SWOT Analysis
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Ch 4: Environmental Analysis
4
Environmental Analysis
Charles Dharapak/Associated Press
Organisations don't exist in a vacuum. They are intricately connected to an outside world with aconstantly changing landscape. —The Happy Manager
Learning Outcomes
After reading this chapter, you should be able to do the following:
· Describe the environmental forces that create change and can influence an HCO's strategic planning.
· Discuss the impact of legislation on HCO operations and strategic planning.
· Identify the main forces referred to in the five forces model of industry analysis.
· Explain why an HCO should continue to assess external opportunities and threats.
· List different benchmarks that can identify an HCO's internal strengths and weaknesses.
· Explain the connections between an HCO's strengths, weaknesses, and distinctive competencies.
· Name the advantages of the Integrated Practice Unit (IPU) as a healthcare delivery method.
Introduction
This chapter discusses the importance and the components of an environmental analysis as part of the strategic planning process for anHCO. This chapter introduces an external analysis that uses a PESTLE framework for identifying the elements of the external environment.This chapter then reviews legislation and governmental initiatives, which have a dramatic impact on HCOs. Next, "Porter's five forces" model,which also is known as the five forces model of industry analysis, is explained and applied to an HCO. Finally, this chapter discusses internaland external analyses and the use of a SWOT analysis, followed by an examination of how resources, costs, and distinctive competenciesaffect strategic planning efforts.
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4.1 External Analysis of Dominant Enviro…
4.1 External Analysis of Dominant Environmental Driving Forces
It is vital for an HCO to gauge the external environment within which it operates. This, in fact, should be standard practice for allorganizations. Virtually anything that can happen probably will happen, eventually. We truly have no certainty about what things will be likein the future, in spite of our attempts to make predictions or forecasts. Still, an HCO cannot afford to let generalized eventualities anduncertainties keep it from being active in strategic planning, and changing in response to environmental demands.
PESTLE is an acronym to describe the elements of the external environment that impact an HCO's planning process. These elements requirespecific analysis about their current or potential impact on the organization's planning and operations. PESTLE stands for political, economic, sociocultural, technological, legal and eco-environmental forces, which exert strong influences on how an HCO crafts andexecutes strategic plans. Figure 4.1 shows the elements of PESTLE.
Figure 4.1: PESTLE framework for external analysis
Several external forces influence how an HCO crafts and executes a strategic plan.The forces are grouped by category.
These elements also interact with each other to create additional ramifications. Consider medical waste. Medical waste first came to theattention of the general public, years ago, when it washed up on New Jersey beaches. Because of the media exposure of this and otherevents pertaining to undesirable disposal practices, as well as the fear of AIDS, public hysteria resulted and regulatory officials were underpressure to develop comprehensive regulations to prohibit such occurrences. The Medical Waste Tracking Act of 1988 was passed,requiring the federal Environmental Protection Agency (EPA) to begin an investigation to determine whether federal legislation wasnecessary. In 1991 the EPA provided their findings, which led to federal regulations on medical waste disposal.
The Occupational Safety & Health Administration (OSHA) began to fine waste generators for improper disposal practices within theirfacilities, and most states have adopted some type of regulation pertaining to infectious-waste disposal requirements. This, in turn, led to anexamination of waste-disposal methods technology, such as autoclave and incineration, and the documentation needed to show that wasteswere being disposed of properly. This also created the need for state-of-the art incineration techniques and facilities. At any given time,some or several of the forces may be driving change in the healthcare industry. It is important to determine which force is the driving forcein creating a change in the environment.
The only way we can manage change is to constantly monitor the environment within which an organization operates. Other examples ofPESTLE forces for an HCO include trends in Medicare or Medicaid funding; the Affordable Care Act; governmental regulations on fundingretirement programs; the labor supply for healthcare professionals; interest rates for capital improvements; better-educatedclients/patients, who expect to be included in decisions on their healthcare; greater emphasis on the marketing of healthcare services; thefast pace of technological change; and so forth.
The external analysis is where we look at past and current developments external to an HCO's operations. From this analysis, we identifytrends and, in effect, take the pulse of the environment in which the HCO operates. An HCO must be aware of characteristics ofenvironmental conditions affecting it, and be vigilant about changes that may occur in this environment. Numerous possible shifts can occurto affect the organization in categories such as patients/clients; the general economy; governmental regulations at federal, state, and locallevels; and sociocultural trends in demographics and lifestyles, among others. Many HCO administrators have discovered their failure tounderstand and heed the implications of the environment on their organization's actions, even when those implications were obvious, suchas a shift in population and businesses from the organization's current urban location to suburban areas. Even without a formalorganizational system to monitor the environment and the changes happening within it, HCO executives must exercise vigilance to detectand use information from the environment in formulating strategy.
Many of the environmental factors influencing the organization and its administration will change. This is a given. Few factors stand still forlong, so constant study of the environment is necessary. Thus, the HCO administrator should expect change and be receptive to it. Manyother driving forces are present. Various industries will have different forces that help determine the direction of the industry and theseforces will have different magnitudes of importance from one industry to another. Table 4.1 provides a sample environmental analysis as itmight apply within an HCO.
