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The Network Development Process
The Network Development Process

Rick Krohn
Following the definition of purpose and strategy, network planners must articulate a formal plan of network development. This is a balancing act - which includes matching the right physician leaders to the right tasks, in collaboration with consultants, legal advisors, and alliance partners. A progressive process of network development that first establishes broad goals and expectations, and then defines the operational characteristics that meet these criteria. This is not a sequential process, in that many of the activities inclusive of network development occur simultaneously and collaboratively. Neither is it a straight path, in that the activities and strategic direction must conform to an evolving mission.

Strategic Issues in Network Development

The point of departure for network development is an honest assessment of the market dynamics, which will determine the characteristics, and operations of the organization. First, physician leaders and their advisors comprising the Network Task Force must look within their own community and determine who among their ranks meet eligibility criteria to either become founders or members of the network. Physician leaders must ask themselves why they are forming the network, by asking questions such as:

  • Why are we coming together and what do we want to become?
  • What value propositions do we bring to the market?
  • What type of common clinical culture will members be expected to adopt?
  • What clinical service distinctions will allow our network to establish "brand identity"?
  • What is the optimal clinical and business configuration of the network?

    It is very likely that not all members of the physician community are suitable partners in this venture; either because they lack the ability to adopt a managed care mentality, or are resistant to professional collaboration, or have an agenda that is in conflict with the goals of the network, or are unwilling to embrace a common clinical culture, or possess personal characteristics that create abrasions within the physician community, to name but a few reasons. The correct mix of physician members, as dictated by the local market, is a key element of the network's ultimate success. This may mean that the network must be selective, or may restrict membership to board certified physicians only, or confine membership to physician who demonstrate a cultural affinity to managed care and group dynamics, or establish geographic membership restrictions, or establish multiple levels of network affiliation.

    The Network Task Force must also establish expectations regarding clinical excellence among the network membership. Particularly for risk contracting networks, there must be full member compliance with network policies and procedures regarding quality, utilization, referrals, outcomes, and patient satisfaction. At a minimum, network members must conform to the following criteria:

  • demonstrated and measurable clinical quality;
  • aptitude to adapt to managed care cost and quality standards;
  • versatility to accept quality improvement measures.

    These clinical criteria are defined in network protocols and guidelines, outcomes measures, demand and disease management programs, and patient education programs. Collectively, these tools and techniques will establish a quality difference that becomes the foundation of the network's "brand identity".

    The Network Task Force must reach agreement at the outset of the network development process about its' purpose and values. The network's purpose, whether it is to drive revenue, or establish information and medical management capabilities, or share back office expenses, or gain market dominance, must be measured against market realities. Is the goal related to a market need? Is the goal attainable with the available resource pool? The network must also identify a customer for its' products and services, and how it will meet a customer need. Questions include:

  • Who are our customers?
  • What do our customers want and need?
  • How can we meet (and exceed) their needs and expectations?
  • How will we establish brand preference?

    Finally, the Network Task Force must consider the means of delivering network products and services. The customer base of the network is of two types: first, the purchaser of network clinical services (payers and direct purchasers) and second the purchaser of network member services. The network must determine the infrastructure needed to deliver services to both customer bases, and the capital required to build this infrastructure. (1)

    Defining Governance, Legal Structure, Ownership Corporate Form

    Early in the network development process, the formal structure and high level decision making apparatus of the new organization must be defined. The corporate form of the organization is most often a function of the tax status of the participants and the purpose of the new organization. For instance, a non-profit IPA may be organized strictly as a conduit for managed care contracts, with little means to generate significant revenue. It may be preferable to establish such an organization whose purpose is not to retain earnings as a non profit taxable entity. Alternately a network management company almost certainly will be created in the expectation that it will generate a profit, and will be organized as a for profit venture. Particularly if there is an external for profit partner, it will make sense to organize as a for profit taxable entity. Not surprisingly, it is important to consult with qualified tax counsel to understand the ins and outs of each structural alternative.

    Legal Form

    As a corollary to the above discussion the network leadership must determine the legal form of organization. An IPA, for instance, might be formed as a C Corporation or LLC, depending on the size of the organization and distribution of ownership. A physician equity alliance, on the other hand, might be organized as a professional corporation and a related management company organized as an LLC. The appropriate legal form is again determined in consultation with qualified legal counsel. Generally, the network will need to complete a series of organizational documents if it is formed as a corporation. First, the network will need to create an organizational document known as the Articles of Incorporation. This document defines basic information about the structure of the corporation, it's address, number of shares issued, director responsibilities, rights of stock ownership, and perhaps additional information required by individual states. A second document, the Corporation Bylaws, describes the terms of network governance, by describing the composition, term, and responsibilities of the corporate board, officers, and committees. The Bylaws also describe voting matters such as election and indemnification of corporate directors and officers. A third document, the Network Services Agreement, governs the relationship between the network and participating physicians. It defines the responsibilities conferred to each party during the term of the agreement, service definitions, and grievance procedures.

