Health care organizations put a lot of effort into preparing strategic plans, and then work even harder to implement them. An essential component of a thoughtful plan is a mechanism for monitoring its ongoing progress and relevance. When they are conceived, strategic plans are based on a large body of assumptions about an organization’s available resources and external environment several years in the future. When the resources and environment change, responsive management makes adjustments to the plans.
All the best-managed hospitals in the
RESOURCES
The capital available to hospitals for strategic investment has decreased markedly. Because of tighter credit standards, access to both debt and equity capital is reduced. Hospitals have seen declines in their investment income and a sharp drop in individual charitable contributions. States have cut back on the provider reimbursements from their Medicaid budgets. Slowing demand from financially-stressed patients has led to further revenue stagnation.
ENVIRONMENT
For several years, there has been accelerating interest from unaffiliated physicians and physician groups in closer relationships with hospitals, including purchase of their practices and employment by the hospitals. In an April 2009 American Hospital Association survey, 71% of hospitals reported physicians seeking employment with them and 37% were approached by physicians wishing to sell their practices.
There currently is a greater likelihood of radical health care system reform than at any time in the last 40 years. Yet, the direction of that reform remains highly unpredictable. The present emphasis in reform proposals is on changing the structures and methods for provider reimbursement. One popular idea is the bundling of payments to all providers treating a patient during an episode of illness, a method that rewards greater coordination of care delivery among those providers. If payment bundling catches on, it will start with CMS (Medicare and Medicaid) and spread inevitably to private payers.
Portents of Bundling Payments to Providers
President Obama said in his talk to the American Medical Association on June 15, 2009 that, “We need to bundle payments so you aren’t paid for every single treatment you offer a patient with a chronic condition like diabetes, but instead are paid for how you treat the overall disease. We need to create incentives for physicians to team up …”
The Senate Finance Committee has suggested bundling of hospital and post-acute care payments, but there are indications that the physicians who perform procedures and treat chronic conditions may also be drawn into the payment bundle.
In its annual report to Congress in June 2009, the Medicare Payment Advisory Commission spoke in very positive terms about “accountable care organizations” which it defines as entities comprising “primary care physicians, specialists, and at least one hospital. In other words, a modest form of integrated delivery system.
Further in June 2009, at its Annual National Institute in
During the same month, the head of the Medical Group Management Association told the BNET website that, “The handwriting is on the wall. The push is going to be towards more integration of physicians, hospitals, home health, and other services.”
Also in June 2009, a coalition of CEOs of major health care organizations (including Group Health Cooperative, Merck & Co. Blue Shield of California), entitled Health CEOs for Health Reform, called for the replacement of Medicare’s fee-for-service reimbursement with bundled payments tied to clinical outcomes, breadth of services, and risk sharing.
IMMEDIATE EFFECTS
Hospitals have responded to these changes in several ways. As a survival instinct, many have gone into a crisis-based management mode, concentrating on preserving cash on hand and maintaining positive cash flow. They also have taken steps to manage more tightly their spending on capital projects.
- Capital decisions are made at higher levels of management. For instance, approval of a $10,000 capital purchase that previously could be given by a middle manager now must have the consent of a vice president.
- New capital initiatives and spending are frozen. For the time being, there are no new capital projects.
- There are detailed reassessments of capital projects and other strategies already approved and in progress.
- Capital expenditures are shifted to later in the project schedule.
- If they are not canceled outright, less essential capital purchases are postponed for months or years.
- Rather than replacing existing facilities, they are renovated or retrofitted.
- Organizations are searching for unused capacity within their present structures and facilities.
- All service lines, all facilities, all activities are reexamined for their strategic viability.
- The organization's entire capital planning process is reviewed to see how accurately it assesses capital availability and strategic growth prospects.
At the same time, hospitals are remaining alert for unusual opportunities that may emerge during a time of economic pessimism. If the hospital is fortunate enough to have access to investable capital, it may be able to take advantage of unique strategic prospects. An ideal example would be hospital service lines that are doing well but still have room for growth through means that do not require large capital expenditures – such as hiring new physicians who can attract additional patients in related specialties.
CONCLUSIONS
Several strategic conclusions can be drawn from these developments. Savvy hospital executives are pausing the intensity of their strategic plans, looking for less capital intensive ways of carrying out the same initiatives and pursuing the same goals. The challenge is in deciding which strategic initiatives to cancel, which to cut back, and which to continue at full funding.
Those same executives must also decide how they will divide their limited time and attention between current financial pressures and longer term opportunities. They cannot completely ignore the organization’s strategic interests. While ensuring the organization’s continuing financial health, corporate leaders must be positioning the hospital for growth once the economy begins to revive.
If the direction of reform initiatives described earlier holds true, hospitals are well advised to begin aggressively exploring alignment and integration opportunities with physicians. In doing so, they must be careful to avoid the mistakes made during the wave of physician practice acquisitions in the 1990s. Hospitals then found that their competence in managing hospital operations did not necessarily translate into effective management of physician practices. Furthermore, the productivity of employed physicians working on straight salary declined noticeably. This time around, hospitals must study and understand the key success factors in running a physician practice, and must institute productivity measures and incentives.
There are numerous proposals being made for reform of the health care system, and each of them contains multiple changes in the way that health care would be delivered and financed in the
INSTRUCTORS
1. These strategic challenges currently facing hospitals raise the sorts of issues addressed primarily by Chapter 10, Monitoring, Fine-Tuning, and Changing the Strategy. They drive home the point that strategic plans are not written in stone, to be implemented unvaryingly to their completion. Strategy decisions are based on estimations of future events, and no one can fully predict the future. Therefore, adopted strategies must be infinitely malleable. Organizations must be willing to expand, shrink, cancel, restructure, refocus, or postpone their strategies.
2. An interesting continuing exercise in this area is to ask each student to assume that she is a strategy leader for a particular type of health care organization (e.g., small/medium/large, single/multiple specialty physician group practice, teaching/community hospital, managed care organization, large pharmaceutical company, small biotech venture), to begin to follow the details of the reform proposals as they emerge, to speculate on their implications (in terms of threats and opportunities) for the organization, and to suggest strategic adaptations that the organization might make. This requires the student to become intimately familiar with the changes likely to be occurring in the health care system, and to develop the practical ability and mental flexibility to modify strategic plans on which much effort has been spent.
3. With regard to the possibility of bundled payments, two student assignments are possible. One is to describe the terms and conditions of a new relationship between a hospital and its physicians that would enable them to take maximum advantage of such a reimbursement scheme. Under what circumstances would it make sense for the hospital to acquire the physicians’ practices? Whether the practices are acquired or not, how should the hospital supervise the physicians’ work to enhance their integration with hospital operations, their role in the continuum of care, the quality of care they deliver, their utilization of resources, and the satisfaction of the patients they see? It might be appropriate to discuss briefly the mistakes that hospitals made in the 1990s when they attempted to join with physicians to gain greater bargaining power with health plans.
The other approach is from the viewpoint of the physician practice. You might postulate a practice of three primary care physicians, aged 47, 52, and 59. All three wish to continue practicing medicine but are growing frustrated at their inability to manage the practice profitably. Their costs of operation rise steadily while the reimbursements they earn from health plans are stagnant. They seek alleviation of their practice administration burdens and some degree of income predictability and security. In their immediate area, there are two community hospitals and a teaching hospital. They have heard of physicians in other cities selling their practices to a hospital and then working as employees for them. They wonder if such an option makes sense for them, whether it would be available to them, how they should begin exploring it, and on what terms such an arrangement would be acceptable to them.