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Table 4.1: Sample PESTLE impact analysis for an HCO |
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Political |
Economic |
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Medicare/Medicaid reimbursement—eligibilityand reimbursement amounts |
Economic trends—increased or decreasedemployment and increased or decreasedinsurance coverage |
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Zoning regulations—the types of businesseslocated near the HCO |
Taxation—changes in tax structures and changingdisposable income for elective procedures |
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Governmental relations—the lobbying effects ofvarious healthcare groups |
Market and distribution trends—increasedavailability of urgent care centers and satelliteunits |
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Sociocultural |
Technological |
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Lifestyle trends—healthier lifestyles with moreemphasis on prevention |
Electronic health records—increased need fortraining and record keeping |
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Aging population—increase in geriatric patientsand greater dependence on Medicare/Medicaidreimbursements |
Value-enhancing IT platform—more and bettertechnology availability and increased cost |
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Patient education—better-educated patientsasking more pertinent questions and doingresearch on treatment options |
New diagnostic devices—better patient care andincreased usage cost |
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Legal and Healthcare Legislation |
Eco-Environmental |
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Affordable Care Act—new mandates andinformation requirements |
Waste disposal—verification of hazardous wastedisposal |
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Health Insurance Portability and AccountabilityAct (HIPAA)—patients' ability to keep currentcoverage |
Energy consumption—higher energyconsumption leading to higher operating costs |
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State Children's Health Insurance Program (CHIP)—eligibility and reimbursement schedules |
Sustainability—ability to maintain existing andfuture operations |
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4.2 Legislative Processes and Implementa…
4.2 Legislative Processes and Implementation Issues
How legislation affects both planning and operations is an external factor that requires continuous monitoring. Federal and state processesmay vary, depending on individual state rules and regulations concerning legislation.
The Federal Legislative Process
At the national level, the legislative process typically involves the following steps and policymakers:
1. A bill is introduced by a congress member.
2. The bill goes to the appropriate committee for review and hearings. The major committees with jurisdiction over health issues are thefollowing:
ii. Senate Finance: Medicare, Medicaid, and the Children's Health Insurance Program (CHIP)
ii. Senate Health, Education, Labor, & Pensions: Most agencies in HHS; public health and health insurance statutes
ii. House Ways and Means: Medicare
ii. House Energy and Commerce: Medicare (Parts B, C, D), Medicaid, CHIP, public health
1. Once the committee approves the bill it is sent to the floor of the House and Senate for a vote, and it must pass in both chambers tobecome law.
1. If the bill passes both chambers, the President has 10 days to sign the bill or veto it. If the President does nothing, it becomes law.
Federal regulations, also known as rules, are issued by agencies and these regulations have the force of law. Agencies issue a notice of aproposed rule to add, change, or delete regulatory text, which is followed by several stages of review, including a public comment period.The final revised rule based on public comment must allow 60 days to pass before the rule takes effect (Aetna, 2013).
Landmark Health Legislation in the United States
Legislation pertaining to healthcare has a long history in the United States (The Associated Press, 2010). Federal involvement in healthcarebegan with "An Act for the Relief of Sick and Disabled Seamen" in 1798. Since then, healthcare legislation has been passed at the federallevel, providing care for Native Americans, maternal and child services, and veterans. The most notable of these acts and the ones that havethe most effect on healthcare planning include the following:
· Medicare and Medicaid (1965) Medicare is a federal program that provides health insurance for those over age 65. Medicare is one ofthe largest purchasers of healthcare in the United States. The coverage and reimbursement decisions made by Medicare affect theways providers operate and have a major impact on the health services industry. Some Medicare coverage and reimbursementdecisions (such as diagnosis-related groups, or DRGs) have been adopted by the private sector. Medicaid is a program run jointly by the federal and state governments to provide health insurance for low-income individuals whomeet eligibility requirements. A recent trend in Medicaid is for the federal government to turn all authority and responsibility for theprogram to the states.
· Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). This act gives employees the right to continue the health insurancecoverage their employer provides after leaving the job. It also made hospice care a permanent part of Medicare and Medicaid.
· Health Insurance Portability and Accountability Act of 1996 (HIPAA). This law strengthened the portability of health insurance that wasfirst authorized under COBRA. This law also encouraged the use of medical savings accounts, improved access to long-term medicalcare, and strengthened privacy laws concerning health records.
· State Children's Health Insurance Program of 1997 (CHIP). This program helps provide medical care to children in low-income familiesthat are not eligible for Medicaid.
· Patient Protection and Affordable Care Act of 2010. Known as the Affordable Care Act, this law provides an array of changes inhealthcare, including coverage mandates, acceptance for insurance regardless of medical history, reduction in spending on Medicare,and more restrictions on health insurance providers. However, many parts of the act are being challenged and delays inimplementation have been given to some organizations. This act will have a major impact on who receives healthcare and how it isadministered for years to come. The changes being brought about by this act are profound and occurring rapidly with respect to themethod by which providers will be paid and the imperative to improve the value of services provided.
The Effects of Reform on HCO Strategy
HCOs must become familiar with the following four key concepts of current healthcare reform that will affect strategic planning:
1. Value-based payment
2. Accountable care organizations (ACOs)
3. Bundled payment
4. Bending the cost curve
Value-based Payment
Historically, the model of reimbursement for the provision of healthcare services has been fee-for-service: a health provider (anorganization or individual) is paid by the volume of procedures or services provided. This payment mechanism tends to incent providers toorder more tests, procedures, and hospitalizations than may be necessary to appropriately care for patients. The fee-for-service model hasbeen blamed for the rapid increases in healthcare costs without a concomitant improvement in quality of care. A key component of healthreform is replacing the fee-for-service model of payment with value-based payment.
