
• Leveraging Geisinger’s market dominance both of physician and hospital markets to get higher payment rates from the region’s four Blue Cross plans (with which Geisinger’s health plan competed); which enabled
• Further growing Geisinger’s hospital network along the I-81 corridor, enhancing its leverage with non-Geisinger payers; and,
• Using the resultant sharply increased cash flow, plus windfall profits from Geisinger Health Plan’s Medicare Advantage product (subsequent to the Medicare Modernization Act of 2003) to fund care system innovation in the “sweet spot” between plan enrollment and the physician group.

Stamping Out The ‘Socialist Ethos’

Changing Geisinger’s culture required instilling profit-and-loss responsibility in Geisinger’s various operating units. This required stamping out what Steele termed “the socialist ethos” which had grown up under previous leadership. Clinicians under the old Geisinger culture had accepted the lower compensation and relative geographic isolation they enjoyed in their central Pennsylvania home market and adjusted their productivity accordingly. This resulted in lengthy queues to see many Geisinger specialists.

At a roughly 50 percent ratio of primary care physicians and specialists, the specialty capacity of the Geisinger Clinic was undersized relative to the then-existing geographically dispersed primary care network. By the time Steele’s recruitment push was completed, the ratio was more like 75 percent-25 percent specialist/primary care. Moreover, primary care satellites were consolidated in a roughly 50 percent reduction in sites of care, reducing overhead expenses.

Steele initially considered selling the Geisinger Health Plan, as McKinsey (and this analyst) recommended. Instead, Steele fashioned a respositioning plan. He offered a unique incentive contract to an experienced health plan executive, Dr. Norm Payson, whose resume included a successful turnaround of the Oxford Health Plan.

Payson’s strategy included aggressive expansion of its provider network beyond Geisinger caregivers and offering broad-network PPO products. The repositioning was so successful that Steele initiated buyout negotiation of Payson’s lucrative incentive contract after just eighteen months. Payson’s turnaround reduced the percentage of Geisinger’s total revenues attributable to its own health plan from 60 percent to 35 percent, making the care system much less dependent on the Geisinger Health Plan. Additional patient care revenues and margins from non-Geisinger health plans were the key to Geisinger’s explosive revenue growth and profitability. In other words, becoming less integrated was the key to Geisinger’s financial recovery.

Geisinger’s Clinical Services Warranty Program

However, the reframed Geisinger health plan remained crucial to Steele’s strategy because the overlap between plan and care system created what Steele called the “sweet spot” inside which care system innovations flourished. It was inside that sweet spot that Geisinger created its “first in the nation” warranty for Coronary Graft Bypass (CABG) surgery.

For members of its health plan that had CABGs at Geisinger, its ProvenCare care protocol enabled Geisinger to guarantee that if complications arose within 90 days post-op, the member would bear no additional cost. (Steele originally wanted to guarantee that the entire episode of care would be free if there were post-op complications, but was restrained by his CFO). To manage this significant risk, a task force of clinicians developed a five-stage protocol beginning at the point of diagnosis to systematize treatment of CABG patients, based on the best available science. The cardiac surgeon who led this protocol effort was Dr. Albert Casale, who practiced at Geisinger’s Wyoming Valley Medical Center in Wilkes-Barre, Pennsylvania. Many of the clinicians who developed the protocol were not members of the Geisinger Clinic, but rather private practicing physicians.

Casale’s protocol reduced Geisinger’s already low 1.5 percent post-op mortality to a remarkable 0.5 percent, and cut post-acute spending by close to 50 percent. And because it was eventually applied to all Geisinger patients, it dramatically improved the profitability of cardiac surgical services under Medicare’s Diagnosis-Related Group (DRG) system. The success of the CABG ProvenCare protocol encouraged Geisinger to extend the methodology to fourteen other clinical problems, including joint replacement, bariatric surgery and lung cancer.

Geisinger went on to develop a ProvenCare care model for primary health care, an industrial strength version of the Patient Centered Medical Home targeted at the chronically ill—physician care was complemented by “commando nurses”, advanced practice nurses that co-ordinated care and visited patients in their homes if needed.

Geisinger’s service area remains economically depressed and includes many older high risk patients with multiple co-morbidities. Here again, there was broad participation of non-Geisinger Clinic clinicians in the model, facilitated by the extension of Geisinger’s Epic electronic health record—a major enabler of Geisinger’s success—into their offices.

What Can We Learn From Geisinger’s Success?

The implications of Geisinger’s turnaround for the operations of other IDNs are significant.

The argument that when capitation grows to a certain percentage of total health system revenues, the opposing incentives of fee-for-service and population health become more manageable is contradicted by Geisinger’s experience. Geisinger was not viable economically at 60 percent population-based revenues, but was both dynamic and highly profitable at 35 percent. Resizing the three main Geisinger businesses to fit market demand was the key to the recovery.

Geisinger also needed committed clinician effort to grow and could not achieve it with capitation as the dominant method of physician payment. Instead, the organization relied on a variant of relative value unit (RVU) based compensation to improve clinical productivity, and relied on the ProvenCare protocols to reduce unnecessary care. Geisinger found the right balance between entrepreneurial effort and clinical discipline in managing their physician groups.

Times have clearly changed since the early 2000s. Specifically, the HMO insurance model has actually declined significantly, and capitated physician payment has shrunk along with it. This decline has been particularly pronounced in the Northeast where Geisinger is located; according to a recent analysis, capitation accounted for 15 percent of all physician office visit payments in the Northeast in 1996 but only 3 percent in 2013! The Payson-architected transition from closed panel HMO to broad network PPO was perfectly timed for changes in market demand.

How IDNs achieve economic viability while operating three very different businesses (e.g. health plan, hospital, and physician group) is a subtle question of balance. In Geisinger’s case, an aggressively entrepreneurial physician group was the indispensable engine of future growth. Being agile enough to adjust to market demand was a key element in the turnaround.

More controversially, Geisinger’s transformation succeeded thanks to “windfall” health plan earnings from the early years of Medicare Advantage and hospital profits generated by Geisinger’s formidable market leverage with local health plans. Those hospital profits were the dominant source of Geisinger’s surge in earnings, a “hedge” that supported care system innovation. In the recent example of the failure of Cornerstone Health physician group in North Carolina, there was no “hedge”, and thus no flow of funds to help Cornerstone negotiate the transition to value-based care.

Geisinger’s experience suggests that market timing and creative opportunism—finding the right balance between growth and clinical discipline—play a significant role in the viability of IDNs. These factors are as important as, or even more important than, any inherent advantages of scale, or integration itself.