Strategic Planning and Marketing
James E. Wawoeroendeng
James E. Wawoeroendeng Associates, Loma Linda, California, USA
Today, as the hospitals environment become more complex,
increasing number of organizations are developing strategic
plans. Changes brought by Indonesia s policy objective of de-
velopment through industrialization, manufacturing and the
push for export-oriented industries are creating new demands
and expectations for the nation s hospitals. These changes, the
dynamics of health care, the need to improve the delivery of
health services, and the need to contain rising health care costs,
arguc for effective responses from hospitals. The formulation of
responses is an outcome associated with strategic planning and
marketing. Adjusting the positions of organizations to fit the
changes in the environment is a function of strategic manage-
ment.
This paper is a review of some of the approaches US hospital
management have used in responding to the rapid changes
brought by intense competition and prospective payment system.
Given there are differences between Indonesia s and United
State s health care systems, to a great extent, however, there are
parallels and similarities between the two. In my opinion it is a
matter of degree. Subsequently, broad efforts and trends in the
US to control cost and improve accessibility have indirect impli-
cations to Indonesia as these are goals both countries share. To
this end, it is hoped that this paper will contribute positively to the
discussions and debates on how we could perfect the nation s
delivery system and meet its goal, that of, providing the best
health care possible, within reason.
STRATEGIC PLANNING DEFINED
Strategic planning is an activity that supports strategic
management, Inherent in the concept is the idea that an organi-
zation can best serve its overall purpose when there is a grand
ˇdesign or a prethought scheme to develop and manage the
Presented at the Vlth
Congress of the Indonesian Hospitals Association
Hospital Expo. Jakarta 21 25 November 1993
organization.
The concept may be described as matching organizational
resources and capabilities with environmental changes, threats
and opportunities. Strategic planning is a formal, ongoing
process of developing, evaluating and implementing goals
selected from key alternatives to guide actions and decision-
making. The process is comprehensive in that it involves con-
sideration of the interrelatedness of problems and issues, and
seeks to understand the full implications or likely consequences
of proposed actions in advance of making decisions. Strategic
planning as a prerequisite to action is imperative.
Plans, the outcome of strategic planning process, are a
blueprint for operating decisions. Key features in a effective plan
are as follows :
ˇ
Plans should strive for higher level of achievement.
ˇ
Plans should be based on a through assessment of the
community needs, organizational capabilities, and the conditions
in the external environment.
ˇ
Plans should be comprehensive in scope and developed with
the broadest participation of key players.
ˇ
Plans should be realistic, action-oriented, and continually
evaluated as important changes occur.
There are at least two dimensions of strategic management:
the process of strategic planning and the content (programs and
structures) of strategic activity. While there is not a single
universal model on the sequence and process of planning, the
essential elements of a generic strategic planning process include
the following:
ˇ
Defining the organization s mission.
ˇ
Assessing strategically important information, such as;
Trends economic, industry, demographic shifts
Resources internal strengths and weaknesses
Cermin Dunia Kedokteran, Edisi Khusus No. 90, 1994
77
Competition competitors profiles, competitive position
Market needs and gaps, depth of service, perceptions,
ˇ
Identifying major or high impact issues
Major opportunities, major threats and major shifts
ˇ
Formulating goals and objectives
ˇ
Selecting a grand strategy.
MARKETING ORIENTATION AND REALIGNMENT
Improving management s ability to assess and be responsive
to the needs of the market constituencies is one of the major
purpose of strategic planning. The development of a market plan
links strategic planning to the external environment. The market
situation is analyzed with an interest on identifying and defining
needs on existing and future programs and or services, and
determining the capability of the hospital resource base to
respond to the dynamic and changing environment.
As the markets of hospitals change, as health service needs,
preferences, and attitudes shift and change, and as competition
and technology intensify, hospitals must evaluate and realign the
mix of services, products and programs offered. Such realign-
ment with market conditions obviously must be done consistent
with the hospital s chosen mission, capabilities and limitations.
