A Strategic Planning Makeover

Hospitals are an important part of the health care system. Our 5,200 acute organizations employ 4 million in their communities and are the focal point of the Affordable Care Act’s transformation from volume to value. But strategic planning in most hospitals is shortsighted. In most, the process fails to address the toughest questions or encompass the broader set of opportunities and threats in the new normal.

In most hospitals, leadership consists of boards comprising community and physician representation and management teams with hospital, outpatient and ancillary operational expertise. A handful of boards also include industry experts.

On an annual basis, these teams review plans for next year, assessing changes in demographic, regulatory, economic and clinical trends at national and local levels. Operating margins, bed and physician demand, changes in the payer mix, forecasts of outpatient and ancillary activity, comparisons with local hospitals, patient satisfaction and reputation survey results are presented. Then, robust discussions cover the list of “challenges” to which the strategy must be responsive: it’s the table stakes punch list in every hospital’s plan:

Operating efficiency and cost-reduction, i.e., outsourcing, employee compensation, supply chain economics, et al.
Physician alignment and clinical integration
Clinical program innovation and portfolio assessment
Risk-based contracting and payer relationships, i.e., ACOs, bundled payments
Strategic partnerships, mergers/acquisition and growth

At a critical access or safety net hospital, a major item on the punch list is state and federal funding to “stay alive.” At an academic medical center, there’s a litany of additional items including NIH funding, curriculum changes, wet lab space and others.

Outside consultants armed with impressive compilations of data lead this process in most hospitals. Many result in a plan closely akin to the prior year’s result.

I participate in these meetings frequently. Invariably, “quality of the medical staff” and “quality of care” are the first two strengths noted in the SWOT profile. It makes everyone feel good, although valid and reliable data supporting the two are rarely presented. Many tout “being a top 100 hospital,” although 1,400 hospitals can claim the same. And in larger systems that dominate their markets, size and scale often is painted as a notable strength.

But it seems to me, given the complexity of the economic, capital and regulatory climate for hospitals of all stripes, strategic planning needs to go further.

Looking ahead — two sets of questions for better-informed, more objective hospital strategic planning

Most hospital strategic plans have two gaps: an inadequate fact base about the hospital’s true positioning, and an inadequate assessment of the scope of services necessary to long-term sustainability and success.

An accurate, more comprehensive fact base about the hospital’s true positioning should answer these questions:

What is the hospital’s relative value positioning when compared with the full range of traditional and nontraditional competitors in the market? How do lenders, employers, consumers and suppliers measure its relative value? How are costs compared by third parties that include reference pricing in their models?
What vulnerabilities will current and nontraditional competitors exploit?
How might capital be accessed more efficiently and optimally deployed more strategically? What’s the optimal mix of investments in “bricks and sticks” vs. other investments?
How much unnecessary care do we deliver? By whom? And what is our exposure to civil or criminal penalties from OIG, Medicare et al?
Which physicians practice in the most efficient ways with the best outcomes?
What is the gap between the quality of care provided based on verifiable safety, outcomes, and patient experience and the best of the best? How many errors were made, and how many of these were avoidable?
How effective is the hospital’s coordination of patients after they’re discharged? What exposure does the organization have to penalties for avoidable readmissions, complications and non-adherence to treatment recommendations by clinicians?
Which episode-based bundles is the hospital prepared to offer the market (payers) as a basis for risk-based contracts? And which physicians are optimal for these risk-sharing relationships?
How effective and efficient is the hospital’s workforce? How is compensation and recognition aligned to the overall organizational strategy? And does senior management possess the core competencies necessary for future success?
How is privacy and security of patient information protected within the system’s scope of operations? Is it hack-proof?
How is the net operating margin (profit) aligned with purposeful stewardship? What’s the goal? How are “profits” used? How does the operating margin align with the organization’s mission and values? Does it matter to outside purchasers?
Can the hospital operate at sub-Medicare reimbursement rates, withstand accelerated erosion of employer-sponsored insurance coverage and manage intensified competition from physician-owned enterprises?
How does the performance of the hospital’s leadership team compare with peers and elite performers, and do the team members have the core competencies necessary to complement the institution’s future direction?
If an academic medical center, how will research and teaching (faculty) be funded if clinical operations (hospital and outpatient services) are unable to fund shortfalls or if payers are unwilling to pay higher costs associated with teaching and research? Where are opportunities to increase industry funding for applied research? And how might faculty composition and compensation be aligned with market initiatives and overall growth strategies?
And others …

A broader assessment of the health care landscape that answers these questions is essential:

How does the hospital engage, manage and take responsibility for the care and costs of those who are not its “patients”? What are the hospital’s addressable new markets? How important is the inpatient enterprise to the long-term scope of the organization’s services?
How might local human services programs and health programs be conjoined to achieve improved coordination of care, lower costs and improved community health? Is there a gap in health and human services in the community? Might the hospital fill the gap with a proactive business solution?
What is the hospital’s consumer health strategy? What is its response to over-the-counter therapeutics, alternative health, self-directed diagnostics, retail clinics and mobile health? Is the hospital patient-focused or consumer-focused: Does it understand the distinction?
How might the hospital engage optimally with health insurers? Should the hospital operate its own plan? How and when is risk-based contracting the standard for the market, and what is the hospital’s plan to be prepared? How is the hospital prepared for reference-based pricing, narrowing networks and carve -outs driven by increased plan cost-activism?
What is the hospital’s plan to engage employers directly, and take risk for employee outcomes and costs? What’s the level of employer confidence in the hospital’s value proposition? How will the hospital respond as employers shift primary purchasing responsibility to their employees via high deductible plans?
What are the alternatives for local physicians as they consider alignment? Why is the hospital the most attractive partner versus other options? How will physicians be recruited to the enterprise in the future?
What model of primary care is optimal to the market’s demand for effective, efficient, accessible, preventive and healthy living services? How is pharmaceutical, dental, vision, mental health, alternative health and nutritional support tightly coordinated in the deliverable?
What sources of capital can be accessed and deployed to manage populations’ health cradle-to-grave with responsibility for outcomes and costs? What traditional and nontraditional sourcing of capital should be considered? What non-core assets should be sold to free up capital for mission-critical purposes? With whom should the institution partner to create a sustainable, creditworthy balance sheet and expand scope of services?
What new sources of revenue may be added that are not third-party payment-dependent?
Is the clinical model inclusive of alternative (non-allopathic) methods and services that attract new markets? And how are physical and behavioral health fully integrated to the hospital’s care management strategies?
And if an academic medical center, should the teaching and research operations be separated from the clinical enterprise, structured as stand-alone competitive entities that contract with a broader set of hospitals, biopharma and device organizations? Could they be viable?
What is the hospital’s path to sustainability? How big must the scope of operations be to be competitive? What is the organization’s achievable scale?
And others …

Running a hospital is a tough job. Creating and implementing a strategy is a formidable task, given the uncertainty of our economic climate. Some hospitals are paralyzed by their medical staff relationships; some are too cautious; and some overly confident — prone to believe their own publicity and embrace their invincibility.

There are no guarantees. What’s clear is that the market does not guarantee a hospital’s sustainability. There will be winners and losers. And even the strongest market leaders have no assurances: Borders and Barnes and Noble reacted to Amazon too late. Blockbuster had no answer to NetFlix.

For hospitals, a broader approach to strategic planning is needed. An objective fact base that answers questions beyond utilization, physician demand and reimbursement is essential.

Many hospitals are struggling. Some are doing well. None is invincible.