Sustainable Consolidation: Pediatric Regionalization through Children’s Hospitals

Introduction

Regionalization of clinical programs has long been a strategic aim of the leading children’s hospitals. With the market size of pediatrics being significantly less than what exists for adult care, children’s hospitals are required to extend their geographic reach to achieve effective program scale. Regionalization:

• Supports the potential for higher volumes, in turn providing support for pediatric service teams at the critical mass needed to sustain excellence, staffing, quality, brand and financial outcomes.
• Improves access to more capable and often better coordinated pediatric services for children and families and their pediatric providers.
• Enables greater parity for children’s hospitals to negotiate viable contracts with large national insurance companies.
• Offers stronger platforms for more effective public advocacy and greater private philanthropy.

Regionalization is good for children as a result, both for society and for children’s hospitals. The strategy is a centerpiece in most planning and drives most affiliation outreach in the children’s hospital sector.

Three phases of regionalization

Over the past 50 years in the United States, regionalization of pediatrics through children’s hospitals has evolved steadily along three phases of timeframe.

1. “Run a program:” The provision of specialized care on-site at adult-focused (host) hospitals supported by organized referral access to the children’s hospital – 1970s to present.

Business model: Programs range, but often involve the children’s hospital staffing and operating the Neonatal Intensive Care Units, or NICUs, on behalf of the host hospital. This may be accomplished through a simple management contract, with the respective parties responsible for their own revenue cycle, on through higher levels of outsource, with the children’s hospital either leasing or owning the host operation, supported by a new financial model. This model has also been extended through the Pediatric Intensive Care Units, or PICUs, pediatric emergency department (ED) care and general pediatric hospital services care, in a range of situations. Telehealth and technology applications have increased the service opportunities in these sectors.

Field expertise: Very high. The NICU model is an established regionalization strategy dating back decades to the pioneering work of such leading children’s hospitals as Children’s Hospital of Philadelphia (CHOP), Cincinnati Children’s Medical Center, Children’s National Hospital and Wisconsin Children’s.

Trending: Stable, in the NICU space per the growth of the overall hospital maternal and neonatal market. Variable-to-growing in the pediatric ED and general pediatric space where adult health systems are actively outsourcing their pediatric services.

Return on investment: Well established in the larger NICU settings (level III and larger level II) with the returns driven by the complex care case transfers requiring the capabilities of the children’s hospital. Returns on the broader balance of services, such as managing the general pediatrics unit, are situation dependent.

Considerations: Hundreds of level I and level II NICUs operate across the country at low volumes in often isolated locations. The low volumes, and the challenges in staffing these units, typically create financial losses. Consolidation of these units by a children’s hospital likely requires financial support via an accompanying political-policy-funding concept along with new models of care provision.

2. “Start a hospital:” The establishment of new small-scale children’s hospital campuses supported by the capabilities of the large sponsoring children’s hospital system – 1990s to present.

Business model: The emerging archetype is the siting and operationalization of a smaller-scale children’s hospital of 40–60 beds in strategic growth geographies. These are funded and operated by larger children’s hospitals with the capital, clinical depth and management bandwidth to support the success of the initiative. These campuses may be established on either a totally freestanding campus or in tandem/alongside a larger health system collaborator.

Field expertise: Established and expanding. This strategy has been unfolding for over 20 years, with children’s hospitals such as Texas Children’s (West Campus; Woodlands) and Children’s Medical Center Dallas (Plano) establishing new campuses in their metro areas, on through the longer-distance regional developments by Arkansas Children’s (Springdale) and CHOP (King of Prussia). The appropriate phasing in of more complex care requiring PICU and related specialized support remains a work/learning in progress.

Trending: Selected growth in those metro markets with sufficient demographic density and a sponsoring children’s hospital to support the model. Current initiatives include the Intermountain Health Care (IHC Las Vegas) and Lurie Children’s (Downers Grove) campuses.

Return on investment: A work in progress; situational. On a direct basis, the new campus may not drive positive short-term financials given the lack of higher margin complex care and ramp-up costs. Indirectly, the geographic presence may deter competitive and duplicative fragmentation of market, improving the overall regionalization portfolio position of the sponsoring children’s health system.

Considerations: A business plan supporting an ongoing evolution to more complex care is essential to financial sustainability given the inpatient infrastructure is costly for lower acuity volumes.

3. “Transition an enterprise:” The absorption by the children’s hospital of the pediatric clinical (and possibly academic) enterprise of a health system aiming to focus on adult care priorities – 2020s to present.

Business model: Emerging models effectively outsource pediatrics within larger health systems to those children’s hospitals with the scale, motivation and collaborative capacity to take on the task. This may be accomplished via a management contract with the respective parties responsible for their own revenue cycle, on through lease/ownership models where the children’s hospital directly incorporates the host health system pediatric business. Engagement of the pediatric faculty inside, alongside or outside the new children’s hospital sponsor and alignment of applicable educational and research initiatives remain learnings in progress.

Field expertise: Emerging, with the impact and key success factors still evolving. Collaborations such as Boston Children’s alignment with the pediatric enterprise at Tufts and New Orleans Children’s hosting of Tulane’s pediatric enterprise are instructive to date, particularly regarding aligning medical staff and academic affiliations from parallel medical school relationships.

Trending: Early exploratory growth stage, accelerated by the pandemic where surges in adult care combined with shortages in pediatric workforce and payment rates to dis-incent large health system commitment to pediatrics. Advancing such opportunities requires close collaboration between large pediatric and adult health systems and partnerships to advance any shared academic mission responsibilities which cannot be fully delegated.

Return on investment: Unclear and situationally dependent. The regionalization benefit has high potential regarding greater market, brand and political presence if the inter-organization elements can be aligned.

Considerations: It’s typically the case that the children’s hospital leading the consolidation is already serving most or all the complex tertiary care volume representing the positive financial margin in the market. Further consolidation comprising greater proportions of lower complexity care is often negative margin volume. For those pediatric programs operating as academic medical centers, the additional education and research missions must be considered, along with their medical school affiliation agreements. The resulting margin dilution suggests offsetting financial initiatives related to improved public policy and new funding are important to sustainability.

Summary

Children’s hospitals continue to pursue the benefits of pediatric regionalization along a continuum of models on ever-larger scales, including assuming running the full pediatric enterprises of large health systems. While the benefits of scale are well established, the margins possible beyond the highly complex care services remains a known risk, requiring new funding sources from the public and private sector to be sustainable. Unlike many other industries where purely scaling to greater volumes is inherently a positive financial outcome, this isn’t the case in pediatric care in the U.S. Regionalization and scale are positives but must be framed in a sustainable financial context.