Realignment
Realigning a hospital s direction in response to market
changes is the responsibility of hospital directors. The range
of alternative strategies considered and eventually chosen is
influenced by among others, the outcome of a portfolio analysis,
the organization s position and service within the organization
life cycle and marketplace life cycle, the managerial style of the
hospital director, the organization s tendency to adapt toward
changes described in such terms as defensive, prospective and
reactive. Prospector organizations are those that, from time to
time, redefine its directions to capitalize on opportunities to meet
the market needs. In contrast, reactor organizations are those that
analyze changes, tend to be passive and seems to be lacking a
sense of direction.
Most Favorable Position
Generally, hospital directors are empowered to make changes
that reorient the hospital s direction in ways that are thought to
improve its performance and chance of survival or growth. This
perspective derives from two closely held traditions in organiza-
tion theory, the first of which stresses the idea that under norms
of rational behavior of key members of the organization, energy
will be exerted to align the institution vis-a-vis the environment
and market so that it will be in the most favorable position
possible. Thus a purposeful scanning of the environment; a hard-
headed assessment of the forces impinging on the hospital, and
a calculation of risks and benefits for hospital innovation are key
actions that would be expected of hospital directors. The second
tradition is derived from the strategic management perspective
positing that directors not only react to changing market and
environmental forces but also anticipate and help shape these
forces via aggressive strategic change.
Portfolio Analysis
The importance of portfolio analysis to strategy choice and
marketing has to do with the degree to which decision-makers
recognize the high growth, high income programs from the low
growth, low income programs. The Boston Consulting Group is
credited for devising a matrix that assist management to examine
the entire hospital portfolio of services. This type of analysis is an
effort to avoid mistakes such as: promoting or focusing on
unprofitable lines, overlooking promising or potential services,
concentrating on product lines or programs that may offer atrac-
tion but whose relative size is too small to merit attention.
Product Lines Management
Product management, a market-oriented approach, facili-
tates strategic planning by focusing on strategic issues program
by program. As some program cut across departmental boundary
lines and involve multidisciplinary teams, breaking up the hospi-
tal into distinct market-oriented programs allows management to
define each program by such criteria as cost, target, segmentation
of market, its stage in the marketplace life cycle, and the man-
power required. Product management looks at the product line as
a competitive entity. Two disciplines are helpful in developing
product line management, cost accounting and marketing. True
product lines have their focus on the marketplace. Their value lies
in establishing groups that are identifiable and manageable as
separate businesses within the hospital. Some important features
to consider in developing product lines are as follows:
Be identifiable to the market by programlproduct line
Be recognized as a unique or special program
Have an identifiable market
Be an administratively manageable unit
Establish a reputation for excellence
Aim to have complete diagnostic and therapeutic supports in
terms of equipment and personnel.
ˇ
Practice state-of-the art medicine and remain current with
progress.
ˇ
Be involved in research and education.
The objective behind the product line management is to
create something unique and different (differentiation). Two
examples of product line application: HUMANA , a for-profit
healthcare corporation created what it calls regional Centers of
Excellence strategically located among their 90-hospitals net-
work. Practicing state-of-the-art medicine, these referral and
consultation centers provide the highest quality of caze in a given
clinical specialty and serve as distinguishing centerpiece of their
network. Another application in the spectrum of product line
management is an approach used by Republic Health Corpora-
tion of Dallas, Texas by branding their products or services.
Republic has identified 10 "product lines" as follows
(1
) :
ˇ
"Gift of Sight" cataract surgery
ˇ
"Step Lively" podiatric services
ˇ
"You re Becoming" cosmetic surgery
ˇ
"Call Me" alcoholism treatment
ˇ
"Sound Sense" hearing examinations
ˇ
"
Impotency Solutions" urology service
78
Cermin Dunia Kedokteran, Edisi Khusus No. 90, 1994
ˇ
"View" women s health problems
ˇ
"Miracle Moments" obstetrics
ˇ
"ReNew" cocaine addiction treatment
ˇ
"Reach" adolescent psychiatric treatment
The examples serve to illustrate the need of differentiating
programs and services so to be distinguished from competitors .
Hospitals compete in two distinguishable levels of the market:
price-based competition, or non-price competition. Naturally,
there are only three major themes from which hospitals develop
strategic responses:
ˇ
Differentiating hospital products from the competitors.
ˇ
Identifying and focusing on segments of the market, by age,
diagnosis, geographic location, income level, etc.