Under value-based payment, which also is known as pay-for-performance (P4P), providers receive payment for service based on theirperformance or the potential outcomes of the service. Tying payment to measurable outcomes in reducing costs and improving quality isthe "value" proposition sought by healthcare reform. Those providers who can lower costs and improve quality of outcomes, resulting inimproved community health, will be distinguished as value-based providers. In some payer arrangements, beneficiaries will experiencehigher out-of-pocket costs if they receive care from a provider that is not designated as value-based. There will also be penalties for failureto meet performance targets; for example, the withholding of payments to acute-care hospitals that readmit a patient within 30 days withthe same complaint.
As value-based payment methods evolve, every provider type will likely be affected by some form of value-based payment. Understandingthe plans of local, state, and federal payer organizations to implement some form of value-based payment and analyzing how those planswill affect the HCO will be critical in the strategic planning process (Health Care Incentives Improvement Institute, 2012).
Accountable Care Organizations
Although ACOs take many forms and involve many different providers, all are based on a group of providers that work together tointegrate, coordinate, and deliver a full continuum of care to a defined population of patients. These providers are accountable to both thepatients and the payer organization for delivering quality care in a cost-effective manner.
Key features of an ACO are the aggressive use of primary care physicians to distribute preventive care; care planning; and patientmanagement practices that minimize high-cost hospital stays through better coordination of community and outpatient settings. This is animportant development in the drive to cut healthcare costs and creates more emphasis on prevention. Although an ACO can receivepayment through a variety of methods, payment for most will be linked to quality improvements that also reduce overall costs. Payment willbe based on reliable and progressively more sophisticated performance measures that support improvement and savings.
A significant consideration by an HCO in the strategic planning process will be participation in ACOs and other collaborative arrangementsthat improve quality and reduce costs, whether these arrangements are developed by that HCO, a competing HCO, a collection of physicians,or a payer organization. Providers across the continuum must maintain a degree of flexibility to remain viable and competitive (Centers forMedicare & Medicaid Services, March 2013).
Bundled Payment
Bundled payment (also known as an episodic or episode-based payment) is a method of payment in which a single lump sum is paid forall services related to a particular treatment or condition (episode of care), such as a hip replacement or a coronary arterial bypass.Services included in the single payment may encompass physician charges, hospital charges, ancillary charges, outpatient, and even pre-and post-acute services.
Bundled payment is an alternative to capitation and fee-for-service payment models, as it is designed to reduce the lack of coordinationamong healthcare providers and the duplication of care prevalent with fee-for-service and capitation arrangements. Under a bundledpayment method, the organization that receives the payment must negotiate fees and costs with the respective participants and services inthe bundle. This results in an increased emphasis on improved coordination, reduction of redundant services, and reduction of costsbecause the organization may be at financial risk for amounts that exceed the bundled payment. Quality measures will pay an importantrole in determining the value of the bundled payment program.
Bundled payment is seen by the Centers for Medicare and Medicaid Services (CMS) as the most effective payment method to reduce overallhealthcare spending. Preparing for bundled payment will be essential as an HCO develops a strategic plan. Bundled payment represents afundamental shift in payments because this method transfers a great deal of risk directly to the HCO. This method will challenge an HCO toexamine its internal operations, identify cost-effective behaviors, embrace evidence-based medicine, and work collaboratively withphysicians and other HCOs to reduce redundancy and improve patient outcomes (Centers for Medicare & Medicaid Services, 2013).
Bending the Cost Curve
For the last 20 years, healthcare costs have risen at a fairly steady rate of 9% per year— an unsustainable ascent (The Washington Post, 2012). The object of the bending-the-cost-curve payment methodology is to alter the current trajectory of healthcare costs nationwide.Changes in payment methodologies such as value-based reimbursement, bundled payment, and care delivery methods encompassing bettercoordination and preventive strategies will be essential in controlling costs over the long term.
No matter where a provider falls along the healthcare continuum, each will be expected to deliver value. For acute-care hospitals, that couldmean decreasing readmissions and reducing duplicate and unnecessary tests and procedures. For skilled nursing facilities or homehealthcare agencies, that might mean better management of unnecessary hospital admissions or collaborating with acute-care hospitals toaddress their readmission and redundant services issue. For patients, it may mean fewer contacts with a physician but greater contact witha team of healthcare professionals that work under a physician's supervision. Teams may be made up of physician assistants, RNs,pharmacists, nutritionists, physical therapists, and mental health professionals. Providers will place greater emphasis on preventive care,and care navigators (also referred to as patient care managers or care coordinators) will be in regular contact with patients to advise andencourage preventive care and healthier lifestyles. The result of these efforts will ultimately be measured in terms of outcomes becauseoutcomes will inevitably dictate payment.
Value will not be achieved in isolation. Improving quality and reducing costs will require cooperation and collaboration that has beenlargely absent from this industry. The historical practice of discharging from one venue to the next with little regard for outcomes orperformance of the admitting organization will, inevitably, be replaced by care management via an integrated continuum (Antos, et al.,2013).
As you begin your strategic planning process, it will be important for you to know what the providers on either side of you, along thecontinuum, from low acuity to high acuity, are doing (Promise Healthcare, 2012). What reform initiatives are being explored in yourcommunity and by your state? What collaborations will be necessary for your HCO to improve internal capacity and be financially rewardedunder value-based payment? As every HCO is unique and no cookie-cutter approach will work for everyone, putting Band-Aids on existingprocedures will not be enough. The voyage for every healthcare provider will be toward greater value.
