Article ImagesWhat time is golf?" is often the biggest question facing trustees at an annual board retreat. But for the trustees of Silver Cross Hospital, Joliet, Ill., the annual retreat in October 2010 had a more difficult question on the agenda: How would the hospital respond to health care reform and industry changes such as accountable care organizations and bundled payments? To sound the wake-up call, the keynote speaker summarized recent changes and, more importantly, the amount of uncertainty about future industry structure.

As the retreat progressed, a sobering picture emerged for the trustees and physician leaders in attendance. Reform was not a theory about industry structure but an effort to change the payment structure. It was really about insurance and payment changes. And the changes meant providers were going to get paid less.

While the future is uncertain, the Silver Cross board decided to assume that bundled payments or payments for episodes of care would become increasingly prevalent, if not dominant. These changes would force the industry to develop new structures and make clinical integration an economic necessity. Silver Cross is an independent community hospital with 300 beds, and the board was especially concerned with public comments from bond rating agencies projecting that reform would encourage even more consolidation as bigger health systems leverage economies of scale to gain access to credit markets. Challenges would be great for many nonprofit hospitals, especially single-site and small hospital systems.

It was also clear that, to succeed in this game, hospitals with independent medical staffs would require an unusual combination of great physician leadership, innovative and flexible administrators, a strong capital base and an institutional culture that could adapt quickly and effectively. The board felt it was facing a Darwinian moment: Only those able to adapt and evolve quickly would survive.

True Clinical Integration

After the first day of the retreat, it was clear that the Silver Cross leadership group had heard the wake-up call and responded to it with a sense of urgency. During the second day of the retreat, the board and physician leaders processed how to respond to pending changes. It was quickly apparent that the relationship between the doctors and the hospital would need significant change. Like many communities across the country, Silver Cross operates in a market dominated by small, independent physician groups. And, similar to marketplaces across the country, there was some history of tension and mistrust between the physicians and the hospital administration. While most of this discomfort was scar tissue from past events, the leadership group knew that the primary task was not information technology or legal documentation; it was redefining the relationship between the hospital and doctors.

In a world of bundled payments, simple coexistence or even active cooperation would not suffice — it demanded true clinical integration. This would require doctors to learn to play a team sport, and the hospital would have to develop a shared governance culture to a much greater degree than in the past.

The board welcomed this opportunity to work with the doctors and, likewise, many of the physician leaders in attendance recognized the necessity of a new relationship. The second day ended with a board meeting during which the board authorized the creation of a special task force to develop a plan to respond to the changing reality confronted during the retreat. The task force comprised two trustees, 12 doctors and four executives. The heavy doctor representation was reflective of the board's view that this was primarily a physician relations and clinical integration project.

Strategy Selection

Within 90 days, the task force was ready to make a recommendation to the full board. The task force had considered a wide range of strategies, including one extreme in which most doctors would become hospital employees and another extreme in which the hospital would be a subcontractor to a new multispecialty medical group formed by merging numerous independent physician practices into one megagroup. In considering this continuum of choices, the task force consulted legal experts, investigated pilot program ACOs and researched how its competitors were responding. Silver Cross' largest competitor appeared to be favoring the employed physician model and aggressively was recruiting many of Silver Cross' key physicians.

The task force decided a joint venture model, in which the hospital would partner with physicians, would be the best approach for several reasons. The probability of successfully merging numerous small practices into a megagroup was deemed low and was fraught with political and social risks. Also, feedback from Silver Cross' doctors indicated they wanted to preserve their independent practices.

Although Silver Cross' largest competitor appeared to be using the employed physician model, the board felt this approach would be expensive and risky. It would create financial risk given the large increase in operating expenses, which was particularly worrisome because Silver Cross was in the process of building a $400 million replacement hospital that already would stress the hospital's financial ratios during the move.

There was also executional risk — it was not clear that physician practice behaviors would rapidly and completely change to a clinical integration practice solely because of their change in employment status. Finally, employing some physicians would make the hospital a competitor of those physicians that preferred to remain independent.

The task force also felt the employment model reduced flexibility, which was worrisome given the flux in health care. If regulations and industry dynamics went in a different direction, Silver Cross did not want to be left with a large number of employed physicians. Overall, the task force felt a joint venture with shared governance best fit the culture and ethos of Silver Cross and its physician leaders. The task force also liked the joint venture model because Silver Cross currently operated a profitable and successful PHO that partnered with 150 physicians for more than 15 years. Inside the hospital, the new joint venture was fondly called PHO-2, because the new organization would build upon the successful experiences of the existing PHO. Also, this moniker reduced fear of the unknown, which was especially important in communicating with physicians. Externally, the partnership was called Silver Cross Health Connections.

Mixed Reception

As any experienced health care leader may suspect, these discussions were often difficult, especially with physicians who were not present at the board retreat. The task force knew physician communications were extremely important, which was one of the reasons physicians made up the majority of the task force. Those physicians met frequently with medical staff leadership to gain their input and keep them informed. Likewise, the task force made presentations at full medical staff meetings.

