By James C. Robinson

Case Studies Of OrthopedicSurgery In California: The VirtuesOf Care Coordination VersusSpecialization

ABSTRACT Two overarching frameworks compete to address theorganizational ills of the health care system. One framework diagnoseslack of coordination and prescribes integration and global payment. Theother diagnoses loss of focus and prescribes specialization and episodepayment. This article, based on research and interviews, assesses how thetwo frameworks manifest themselves at two high-volume orthopedichospitals in Irvine, California. The Kaiser Permanente Irvine MedicalCenter is part of a large and diversified health system. The HoagOrthopedic Institute is a single-specialty facility jointly owned by thephysicians and the hospital. Market outcomes, such as the merger of theHoag specialty hospital into a larger diversified health system, suggestthat Kaiser’s focus on coordination of patient care from preadmission topostdischarge is a key factor in its success. But Hoag’s specialization alsoleads to improved efficiencies. The integrated approach appears to beprevailing. At the same time, large diversified organizations might obtainfurther efficiencies by pursuing service-line strategies as described in thisarticle—for instance, by providing incentives for efficiency and quality foreach specialty and type of care.

Two frameworks compete to inter-pret and remediate the ills of theUS health care system. The first di-agnoses the system’s central prob-lem as organizational fragmenta-

tion and lack of clinical coordination, and itprescribes integration into group practices andhospital systems reimbursed on the basis ofglobal payment. Traditionally associated withthe work of Alain Enthoven,1 this framework ispartially exemplifiedbyGeisingerHealth Systemand other diversified organizations that com-bine physician groups and hospital systems.2 Itunderlies the Affordable Care Act’s emphasis onaccountable care organizations.Thealternative frameworkdiagnoses theprob-

lem afflicting health care as excessive consolida-tion and loss of clinical focus, and it prescribes a

streamlining of health care organization intospecialty hospitals and ambulatory care centersthat are reimbursed based on episodes ofcare. Traditionally associated with the work ofMichael Porter,3 this second framework is parti-ally exemplified by the New York Hospital forSpecial Surgery and other condition-specific or-ganizations.4 It underlies the Affordable CareAct’s emphasis on episode payment.It is too early to predict which organizational

formandpolicy frameworkwill prevail under theAffordable Care Act—and, in fact, as this articledescribes, the two frameworks appear to beblending into one. Preliminary insights can beobtained, however, from case studies of organ-izations that exemplify each of the frameworksand compete directly with one another. Casestudies permit in-depth comparisons of strategy,

doi: 10.1377/hlthaff.2012.1119HEALTH AFFAIRS 32,NO. 5 (2013): 921–928©2013 Project HOPE—The People-to-People HealthFoundation, Inc.

James C. Robinson (james.robinson@berkeley.edu) is theLeonard D. SchaefferProfessor of HealthEconomics and director of theBerkeley Center for HealthTechnology at the Universityof California, Berkeley.

May 2013 32:5 Health Affairs 921

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structure, and performance and also offer in-sights into how the models evolve under pres-sures in the market.

Orthopedic Surgery Case StudyThis article compares the organizational, finan-cial, and clinical design of orthopedic surgery inKaiser Permanente, the nation’s paradigmaticintegrated delivery system, with that of theHoagOrthopedic Institute, a renowned specialtyfacility.Although Kaiser operates in numerous local-

ities, its Irvine Medical Center in California hasled the system in the redesign of surgical proc-esses and related clinical pathways. The HoagOrthopedic Institute provides the most kneeand hip replacement surgeries in Californiaand is a prominent participant in health planinitiatives to promote episode-of-care payment.Kaiser's Irvine Medical Center and the Hoag

Orthopedic Institute opened their facilities inthe same year. They are located across the streetfrom one another, and they compete headto head.5