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4.3 The Five Forces Model of Industry An…
4.3 The Five Forces Model of Industry Analysis
The forces of competition greatly influence the strategy formation and market-opportunity decisions of an organization. Although eachindustry has its own unique characteristics, five main forces are representative of the actual driving mechanisms of any given industry andare often referred to as the five forces model of industry analysis. These five forces, shown in Figure 4.2, include the following:
1. The industry itself and the competitive decisions and activities engaged in by each company
2. Consumer/buyer composition
3. Supplier composition
4. The possibility of new entrants
5. Availability of good product substitutes
Figure 4.2: The five forces model of industry analysis
Though there are unique characteristics in any industry, five main forces drive allindustries.
Source: Adapted from Michael E. Porter, How competitive forces shape strategy. Harvard BusinessReview, 57, No. 2 (March–April 1979), p. 141.
The industry itself and the individual companies within the industry are constantly involved in dynamic interplay in an attempt to build asuccessful competitive edge over one another. The success of one organization's strategy in accomplishing this is based in large measure onthe strategies of the other organizations. Constant monitoring of these interdependent strategic maneuvers is required to make theadjustments necessary to improve competitive position and achieve market success. Multiple views of the industry are necessary.
Consumer/buyer composition can range from a few, high-volume purchasers to a large number of low-volume purchasers. In one instance,losing a few customers can be the difference between success and failure, while, at the other extreme, losing the same number of customershas essentially no impact. Most firms try to minimize the number of customers who can exert an adverse effect on their business.
Supplier composition also has an important influence on the competing position of individual organizations. The relative importance of thegoods or services they supply will determine the strength of their competitive influence over firms in the industry. They can have a positiveor negative impact on profit margins, inventory levels, product quality, and prices.
The possibility of new entrants into the market is a constant threat to altering market share, production capacity, and supply distributionwithin the industry. This threat can be minimal when there are strong barriers to entry, such as strong customer loyalty, large capitalrequirements, difficulty in establishing distribution channels, and strong response of current market participants. When entry barriers areweak or the expected response of existing firms is weak, then the possibility of entry is stronger.
The fifth force in the model is the availability of good product substitutes. This is a major threat to existing firms when high-qualitysubstitutes exist in ample quantity at competitive or comparable prices. An example of such a substitute in healthcare might be acupuncturefor more traditional medical treatments.
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4.4 Assessing Environmental Opportunitie…
4.4 Assessing Environmental Opportunities and Threats
Recall, from Chapter 2, that a SWOT analysis involves analyzing internal strengths and weaknesses and external opportunities and threats.Opportunities and threats related to the external environment are analyzed to determine if any action (strategy) is needed to deal withthem. For example, a nursing center may notice the move toward hospice programs for the terminally ill. While the hospice philosophyencourages a stay-at-home approach for the dying, there are often needs for short-term interim institutional care to manage complicatedmedication regimens. The nursing center, recognizing an opportunity in this area, could offer such institutional services at lower costs thanthe traditional inpatient, acute-care hospital. The patients benefit from the lower charges and the nursing center, from increased usage.Alternatively, the nursing center may decide it does not have the staffing expertise or pharmaceutical services to extend the service, eventhough the opportunity exists. In either case, opportunities cannot be pursued if they are not recognized and analyzed.
The same is true for threats. An HCO already in trouble from inadequate funding and in heavy debt would face even greater risks if it lost akey leader to illness or death without any preparation for a replacement. The ripple effect of bad publicity regarding the management andexpenses of other HCOs may also be a threat to the existence or at least the effectiveness of an HCO. Upon recognizing such threats, andanalyzing the possible ramifications of events, an HCO can avoid many crises by developing the contingency plans for dealing effectivelywith such situations. Some have referred to this process as the what if and what then analysis. In other words, asking the questions What ifthis happens? and What do we do if this happens? helps an HCO deal better with major events that might be detrimental to the organization.
The more you know about the people being served, the better you can meet their needs. Thus, the HCO's patient/client base should be aprime element for study. Here, building a database is useful. Many successful businesses, such as Wal-Mart, are continually doing researchto learn more about their customers. An HCO should do the same thing. Information can be gathered on such factors as marital status,family size, age of family members, occupations, housing, means of transportation, healthcare needs, reasons for using the HCO's services,and length of time using the HCO's services. All of these are good subjects to gather information about by asking questions.
Scanning the environment of an HCO's operation for significant trends, especially in changing times, is an ongoing effort. This stage in theplanning process is not about gathering data, reporting that data, and then forgetting about the data. The environment must be constantlymonitored to help ensure that the HCO survives and grows.
Healthcare Organizations and Strategy: Past, Present, and Future
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4.5 Conducting an Internal Analysis
4.5 Conducting an Internal Analysis
After identifying an HCO's vision and mission and having considered the environment in which the HCO operates, strategy planners mustobjectively assess the strengths and weaknesses of the organization's internal operations. HCO administrators can learn from athleticcoaches in this area. Coaches constantly assess the strengths and weaknesses of their own team as well as the opponent. The coaches try tomaximize their teams' strengths on game day, and, during practice, remedy their teams' weaknesses.
Organizations have certain strengths that make them uniquely suited to carry out their tasks. Conversely, they have certain weaknesses thatinhibit their abilities to fulfill their purposes. HCOs that seek greater effectiveness need to carefully evaluate the strengths and weaknessesof their organizations.
