Health care organizations that make decisions about service line expansion based exclusively on anticipated market growth may generate additional volume that does not contribute to profitability. Optimizing profitable growth requires a strategic market assessment and a detailed understanding of hospital performance.
Columbus Regional Hospital, a midsized hospital in Columbus, Ind., wanted to gauge its market growth potential to ensure it was offering service lines that maximized revenues while delivering needed services to the community. The hospital's analysis concluded that the expansion of cardiac services was a prime opportunity--a finding that resulted in a $2.5-million annual increase in revenues.
Health care organizations that make decisions about service line expansion based exclusively on anticipated market growth may generate additional volume that does not contribute to profitability. Meanwhile, financial planning that relies too heavily on past experience within the organization or the local market may ignore or miscalculate the impact of anticipated changes in demographics, consumer behavior, reimbursement patterns, competitive position, or emerging medical technologies. Optimizing profitable growth requires a strategic market assessment and a detailed understanding of hospital performance.
It's helpful for hospitals and health systems to forecast market opportunities through a comprehensive service line portfolio analysis that integrates facility volume, physician volume, current and projected market volume, market share, payer mix and profitability information by service line. This creates a thorough assessment of each service line and provides a comprehensive, common foundation across the organization's business development functions--strategic planning, financial planning, marketing and operations. This foundation enables hospital leadership to understand how each service line contributes to the organization's success and recognize the potential volume and financial impact of service line investment.
Successful service line portfolio analysis also requires the integration of historic utilization, market trends and financial information--often from disparate data sources--into a single view. In addition, it requires a common understanding of service line definitions across the organization--often more difficult to achieve than assembly of the necessary data. Involving representatives from strategic planning, financial planning, and clinical operations in the development of service line definitions (e.g., groupings of diagnosis and procedure codes and inpatient versus outpatient settings) at the onset of the process can prevent disagreement later over the value of the assessment.
To illustrate how this works, let's return to Columbus Regional's successful service line portfolio analysis. Wade Seaborne, Columbus Regional's senior analyst in planning and marketing, developed a chart that analyzes the current services provided for each hospital product line, the unmet market potential, and the financial contribution per case. This new evaluation tool helps the executive team and product line managers establish volume and revenue goals as well as their five-year plans.
To create this chart, Seaborne used marketing and planning data from Medstat, the hospital's patient data, and information from its cost accounting system to evaluate each service line based on several metrics: current patient volume, current and projected market volume, and estimated contribution margin. He used these metrics to assign service lines to one of four categories:
1. Improve margins--Service lines assigned to this category promised additional volume, but the hospital needed to increase profit margins through changes in processes, procedures, costs and charges before proceeding to capture this growth.
2. Invest in growth--These service lines offered additional volume and good margins. The hospital would invest in equipment, space, and personnel to capture this growth.
3. Hold status quo--These service lines offered few additional cases, so the hospital focused on maintaining its current market share and margins.
4. Move to another quadrant or divest--The strategy for service lines in this category was to improve margins and volumes or divest the services--unless they directly supported the hospital's mission to serve the community.
Columbus Regional's service line portfolio analysis looked similar to the chart below (illustrative only--not actual data) in which the size of the bubble represents patient volume. In this hypothetical example, a hospital might decide to invest in general surgery to capture profitable market growth and divest urology services to reduce financial losses.
Columbus Regional's analysis identified cardiac surgeries as a service line with high net contribution and growth potential. Based on these findings, the executive team and board of directors expanded cardiac services with remarkable financial impact.
Upon the addition of this service, Columbus Regional performed 190 cardiac surgeries in 2003, realizing an estimated net contribution of $807,857. In 2004, the hospital performed more than 601 cardiac surgeries with an estimated net contribution of $2.5 million.
"The service line analysis is critical in shaping our business strategy," Seaborne says, "and is a driver of the hospital's financial stability."
Content provided by Medstat.