Medical Lessons From The Big Mac

Startups thrive by treating specific illnesses or conditions

On two leased floors of St. Francis Hospital in Beech Grove, Ind., Intensiva HealthCare takes on patients that most hospitals can't afford to keep. Ray Liggett, for one, has been hospitalized for a month with Guillain-Barre syndrome, a neurological disorder. St. Francis lost money every day he took up one of its beds. But because Intensiva accepts only long-term acute cases and operates independently--though within St. Francis' walls, often using its staff--an insurance quirk allows it to collect higher reimbursement. Its costs, meanwhile, are 50% lower than those of a typical intensive-care ward.

Intensiva opened the first of its 10 centers only in 1995 and still loses money. But its model is drawing attention across the health-care field. The key is focus: Its hospitals-within-hospitals handle only certain patients in strictly defined settings and markets. "We treat them more aggressively and get them out of the hospital quicker," says Intensiva Chief Executive David W. Cross. And, Intensiva says, more patients leave in better health.

Steelmakers, carmakers, and burger joints long have understood that mass specialization can pump up productivity. Volume, standardization, and focus drove the success of Nucor's minimills, General Motors' Saturn venture, and McDonald's Big Mac. Now, the health-care industry is catching on. Doctors, hospitals, and insurers are pursuing strategies that depend on caring for a narrow range of patients or on mastering a small slice of treatments.

It's the latest step in health care's rapid evolution, promising to alter once more the way Americans are treated for a broad range of medical conditions. In Boca Raton, Fla., Orthopedic Medical Networks of America is organizing teams of orthopedists, occupational therapists, chiropractors, and other specialists to provide soup-to-nuts back care. Sheridan Healthcare Inc. emphasizes management of in-hospital physician services, such as anesthesiology and neonatology.

MONEY MAGNETS. A raft of specialty startups, in fact, is attracting investments from top-drawer venture firms such as Mayfield Fund, ta Associates, and Morgenthaler Ventures. Meanwhile, Columbia/HCA Healthcare Corp., the nation's biggest hospital chain, is creating "centers of excellence" within some of its general-purpose institutions to compete for contracts for coronary and cancer care, much as the Mayo Clinic has long done.

Regina Herzlinger, professor of health-care management at Harvard business school, calls these new specialized entities "focused factories." Such organizations, she says, "get econ-omies of scale from horizontal integration and from doing the same thing over and over." With professional management and close coordination of services, she says, such companies can lower costs and produce better medical results.

It's a straightforward notion, but one that fights decades of health-industry tradition. Managed-care advocates long have viewed medical specialists as the enemy. Most still prefer to see generalist "gatekeepers" control treatment decisions, limiting access to expensive cardiologists and podiatrists. That has helped slow medical inflation, but hmos generally haven't changed the way those physicians actually practice medicine, so overtreatment and waste persist. Patients, meanwhile, hate the inconvenience the gatekeeper model imposes.

Increasingly, insurers are addressing such failings by creating "carve-outs"--awarding specialist groups portions of patients' premiums for the care of discrete disease categories. An hmo pays a provider group a fixed monthly sum to take responsibility for all physician, hospital, and other services related to, say, cardiac care, no matter what treatment patients require.

On Feb. 3, Oxford Health Plans, a managed-care insurer, will go one step further, unveiling a plan to pay groups of doctors and hospitals for specific medical cases. A neurologist, for example, could join with a hospital, therapists, and other professionals to bid on care for stroke victims. The team would be responsible for consultations, lab tests, surgery, and post-operative care, receiving a flat rate for the packaged services.

INTEGRATION. Oxford plans to contract out 120 of its most expensive cases by the end of 1998. Executive Vice-President David B. Snow Jr. says the resulting integration of providers, and adherence to its care guidelines, could reduce medical costs by 20%. Ultimately, the insurer could restructure itself into several operating companies, each focusing on a disease group. "This model really gets to the point of care," Snow says.

Focused providers can survive on flat, per-patient compensation because their operations are standardized and thus predictable. HealthSouth Corp., based in Birmingham, Ala., operates 1000 centers dedicated to outpatient orthopedic surgery and rehabilitation, producing revenues last year of $2.4 billion. With patient records from thousands of operations over 10 years, it has created medical protocols for 54 different diagnoses, such as a sprained ankle. "We're no longer in learning mode," says ceo Richard M. Scrushy. "It's proven, and that's why we're so cost-efficient." Liberty Mutual Insurance Co. says 86% of its worker-compensation patients treated by HealthSouth eventually return to work; Liberty Mutual's average is 47%.

The trend toward specialization could take on many forms. Rather than working with insurers, some focused providers are taking on subcontracts from primary-care groups. Consultant Michael Sachs sees the possibility of "department-store" medical centers containing branded "boutiques" operated or franchised by specialty companies. Joslin Diabetes Center, for example, licenses its name and treatment protocols to 12 affiliates nationwide; M.D. Anderson Cancer Center has similar arrangements with four hospitals and dozens of doctors.

As such models proliferate, critics predict that care will increasingly grow less personal and more regimented--"cookbook medicine," as some call it. Doctors and hospitals will win more autonomy from insurers but also will be obliged to adopt protocols that carefully orchestrate their practices. It's a trade-off that they and their patients may resist, even in the name of higher quality. But soon, they may not have a choice.

Before it's here, it's on the Bloomberg Terminal.