Becker's Hospital Review

72 Executive Briefing: Health System Strategy Sponsored by T he U.S. health system depends on having strong hospital-based health systems. As the major component of the provider sector that maintains a patient- focused, nonprofit mission, the health sys- tems fill a vital role for patients at their most vulnerable time: when they are the sickest. However, the financial system that has sup- ported the hospital-based health systems is rapidly changing, and more agile non-tradi- tional providers are rapidly moving into the hospital business. Consider how rapidly the following is happening: • Insurers are moving to manage care by economically partnering with phy- sicians • Employers are using technology firms or alternative delivery models combined with now 44 percent (up from 27 percent in 2013) considering narrowed networks to lower costs 1 • Retailers are again growing health- care clinics and looking for ways to use their large data sets to predict lifestyle habits that lead to disease 2 3 • Technology and communications vendors are providing virtual substi- tutes for traditional clinics, 4 and orga- nizations such as Apple and IBM are working to help patients manage their health information • Private equity firms are aggregat- ing delivery networks to arbitrage the shift from fee-for-service to risk- based reimbursement The rapid increase of non-traditional com- petitors in the hospital delivery space sug- gests hospital-based health systems have a growing market relevance challenge. In our work with health systems around the coun- try, we have seen first-hand how quickly health systems decline as they lose market relevance. With the rise of non-traditional competitors, health systems with declining market relevance often have an impos- sible time cutting price, improving quality and streamlining operations fast enough to remain solvent. In some cases pundits will profess the decline of weaker hospital- based health systems is a good thing. We, however, believe the health systems pro- vide a vital role for individuals when they are sick and vulnerable that cannot be replaced by for-profit organizations seek- ing to profit from arbitrage opportunities in individual market segments. As such, the struggles weak hospital-based health sys- tems are having today may be a leading in- dicator and a wake-up call for all health sys- tems to evaluate and actively seek ways to improve their market relevance. Strategies to build market relevance: Market relevance: The unique ability to satisfy the customers' needs. We believe there are two major approach- es to expand the market space in which the health system is relevant: 1. Increase scarcity of the service by reducing the availability; or 2. Increase the value of the product or service to the customer by improv- ing cost, quality or service. The approaches are not mutually exclu- sive; however, the preferred approach chosen by the organization says a lot about the organization's mission. 1. Increase scarcity Healthcare organizations grow market relevance by reducing the availability through mergers and acquisitions and ra- tionalization of services within a market. This approach to create relevance is one of seeking leverage over the other market players and the customers. If both orga- nizations in a two-hospital town merge to create one hospital, the new organization has increased market relevance and com- mands typically higher prices for their ser- vices 5 — there is not an alternative for the consumer to pick and choose between. While there are other reasons for merging, particularly reduced cost of capital, sharing overhead, etc., the "reduced availability ap- proach" is helping to drive ever-larger scale in hospital-based health systems today. Moreover, it is one that hospitals and health systems fundamentally understand, as it is similar to managing operational capac- ity within hospitals. To the extent there is competition between hospitals and health systems (including physician groups) in a market or region, the strategy to reduce availability can be highly effective. Today there is an increasing potential to play one hospital or health system off another for better pricing, service or some other value characteristic. Being the must-have net- work combats this commoditization. However, over the past few years there has been a rise of non-traditional substitutes to the health systems' models. Outline on page 74, these new entrants into the pro- vider game are nowhere close to making the health system obsolete, but do pres- ent a challenge to the scarcity strategy. By virtue of the new entrants' motivation (i.e., profit), these non-traditional competitors tend to siphon off the most profitable seg- ments of the population. As a result, while it only represents a small fraction of the total customer base for the health system, that small percentage may contribute to the bot- tom line at seven- to 12-times the average. What Can Traditional Health Systems Do To Build Market Relevance? By Kate Lovrien and Luke C. Peterson, Principals, Health System Advisors

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