Identifying strengths and weaknesses within the organization involves a thorough internal analysis, or strategic audit, of the organization. Acomplete study of the HCO's emphasis on its services and how well they are delivered is the goal. In looking for strengths and weaknessesin the functioning of an HCO, strength represents some significant operational aspect that is done exceedingly well, such as a burn center. Asignificant operational aspect is a fundamental activity that is likely to affect the performance of an HCO in a major way. Conversely, a weakness is some inadequacy in a major activity or resource, such as financial resources, that reduces the organization's ability to achieveits goals.
Several different benchmarks can identify whether an activity should be considered as a strength or weakness. One internal standard ishow well this activity meets its operational goals when compared to other major functions. This comparison can be made over time toestablish trends in effectiveness. Another standard is how well an HCO handles this activity when this function is compared to the samefunction in other HCOs that might be considered immediate competitors. This is called a strategic group comparison. Another importantbenchmark, for HCOs in particular, is how well the activity contributes to the HCO's ability to satisfy the expectations of funding sponsors.Perhaps the most fundamental standard, however, is how well this activity meets the immediate and long-term needs and interests of theHCO's patients.
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4.6 Assessing Strengths and Weaknesses: …
4.6 Assessing Strengths and Weaknesses: The Search for a Distinctive Competence
The definitive goal of an internal strengths-and-weaknesses analysis is to identify a distinctive competence. A core competence is anorganization's proficiency in performing an internal activity that is vital to a company's strategy and its ability to compete. A distinctivecompetence is a function that an organization does extraordinarily well. A distinctive competence represents a level of mastery that makesan HCO extremely effective in meeting clients' needs, particularly when we consider the typical effectiveness of a strategic group in this areaof operation. In other words, a distinctive competence is a "super strength" that provides an edge in serving patients' needs and deliveringpatient satisfaction. For example, Nypro (2013) has partnered in the launch of many of the world's leading diagnostic, drug delivery, andmedical/surgical products. Its core competencies include management-design teams as well as high-speed assembly and processdevelopment. Because Nypro performs these activities extremely well, these activities have become a distinctive competency for thecompany (Prahalad & Hamel, 1990).
A systematic way of identifying strengths and weaknesses is to divide the HCO's operations into major sectors for analysis. Depending onthe specific nature of an organization, some basic categories for internal analysis include overall management effectiveness and companyresources, financial operations, marketing operations, and production operations or service functions. A good place to begin is with themanagement of the HCO and its planning systems.
Management and Planning Systems
A specific target of an internal strengths-and-weaknesses analysis should be a study of the management system. Management's willingnessto take risks as well as its values, skills, ages, and experiences are all important aspects of an organization's ability to respond toopportunities. Identifying the effectiveness of an HCO's human resources management is also an objective of this portion of the analysis.This can include issues of the firm's organization, staff turnover, and the recruitment and morale of healthcare professionals.
For example, the demographics of an HCO's professional staff are important in understanding the potential effectiveness of that HCO'sservice capabilities. Appropriate questions include the following:
· What are the basic staffing categories by profession requiring our attention?
· How many professionals do we have in each category by age group?
· What percentage of professional staff will be retiring in the near future?
· What is the nature of demand and supply for these professionals that will affect the level of recruiting competition?
Still another target for analysis concerns the organization's culture, or personality. The following questions concern the cultural profile ofan HCO:
· Is our service philosophy conservative or liberal?
· Are we patient/client-driven or do we focus more on our third-party payers' or financial sponsors' expectations?
· Does our HCO collaborate with other community agencies and institutions?
· As an HCO, what are our primary interests and social values?
· What is the power structure of our HCO? Who really makes the decisions and by what process?
It also is important to analyze the effectiveness of present programs. What are they? Is the leadership for each program effective? Howmuch interest and support does each program have? A management questionnaire can be developed that provides information about theeffectiveness of the management system and brings major problems to the surface.
Another target of this analysis is the planning system. Is planning undertaken systematically and performed on a regular basis? Arecontingency plans considered? Are the plans realistic? Are the plans, in fact, used? All are important issues. Again, a questionnaire can beused to identify and review the planning environment and process, organizational structure, management philosophy and style as it relatesto planning, and other factors relating to the organization's performance.
The result is a thorough understanding of the planning system. The data collected in the audit can then be analyzed to determine strengthsand weaknesses in the planning system. The most important of these are then included in a strengths-and-weaknesses summary as aportion of the overall strategic audit. In a similar fashion, the following sectors can be analyzed, by using surveys, and the major findingsincorporated into the audit.
Financial Resources
An organization's ability to function effectively is influenced by the total amount of financial resources that the organization has availableand the process through which these funds are allocated. For some organizations, there are virtually insurmountable financial barriers. Notonly are capital needs extensive, but other expenditures are at a high level. Adequate financial resources must be available to ensure thatadequate production and marketing capabilities have been provided for, or the organization must have easy access to funding sources,before some ventures can be undertaken.
In many cases, adequate, initial financial resources are needed to operate for the first few years until enough paying patients/clients orfunding sponsors are developed to sustain an operation. Low revenue levels and high operating costs during the first few years must beanticipated. It goes without saying that unless the financial resources to permit continued operation are available, failure can be anticipated.Thus, an organization's current financial position, plus its ability to successfully obtain financing, directly influence its ability to pursueopportunities. Specifically, the financial resources of the HCO, including operating funds, special funds, donations, and expenditures, shouldbe analyzed. Appropriate questions include What has been our performance over the last five years in adhering to budget limits? and What isour ability to raise funds when needed? Other specific targets for analysis include break-even points, cash flow, and debt-to-asset ratios.