The task force found that some physicians saw the joint venture as an imperative given reform; others were in denial or angry about reform; and some just hoped to keep the current structure going long enough so they could retire. The task force worked to develop plans to address each of these groups. And, as previously stated, there is scar tissue between every hospital and its medical staff. In addition to all the scars from past events, there were recent wounds between Silver Cross and the physicians. The hospital had recently signed contracts with several academic hospitals in Chicago to provide specialized services at the replacement Silver Cross Hospital. Many doctors perceived these relationships as threats to their patient volume.

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Further, past and pending transformations in health care had created a resistance to change among the medical staff. The task force recognized the physicians' concerns and stress levels and worked to position the joint venture as a vehicle for doctors to have some control over their response to reform.

The task force worked to keep the full board of trustees informed and sought to ensure the project was heading in a direction that the full board would support. The full board was comfortable with the proposed shared governance model, and was pleased that the project appeared to be a new, positive step in the relationship between the hospital and the physician community.

Building the Joint Venture

The most significant issue facing the task force in designing the joint venture was: How do we share ownership, governance and control between the physicians and the hospital? Because the joint venture would be a clinically integrated organization, the physicians should have control. However, from a legal and financial standpoint, the hospital could not abdicate its responsibilities and simply hand the keys to the physicians. The task force consulted legal counsel on issues related to Stark compliance, antitrust issues and the decision in Redlands Surgical Services v. Commissioner of Internal Revenue, which impacts how nonprofits handle joint ventures. The most significant questions were:

  1. Who will put up the cash equity to form the joint venture?
  2. Should the board composition and election be dominated by physicians?
  3. Who will make which decisions, such as clinical and financial decisions?

In a traditional joint venture, whoever provides the equity is the owner who elects the board and controls most governance decisions. A key insight for the task force was the realization that the equity and board composition and governance control did not have to be proportional. Specifically, the hospital could provide 100 percent of the equity, but let the physicians control the majority of the board seats to ensure that the joint venture is physician-led and -controlled.

Furthermore, the joint venture's bylaws could declare which decisions were controlled by the physicians (mostly the clinical decisions) and which were controlled by the hospital (mostly financial). Although the hospital would not have enough votes to control the board, the bylaws included certain reserve powers giving the hospital authority over certain key financial decisions.

The task force originally wanted the cash investment to reflect the cooperative tone of the joint venture and preferred that 50 percent or even 80 percent of the equity belong to the physicians. Ultimately, the task force decided that 100 percent of the equity would be provided by the hospital for several reasons:

  1. Speed: It would take much longer to launch if a complicated equity raise was to be conducted within the physician community. However, the joint venture was structured to allow physician investment in the future.
  2. Risk: The task force didn't want an equity contribution requirement to create a perception that would discourage doctor participation in the joint venture (even though the joint venture was structured to allow both equity and non-equity participation). Also, there were concerns voiced about investment losses and future capital calls if the joint venture had operating losses.
  3. Funds availability: While it was clear the doctors wanted control of the clinical process, it was less clear they were willing and able to commit significant personal funds for the equity to cover startup expenses.

As a result, the joint venture bylaws would be written to allow board composition and governance to be shared with the physicians even though they would not initially be equity partners. The task force discussed and negotiated two questions: How many of the board seats would be filled by doctors? Who would elect the directors?

In conversations with the physician leaders, it became clear that the number of physicians on the board was more important than how they were elected. This realization allowed for a workable, even elegant, solution: The board would have 10 directors: seven would be physicians (four of which would be elected by the medical staff and three of which would be appointed by the hospital) and three would be nonphysicians appointed by the hospital.

The result? The physicians felt as though they had control because doctors would hold seven of the 10 seats and the hospital felt it had proper safeguards because it could appoint six of the 10 directors (three physicians, three nonphysicians). Lastly, the bylaws allowed an 11th member if the joint venture elected to become a Medicare ACO, because current regulatory drafts indicated that a Medicare beneficiary must sit on the board.

A New Team Sport

In just 90 days, the task force had created a path forward that would allow Silver Cross to respond to rapidly changing industry dynamics while remaining flexible enough to adapt to new developments. The board approved the plan and implementation proceeded in February 2011 with the creation of a steering committee and five subcommittees: legal/financial, information technology, physician participation, clinical initiatives and education, and external networks.

Over the next six months, more than 60 physicians staffed the committees to build the clinically integrated network that was legally formed in August 2011 and then began negotiating final terms on an intensive outpatient clinical program contract with Blue Cross Blue Shield of Illinois. The opportunity presented by the BCBS contract was an important impetus that drove the group to move quickly.

Just one year after the wake-up call, the new organization was created and boasts membership of 275 physicians — almost half of the medical staff. The BCBS contract is ready to be launched. Equally important, the board, hospital executives and physician leadership view the task force and creation of a new physician-hospital organization with shared governance as an important and significant step in more closely aligning and integrating hospital-physician relationships at Silver Cross. It seemed the process of developing a clinically integrated network to address health care reform was helping Silver Cross and the physicians learn to play a team sport.

Stephen G. Morrissette ( is a trustee of Silver Cross Hospital and an associate professor in the College of Business & Health Administration at the University of St. Francis, both in Joliet, Ill. He also teaches at the University of Chicago Booth School of Business.

Sidebar - For the Board: ACO Discussion Questions