"Five years from now," said a hospital CEO to his peers at a recent conference, "our organizations will look very different. They will operate with different incentives, different business models and different footprints." What does the future look like for community hospitals and health systems — and what are their marching orders?

The hospital business model is under pressure. The costs of physicians, nurses, technology, compliance and marketing are rising, while payments from all payer types are shrinking, as is inpatient utilization. We anticipate a 12 to 28 percent revenue decline over the next few years.

Many community hospitals, already operating at razor-thin margins, soon may find themselves deep in the red. Although most hospital leaders realize this, their responses to these pressures often betray a lack of focus. They react with across-the-board cuts, a race to acquire physicians, a superficial rebranding, or a search for elusive mergers and acquisitions. These incremental actions are unlikely to move the needle. What's needed is a new way of thinking about form and function.

Cutting Through the Strategic Haze

When we ask hospital executives to share their strategy, too many respond with their vision and mission. Vision and mission are critical if leaders are to inspire, challenge and direct, but they are no substitute for a thoughtfully conceived and well-executed strategy. Mission statements are often rooted in the past and can become disconnected from the current market reality, and even the best one cannot inform the kinds of daily decisions an organization faces. A strategy is a set of choices, trade-offs and priorities that steer the organization's course, direct its investment decisions, shape its operating model and guide the performance of its people.

Community hospitals in particular are prone to "strategic haze." Many were founded to serve their community as the first and only provider of care. By necessity, these entities tried to be all things to all people. However, in many communities the market realities since have evolved — and better-capitalized, more-focused competitors have moved in. Providing access to care is no longer sufficient. If community hospitals want to be the providers of choice rather than the providers of last resort, they have to declare and defend their areas of distinction.

The critical first step is answering this strategic question: Who are the customers we want to attract? Defining the target customer and a value proposition that this customer would find appealing provides crucial focus. This does not mean denying care to anyone; it means selecting a center of gravity and aligning the bulk of your organization's resources behind it. For example, a hospital may consider what role it wants to play for its traditional customer, the health insurance company. Will the hospital be a must-have brand in the network, a destination for a subset of clinical services, a high-value alternative, a broad network player or a risk-sharing partner? These decisions then inform a hospital's investments, services, pricing and footprint.

Now, as health care becomes increasingly consumer-centric, hospitals also must define their customer-facing value proposition. Who are their target consumers, what do they value and how do they make choices about where to seek care? These answers will inform how a hospital positions itself — as a cutting-edge innovator, a leader in a particular service, a ubiquitous and convenient provider of care, a best-value-for-money treatment center, or a one-stop shop. See the table below for a full list of pure-tone value propositions.

Rethinking Form and Function

Once hospitals identify their value proposition, they must invest in the right capabilities to support it. For example, a specialist hospital seeks to attract customers who are looking for a provider with a single-minded focus on their condition and a track record of excellence. Organizations such as MD Anderson Cancer Center (a world leader in cancer treatment) pick one or a few clinical areas and use all their attention and scale to deliver consistent and quantifiably superior results within them.

Alternatively, a convenience king, such as St. Vincent Health in Indianapolis (a member of Ascension Health, the nation's largest nonprofit Catholic health care system), offers a full range of clinical services in its community-based facilities, providing a core set of service offerings to meet most of its patients' needs close to home, in one facility. For the rest (including specialized tertiary and quaternary care), a convenience king might designate one of its hospitals as a center of excellence or partner with a specialist institution.

A possible emerging market position for community hospitals is that of a value maximizer, which does not seek national leadership in clinical care, nor does it attempt to be the lowest-priced option in the market. Instead, it seeks to deliver the best possible outcome and experience at the lowest possible cost. By reducing complexity, shifting care settings and removing waste, these hospitals seek to create pricing transparency and help their customers get everything they need while eliminating unnecessary extras. A value maximizer like Steward Healthcare in New England holds unique appeal not only to consumers, but also to employers and other payers in the community.

Few health care institutions play only one function and fit perfectly into any of these value propositions — indeed, many hospitals are likely to adopt a hybrid strategy rather than a pure play. For example, an R&D leader might also cultivate a premium price position, while another hybrid might mix the frugality of a value maximizer with the accessibility of a convenience king. The key is to select a hybrid that is coherent. For example, a combination of convenience and value is more coherent than a combination of innovation and ubiquity.

A hospital's value proposition also impacts its asset portfolio. Combined with its capabilities, an institution's assets enable it to effectively serve its function. Through our analysis of the success of multiple merger and acquisition transactions, we have identified several distinctive and coherent portfolio types. For example, a scaled portfolio system has reached the size at which all of its service lines and support services are at scale — and has eliminated or outsourced the rest. It is tightly integrated through shared services and best practices.

A hub-and-spoke system creates value through a network of convenient "feeders" that provide basic care and refer more complex cases to the hub. A geographic cluster goes deep in a particular market — giving it greater market power and more ability to manage population health. Finally, an innovation system is built to monetize intellectual property (such as co-branding) without a major capital investment.

Putting It All Together

Community hospitals seeking to define or refine their strategy have to answer several key questions: What are our organization's aspirations and strengths? What are the market realities we must consider? What are the strategic imperatives for success? Who is our target customer and what value proposition is required? What assets and capabilities are needed to deliver on this value proposition? How should they be organized into a high-performing operating model?

In these challenging and exciting times, hospitals and health systems that have the will, the courage and the discipline to truthfully answer these questions and define a clear strategy will regain control of their future. They will become vital to their communities, distinctive in the market and financially sustainable — they will stay the course through the storm.

Gary Ahlquist is a senior partner in the health practice at Booz & Co. and leads the firm's work for health care clients worldwide. Sanjay B. Saxena, M.D., is a partner and co-leads Booz & Co.'s Hospitals & Health Systems practice in North America. Booz & Co. principals Igor Belokrinitsky and Akshay Kapur are also co-authors of this article.