Marketing Resources
An organization's ability to take advantage of opportunities requires having personnel with the marketing expertise to develop and executeeffective marketing strategies. A good service does not guarantee success. The adage to build a better mousetrap and the world will beat apath to your door is just not true. An HCO must get its message across if it is to thrive. This requires good marketing, and good marketing isthe result of good marketers. Many formerly successful organizations have failed in the new business environment facing HCOs because ofa lack of marketing know-how. If an HCO does not have adequate in-house marketing skills, then its financial resources must be sufficient tohire the marketing personnel that it needs. Chapters 7, 8, and 9 will examine marketing concepts, including strategy, processes, andbudgeting, in depth.
Operations/Services Resources
Several distinctly different production-resource elements affect a firm's ability to handle new opportunities: service capacity, cost structure,technology, and personnel skills. Capacity is influenced by previous commitments to acquire facilities. In the short-run this capacity isusually fixed, but it can be altered, over time, for new strategic opportunities. The skills of personnel available during the short run are alsoconsidered fixed. Therefore, a firm must have both the capacity and the skills on hand or the financial ability to acquire them. The coststructure of a firm can be a determining factor for some opportunities. The ability or the lack of ability to deliver services in a cost-efficientmanner can determine an HCO's staying power. Technological capabilities must also be considered. Some new services may requiretechnology not currently available in the organization. If the organization cannot acquire technology at a reasonable cost, it may have toforgo some opportunities.
Appropriate equipment and space questions include the following:
· Are equipment and space adequate for present needs and for planned future needs?
· Are they in good operating condition?
· Are they costly to maintain or operate?
It is relatively easy to identify the strengths in each of these areas. Attempting to define weaknesses can be a little more painful. Often,organizations must call in outside consultants to candidly pinpoint the limitations of the organizations. Despite the restraints oforganizational politics, weaknesses and limitations must be recognized before an HCO can move on. The process should result in all of theevaluations listed in the internal analysis having been separated into strengths and weaknesses.
HCO planning groups often identify strengths first and write them down on a board or flipchart. After having discussions that may identifymany strengths by organizational function (such as marketing, operations, and so forth), members of the group need to agree on perhapsfive major organizational strengths. Each planning group member then writes on paper two or three of the organization's weaknesses,which are copied onto the board to generate further discussion. Only with an objective appraisal of strengths and weaknesses can realisticobjectives be set.
Using a SWOT Analysis
SWOT is an acronym for strengths, weaknesses, opportunities, and threats. The process of reviewing an HCO's internal operations forstrengths and weaknesses and scanning the organization's external environment for opportunities and threats is called a SWOT analysis.
The ultimate goals of a SWOT analysis include, on the one hand, matching vital operational strengths with major environmentalopportunities. On the other hand, a SWOT analysis also provides a basis for eliminating operational weaknesses, or at least minimizingthem, and avoiding or managing environmental threats to operations. Ideally, a SWOT analysis helps identify a distinctive competence thatcan be used to tap an important opportunity in an HCO's environment, allowing the organization to effectively fulfill strategic objectives andits ongoing mission.
Table 4.2 illustrates one format for evaluating internal strengths and weaknesses in light of external opportunities by taking intoconsideration the application of major organizational resources. Each factor—capacity, personnel, marketing, finance, and management—israted in relation to an opportunity on a quantitative basis.
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Table 4.2: SWOT analysis |
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Rating |
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Very Good |
Good |
Fair |
Poor |
VeryPoor |
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(1) |
(2) |
(3) |
(4) |
(5) |
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Operations/services |
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Production capacity |
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Cost structure |
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Technology |
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Personnel skills |
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Productivity |
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Operations score |
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Marketing |
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Marketing skills |
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Facilities |
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Location |
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Marketing score |
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Finance |
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Fixed capital investments |
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Working capital requirements |
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Finance score |
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Managerial |
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Number |
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Depth |
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Experience |
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Managerial score |
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Source: Adapted from pp. 257, 261: Rewoldt, S. H., Scott, J. D., & Warshaw, M. R. (1977). Introduction to marketing management.Homewood, Illinois: Richard D. Irwin, Inc. |
Click here for a PDF of this table to use in your own work.
An alternate approach is to analyze these resources as strengths or weaknesses in relation to opportunities in the HCO's environment. Thisapproach is shown in Table 4.3. For each strength and weakness identified, strategy implications are drawn. Analysis of strengths andweaknesses flows logically from the identification of the resources relative to the opportunity. Each resource, when evaluated within thisframework, can be labeled as a strength or weakness, and the implications of that strength or weakness for a specific opportunity can beevaluated.
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Table 4.3: Analysis of resources as strengths or weaknesses |
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Factor |
Opportunity Implication |
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A. Marketing Resources |
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1. Strengths: Established facilities |
New service could use the same facilities. |
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2. Weaknesses: No in-house advertising |
Service needs strong advertising effort; useoutside ad agency. |
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B. Financial Resources |
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1. Strengths: Good cash position and strong earnings |
Consider new service offerings; must fundthrough internal sources |
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2. Weaknesses: Higher than average debt/asset ratio |
Must fund through internal resources |
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C. Service Capacity |
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1. Strengths: High-quality operations |
Offers additional sophisticated services; restrictsnew service offerings |
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2. Weaknesses: Low professional staff |
Restricts new service offerings |
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D. Managerial Resources |
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1. Strengths: Strong planning |
Cost-effectiveness in operations |
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2. Weaknesses: No experience with new service |
Consider alternative services |
Making Assumptions
The next step in the internal assessment is to identify major assumptions. Assumptions are those situational trends that, in an HCO'sestimate, will significantly impact that HCO's activities during the period being planned for. These assumptions should be made aboutspheres over which management has little or absolutely no control: factors in the external environment. One good place to start is to extendsome of the items studied in the external analysis.
