Rather than be everything to everyone, hospitals can distinguish themselves by focusing on one business model.
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| Stephen Wunker | Andrew Waldeck |
While the finances of a hospital are relatively easy to describe, it's harder to outline the underlying model bringing cohesion to the enterprise. We have found that hospital executives often ponder the basic business of a hospital versus its ancillary offerings. As hospitals face extreme pressure due to declining reimbursements, tough competition, defecting physicians, tight credit markets and other factors, it is more imperative than ever to nail down the essence of a hospital's business and to determine what is essential to protect and grow.
Few organizations define their business as delivering every type of service to everybody all the time, yet most general hospitals are set up along precisely these lines. The reason reflects the history of the hospital model. In the past, transportation was expensive and difficult, while physicians were relatively cheap. It made sense to centralize the provision of care in settings that could cater to the very diverse needs of a community.
Moreover, there were few technologies that could precisely characterize a disease to the extent that its treatment could be codified into a simple protocol. Physicians needed to adjust their care according to myriad medical circumstances, and the hospital had to provide a wide range of services to cope with the diversity of treatment plans.
How Hospitals Operate Today
Today, we face a different situation: It's easy to transport patients from a setting providing simple, standardized care to a tertiary institution. Physicians are expensive and must be used as efficiently as possible. Technologies enable the treatment of many conditions, allowing clinicians to apply hard-and-fast rules. Many conditions are treated in a highly predictable manner.
These circumstances enable less skilled practitioners (e.g., nurse anesthetists, general surgeons) to treat many patients in settings equipped to handle only routine types of cases. Patients with more complex conditions can then be the focus of institutions dedicated to a more complex type of care. Different types of conditions can be handled by hospitals with different kinds of business models.
Looking at other industries, we have found three basic types of business models, which are described in detail by Harvard professor Clayton Christensen in The Innovator's Prescription, co-authored by Innosight Institute's Jason Hwang, M.D., and the late Jerome Grossman, M.D. The three types of business models are:
- solution shops;
- value-added process businesses; and
- facilitated network businesses.
Solution shops are business models optimized through flexibility; they are designed to deliver a highly tailored offering to customers with complex needs. Because the offering varies so much, the only way to charge for it is on a fee-for-service basis. Consulting firms like ours, or high-end law firms, are solution shops.
In contrast, value-added process businesses are optimized through repeatability to create a predictable output every time. The experience is quite uniform, and therefore the offering is priced on a fee-for-outcome basis. Hilton Hotels and Jiffy Lube are two examples of these types of businesses.
Last, facilitated network businesses are optimized through reliability and create value through brokering interactions. Telephone networks and banks are examples of these types of businesses, which often charge on either a subscription or fee-per-transaction basis.
A typical general hospital co-mingles all of these business models. Doctors treat some very complex conditions by discussing potential treatments among diverse specialists and using the wide range of resources at the institution's disposal, from advanced imaging equipment to physical therapy to psychological counselors. They also undertake routine procedures like colonoscopies. And, although they may do so reluctantly, they often play an important role in facilitating social services for some patients, particularly those who frequently visit the emergency department.
This comingling creates complexity and cost. Because a patient could take so many pathways through a hospital's various departments, the institution deals with high overhead in managing so many permutations of care. With expensive departments or equipment on hand to treat complex cases, the hospital tries to maximize utilization of these costly resources, and so forces other parts of the institution to deal with queuing and other inefficiencies. The hospital also can become confused about its strategy, as the profitability of various departments becomes the focus of attention, rather than the opportunity in maximizing how the institution delivers care within a single business model.
The Prescription for Hospital Improvement
To thrive in the midst of so much economic pressure, hospitals need to determine whether flexibility, repeatability or reliability is most important, and then organize according to the most appropriate business model.
A value-added model may entail building out ambulatory surgical centers, creating competency of the patient experience for certain high-volume procedures, and honing clinical practice to ensure that outcomes are stellar in treatment of a focused set of conditions.
Alternatively, a hospital may organize as a solution shop that integrates care for a set of complex conditions. For instance, the Cleveland Clinic has broken up its traditional departments and re-organized around disease states. Its GI discipline now includes colorectal surgeons working directly alongside gastroenterologists.
Some hospitals deeply rooted in a community, or heavily oriented toward treatment of chronic conditions, may choose to bulk up their capabilities for facilitated networks, helping patients modify their lifestyles to keep them as healthy as possible.
Whichever direction hospitals choose to go, these types of choices will clarify what is and is not essential to invest in and grow. When money is tight and competitive pressures are unrelenting, clear strategies can help critical functions thrive and distinguish themselves in the marketplace. These competencies can become the core of the future business.
Stephen Wunker is a senior partner and Andrew Waldeck is a partner at Innosight LLC, an innovation strategy firm in Watertown, Mass.
This article 1st appeared on May 26, 2009 in HHN Magazine online site.
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