I conducted a two-year case study that includedmore than one hundred interviews with seniorexecutives, midlevel managers, practicing sur-geons, and nonphysician staff at Kaiser, Hoag,and other health plans and hospital systems inthe same market.Interviewees included orthopedic surgeons

and people with responsibilities in organiza-tional strategy, operating room management,medical implant purchasing, clinical pathwaydevelopment, quality improvement, postsurgi-cal care and discharge planning, managedcare contracting, marketing, and businessdevelopment.I found similarities and differences between

the two organizations with respect to physicianfinancial incentives, operating room processes,postsurgical care, osteoarthritis diseasemanage-ment, and patient selection for surgery. I con-clude that the market appears to be favoringdiversified organizations overmore narrowly fo-cused service-specific organizations. The econo-mies of scale and scope obtained from integra-tion appear to outweigh the economies of focusand experience obtained from specialization.

Organizational Structure:Diversification Versus FocusKaiser Kaiser has a strong presence inCalifornia, with more than seven million enroll-ees in the state and 435,000 in Orange County.The organization’s market share has beengrowing among commercially insured people,

Medicare beneficiaries, and Medicaid enrollees.In 2010 it constructed a 250-bed facility

in Irvine, which serves as its referral center fororthopedic knee and hip replacement surgery aswell as a general acute care hospital for southernOrange County. The Irvine Medical Center’stwenty-one orthopedic surgeons perform 900total joint replacements and 4,700 other ortho-pedic procedures annually. Neurosurgery andorthopedic spine procedures are performed atother Kaiser hospitals.The Kaiser health plan contracts with the

multispecialty Permanente Medical Group ineach geographic region, paying the medicalgroup on a capitation, per member per monthglobal basis for all professional services.Nonclinical services, including orthopedic im-plants and other medical devices, are paid outof thehospital budget and arenot included in themedical group capitation.Individual physicians are partners or employ-

ees of the Permanente Medical Group and arepaid on a salaried basis with modest bonus op-portunities based on achievement of quality andpatient satisfaction targets. They do not have anownership stake in the nonprofit Kaiser system;are not paid for procedures on a fee-for-servicebasis; and do not participate in financial gainsharing, where additional incentives are paidto physicians if hospital costs are reduced.Physicians in the Permanente Medical Groupare forbidden to consult with firms that sellorthopedic and other medical devices to theKaiser system.Some hospital administrators fear that device

representatives use their relationships with sur-geons to promote the most expensive devices—apractice called up-selling.6 This concern is ad-dressed at the Permanente Medical Group byan absolute ban on physician consulting andremuneration from device firms.7 KaiserPermanente finds that in consideration of thehigh volume of devices it purchases annually,devicemanufacturers arewilling to forgo aggres-sive sales techniques, and the system will termi-nate arrangements with distributors if theythreaten the larger relationship.Hoag Orthopedic Institute HoagMemorial

Hospital Presbyterian, a nonprofit entity, pro-vides a full range of clinical services through twoinpatient hospitals, twelve community-basedclinics and urgent care facilities, specializedservice lines in cardiovascular medicine, neuro-science, women’s health, and orthopedics, andnumerous affiliated physician offices in OrangeCounty.In 2010 the hospital created a for-profit sub-

sidiary, the Hoag Orthopedic Institute, as a jointventure with two large orthopedic surgery

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medical groups. The institute’s ownership wasdivided, 51 percent for the hospital and 49 per-cent for the physicians. The institute includes aspecialty hospital with seventy inpatient bedsand two ambulatory surgery centers inneighbor-ing communities. The institute’s medical staffincludes forty-two orthopedic surgeons, whoperform 4,300 knee and hip replacement proce-dures and 12,000 arthroscopic, spine, trauma,and peripheral orthopedic surgeries per year.Hoag is a leading participant, with health