Using the environmental trends for a hypothetical home healthcare agency, assumptions for planning and management of the organizationmight include such statements as the following:
· Intervention by the federal government in healthcare delivery will continue to escalate. Some major modifications of healthinsurance coverage will be mandated by Congress within five years.
· Federal reimbursement for healthcare will continue to drop, and philanthropy will largely be a thing of the past.
· Employers will take an increasingly aggressive stance as healthcare purchasers in trying to control the costs of healthcare benefitsfor their employees.
· Technological advances will continue at an ever-increasing pace. Many will continue to be expensive, but others will representcompetition to traditional in-house services as more over-the-counter tests are approved for direct public use.
· The relatively high cost of traditional inpatient hospital care will cause physicians to admit more patients directly to home-careprograms without prior hospital stays.
· Capitated (limited enrollment) reimbursement programs will escalate, changing hospitals from profit centers to cost centers andencouraging greater linkages with less expensive home healthcare services.
· Managed-care companies will proliferate with the general mandate to cut delivery costs significantly, often by moving patientswith cardiology, respiratory, diabetic, and pregnancy conditions into home-care settings sooner.
A similar list should be developed of certain assumptions that characterize strategic aspects of your particular HCO's operation. Majorconsiderations include the nature of patient or client expectations; funding sources; and competitors. Although these assumptions arelargely outside administrators' spheres of influence, they are basic beginning points for the HCO's plans for the future delivery of services.
General assumptions that fit the strategic planning model include the following:
· Quality leads to quantity. The quality of service leads to expansion of services. Higher quality of services leads to greater demand forservices.
· A commitment to excellence produces confidence in the HCO's leadership and administration. If the administration is committed toexcellence and demonstrates that through its leadership style, then the professional staff and other constituents will feed off thisconfidence, allowing them to persevere in uncertain situations.
· Sponsorship and funding of the HCO will continue to be a challenge, but continued effort will produce sources of funds, sometimesfrom new and unexpected directions.
· Each service offered has some unique aspects to it that may require new ways of doing things. Policies and procedures should beadapted to produce the best results, not just standardization.
· Improving the efficiency of an HCO's operations should not be such an overwhelming focus that staff loses sight of the inherent goodthe HCO seeks to provide to society.
· Assumptions must be directly related to action.
Note the relationship between assumption and proposed action in the following example, which involves nursing homes:
Assumption: The costs of extended care will receive even more scrutiny as the demand for services escalates. As managed-care companiesincreasingly blanket the healthcare marketplace, they will seek to find cost-saving measures wherever possible. Many will look for nursinghomes with lower cost structures to provide more sophisticated services to their sub-acute patients.
Action: Bring in a consultant with healthcare industry experience to design a value-driven program.
A discussion follows of value-driven strategy and its importance to healthcare strategic planning. Escalating costs are one issue faced byHCOs in the United States and throughout the world. The increase in healthcare costs over the last few decades is not sustainable.Controlling healthcare costs is a challenge for everyone involved, including administrators, providers, medical device manufacturers,pharmaceutical companies, and patients. Closely associated with cost control is the concept of value—achieving the best outcomes for thelowest cost. Areas in need of improvement include (a) healthcare delivery methods, (b) metrics that accurately measure costs andoutcomes, and (c) methods of reimbursement (Chartered Institute of Personnel and Development (CIPD), 2013).
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4.7 Healthcare Delivery Methods
4.7 Healthcare Delivery Methods
Today's healthcare is largely organized around each medical specialty. This method of delivery creates silos where, for example, a patient'sinternist may not be aware of what treatments the patient's orthopedist is performing. Organizing around specialty also results induplication of procedures, higher costs, and no effective way to measure outcomes. Michael Porter, a Harvard University professor, andThomas Lee, chief medical officer for the healthcare consulting firm Press Ganey, suggest the following: Instead of organizing according tospecialty, have healthcare organize around the patient. This method of providing care is known as the Integrated Practice Unit (IPU). TheIPU provides the full cycle of care for the patient and includes all of the patient's clinical and nonclinical personnel. The IPU is a teamcommitted to a specific patient outcome (survival in the worst of cases and sustained recovery in the best). Team members meet regularlyto discuss patients, their progress, and the results. The team also shares joint accountability for patient outcomes (Porter & Lee, 2013).
Metrics to Measure Costs and Outcomes
The advantages of the IPU include avoiding the duplication of services; having one provider organization, which understands all of apatient's health needs and conditions; and providing a way to measure how well the patient progresses. The IPU method allows for costcontrol. At present, hospitals and other healthcare providers typically are reimbursed by fee-for-service arrangements, which means thatthe hospital or physician is reimbursed based on the number and type of procedures performed. With fee-for-service arrangements, even ifthe patient is satisfied with the quality of the healthcare received, there is no way to measure the real cost to achieve that result. Under theIPU system, costs are tied to the patient and not to the procedure (Porter & Lee, 2013).
Outcomes should also be tied to the patient. A hierarchy of patient outcomes is used for measuring the outcomes that matter to the patient,rather than to the healthcare provider. This hierarchy includes three tiers (Porter, Pabo, & Lee, 2013).
