Monday, June 8, 2009

Evolution or De-volution?

Not a big scholarly effort today, just an idea for conversation....

Friday I was involved in a new business pitch. The market situation in this town (metropolitan population 350,000ish) was interesting and one I wanted to share. The prospect hospital is in a three-hospital town. There is a "Big Dog" market leader - 600 beds. The #2 hospital is a vibrant place – 350 beds - that can “provide 90% - 95% of the services” #1 can. The #3 hospital is smaller still – 150 beds - and serves a very distinct local community primarily. While each hospital has its share of dedicated, loyalist physicians, the loyalists skew toward primary care with the specialist community mostly splitting their admissions between the top two hospitals. It is not uncommon for the larger specialty practices to favor the Big Dog, with some specialty practices treating their public assistance patients at #2 and their "good paying" patients at #1.

In some specialties (such as neurosurgery) there is only one practice in town. Recently the Big Dog began an aggressive campaign to buy these exclusive specialties, essentially leaving the other hospitals in the market without access to these capabilities. And for something like neurosurgery, you can imagine the impossibility of both supporting and recruiting a second group to the area. The market's just not big enough to make that practical.

Here's where the strategy discussion begins. The Big Dog's strategy is to become more and more academic. This town is within 2 ½ hours of 3 different urban centers, each with true academic medical center destinations, but Big Dog is embarking on a strategy of greater and greater technological advancement, sub-specialization and crafting a public image as the region's closest thing to the "cathedral of medicine" [my words] mystique that surrounds a larger, urban AMC.

Hospital #2 (our prospect) seems to be a wily competitor. Nice facilities, but not as grand and polished as the Big Dog. Again, providing almost all the same services - including open heart surgery, bone marrow transplant, tomotherapy, DaVinci surgical options for minimally invasive therapies, and the like. Data would indicate #2 is home to higher clinical quality (Core Measures and other data) and lower cost than the #1 (less expensive infrastructure to support).

The CEO at #2 is pursuing a different strategy than the Big Dog. He's not engaging in a medical arms race, not going to try to go claim-for-claim, specialty-for-specialty with #1 (for reasons very practical as well as strategic). In his view, the future of US health care will not necessarily reward bigger, more specialized, more complex, more inpatient focused (Big Dog strategy). He is looking across the continuum of care and embracing the Accountable Care Organization/Medical Home model (although not explicitly) - believing that health reform will incentivize and reward prevention, wellness, health promotion, organization and integration - especially interoperable EMR and data integration - and value/cost efficiency at the institutional/inpatient setting. Philosophically and theoretically it's a powerful counterpoint.

Because #3 is so much smaller as a market competitor, less clinically capable than #1 and #2 and more community based we can respectfully leave it out of this conversation.

Thinking about human behavior and the strategy of competition, what might be the winning approach? People certainly admire large, shiny new buildings, equate technological advancement and specialization with quality and capability. More powerfully, they also tend to derive a significant measure of confidence from these kinds of organizations. And, in health care, patients want to be confident in their care decisions.

But then there's economics and the specter of reform. Demonstrated quality and lower cost can be powerful market tools for competition, though currently there’s little evidence they can move market share. Integration *might* be marketable as more in line with the future of health care while massing inpatient resources could be seen as backward looking, duplicative and part of the health care cost problem.

It's a fascinating situation because it's not theoretical. This is a real market. These are real hospitals treating real patients, wooing real physicians and making real capital allocation decisions based on strategies. The hospitals are going to go down different paths. One's strategy will be more successful than the other's.

I understand and admire each hospital's vision. This seems like sheer force (e.g., Big Dog) vs. betting on a vision of the future much different from today. It’s a bold gamble – perhaps the one #2 is forced to take – that could leave #2 slugging it out for every last high margin admission as consumers struggle to get their mind around some difference based on “system-ness.” That said, a unique worldview, scaled appropriately, can be powerful (see also: Mac vs. PC) and profitable, if not visionary and respected. To make that strategy work, though, product has to match communications; the promoted difference, attitude and advantages have to be real.