plans and self-insured employers, in initiativesto develop episode-of-care payment, reference-priced benefit designs, and narrow networkinsurance products. Episode-of-care paymentcombines the reimbursement for the hospital,expensive implanted devices, the physicians,and some elements of postdischarge care intoa single payment, thereby aligning incentivesfor efficiency. Reference pricing is a health in-surance benefit design that requires enrollees topay out of their own pockets the difference be-tween the insurer’s maximum payment and theprice actually charged by the hospital, therebygiving the enrollee the incentive to select a low-price hospital. Narrow network insurance prod-ucts limit their contracts to a subset of hospitalsthat are willing to discount their prices to theinsurer in exchange for higher patient volume.Hoag seeks to become a center for major pro-

cedures forwhich commercially insured patientswould be willing to travel—not only for ortho-pedics, but also for interventional cardiology,electrophysiology, women’s health, and oncol-ogy. Establishing the subsidiary orthopedic in-stitute represents its most fully developed ex-pression of this regional center of excellencestrategy. Some insurersdesignateparticularhos-pitals as centers of excellence for particular pro-cedures if documented quality is high and nego-tiated prices are low.The joint-venture Hoag Orthopedic Institute

builds on the model of physician-owned ambu-latory surgery centers, which represent the sur-geons’ interests in obtaining equity ownershipand a share in the profitability of the facilitieswhere they provide care. The physicians arenot employed by Hoag; instead, they are ownersand partners in the surgical medical groups.Physicians are paid for their professional ser-vices on a fee-for-service basis, with mostpatients covered by traditionalMedicare or com-mercial preferred provider organization insur-ance, both of which also pay on a fee-for-servicebasis.As equity owners in the Hoag Orthopedic

Institute, physicians share in the profits earnedby the specialty hospital and hence face gainsharing–type incentives for reducing the costs

of implanted devices and other aspects of thecare process.Many of the surgeons perform con-sulting work for orthopedic device firms, includ-ing those that sell to the institute, but they arerequired to comply with strict disclosure ruleswhen involved in device contracting and pricenegotiations.Although the Affordable Care Act banned

physician-owned specialty hospitals, HoagOrthopedic Institute was grandfathered intothe legislation by special request.

Surgical And Postsurgical ProcessesHoag Orthopedic Institute The formation ofthe Hoag Orthopedic Institute embodies theprinciple that entities can best achieve clinicalquality and efficiency by focusing on a limitedrange of clinical procedures. In so doing, theyreduce the complexity that impedes perfor-mance in organizations that attempt to offerall services to all patients.A primary objective of the institute’s founders

was to streamline the process of care to maxi-mize the number as well as the quality of proce-dures that can be done per surgeon, per operat-ing room, and per day. The broader goal was tobuild the infrastructure for referral volumegrowth.The Hoag Orthopedic Institute’s operating

rooms now handle five joint replacement proce-dures per day, with peripheral orthopedic pro-cedures, such as knee arthroscopy and shouldersurgery, done primarily in the affiliated ambula-tory centers. The institute’s surgeons are pio-neers in the development of ambulatory surgeryfor total hip replacement, reducing the length-of-stay to an average of twenty-three hours foruncomplicated cases.The institute streamlines orthopedic surgery

and operating room processes by selectinghighly motivated physicians and by ensuringthat those surgeons accept the facility’s clinicalprocesses. Everything is standardized: methodsof patient education and preparation prior tosurgery, operating room schedules, proceduretiming, staffing, the role of implant manufac-turer representatives in the operating room,pain medication protocols, laboratory testingand radiology protocols, patient diet, and physi-cal therapy. This standardization constitutes amajor change in culture for traditionally autono-mous orthopedic surgeons.The Hoag institute has taken over discharge

planning functions from the individual phy-sicians as well as from the health plans in thelocal market. A nurse navigator is assigned toeach patient for the entire course of care, frompreadmission preparation to postdischarge re-

