January 31, 2018

All healthcare providers are experiencing some degree of financial pressure due to contracting reimbursement growth and rising costs for technology, drugs, and human resources. As a result, the healthcare industry has experienced unprecedented merger and acquisition activity. At the national level, large health systems continue to pursue top line revenue growth and economies of scale by acquiring additional inpatient facilities. At the local level, even “independent minded” community hospitals recognize the importance of solidifying their service area through strategic access point placement.

While a few large independents, in lucrative markets, may be able to withstand the challenging industry dynamics over the next decade; the cost of capital and resource utilization requirements will prove daunting.

At the regional level, academic medical centers have been re-establishing the perimeters of their service area for nearly a decade. Many AMCs have even crossed those “sacred” state lines to partner with community hospitals and establish new channels for patients requiring tertiary and quaternary care. Unfortunately, several AMCs are currently victims of their own successful network development due to the lack of a calibrated long-term plan. Their community hospital network is providing more admissions than existing bed capacity can accommodate. Several organizations have been adding inpatient beds without a long-term vision for market solidification and balanced infrastructure requirements.

So, despite your organization’s scale, access points can leverage market opportunities and incrementally contribute the volume necessary for critical clinical mass and core resource utilization. However, for these patient portals to position for service line success, you need a long-term vision and comprehensive network strategy. In these turbulent times, there will be pressure to quickly respond to new competitor placements or mega-community development announcements. While being first in a new market has the advantage of early share capture, being strategically configured as part of a fully integrated system vision will serve you well for decades to come.

Too many organizations seem to be embracing the business mantras of “grow or die” and “bigger is always better.” While size does offer the ability to negotiate with state insurers and maintain a price advantage; expanded health systems (M&A) rarely reap the cost advantages promised. Centralized accounting and patient financial services offer symbolic, but relatively small savings. The real cost advantages remain in the rationalization of medical and clinical services across a system’s facility resources. The most recent poster child for system rationalization is Yale New Haven Health System and their 2016 Hospital of Saint Raphael purchase, that cut tens of millions while maintaining service delivery. Their secret: a well-planned and executed consolidation of cardiac surgery, trauma, and oncology services.1

For the first time in history, most states actually have the data to fuel a smarter plan. Given the competitive market pressures and today’s data-driven world it is now possible and necessary to have great forecasts and analytics to inform that plan. At GS&P we have both an interactive planning framework, Value-Added Consulting, which helps hospitals and health systems make data-driven capital planning.

Core Strategic Vision – Network Calibration is Key 

The first step in strategic network planning is to solidify a five and ten year strategic vision. This is the time to re-evaluate and confirm what businesses you want to be in. Are there any more opportunities in support or ancillary services for outsourcing; or is it time to reconsider bringing it back in-house? In the hub and spoke scenario you have to ask about how the satellites fit into the big picture of your expanding universe. In the case of academic medical centers, providers must decide if there is an optimal size for their core facility asset (“the mothership”).

Strategic Market Segmentation

Once you’ve determined your core vision, service area segmentation defines who lives in your markets, their health status, unique challenges, special needs and management opportunities. We can determine these through precision socioeconomic, education, and community health assessment data. Historical utilization trendlines for emergency visits and inpatient admissions are guide posts to a community’s DNA. Robust market analysis and strategic segmentation gives providers a clear picture of where to target specific services, customized for the unique needs of that community.

Traditionally, a hospital’s primary service areas was defined by the geographic origin of 50-65 percent of hospital admissions. The secondary service area were those additional zip codes taking the hospital to 85% of hospital admissions. Traditional segmentation is too simplistic to drive real value or insight because it doesn’t provide granular detail about competitive position or the needs of a particular community. To achieve real insight, we integrate competitor metrics, socioeconomic data and population health indicators.


Future Market Scenarios and Market Opportunity

The next step is to create detailed projections by MSDRG product line for each of the service area segments. To determine this we rely on historical market dynamics: population by age cohort (e.g., pediatric population 0-17 years of age) and utilization rates per 1,000 population (e.g., fertility rate) provide the market opportunity. For instance, how big was the birth market and how big will it be in the future? We use these projects to frame market opportunity. As part of this, providers must conduct an honest assessment of their ability to succeed and capture market share. Success factors include medical expertise, loyalties, distance and travel times to the facility and more.

Armed with these projections, providers need to conduct an honest evaluation of existing facility capacities and clinical capabilities and throughput. How many more operating rooms, cath labs and ER bays are required to meet both near-term growth projections, as well as, future population needs when health management and system rationalization are realized? What MSDRG’s can be remotely monitored from the mothership, so full cost-effective utilization can be achieved across the system of care?

And therefore, how does our infrastructure have to grow in terms of priorities, phasing, and connectivity?

Three-Dimensional Chess Planning for Success

Thirty years ago running a hospital required basic organization and communication skills. A relatively robust capital budget was annually invested in a full range of growth opportunities. Today’s executive teams are challenged by complex industry dynamics:

  1. New forms of competition in a deregulating environment
  2. Diminished reimbursement and high deductible plans
  3. Rising prescription drug prices in an opioid epidemic
  4. Tech-enhanced consumerism amid growing wealth disparity

Master planning today is three-dimensional chess that requires thinking several moves ahead. The strategic mindset must be five and ten years out, utilizing today’s big data to create realistic probable futures. After data is translated into intelligent information, members of the planning team can visualize future scenarios playing out. Once they can anticipate market evolutions and picture emerging threats, their ability to embrace tactical battle plans with proactive positions and strategic locations becomes easier.

In today’s competitive market, smarter network formation is critical for long-term health system success. Even with HOPD reimbursement headwinds, strategic satellite locations will solidify your service area for decades to come. While the new revenue streams may be diminished, the time clock for customer connectivity is ticking. Leveraging big data, GS&P employs sequenced strategy sessions to confirm the continuum of care, balance the infrastructure, and align the hearts and minds of your team.


1Cheney, C., How Yale-New Haven Health System Cut Spending by Millions, HealthLeaders Media, October 6, 2016: http://www.healthleadersmedia.com/finance/how-yale-new-haven-health-system-cut-spending-millions