ˇ
Pursuing aggressive cost management and compete on cost.
STRATEGIES
There are a number of patterns to describe the long-run
strategic thrusts of hospitals. The following summary are generic
grand strategies applicable for health care organizations con-
sidered common: expansion of the product line or area, service
specialization or niche, vertical or horicontal integration, joint
venture, diversification, and retrenchment.
Expansion of the Product Line
ˇ
A strategy to increase or maintain market share.
ˇ
Developing new product lines, Pediatric Cardiovascular,
Oncology, etc.
ˇ
Selling of underused capacity, (dietary, housekeeping,
laundry, EDS).
ˇ
Establishing freestanding ambulatory service, diagnostic
departement, dialysis.
Service Specialization
ˇ
A strategy to focus and serve a particular segment of the
market; differentiation.
ˇ
Service to age group,. diagnosis group, socioeconomic
class, or geographic area.
ˇ
Specialization in Pediatric, Rehabilitation, Prenatal Care,
Oncology, Burn Unit, Sport Medicine, Geriatric Care, Mammo-
graphy.
Integration, Service Vertical Integration Horizontal
ˇ
Establishing organizational arrangements that provide a
range of services.
ˇ
A strategy to retain patients within the system or chain by
providing more services. Pre-admission services and post-
discharge care. Post discharge care: skilled-nursing care, long-
term care, home care.
ˇ
Non-clinical integration include entering businesses that
supply/manufacture hospital products or services (pharmaceuti-
cals, prosthesis, linen, IV).
ˇ
A strategy to control the use of supplies and resources used
by hospitals.
ˇ
Voluntary merger of two entities providing same or related
service, products.
ˇ
Geographically dispersed, or geographically proximate.
ˇ
A strategy to achieve economies of scale, avoid duplication,
increase availability of skills and talents in management and
clinical applications, increased access to capital, and lower cost
of capital.
ˇ
A strategy to achieve stability as risks are reduced.
Joint Venture
ˇ
Similar to horizontal integration, except autonomy is
retained.
ˇ
A strategy to shared opportunities and risks; mutual benefits
and risks.
ˇ
May be used to integrate forward, backward, diversity or
expand service.
ˇ
Hospital and Physician groups joint ventures, common and
relevant (PHO, physician-hospital-organization).
Diversification
ˇ
Entering into related or unrelated businesses: real estate,
shopping centers, restaurants, medical plaza or medical office
buildings.
ˇ
A strategy to spread risks or maximize earnings through
investment opportunities.
ˇ
A strategy to protect against the risks of uncertainties.
ˇ
A strategy to improve cash flow.
Retrenchment
ˇ
Downsizing, divestment, eliminating unprofitable services
or reducing in order to survive.
ˇ
A strategy to prevent insolvency by reprioritizing funds
allocation.
STRUCTURE AND PROGRAMS
There are two main strategic variables at the disposal of
hospital management that may be altered to meet changes in the
environment: organizational structure or organizational pro-
grams. These are the variables and the focus of strategic planning
when reviewing and analyzing the mazket. The structures and
programs reviewed in this paper have to be viewed in the context
of the prevailing conditions in the United States, and they are:
ˇ
growing trend of prospective payment system
ˇ
decreasing reimbursement from third party payors
ˇ
continued high health care costs
ˇ
accelerated competition
ˇ
tighter profit margins
ˇ
decreasing inpatient census
ˇ
large excess capacity, overbedded
ˇ
intense consumer pressures and expectations for change
ˇ
growing pressures from business community
ˇ
labor shortage in professional and technical categories
ˇ
new delivery systems, HMOs, PPOs, IPAs
ˇ
increasing ambulatory services
ˇ
declining average length of stay (ALOS)
ˇ
increase in investor-owned corporations
ˇ
growing participation in alliances, chains
Cermin Dunia Kedokteran, Edisi Khusus No. 90, 1994
79
ˇ
increased regulations
Consequently, What are the measures hospitals undertake
in order to survive in this increasingly hostile climate; How do
they position their organizations in a way that ensure continued
growth and survival, and How do they adapt to the changes? How
should hospitals orient their strategies? The following I submit
are some of the answers in terms of organizational structures and
programs.