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ferral. This assistance facilitates the transitionsfrom surgery to subacute care, rehabilitation,skilled nursing, or home care, which are oftenconfusing to patients.The institute is paid by Medicare on the

basis of diagnosis-related groups and by mostcommercial insurers on a case-rate basis, givingthe organization strong incentives to reducepatient length-of-stay as well as the cost of sur-gical implants. The institute does not servemany managed care patients from MedicareAdvantage, Medicaid, or commercial healthmaintenance organization plans.Kaiser Rapid growth in enrollment, com-

bined with obesity-driven growth in population-based knee and hip replacement rates, has led toconcerns about demand for surgery outpacingcapacity at Kaiser in the Orange County market.The health plan has partly alleviated suchstresses by opening Irvine Medical Center andby continually recruiting new surgeons, but ithas identified long wait times for discretionaryprocedures as a potential source of enrolleedissatisfaction.In 2010 Kaiser contracted with the medical

device firm DePuy, an affiliate of Johnson &Johnson, to conduct an assessment of and helprestructure Irvine Medical Center’s operatingroom scheduling, room preparation, procedurecut-to-close times, and postsurgical manage-ment. The assessment incorporated principlesof parallel processing and Lean manufacturing5

and led to a complete redesignof operating roomprotocols.TheKaiser Irvine teamdevelopedwhat it refers

to as the “total joint dance”—a set of well-choreographed operating room procedures andpostoperative processes. The standard two-daylength-of-stay is now broken down into hourlysegments, and the exact role and timing of anti-biotics, pain medications, physical therapy, andpatient mobilization are specified.In orthopedic surgery, operating room scrub

and circulating nurses, operating room techni-cians, device firm representatives, and otherteam members have a strong influence on therate at which patients are prepared and proce-dures are conducted, andon the rate atwhich theoperating room is turned around for the nextpatient. At Irvine Medical Center, each surgeondevelops his or her team of these personnel, topromote consistency and to reduce the need forrelearning routine processes.Discharge planning begins prior to admission

and continues after surgery based on outcomesand patient preferences. Physicians at IrvineMedical Center conduct postsurgical care andpatient management at contracting subacute,rehabilitation, and skilled nursing facilities,

even though the system does not own theseentities. Patients are not discharged from thehospital until follow-up appointments have beenscheduledwithboth the surgeonand theprimarycare physician.In summary, both Hoag and Kaiser maintain

a strong focus on productivity and patientthroughput. Hoag pursues process efficiencytomaximize surgeon and operating room capac-ity in order to expand patient volumes and fee-for-service revenues. Because Kaiser pays itsphysicians on a capitation rather than fee-for-service basis, physicians do not profit fromgreater volume of services. Instead, KaiserIrvine surgeons pursue process efficiency be-cause they face capacity constraints from popu-lation growth, expansion of insurance coverage,and epidemiological trends.

Patient Selection AndAppropriateness Of CareHoag and Kaiser face similar incentives to in-crease the efficiency of their processes. How-ever, incentives differ with respect to selectingcandidates for surgery and for managing theunderlying disease processes of osteoarthritis.Kaiser After redesigning its operating room

and choreographing its postsurgical procedures,Irvine Medical Center turned its attention topatient selection and care management forosteoarthritis—the chronic illness that mostoften underlies patient requests for joint re-placement. Disease management is delegated bythe Kaiser insurance plan to the PermanenteMedical Groups in each market.Prior to the redesign, patients sought care

themselves in the surgery clinic or were referredby primary care physicians without prior triage.Many of these patients were passive and unin-formedabout the roleof lifestyle choices on func-tional ability, and many had been treated withdifferent combinations of analgesic drugs, ste-roids, and counseling and had not received careaccording to formalized, evidence-based stan-dards. Permanente surgeons were thereforespending a considerable amount of time assess-ing patient disease severity, functional limita-tions, attitudes toward surgery, and willingnessto make behavioral changes, such as losingweight. None of these functions is primarilysurgical in nature.In 2011 the orthopedics department at Irvine

