Issue link: https://beckershealthcare.uberflip.com/i/674245
37 B. e national size of a system is less important than regional domi- nance. e number of hospitals a system has nationally is less important than the number of markets a system has dominance in. e financial performance of the large, for-profit and nonprofit hospital operators is driven by the regions in which they win. e regions in which they are dominant tend to deliver the greatest share of their profits. In contrast, the more systems own lots of hospitals without market domi- nance in specific or regional markets, the less profitable they are as a whole. C. A second-size system must work really hard and smart to survive and thrive. California is home to several outstanding and competing hospitals systems, the most expansive being Oakland, Calif.-based Kai- ser Permanente. is multi-hospital integrated delivery network also operates a managed care plan covering millions of members throughout California, Colorado, Georgia, Hawaii, Oregon, Washington, Virginia, Maryland and Washington, D.C. Sutter Health, based in Sacramento, op- erates 24 hospitals. It is outstanding but second in market dominance to Kaiser Permanente, its biggest competition. It also faces Stanford (Calif.) Hospitals & Clinics and UCSF Health, which are best known for special- ized, complex care. To make it more competitive, in 2013, Sutter launched its own man- aged care plan, Sutter Health Plus. Sutter's health plan and reach is much smaller than Kaiser's. Sutter Health's latest financial report shows the system has its work cut out for it. Sutter reported a net income of $81 million in fiscal year 2015, down nearly 80 percent from $402 million in 2014. Jeff Sprague, Sutter's CFO, told the San Francisco Business Times that salary and benefit increases and one- time costs of implementing an EMR system in some of its facilities contributed to the rise in expenses last year. The health system also put $9 billion into new buildings and technology over the last de- cade, including $898 million last year. 2. Know Your Business; Double Down on Cash Cows; Test New Areas A. Know your business. A core concept of business management is the discipline to constantly understand and study where one's current busi- ness is coming from. What are you great in and who makes up your cus- tomer base? A first effort is to constantly reinforce that customer base and those revenues. How do you continue to get those revenues? Are those revenues at risk? Are you appropriately allocating resources? One of the fascinating refrains of many health systems is the spraying of money and resources in several different directions. In a health system, as in any business, it is critical to understand where revenues come from, whether they are high- or low-margin revenues and whether a more tar- geted effort can be made toward the higher margin and higher revenue businesses. Further, can the system afford to abandon certain low-mar- gin businesses? As there is so much change, it is more important than ever that hos- pitals go back to the old Boston Consulting Group paradigm of busi- ness management. First, leadership has to understand their cash cows. Before reallocating to other areas, health systems must maintain and harvest cash in those businesses. Two successful community hospitals excel in orthopedics (a Southern and Midwestern hospital) and another in neurosurgery (a Midwestern hospital). e leadership team knows the exact revenues and margins these specialties and practices mean to the hospitals. Each consistently doubles down to protect those revenues. Second, leadership must devote a certain percentage of resources, may- be 25 percent, to new initiatives and areas that can become tomorrow's stars. See also the next subsection "Test New Areas." is may be ori- entating part of the system to a more focused shared savings payment model, looking at different types of fee-for-service initiatives or creating and maintaining greatness in product lines. Here, while exploring new areas, there needs to be a constant doubling back to three core questions: What is the system going to be great in, where does it make its money and who is its customer? Many of the systems that continue to thrive and dominate are leaders in their markets. ey can point to the specialties they are the best in, and they continue to double down on areas that work. Even when the world around them is changing and moving, they are very cognizant of where their revenues come from and the need to continually invest in and harvest these areas. At the same time, these systems keep track of the world around them. Cleveland Clinic is one of the most well-respected health systems in the world. It has built an international brand based on excellence in clinical quality. e clinic consistently ranks among the top hospitals and health systems in the nation by U.S. News & World Report. It is among the best for numerous specialties and was ranked No. 1 by U.S. News & World Report for cardiology and heart surgery for the 21st consecutive year. To capitalize on this, the health system created the Cleveland Clinic Affili- ate Network, through which it has drastically expanded its reach. It has entered into many agreements with other hospitals and health systems around the nation through the affiliate network, with more than 24 sys- tems signing on as either cardiovascular, orthopedic and spine network affiliates — the specialties represented in the network to date. Since it be- gan in 1994, the Cleveland Clinic Heart & Vascular has grown to include affiliates in Ohio, Kentucky, Missouri, New Jersey, New York, North Car- olina, Pennsylvania and Texas. At the same time that Cleveland Clinic does this, it also doubles down on its own market leadership. Baltimore, Md.-based Johns Hopkins is another academic medical cen- ter that uses its renowned excellence to channel new sources of revenue. Johns Hopkins University, the health system's affiliated university and a research powerhouse, received the most funding from the National Insti- tutes of Health with more than $603 million in 2015. e institution cap- italizes on its vast intellectual property through its technology ventures. In fiscal year 2015, Johns Hopkins Technology Ventures, which serves researchers and investors as a licensing, patent and technology com- mercialization center, formed 16 startup companies based on licensed university intellectual property. e venture made $18 million in total revenue by the end of the year. John Hopkins also doubles down on its core business and makes a great deal of its profits from overseas. B. Test new areas. e best businesses try to constantly improve current operations and also pursue new initiatives. e best businesses are not static. ey are constantly working at understanding and improving the core business, and then they devote time and attention to the allocation of talent to new initiatives. Hospitals have to constantly look at how they maintain a cost and margin structure so they can attack different areas while refocusing on their core areas and patients. Hence, it is an interesting concept used by business consultant Jim Collins to put resources into different areas, but fire bul- lets as opposed to huge amounts of money. His school of thought is to test new areas but not break the bank. One of the tensions we see is between geographic expansion versus not too much expansion. Can you do a geographic expansion without invest- ing a ton of resources? In contrast, will a geographic expansion be use- ful without a huge position in the new market? For example, a constant theme — and a disaster in many situations — is where a health system significantly increases its cost structure at a time of change. A health system may invest a certain amount for outreach clinics, for