1. Medical Staff Relations
Medical Staff are the single most critical factor in a fiercely
competitive climate. They serve as gatekeepers for a hospital s
flow of patients. Without incorporating physicians into the stra-
tegic plans of hospitals, it is unlikely that hospitals will develop
a foundation for responding adequately to competition. From the
hospital s perspective it is highly important to attract and retain
the best qualified medical staff. Physicians are the key ingredient
in maintaining a desired census. Some measures used to enlist
physicians loyalty and cooperation:
ˇ
adequate and or reasonable compensation
ˇ
assistance in new equipment financing
ˇ
participation in the development of strategic planning
ˇ
participation in joint ventures with the hospital
ˇ
hospital-physician alliance, partnership, joint owners of
hospitals business units
ˇ
professional development allowances: continuing educa-
tion, journals, national/overseas programs observation trips
ˇ
hospital allowances for: club memberships, home loans food
or meals, housing and transportation.
ˇ
funds for research and development.
The two main strategies employed in dealing with the
medical staff as shown in the preceding list are, the extension of
financial and non-financial benefits, and incorporating physi-
cians as partners and/or owners of hospital or hospital s business
units. Key advantages of the partnerships are as follows:
ˇ
shared risks and shared profits
ˇ
higher motivation to control costs
ˇ
improved capability of the partnership to offer diverse
services
Much is at stake if a hospital is unable to obtain and retain
competent medical staff, or enlist their cooperation in the hos-
pital s expansion program or cost reduction program, all of which
involve physicians. Acute care hospital is physician-intensive,
and without acute care, the hospital is just another clinic. Hospital
executives must gain the support and cooperation of physicians
in order to continue a viable hospital operation.
2. Hospital-Physicians Joint Ventures
By engaging in joint ventures with those who control access
to patients, principally physicians, hospitals can lock in their
existing patient base (market share) and possibly increase it by
(1) giving the physicians a financial stake in the operation of
certain lines of business, such as ambulatory surgery centers, and
(2) tying into potential new sources of patients. Hospitals hope
that engaging in join ventures will enable them to be more
effective competitors in the marketplace by enabling them to
offer a broader range of services and in more markets. To do so
hospitals are better off to collaborate with physicians rather than
be in opposition or competition with them.
The area where joint ventures have been formed include the
establishment and operation of urgent care centers, ambulatory
surgery centers, medical office buildings, skilled nursing facili-
ties, independent laboratories, home health care agencies, the
acquisition and operation of major medical equipment such as
CT scanner, MRI, and lithothripters. The joint ventures may be
any of the following three forms:
ˇ
Contractual Agreement.
A form of alliance with the physicians, ensuring their partici-
pation and mutual sharing of benefits and risks, for specified
purpose(s) and or a specified period.
ˇ
Corporation.
Incorporation limit the liability of both parties to the extent
of their investment. Physicians gain liability protection. Control
rest with a new entity and separate board of directors represented
by both parties.
ˇ
Limited Partnership.
Hospital often is the general partner thus exposed to risks,
physicians as limited partners are precluded from sharing in the
management.
The real value of joint ventures is when both hospitals and
physicians recognize that there are overlapping values and
benefits to be gained if both parties join their resources together
and accept that they are better off joined than separate.
3. Diversification
To compete effectively hospitals have to implement
measures to control operations and attain high operational
efficiency. The other option is to maximize revenue by engaging
in or entering promising markets. In rural hospitals where funds
are scarce and there is no excess of hospital beds, diversification
may be an inappropriate strategy. Some reasons given for diver-
sification:
ˇ
The hospital diversify its program in order to capture a larger
share of all patients served in a community, by offering new
services to unserved market segment.
ˇ
The hospital strive to become the sole source of a medical
technology, such as diagnostic imaging equipment or MRI.
ˇ
The hospital seek feeders or satellite facilities to function as
sources of referrals.
ˇ
The hospital seek to protect its exposure by entering into
profitable ventures, related or unrelated to its core business.