Medical Center launched the “osteoarthritis carepathway.” The patients were divided into threecategories depending on stage of osteoarthritisand interest in surgery.First, patientswithout activediseasebut at risk

for eventual surgery were triaged to behavior

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change and early intervention programs coordi-nated by their primary care physicians and well-ness coaches. Second, at the other end of thespectrum, patients who had failed prior inter-ventions and who sought surgery were triagedinto the surgical preparation pathway, with em-phasis on education, preoperative weight loss,diabetes management, and planning for post-operative care. Third, the osteoarthritis pathwaywas developed for patients who were not yetcandidates for surgery but who needed to man-age their pain, improve functioning, andpreventthe progression of their disease.Kaiser Irvine developed a clinical pathway for

each of the three types of patient, emphasizingthe roles of primary care physicians, nursepractitioners, physical therapists, and wellnesscoaches. It also modified existing clinical guide-lines on drug management, radiography, injec-tionof steroids, exercise andweight loss, referralto bariatric surgery, nutritional counseling, andphysical therapy, and it standardized the flow ofpatients through those options and processes.The intent was to limit the need for surgery bypreventing disease progression and to limit sur-geons’ involvement in nonsurgical processes.

Hoag Orthopedic Institute The HoagOrthopedic Institute is a hospital and set of am-bulatory surgery centers. As such, it is structuredto provide care to patients who seek surgery.Patient selection and appropriateness criteriafall within the authority and practices of theindividual surgeons, not the orthopedic hospi-tal. The institute needs to promote processstandardization while respecting physicianautonomy. The surgeons are highly skilled prac-titioners, the source of new patient volume, andequity partners in the facility; they cannot berequired to adhere to clinical pathways they donot embrace.The Hoag Orthopedic Institute specialty hos-

pital, as an organization, has strong financialincentives and quality reasons to standardizecare processes, but it has neither incentive norcultural authority to standardize the way inwhich the surgeons and referring primary carephysicians decide which patients are good sur-gical candidates. The facility is paid on a case-rate basis—a pricing method in which a flatamount covers a defined group of proceduresand services. The surgeons are paid via fee-for-service. TheHoag institute doesnot reap a returnon investment in nonsurgical care managementfor chronic illnesses. Therefore, it does not en-gage in chronic disease management.Although the Hoag Orthopedic Institute is not

structured to provide ongoing care for patientswith chronic illnesses, the two surgeon groupsprovide nonsurgical care for patients suffering

from arthritic disease and disability outside ofthe hospital context. The Newport OrthopedicInstitute, one of the two Hoag-affiliated medicalgroups, has expanded its scope of care into pri-mary care treatment of osteoarthritis, havinghired a family practice physician who has ad-vanced training in sports medicine and ortho-pedics. This physician assesses patients whoseek care at the Newport Orthopedic Instituteand provides pain management, coordinatesphysical therapy, and refers patients to diagnos-tic radiology.The Newport Orthopedic Institute employs

physician assistants and numerous techniciansto ensure that surgeons can focus their time onsurgery rather than on nonsurgical care.7 Anorganizational principle is that each type of careshould be provided by the least expensive level ofclinician and facility that can achieve qualitystandards.As previously mentioned, the individual sur-

geons are responsible for assessing the candi-dacy of individual patients for surgery. Theseappropriateness reviews are not coordinatedwith the medical management initiatives at thehealth insurance plans or the primary care–based medical groups with which some of thepatients are affiliated.

The Virtues Of Focus AndSpecializationThe Hoag Orthopedic Institute constitutes acenter of excellence focused on a high-volumeservice line, for which it publishes extensivequality performance metrics and is paid on acase-rate or episode-of-care basis. It pursues acycle of strongperformance, increasedphysicianaffiliations and patient volume, and further ex-perience-based performance improvement. Itsbusiness model assumes that patients havechoices among competing hospitals and that in-surancenetwork contractingandbenefit designsdonot channel volumeaway from the specializedfacility toward general-purpose hospitals.The Hoag Orthopedic Institute is a revenue

center for the larger Hoag hospital system, witheach patient bringing in revenue that pays sur-geons’ fees and facility overhead and contributesto the return on investment for the hospital andthe medical groups.8 Marketing for local growthhas centered on attracting surgeons who haveestablished patient practices with attractive in-surance coverage, especially commercial pre-ferred provider organization insurance.The orthopedic institute treatsmanyMedicare

fee-for-service patients, but payment rates are solow that it is not actively seeking to expand thatpatient population. The institute has declined