    Ownership and Distribution of Stock

    The founders must determine who will be offered an opportunity to own stock, if there will be more than one class of stock, and if founding members will be awarded stock on preferential terms in recognition of their "sweat equity" in developing the network. In some networks the founding members are the sole stockholders, since they contribute the entire pool of initial capitalization. In other networks two or more classes of stock are created, with a single class reserved for founders, which may include voting rights, and reserve powers, which other classes of stock do not exercise.

    Network Governance

    The Network Board is the premier decision making body of the network, and its' composition is often a subject of hot debate. For physician only networks, how is representation assigned? How large does the Board need to be in order to achieve adequate member representation? Should groups be given proportional representation, or should founding members reserve certain seats and voting rights? Should the multispecialty mix of Board representation be actively manipulated to favor primary care physicians or certain specialties? For joint venture networks should alliance partners be given equal representation and voting rights? These are linchpin decisions because the composition of the Board is the single greatest influence on the strategic and business decisions that determine the future success of the organization.
    Board selection may occur by appointment or selection. During the development process, an interim Board is impaneled to conduct initial planning and decision making. A process will later be established to either appoint or elect members for a fixed term. A Nominating Committee is commonly created to ensure fairness and representation in the Board selection process. A formal allotment of Board composition is generally written into the bylaws, and may include a designated number of primary and specialty care physicians, alliance partners, community representatives,

    Voting Rights

    The issue of voting rights is concurrent to the organizational structure decision, in that the type of voting, the reserve rights of voting, and the distribution of votes must be reconciled as part of the larger question of organizational form. There are three main types of voting rights: simple majority; super majority; and constituent majority. A simple majority vote is appropriate in networks with relatively few constituencies, since 51% of any vote carries the day. In larger, more diverse networks it may be appropriate to apply a super majority of two thirds to three quarters majority, to ensure a true consensus among the various network constituencies. Finally, in joint venture networks it may be useful to employ a constituent majority, in which each partner must achieve a majority (or supermajority) to carry a decision.

    Establishing Committees and Defining Key Decision Areas

    Generally, key decision areas define network committees. The chairs of subcommittees and key network managers represent a central coordinating committee, usually called the Executive Committee. This Committee has authority to make operational decisions as described in the network Bylaws, and makes recommendations on issues of a higher order to the Board. Illustration 3 describes the reporting relationships of the Committees and the Network Board.

    Reporting directly to the Executive Committee are a number of sub-committees, which may be chaired by a physician or include a defined physician representation. Committee members are selected on the basis of topical expertise or personal interest, and are expected to possess or gain a fundamental knowledge of Committee subjects. A key aspect of organizational development or operational characteristics defines each subcommittee. Examples of network subcommittees include a contracting committee, medical management or quality committee, network development committee, membership committee, and governance committee.

    Network Alliances

    In the course of the network development process, if not at the outset, it may become apparent that the network can best achieve its' vision and mission by entering into a strategic partnership. This decision may be the result of any number of factors, including:

  • the need to establish a "critical mass" of network resources to impact the market;
  • the need to obtain external capital;
  • the need to gain access to organizational infrastructure (management and information systems);
  • the need to obtain expertise (medical and business);
  • the need to diversify network service capabilities.

    The alliance decision is largely a value decision. The optimal alliance partnership is one that provides the greatest added value to the vision and mission of the network. On a more practical note it must be said that the optimal partnership is one that contributes to the vision and mission of the network, at the least cost. From an ethical and philosophical perspective, provider alliances make the most sense. Providers, whether they be physician partners, a hospital or health system, or ancillary service provider, are intuitively aligned in terms of quality and control of health care delivery. External capital partners do provide much needed cash, but are more likely to introduce a business bias to the network, which can easily interfere (or contradict) the stated clinical purpose of the organization. The network leadership must carefully weigh the up-and-downside of alternate alliance partnerships, both in the short and long term.

    Network Products and Services Development

    A subset of issues immediately arises out of the network definition of purpose, namely how will it achieve that purpose? If the network has been organized mainly for contracting purposes, how will it attract and manage contracts? If the network will offer practice support and network member services through an owned management services organization (MSO), how will these services be delivered, and what physical resources must be built, bought, or leased? If the network is a joint venture, how will the partners apportion service delivery responsibilities and resources? A dedicated network committee (or committees) must focus on these issues, since the network cannot proceed to operationalization until the means of service delivery are in place.

    Network Revenue is a function of contracts for clinical service delivery and practice support services offered to members and perhaps community physicians as well. For all types of contracting, network revenue is dependent upon the ability of the network to effectively market and manage itself, on the basis of quality, cost, and access. For risk contracting networks, the risk management capabilities of the network are a prime determinant of network profitability. At the least, the network will contract for the clinical services of its members, either directly with payers or as a subcapitation of a larger contract held by others. This is the lower end of the contracting pyramid and yields lesser reimbursement for lesser risk. Among more ambitious and more integrated networks, shared risk arrangements and risk products such as case rates and disease management confer greater risk to the network (overhead, utilization) specific to covered services. At the higher end, global risk transfers all utilization and financial risk for covered services to the network. The correct contracting strategy is a function of the network internal management capabilities, the managed care sophistication of participating physicians, the strength of utilization and financial controls throughout the network, and the stage of managed care in the local market.