A survey conducted by "HOSPITALS" as published in the
January 5, 1989 issue, rank most successful hospitals ventures as
follows:
1. Freestanding outpatient diagnosis
2. Inpatient rehabilitation
3. Freestanding outpatient surgery
4. Industrial medicine
5. Women s medicine
6. Psychiatric outpatient services
7. Home health
8. Substance abuse
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Cermin Dunia Kedokteran, Edisi Khusus No. 90, 1994
9. Cardiac rehabilitation
10. Nursing facility
11. Preferred Provider Organization
12. Intermediate care
13. Obstetrics
14. Pediatrics
15. HMO
16. Trauma center
17. Satellite urgent care
18. Retirement housing
19. Wellness/health promotion
Many hospitals experienced failures with diversification
projects because they are undercapitalized, had conducted poor
planning, lack the entrepreneurial managerial skills, and lacking
the required support from physicians. The following criteria are
important when a hospital considers diversification:
ˇ Rate of Return Project generates positive cash flow
ˇ Mission
Venture is compatible with mission
ˇ Community
Projects improves service to the community
ˇ Market share
Hospital gain market share
ˇ Patients
Hospital gain new referrals
ˇ Autonomy/
Hospital are in control
control
ˇ Patient care
Interest in quality is an important factor
ˇ Physicians
Possess the education and skills
ˇ Support
Approved by key participants
ˇ Interests
No conflict ofinterests withMDs/board
Caveats for hospitals already diversifying into programs or
services in their community: First, to recognize as soon as
possible when demand for a program is declining. Hospitals
should not wait too long to discontinue the line or sell it, second,
be financially ready to handle any temporary downturns for
extended period of time.
An important source for diversification is the creative use
and development of hospital s hidden and under-utilized assets.
Converting these into new profit centers, is the challenge for
management. Examples of those hidden assets could be as
diverse as:
ˇ
Excess capacity or off-hours of plant and equipment
ˇ
In-house support services
ˇ
Proprietary software (developed in-house)
ˇ
Real estate, medical plaza
ˇ
Vendor relationships, endorsement for royalty
ˇ
Reputation and image, acceptance
ˇ
Technical expertise and technology
A number of viable structural methods may be employed to
facilitate diversification. Diversification does not have to include
formal alliance with another health care organizations through
merger, consolidation or combination. Diversification implies
that the hospital is rearranging its programs and services. Pro-
spectively, diversification s real value is revenue maximization,
defensively, it is a means of protecting the hospital from the risks
of uncertainties.
4. Outpatient Care and Referral Networks
Outpatient revenues currently account for about 25% of
community hospital s revenue. There are predictions that by year
2000 the percentage will increase to 50%. This major change in
health care delivery presents US hospitals with one of the most
difficult strategic planning issues today. The number of hospitals
decreased 5 percent from 1980 to 1990, while the number of
freestanding ambulatory centers increased 57 percent from 19,516
to 45,510(
2)
.
To shift to ambulatory care, in several cases, is to place
the hospital in direct competition with physicians. However, in
order to remain viable in the emerging delivery model, hospitals
must capture a significant share of the growing outpatient busi-
ness. This effort require physicians involvement, capital invest-
ment in facilities, equipment and information systems to support
growing ambulatory care demands.
In the evolving opportunities for outpatient care and referral,
at least four types of strategies can be adopted :
ˇ
Inpatient-oriented, specialty ambulatory care services
ˇ
Comprehensive primary ambulatory care services
ˇ
Ancillary ambulatory care services that are part of overall
diversification
ˇ
Joint ventures with physician group that may expand the
current level of patient referrals.
Surgicenters
The growth of ambulatory surgery has been due to advances
in medical science such as the use of anesthesia in a precise
manner. New technologies that offer greater precision in meas-
uring blood gases and that permit a patient to be anesthetized just
sufficiently for the procedure are expanding the number of
operations that can be done on an outpatient basis. Third party
payers are reluctant to pay inpatient stays associated with surgi-
cal procedures that can be performed on an outpatient basis.
Selected categories of surgicenter procedures :
OB/Gyn - - gynecological surgery, laparoscopy/tubal ligation
Orthopedics - - orthopedic surgery, arthroscopy
ENT - - myringotomy, tonsillectomy or adenoidectomy
Dermatology
Plastic surgery
Urgent Care Centers - - Freestanding Emergency Facilities
In many cases, hospitals emergency room have been used by
patients for nonemergency cases.To meet these needs,hospitals
have opened up Urgent Care Centers, a cross between a phy-
sician s office and an emergency room, complete with laboratory
and radiology facilities. Minors sugeries can be performed in
some centers. Urgent care centers owned and operated by phy-
sicians are a threat to hospitals as these tend to draw patient away
from hospitals.