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to participate in the Center for Medicare andMedicaid Innovation demonstration project fororthopedic surgery that would channel greaterpatient volume to facilities in exchange for fur-ther fee discounts.9 The institute is not willing toaccept even lower payment rates from Medicarethan it already receives.The Hoag institute’s major growth opportu-

nity lies in reaching beyond Orange County toLos Angeles, San Diego, and more distant mar-kets to attract patients willing to travel for elec-tive surgery. The institute was an early propo-nent of bundled payment; reporting of qualityoutcomes; and travel medicine, in which pa-tients seek care outside their home community.Unlike many of the other hospitals in themar-

ket, the Hoag Orthopedic Institute accepts caserates as a prototype for the episode-of-care pric-ing that it sees as the logical form of paymentfor hospitals competing on a regional basis.Although most hospitals exclude the cost of theorthopedic implant devices from their per caserates and insist on being reimbursed by thehealth plans on a supplemental fee-for-servicebasis, the Hoag institute allows most healthplans to include the implants in its case rates.In moving from case rates to episode-of-care

payment, the institute has taken a leading rolein the bundled payment initiative with Aetna,Blue Shield of California, and the IntegratedHealthcare Association. This initiative bundlesinto a single payment the orthopedic implant,physicians’ clinical fees, all facility costs, andrelated hospital readmissions within thirty daysof discharge.

Challenges Facing SpecialtyOrganizationsThe general trend in the California health caremarket is for hospitals and medical groups toconsolidate and to contract with insurers forall care of the patients affiliated with themedicalgroups’ primary care physicians. This popula-tion-based contracting—a long-standing featureof commercial and Medicare Advantage healthmaintenance organization plans—is expandinginto the commercial preferred provider andMedicare fee-for-service plans as they embracenewpaymentmodels under the accountable careorganization rubric.10

A challenge facing the Hoag OrthopedicInstitute is the potential erosion of its primarycare referral base.Although the institute scoredamajor coup in attracting an orthopedic surgerygroup from its primary competitor, St. Joseph ofOrange, the latter system has been steadily in-creasing the employment of primary care physi-cians through its Heritage multispecialty group

practice.Greater Newport Physicians, an independent

practice association formerly associated withHoag, recently was acquired by another majorcompetitor, MemorialCare Health System. IfHoag and its orthopedic institute had notmovedupstream into population-based care by joiningwith themultispecialty St. Joseph health system,they would have been relegated to an unattrac-tive position further down the financial foodchain.The Hoag Orthopedic Institute has tradition-

ally focused on preferred provider organizationenrollees, because such plans pay attractiverates. But the rise in health insurance premiumsis leading to an increase in forms of consumercost sharing that dampen patient interest in dis-cretionary orthopedic procedures. The insti-tute’s reliance on preferred provider organiza-tion insurance makes it particularly vulnerableto the increases in deductibles. Some Hoag sur-geons refuse to accept health maintenanceorganization patients, even though the penetra-tion of thesemanaged care plans remains strongin the local market and is likely to expand as theAffordable Care Act is implemented.

The Virtues Of IntegrationAlthough diversification and specializationrepresent two distinct organizational strategies,they appear to be blending into one another inhealth care. The marketplace importance oforganizational integration is evident in the evo-lution of specialty-focused firms. After years ofpursuing service-line specialization,HoagMem-orialHospital Presbyterian recentlymergedwithand formed an integrated, diversified organiza-tionwith the St. Joseph ofOrange health system.The new entity will have six hospitals in OrangeCounty, including the Hoag Orthopedic Insti-tute, and will be the county’s largest providerof inpatient care.St. Joseph owns a large multispecialty medical

group and has a strong commitment to capita-tion payment. It has developed an accountablecare organization structure with one of the larg-est health plans in the market, covering bothhealth maintenance organization and preferredprovider organization patients.St. Joseph has long viewed Kaiser Permanente

as its primary competitor and has modeled itsstrategy and structure on the Kaiser system.St. Joseph consciously dismissed the strategyof forming specialty hospitals paid on a fee-for-service basis, deciding to pursue a strategy ofmultispecialty organization and capitationpayment.A major impetus for St. Joseph in the merger

