As part of their growth strategy, more hospital executives are seeking to extend the geographic reach of their centers of excellence.To do this successfully, they’ll need to move beyond the hospital-centric focus of past expansion efforts. They’ll need to build an efficient, high-quality-care model that spans the continuum; the marketing infrastructure to position it; and a compelling value proposition in new markets.
Why is there a need to think about growth differently? Traditional growth tactics have outlived their usefulness. Changing market dynamics dictate that growth be based on comprehensive, patient-centric services that deliver superior value. Here are a few of the leading dynamics:
- Price and payer-mix pressures: As called for in the Affordable Care Act, Medicare rate cuts for hospitals will total more than $260 billion over a 10-year period. Commercial payers are following suit. Further compounding pricing pressures, the number of commercially insured patients is decreasing as aging baby boomers join the Medicare ranks. Past reliable growth sources are clearly on the decline.
- Shift to value- and episode-based payments: The Centers for Medicare & Medicaid Services has a goal that half of all reimbursements be value-based by 2018, and commercial payers are equally committed to linking payments to outcomes. With the growth in bundled payments for broader care episodes, hospitals face the challenge of measuring and managing performance in settings (e.g., skilled nursing facilities, rehab, home) that often fall outside their direct control.
- Shrinking in-market growth potential: Market share growth is becoming more challenging as a result of hospital integration and new market entrants (e.g.,ambulatory surgery centers, and urgent care and specialty clinics). Another nascent though growing factor is the rise in medical tourism and employer health plans that steer patients to centers of excellence in other cities.
- Fewer potential referral sources: The pool of referral sources is shrinking as physicians are “captured” by employment and clinically integrated network agreements. Fueled by payment reform and, most recently, the Medicare Access and Chip Reauthorization Act of 2015, this decline is expected to continue as physicians increasingly align with hospitals or larger practices. As a result, hospital executives need to rethink physician outreach programs and explore new strategies for generating patient referrals.
- More value-conscious consumers: Growth in average out-of-pocket spending per hospital stay increased at an annual rate of 6.5 percent between 2009 and 2013, far outpacing the 2.9 percent annual growth of overall health care spending. This growing financial burden, combined with easier access to hospital cost, quality and outcomes data, is creating more-discriminating consumers. And these consumers will seek quality care in the most cost-effective settings.
Increasingly, growth will come from existing value-based centers of excellence that tap unmet needs beyond current market boundaries. These centers of excellence are built on efficient, high-quality delivery models that span the care continuum and meet the value expectations of consumers, payers and providers alike. The following elements are key to hospital success in expanding centers of excellence to serve a broader geographic footprint:
- Superior, patient-reported outcomes measures: For consumers, value is about getting the outcomes that matter the most relative to the cost of achieving these outcomes. It’s true that mortality, infection and readmission rates are important. But other outcomes that matter to patients include treatment length and convenience, and the degree to which they can regain pretreatment functional status, return to work and remain symptom free. These measures are critical to building a compelling economic and clinical value proposition for consumers, payers and even other providers when growth through strategic affiliations is a possibility.
- In-depth expertise and solution sets: Value-based centers of excellence must offer a comprehensive set of preventive and treatment solutions. Using a joint pain program as an example, preventive solutions would include arthritis control, sport-injury treatment and geriatric care; treatments would range from nutritional counseling and physical therapy to minimally invasive surgery and total joint replacement. These solutions should be provided through a highly accessible network of health care professionals and community resources.
- Evidence-based care pathways and coordinated care management: Providers need to master value-based delivery and manage variation in cost and quality on their home turf first. Doing so requires having the care processes, technology and management infrastructure to provide the right services at the right cost at the right time in the right setting. Consistency throughout the continuum can be ensured through unambiguous partnership and service-level agreements, and physician compensation models that support value-based care practices.
- Brand credibility: Most players launch regional expansion efforts off a brand reputation that’s already highly regarded by payers, risk-bearing entities (e.g., accountable care organizations), employers and consumers. Hospitals like the Cleveland Clinic and Johns Hopkins have successfully employed the power of their brand, quality and cost-effectiveness to secure capitated care agreements for services such as cardiac surgery, chronic pain management and spine surgery. Increasingly, highly regarded academic medical centers are using their reputation to expand through regional and national alliances.
- Product and market development capabilities: Key to successful expansion in a value-based world is the demonstrated ability to bring service offerings to market. This involves defining services and target populations, setting a defined price, and tying the price to specific outcomes and quality guarantees. It forms the basis for a compelling yet financially sound economic and clinical value proposition — along with supporting market messaging — that’s extendable to consumers, payers and employers in new target markets. It also guides the development and management of alliances with post-acute and other providers.
Pursuing value-based expansion
Executives who believe their care model could appeal to a broader geographic area must consider a number of factors as they target specific markets, clarify their value proposition and refine their market entry strategy:
- Does your offering address unmet needs of specific populations in your target market? Executives need to perform a rigorous assessment of target markets to ensure there is sufficient untapped demand for their services. Once identified, unmet needs are key opportunities for growth and differentiation.
- Is your offering clearly differentiated from those of existing providers? Executives can’t assume that the factors that successfully differentiate a center of excellence in their local market apply equally to new markets. Providers need to understand how consumers, employers and payers in target markets perceive the strengths and weaknesses of current offerings. Using the previous joint pain example, will your solution-based program deliver better outcomes at a lower cost than current providers' offerings?
- What other marketing and delivery infrastructure elements need to be developed and how should this occur? A system looking to export its joint pain offering might own all of the key delivery elements in the local market. It might, however, need to buy practices, make technology investments or form alliances to reach new markets. For those parts of the infrastructure that the system doesn’t own, executives need to establish performance management mechanisms.
- Can effective feeder mechanisms be developed to ensure sufficient volume? Entering new markets means finding new ways to rapidly generate program awareness and demand. Options range from employer program offerings to partnerships with local community organizations. Types and potential effects of feeder options will differ widely depending on market dynamics.
Most hospital executives have work to do before they can successfully execute a value-based market expansion strategy. While there is general agreement that population health and the move to value are major strategic imperatives, most organizations are deliberating about how, and how fast, to move from fee for service to value. Until the necessary capabilities and delivery infrastructure have been developed, organizations will find it difficult to offer defined sets of services with specified quality outcomes at a predictable and attractive price. Getting it right in the local market is essential before tackling new market opportunities.
It’s never too early, though, for hospital executives with high-performing centers of excellence and strengths in the capabilities described above to start thinking about how to use them beyond their existing market footprint. Time is of the essence. Value-based payments are a rapidly growing part of the health care landscape. And regional, national and even offshore providers of health care services are planning their next moves. Are you planning yours?
Michael N. Abrams, M.A., is the managing partner and Gordon Phillips is a consultant at Numerof & Associates Inc. in St. Louis.