Freestanding Dialysis Centers
At one time kidney dialysis was an extremely expensive
procedure and could be performed only in a hospital setting. With
significant technological advances, most dialyses can now be
Cermin Duniu Kedokteran , Edisi Khusus No. 90, 1994
8 1
performed on an outpatient basies, further eroding traditional
source of inpatient revenue. As more physician Group Practices
provide comprehensive outpatient services by doing more of
what traditionally are inpatient functions, hospitals responses
could be either to let the physicians be joined owners with the
hospitals or, concentrate and focus on hospital core functions.
Wellness Programs
This strategy is used to approach the health conscious
members of the population. These programs may include hyper-
tension screening, medical evaluation, alcohol and drug reha-
bilitation, injury prevention, etc. Studies have shown that the real
benefits of wellness programs appears to be the positive com-
murity image that it fosters.
5. Multihospital Systems
Some hospitals have turned to multi-institutional alliances
in an effort to stem the adverse influence of prospective payment
and competition. Indications are that these multhihospital sys-
tems will continue to expand as regulations and competition
increases. System affiliation was designed to provide the follow-
ing benefits :
ˇ
increased access to capital markets
ˇ
reduction in duplication of services, increase in efficiency
ˇ
economies of scale
ˇ
access to management expertise
ˇ
increased personnel benefits
ˇ
improved patient access through geographical integration of
various levels of care
ˇ
improvement in quality through increased volume of ser-
vices for specialized personnel
ˇ
increased volume due to increased number of services
Formerly it was possible to classify hospital cooperative
arrangements in two classes. First, alliances that bring inde-
pendent organizations together to share and cooperatie in solving
problems, second, independent organizations together combines
under a common organizational framework. The concept has
now a spectrum of formats that begins with one that is highly
informal to highly formal :
Consortia on planning or education, professional associa-
tions, shared or cooperative services, formal contractual asso-
ciations, contract management, leasing, corporate ownership
with separate management, complete ownership, complete
ownership with large-scale system.
Shared Services
Sharing involves two or more organizations joining together
to produce and/or use the same sercive for the member institu-
tions. This ranges from the joint use of computers, laundry, and
laboratories to purchasing and specialized clinical facilities.
Sharing of MRI and CT scanners are good examples of this
model.
Consortia
Consortia hospitals, often including medical schools, are
memberhsip organizations with full time staff devoted to joint
planning and programming. Agreements usually include criteria
for the size of investment which can be made by individual
member institutions without efforts to plan the program jointly
and/or share each major clinical service. This will help to limit
major investment to fewer institutions and to improve utilization.
patterns and thus may help to ensure efficient and quality
services. Hospitals join consortia because they find it difficult
to survive as independent units. The more important benefits
include reduced environmental uncertainty and complexity
and improved access to resources, which is achieved through
linkages with both the consortium management and other affili-
ated hospitals.
Mergers
Mergers by acquisition are when two entities merged to
become one. Two organizations are integrated into one single
legal body with one sole corporate board. Merger is a strategy for
capturing a larger market share by integrating vertically or
horizontally, or as a menas of providing more comprehensive
services.
Contract Management
For agreed fees contract management companies provide
specialized services ranging from hospital management, house-
keeping services, laundry, emergency room staffing, pharmacy,
laboratory, food services to contracting hospitals. More often
than not, contract management companies can deliver their ser-
vices more efficiently and cheaper. Hospitals benefit from re-
duced salary, retirement and benefit expenses. Mariott Ma-
nagement Services, one of the largest contract management
company, is a large hotel restaurantcorporation which diversi
into the hospital industry business. Being large and highly
capitalized, their expertise in food distributi
o
n and production
result in high operating and cost efficiency. Con tracts are ty
pically based on a fee or a fee bonuses. Increasingly, howcvcr
fees will be based on capitated rates based on patient days or the
number of enrolees. A survey published by Modern Health care
August 30, 1993 issue growing trend for this mode of service as
evidenced by the reveals increased number of contracts :
1992
1991
Food Service
1,936
1,833
Hospital-based Emergency
1,547
1,476
Housekeeping
1,462
1,639
Clinical, diagnostic equipment
812
726
Laundry
662
593
Pharmacy
566
545
Cardiology Services
421
404
Rehabilitation/physical therapy
352
302
Psychiatric
223
214
Respiratory Therapy
155
168
Home Care
147
152
Materials Management
82
75
6.