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with Hoag was to obtain the efficiencies of spe-cialization within its service lines without sacri-ficing the larger strategy of diversification. Itrecognizes the importance of service-line focuswithin the integration strategy. St. Joseph haschosen to participate in the Center for Medicareand Medicaid Innovation bundled payment ini-tiative for orthopedic surgery even as it contin-ues to embrace global capitation payment for allits affiliated patients and services.

Challenges Facing IntegratedOrganizationsIntegrated and diversified organizations facethe risk that particular service lines will beneglected, that low-performing units will be al-lowed to coast on the coattails of the larger en-tity, and that high-performing units may beunable to disseminate their innovations in theface of bureaucratic indifference. A large non-profit system with salaried physicians muststruggle to achieve a level of physician pro-ductivity and entrepreneurship comparable tothat of systems whose physicians are rewardedby fee-for-service reimbursement and equityownership.Kaiser Permanente traditionally does not seek

to reward performance at the unit and specialtylevel. It has recognized,however, that themarketpressures for efficiency must be transmitted toeach of its specialties and service lines. KaiserPermanente is now implementing IrvineMedical Center’s orthopedic redesign principlesat its other hospitals. The “choreographic” ap-proach has been applied to cataract removal andbariatric surgery as well as selected high-volume

medical procedures. However, standardizationhas proved difficult to implement in generalsurgery and trauma care, where there is highvariance in patient conditions and surgicaltechniques.

ConclusionThere is an ongoing debate about whether topursue the path of organizational integration—as embodied inproposals forglobal payment andaccountable care organizations—or the path oforganizational focus—as embodied in proposalsfor episode payment and specialty organiza-tions. These models compete with one anotherboth in the market and in the policy arena.Market competition seems to be resolving infavor of integration, as illustrated by the experi-ences of Kaiser's Irvine Medical Center and theHoag Orthopedic Institute. The competitionbetween integration and specialization in thepolicy arena also seems to be resolving in favorof integration.Integration and coordination are essential to

the reform of the health care system. However,the value of specialization must not be lost. Thegoal is clinical coordination, not organizationalgrowth and diversification for their own sake.The efficiencies of specialization can be ob-

tained by integrated health care organizationsonly if the larger entity does not stifle its physi-cians and facilitieswithbureaucratic supervisionand a weakening of local accountability. The bat-tle for efficiency is won or lost in each surgicalprocedure, each service line, and the course ofcare for each patient. ▪

Funding for this research was providedby the Institute for Health TechnologyStudies (inHealth), the CaliforniaHealthCare Foundation, and the Agencyfor Healthcare Research and Quality.

NOTES

1 Alain Enthoven has consulted withKaiser Permanente over many as-pects of its organizational strategy,including regionalization to achieveefficiencies of scale and experience.See Arrow K, Auerbach A, Bertko J,Brownlee S, Casalino LP, Cooper J,et al. Towards a 21st century healthcare system: recommendations forhealth care reform. Ann Intern Med.2009;150(7):493–5.

2 For a description of the Geisingersystem, see Lee TH, Bothe A, SteeleGD. How Geisinger structures itsphysicians’ compensation to supportimprovements in quality, efficiency,

and volume. Health Aff (Millwood).2012;31(9):2068–72.

3 Porter M, Teisberg EO. Redefininghealth care: creating value-basedcompetition on results. Cambridge(MA): Harvard Business SchoolPress; 2006.

