Recently, a CEO told me about a conversation he had with the head of a physician group that provides about 20 percent of inpatients to the CEO's hospital. The doctor told the chief executive that the group had bought an interest in an ambulatory surgical center and was moving all of its ASC cases from the hospital's outpatient surgical suite to the new ASC. The hospital stands to lose about 500 cases annually.
This story illustrates a hard truth for today's hospital executives and board members: They have less control than ever over market share.
In the past, hospital market share was driven largely by physician referrals. If a hospital had a dispute with a doctor, the hospital might lose a handful of patients, but it wasn't a staggering blow and, in many cases, the physician and patients would return.
Now, as the structure of the health care market changes, hospitals are vulnerable to physician, payer and employer decisions that, virtually overnight, can remove a large chunk of market share. And there's little that hospitals can do about it.
Physicians' referral patterns are influenced less by hospital loyalty and more by financial incentives. Bundled pricing, shared savings programs and other value-based payment models provide the incentive for physicians to seek out the lowest-cost options for patient referrals. As a result, hospital services are being commoditized, with hospitals vulnerable to losing a large number of referrals to lower-cost facilities.
As payers increasingly favor low-cost providers, hospitals find themselves with diminished negotiating leverage. They may acquiesce to rates or terms that in the past were unacceptable, or they may be excluded from ever-narrowing networks, as occurred throughout the country when states set up public health exchanges. A hospital may even find itself competing with a health plan that it used to contract with if that payer acquires a competing provider to set up a single entity for insurance and care delivery.
Employers also can undercut hospital market share. An employer may decide to contract directly with certain providers for high-volume or high-cost care, leaving other providers on the outside looking in. Perdue, Intel, Lowe's, Wal-Mart and Boeing all are contracting directly either with a single-provider organization or with a hand-picked narrow network for certain types of care.
Even more pervasive is employers' movement toward defined-contribution and high-deductible plans, techniques that encourage consumers to shop for the highest-value hospital.
Hospitals are responding with a battery of new and enhanced approaches to protect or gain market share, from clinical networks to content marketing to targeted community outreach. Yet, all of those efforts, as important as they are, can be undermined by a single decision by a physician group, payer or employer.
Room to Maneuver
Hospital executives and board members are facing a level of instability not seen for the past 30 years. They still have all the costs of running a hospital, but their market share is increasingly volatile.
In this kind of business environment, organizational maneuverability and flexibility are all-important, because you can't be entirely sure in which strategic directions you may have to go to maintain organizational integrity and relevancy.
The strategic road is narrowing. However, hospital executives and boards still have steps they can take to create maneuverability for their organizations:
1 Accept the inevitability of the changing business model. Embrace the coming outpatient-focused health care system. Such a model is inevitable given the high cost of hospital services and is central to making our health care system sustainable and effective. Hospitals must play in this space.
2 Act promptly. In every market, the window of opportunity can close quickly. Prompt action is required for the extensive changes needed for the new business model.
3 Achieve a cost point that will be sustainable in your market. Hospitals and systems should move rapidly to anticipate future purchaser demands and to change their cost structure to meet those demands. For example, hospitals may seek to reduce their costs for ambulatory surgery to reflect those of ASCs, an especially pressing concern given the Health & Human Services' Office of Inspector General's recent recommendation that Medicare reduce hospital ambulatory surgery payments to match ASC rates.
4 Build the organization your future market will demand. Executives and board members need to look beyond today to anticipate purchaser and patient needs three to five years from now and then move aggressively to institute the extensive structural, operational and infrastructure changes required to meet those needs.
With a keen sense of what the future market will demand and a commitment to rapid change, health care executives and board members still have time to position their organizations as relevant participants in this fast-changing environment.
Kenneth Kaufman (firstname.lastname@example.org) is chair, Kaufman, Hall & Associates, Skokie, Ill.