Investor-owned Multihospital Systems
Investor-owned systems are growing in terms of hospitals
and hospital beds at the rate of 100% a year. This growth has been
82
Cermin Dunia Kedokteran, Edisi Khusus No. 90, 1994
achieved largely through the acquisition of independentinvestor-
owned hospitals. Investor-owned systems are constructing and
acquiring freestanding nursing homes and psychiatric hospitals
at a rate more than three times that for community hospitals. The
financial performance of investor-owned system has been im-
pressive. A report by the Insitution of Medicine, Washington
states that a dollar invested in an investor-owned system has
returned nearly 40 percent more in earnings than the average
for other industries in recent years. The major advantage of
systems is their ability to finance capital purchases. Empirical
evidences indicates strong preference for system by capital
markets. Diversification into nonhospital markets provides addi-
tional financial stability to systems; separate lines of business
offer the potential of offsetting cash flow demands during the
downturn of the hospital s business cyle.
Investor-owned hospitals shows they provide care cheaper
or equal to non-profit institutions. On top of this, having stabi-
lized or reduced costs, investor-owned systems pay taxes. The
trend shows growing trend of investor-owned hospitals 10.3
percent per year. Major benefits offered by this model are :.
economic benefits, planning and organizational benefits, per-
sonnel management.
Economic Benefits
1) Access to Capital
The financial institutions, banks and nonbanks provide more
favorable borrowing conditions to systems than to independent
hospitals. Multi-institutions (both tax-exempt orinvestor-owned)
are perceived as more stable therefore less risky because of their
larger revenue, asset and equity bases. Systems are better able to
spread risks among its units or member hospitals. Furthermore,
investor-owned systems may raise capital through the issuance
of stock which means the cost of funds are low. In the US capital
market, $1 in equity may raise $15 or $20. As a result sharehold-
ers equity in the largest four investor-owned multihospital sys-
tems quadrupled during 1977 to 1981, from an aggregate of $461
million to $1,832 billion.
2) lncreased Efficiency and Economics of Scale
Systems realize savings through mass purchasing. Systems
uses capital facilities and equipment more efficiently through
sharing and specialization. System uses highly skilled and highly
experience personnel than independent hospitals. They pay
better compensation therefore attract skilled professionals. Sys-
tem hospitals use fewer staff per bed than other systems.
3) System Diversification
Profit from health and nonhealth lines of business provides
a source of internal fund for financing new capitaLacquisitions.
Diversification into non-hospital markets provides additional
financial stability.
In summary, the obvious economic benefits of multi insti-
tutional arrangements may be the following :
ˇ
Abilityto afford specialized management talent
ˇ
Standardization of supplies and equipment
ˇ
Volume purchasing
ˇ
Sufficient breadth and diversity to attract capital
ˇ
Lower levels of average case cost
ˇ
Lower ALOS-tighter control of medical practice patterns
ˇ
Higher rates but not high labor costs
ˇ
Higher outputs
7. Government-owned Hospitals
Public hospitals in the US, burdened with the care of indi-
gent, suffered from poor management and inadequate funds.
Constrained by the peculiar nature
of public
hospitals, they are
limited in their options in such areas as diversification, joint
ventures and so forth. These prohibitions consequently limit
the flexibility of public hospitals to participate financially
with physicians or others in lucrative alternate delivery methods
such as ambulatory surgical centers, urgent care centers, and
diagnostic imaging centers. Public hospitals also face particu-
lary acute problems in raising sufficient capital to make the re-
novations and plant improvements necessary to furnish an ac-
ceptable level of care, to meet accreditat vn standards, and to
attract the increasingly important private pay patients. They lack
the flexibility enjoyed by private facilities in raising funds. They
are frequently forced to compete for funds with other equally
important government social programs.