4 The Hoag Orthopedic Institute wasdeveloped in part with the consult-ing expertise of Michael Porter. For adescription of the Hospital forSpecial Surgery system, see RanawatAS, Koenig JH, Thomas AJ, Krna CD,Shapiro LA. Aligning physician andhospital incentives: the approach atHospital for Special Surgery. Clin

Orthop Relat Res. 2009;467(10):2535–41.

5 Center for Studying Health SystemChange. Physicians key to healthmaintenance organization popular-ity in Orange County. Washington(DC): The Center; 2011 Aug.(Community Report No. 10).

6 Montgomery K, Schneller ES.Hospital strategies for selection ofphysician preference items. MilbankQ. 2007;85(2):307–35.

7 DePuy Healthcare Solutions Group.Clinic optimization: a consultingservice to improve patient satisfac-tion. Rayburn (MA): The

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Group; 2012.8 A small percentage of patients

treated at the Hoag OrthopedicInstitute are covered through sub-capitation payments from a localindependent practice association tothe Newport Orthopedic Institutemedical group. Additional proce-dures performed for these patientsdo not bring additional revenue tothe orthopedic medical group,although the individual surgeonperforming the procedure is paid by

the group on a fee-for-service basis.Procedures performed on indepen-dent practice association patients dobring in additional revenue to thehospital through the case-ratepayments.

9 For a description of the Center forMedicare and Medicaid Innovationdemonstration on bundled payment,see CMS.gov. Bundled Payments forCare Improvement (BPCI) Initiative:general information [Internet].Baltimore (MD): Center for

Medicare and Medicaid Innovation;[cited 2013 Jan 13]. Available from:http://www.innovations.cms.gov/initiatives/Bundled-Payments/index.html

10 Robinson JC. Accountable careorganization for PPO patients[Internet]. Oakland (CA): IntegratedHealthcare Association; 2011 [cited2012 Apr 20]. Available from: http://www.iha.org/ACOWhitePaper_PPO_final.pdf

ABOUT THE AUTHOR: JAMES C. ROBINSON

James C. Robinsonis the Leonard D.Schaeffer Professorof HealthEconomics at theUniversity ofCalifornia, Berkeley.

In this month’s Health Affairs,James Robinson reports on his casestudies of two different approachesto improving health care andconstraining costs: on the onehand, greater integration,coordination, and global payment;and on the other, specializationand episode payment. Comparingtwo high-volume orthopedichospitals in Irvine, California—aKaiser Permanente facility and theHoag Orthopedic Institute, aspecialized orthopedic hospital—heconcludes that Kaiser’s focus oncoordination of patient care is a

key factor in its success but thatthe Hoag institute’s specializationalso leads to improved efficiencies.Even as the integrated approachappears to be prevailing in themarket, Robinson also concludesthat large diversified organizationssuch as Kaiser Permanente mightobtain further efficiencies bypursuing the service-line strategiesof the Hoag institute.Robinson, an economist, is the

Leonard D. Schaeffer Professor ofHealth Economics and director ofthe Berkeley Center for HealthTechnology at the University ofCalifornia, Berkeley. He launchedthe center in 2008 to focus on howinsurance and payment influencethe development of innovativedrugs, biologics, and medicaldevices. His research andprofessional activities havecentered on the role of insurancecoverage and payment methods ininfluencing the use, pricing,

appropriateness, and cost of healthcare and health care technology.Robinson is on the board ofdirectors at the IntegratedHealthcare Association, a nonprofitassociation of large health plans,physician organizations, andhospitals that has developed thepay-for-performance and episode-of-care payment systems forprivate-sector plans and providersin California.Robinson was the editor-in-chief

of Health Affairs during 2007–08and now serves as a contributingeditor of the journal. He haspublished more than one hundredpeer-reviewed articles in healthpolicy, economics, and clinicaljournals, including the NewEngland Journal of Medicine and theJournal of the American MedicalAssociation. Robinson received adoctorate in economics from theUniversity of California, Berkeley.

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