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?