    Network services provide an additional revenue stream to a receptive, if not captive, customer base. In non economically integrated networks, the network may offer, assumedly on competitive terms, practice support services such as billing, scheduling, eligibility and referral management, purchasing, medical management and information services to both network members and the physician community at-large. In economically integrated networks, these functions are commonly transferred to a management service organization, which levies a fee on revenues to recapture the costs of these services.

    The network planners must decide if network services will be "scratch built" internally, accessed externally from an alliance partner, purchased or leased from a vendor. Capital constraints often play a defining role in this decision, and the up front costs of establishing service capabilities must be reconciled with the expected revenue to be captured from the provision of the service.

    Developing a Network Business Plan

    The culmination of the network planning process is the production of a network Business Plan, which profiles the organization, describes its' operations, and creates a blueprint of progressive growth and profitability during its' early stages of growth and development. The Business Planning process is a complex one, and is one of the key outcomes of the strategic planning, capital planning, legal planning, and network development exercises. Typically, the Business Plan is divided into three main sections: strategy and market opportunity; organizational development and operations; and financial projections. Appendices may include legal documents or biographical material about the organization and its' principle employees and leadership. A typical sequence of Business Plan Topics includes:

    Executive Summary - this section is most often read by those interested in a synopsis of the full document. The Executive Summary describes the strategy and goals, market research results and economic opportunity, organizational entity(s) and operational plan, products and services, management, marketing plan, and financial results.

    Market Opportunity and Marketing Plan - this includes a profile of the local market from the payer, purchaser, and provider perspectives, and validates the economic proposition of the network. The section might include a discussion of industry trends, competitive factors, competing organizations, and market positioning.

    Organization Overview - this section includes a discussion of the legal structure, interrelationships between participating entities, governance and equity, corporate officers and management team, board and committee structures, and infrastructure.

    Operations Plan - in conjunction with the financial projections section, the operational plan defines the growth and diversification of the network in terms of membership, products and services, geographic range, staffing, and infrastructure.

    Financial Projections - based on well-documented assumptions, the multi year financial projections describe the growth, risk factors, and expected profitability of the network. The projections identify the capital required to achieve profitability and potential equity growth during the first three to five years of operations.

    The process of Business Planning is often a complex one, and does not conform to a single standard of execution. A simple Business Plan can be produced within two months. More sophisticated Plans are more realistically produced within six to nine months. A representative sampling of tasks and timelines of Business Plan development might include the following:

    Month 1-2: Appoint internal Business Planning leadership, conduct, market research and strategic planning, define organizational characteristics.

    Months 3-6: define operational characteristics, develop product and service lines, conduct inventory of capabilities and identify infrastructure requirements, develop marketing plan, commence acquisition process of management and information systems.

    Months 7-9: produce remaining Business Plan elements, including financial projections, begin relationship development with payers, providers, and investors, begin marketing in advance of launch, refine and finalize Business Plan.

    Ordinarily, outside consulting assistance is obtained to complete an "investor quality" Business Plan, since potential investors will examine the economic proposition and projected financial results very closely. Prospective network members will also want evidence to justify their confidence in the network, its' contribution to their career success, and it's ability to represent their interests in the age of managed care.

    Success Factors of the Network Development Process

    Successful execution of the network is a highly conditional process, dependent upon market dynamics, the contracting environment, provider cohesion, adequate capitalization and infrastructure. The following is a representative, though by no means all inclusive, list of successful network execution characteristics.

    Have a Clear Network Mission
    Choose the Right Leaders and Managers
    Obtain Adequate Capitalization, Either Internally Or With Partners
    Establish and Maintain Payer Diversity
    Make Quality a Brand Identifier
    Develop and Use Information Tools
    Exercise Network Panel Selection and Deselection
    Offer Risk Management Services
    Be a Learning Organization
    Consider the Network a Work in Progress

    This last point should be carefully noted. The continued success of the network requires continual adaptation to market realities. The network should be poised to grow and seize market opportunities by growing geographically, by expanding the provider panel, by diversifying products and services, by forming revenue supportive alliances, by aggressive marketing, by creating risk management and medical management capabilities, and by constantly examining innovative ways to deliver care. ________________________________________________________
    Richard Krohn is a member and contributor of HealthBond. View his expert page on HealthBond.

    Richard Krohn is President of HealthSense. Krohn is a widely-published managed care expert as well as a dynamic speaker providing in-depth, practical and timely information on topics such as managed care contracting, strategic positioning for provider organizations, building new provider alliances, reengineering practice operations, developing market driven products, and creating equitable physician compensation plans.

    1. Marr, Thomas, and Zismer, Daniel, "When is a Physician Network a Group?, Partner's Integration Advisor, Minneapolis, MN, Volume V Issue 4, April 1997.

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