Recognizing the need for greater flexibility on the part of
public hospitals, many statelegislatures have amended pertinent
statutes to provide latitude for the disposition, lease, contract
managed of public hospitals. Acquisiton of public hospitals
through lease or contract management can be attractive, both for
the government entity and for the acquiring entity. Major advan-
tages for the government entity :
ˇ
Management contracts or lease by multi-hospital bring the
benefits of resource-strong organizations such as highly skilled
professionals, economies of scale, and known organization
development experience.
ˇ
Contractual agreement/lease reduce the politics present in
the management of government-controlled instituions.
ˇ
Contracts/lease arrangements establish ahead of time the
annual costs - - facilitating precise government budgeting.
Important consideration when considering the lease, con-
tract or sale of public hospitals. At a minumum, the terms of
transaction must include the following itens :
ˇ
Protection of the constituents, of the solemn public interests,
(Continues obligation to provide indigent care; details
of
the
level of staffing, breadth of service, hours of operation, rates, etc)
ˇ
Assumption of labor, liability and pension and employee
benefits.
ˇ
Compliance with disclosure laws.
ˇ
Clear accountability line to the governing authority.
8.
Rural Hospitals
Rural hospitals in the US are in crisis. Their problems
include inadequate funding, shortages of health care professio-
nals, facility deterioration, and high administrative turnover.
From 1980 to 1990, 330 rural hospitals were closed due to
financial stress. Major theme in their strategic response has to do
with networking or affiliation with larger organizations. A study
Cermin Dunia Kedokteran , Edisi Khusus No. 90, 1994
83
done in 1988 showed the following strategic activities engaged
by rural hospitals :
Multi-hospital system affiliation
34%
Consortium affiliation
30%
PPO affiliation
27%
HMO affiliation
22%
Corporate restructuring
20%
Ambulatory Service
17%
Downsizing
15%
PLANNING AHEAD
Expecting the worst, hospitals in the US are stepping up
planning. Two main forces are rearranging hospital system in the
United States : President Bill Clinton s proposed managed com-
petiton and prospective payment system. A survey published by
hospitals
health networks of October 5, 1993 indicate the
following hospital planning activities :
Managed care planning
76%
Expense reduction
74%
Physician/hospital; organization
69%
Affiliation with another hospital
62%
Medical Staff development
59%
Job- reengineeri ng
53%
Strategic planning
55%
Merger activity
15%
These planning activities indicate that in order to redefine
the US imperfect health care system two trends will emerge :
ˇ
Increased used of competition to enhance market effi-
ciency. The use managed care models (PPOs, HMOs, IPAs)
which compete on price, to screen out excesses and inefficient
hospitals.
ˇ
Facilitate integration
-- Integrating providers through, affiliation, and networking to
share and widen the risks and costs among many, and achieve
economies of scale resulting in lower costs.
-- Integrating hospitals and physicians and provide incentive
to contain hospital costs jointly through prospective payment
system or capitation.
The race is on now in the United States for large-scale
mergers, integration among medical groups and integration be-
tween institutions. These realignment are in search of lower
costs and higher operating efficiency for the same high level of
care. The changes are forcing organizations to be innovative and
flexible in their organizational structures and program offerings.
CONCLUSION
Today, health care organizations are intently concentrating
on strategy formulation as the focal point of strategic planning.
There is greater interest in the output of strategic planning -
strategies - as opposed to the process. Selecting a strategy with a
view of defining a destiny - is the challenge hospital management
must face with. In the final analysis, doing the right thing at the
right moment at the right place is what strategic management is
all about.
As Indonesia moves into the rank of the newly industriali-
zed countries (NICs), commensureable responses from hospitals
shall be evaluated for their appropriateness, effectiveness and
cost efficiency. Strategic planning is a tool among many stra-
tegic planning I submit, may be the most effective tool available
for the hospital management to span the entire horizon, and select
the most fit organisational structure and program and redeftne its
destiny.
REFERENCES
1. Folger JC, Preston Coe, E. Product Management for Hospitals. AHA.
2. AHA. Frustee, April 1993.
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