I won’t advance any strategic recommendations or conclusions at this time, as there is more info to gather. But, what do you think it will take for each of these hospitals to succeed on their chosen path?


  1. you want us to do your consulting for you? I see a pattern here -- develop interest in your site by posting comments about topical health care articles, attract readers, and then ask them to help you with your consulting assignments. You are truly a smart man.

    I like #2's willingness to consider alternatives to copying #1 tactic for tactic. The more common response is to try to outdo the competitor at the same game. Clearly, copying is hardly a differentiating strategy.

    At issue will be creating value -- for the patient, for the payer and for the physician -- in a way that crates sustainable advantage for #2. Clearly, #1 is taking the strategic position that it can add value by providing academic medical center services (like those of Loyola University Medical Center, by example) close to home. If there is a critical mass of patients in the town to justify offering these tertiary services, this may be a good strategy. The underlying assumption is that the market will reward this behavior with higher payments per unit of service paired with sufficient volume so that #1 can cover the higher costs associated with such a strategy. This isn't as easy a strategy to implement as one might think. It increases your cost structure, it makes an institution dependent on a select few physicians, it attracts few patients than one might think (how many neurosurgeries are there?, and it stimulates competitive responses.

    What is #2 to do? It would seem from what you said that #2 is the high quality, low cost model. It is unclear from your comments whether this position is truly a meaningful differentiator that favors #2 -- Is #2 growing? Is #2 profitable? Is #2 better ranked for consumer satisfaction? Do payers favor #2 because of its quality/cost advantage? In my experience higher quality and lower cost positions do not necessarily translate into higher operating margins. The market has to understand the advantage and often does not. Seems paradoxical, doesn't it?

    That said, it would appear that #2 may have taken the first step to a differentiating strategy -- #2 knows how to improve quality while reducing cost (it's a core competency). In a more transparent marketplace this value proposition should be competitively advantageous. The issue will be how to exploit that unique skill set and add to it in order to create sustainable market advantage based on value creation.

    But how does one do this? Some thoughts are: 1. Make the value advantage transparent through effective communication. 2. Press the value advantage by working with self-insured employers, business coalitions, insurers, and unions, to seek exclusive contracts or revisions to benefit packages. 3. Extend the value advantage through process improvement (that is, strengthen the core competency). 4. Extend the advantage by controlling the assets necessary to do so and integrating them with effective IT (own your home health company to reduce ALOS, provide home infusion services and DME. 5. Control primary care. 6 Be ahead of #1 in organizing for new federal payment schemes that require new models of delivery and payment. 7., 8, 9, 10……..

    I look forward to other thoughts, comments or concerns.

    An interesting problem. Makes for a great case study, doesn't it?

  2. Paul, I certainly appreciate your tongue-in-cheek sarcasm!

    For a more eggheaded discussion of this topic, I encourage one and all to read posts from November 14 and 18, 2008 in the archive. This question is (or should be) at the heart of strategy sessions in hospital/health system senior management suites across the country.


  3. I appreciate Paul's analysis, however it does make me wonder what value really means in the health care world? With lack of a meaningful pricing structure, patients (with insurance) may base value on things like cleanliness, convenience, friendliness (the classic patient satisfaction points). Payers may perceive value as getting the most services for the lowest cost.

    But what about physicians? I would like to know how #2's physicians define value. A strong physician base is necessary for the medical home model to thrive. And as Gawande clearly paints in his most recent New Yorker article, health care stakeholders with financial motive can easily manipulate a regulated payment scheme like Medicare into a lucrative advantage.

    Julie Garrett

  4. Hospitals should be more caring to the patients and also affordable. For treatment of many common disease as toe fungus & nail fungus and more.

  5. Hospitals should get latest techniques with affordable fees .

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  7. The patients are in the miserable conditions, If the hospitals has latest technologies and affordable fees system then more patients would come to the hospitals thus there could get benefits by both the patients and the hospitals also.