Tier 1 involves the health status achieved or retained. Patients are concerned about survival, but to the degree of recovery. For example, apatient who receives an angioplasty is concerned with the level of residual pain and the ability to return to normal activities.
Tier 2 involves the process of recovery, which includes the length of treatment, recovery time, and any complications. To again use theexample of the patient who had the angioplasty procedure, outcome concerns include the scheduling of the procedure, patient anxiety,infection, and the success of the procedure.
Tier 3 is related to the sustainability of health. The angioplasty patient, as an example, is concerned about the need for new surgery,susceptibility to infection, and any possible care-induced illness.
Methods of Reimbursement
Currently, there are two primary methods of third-party reimbursement. One is global capitation and the other is fee-for-service. Globalcapitation, which is popular in HMOs, provides a single payment to cover a patient's entire healthcare needs. The provider is rewarded forkeeping the patient's cost at less than the capitation fee. However, capitation offers no incentive for improving outcomes. Fee-for-service, aspreviously discussed, is the prevalent method of reimbursement and pays for procedures such as X-rays, office visits, and lab work. Thissystem addresses neither outcomes nor costs. Bundled payment, which is described in section 4.2, may represent the future standard inhealthcare payment models.
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Summary & Resources
Summary & Resources
Chapter Summary
This chapter has emphasized the importance of coming to grips with the external and internal environments in which an organization mustwork to fulfill its vision and mission. An organization's analysis of the forces driving or changing its operating environment, especiallylegislative changes, must be an ongoing process if the organization is to keep abreast of the factors that it must respond to in order toremain competitive. Minimizing weaknesses and capitalizing on strengths helps to bolster the ability of an organization to operate effectivelyin its external environment. Specifying assumptions provides a basis for thoughtful consideration of the basic premises on which an HCOoperates. Specifying assumptions should also cause an HCO to ponder the what if and what then scenarios that, through contingencyplanning, help to avoid disruptions in an organization's operations.
Key Points
1. It is vital for an HCO to gauge the external environment within which it operates. This should be standard practice for all organizations. Virtually anything that can happen probably will happen, eventually. We have nocertainty about what things will be like in the future, in spite of our attempts to make predictions or forecasts. Still, an organizationcannot afford to let generalized eventualities and uncertainties keep it from being active in strategic planning, and changing inresponse to environmental demands.
2. PESTLE is an acronym to describe the elements of the external environment that impact an HCO's planning process. These elementsrequire specific analysis about their current or potential impact on the organization's planning and operations. The political, economic, sociocultural, technological, legal, and eco-environmental forces exert strong influences on how an HCO crafts and executes strategicplans. From this analysis, we identify trends and, in effect, take the pulse of the environment in which the HCO operates. An HCO mustbe aware of the characteristics of environmental conditions affecting it, and be vigilant about changes that may occur and what force iscurrently driving change in the healthcare industry.
3. One factor that requires continuous monitoring is how legislation affects both planning and operations. While federal and stateprocesses may differ, depending on an individual state's rules and regulations concerning legislation, the lawmaking process involvesseveral steps, from the introduction of a bill to its passage and the subsequent regulations set forth by the implemented legislation.
4. The forces of competition greatly influence the strategy formation and market-opportunity decisions of an organization. Although eachindustry has its own unique characteristics, the five main forces representative of the actual driving mechanisms of any given industryoften are referred to as the five forces model of industry analysis. These five forces are the industry itself and the competitivedecisions and activities engaged in by each company; the consumer/buyer composition; the supplier composition; the possibility ofnew entrants; and the availability of good product substitutes.
5. The process of reviewing an HCO's internal operations for strengths and weaknesses and scanning the organization's externalenvironment for opportunities and threats is called a SWOT analysis. SWOT is an acronym for strengths, weaknesses, opportunities,and threats. The ultimate goals of a SWOT analysis include, on the one hand, the matching of vital operational strengths with majorenvironmental opportunities. On the other hand, a SWOT analysis provides a basis for eliminating weaknesses, or at least minimizingthem, and avoiding or managing environmental threats to operations. Ideally, a SWOT analysis helps to identify a distinctivecompetence that can be used to tap an important opportunity in an HCO's environment, allowing for the effective fulfillment ofstrategic objectives and the ongoing mission of the organization.
6. An organization's resources—financial, marketing, operational, and staff—are all factors that influence strategic choices. The moreresources that are available, the more options that the HCO can pursue. These resources become the basis for developing a distinctivecompetence—something that the HCO does well and that makes it distinctive from competitors, giving the HCO a competitiveadvantage.
7. No matter where an HCO falls along the healthcare continuum, every provider will be expected to deliver value. Thus, creating valueshould drive the strategic development process in healthcare. For acute-care hospitals, that could mean reduced readmissions and thereduction of duplicate and unnecessary tests and procedures. For skilled nursing facilities or home healthcare agencies, that couldmean better management of unnecessary hospital admissions or collaborating with acute-care hospitals to address their readmissionand redundant-services issues. For patients, it may mean fewer contacts with a physician but greater contact with a team of healthcareprofessionals who work under a physician's supervision.
Chapter 4 Flashcards
Key Terms
Click on each key term to see the definition.
bundled payment, or episodic or episode-based payment
value-based payment, or pay-for-performance (P4P)
Critical Thinking Questions
1. How would the impact of an aging population base affect a group of dentists differently than it would a group of physicians?
2. Differentiate the impact on competitiveness when supplier composition for a hospital is made up of many small suppliers versus a fewlarge suppliers.
3. What strategies would you recommend for an HCO that cannot identify any distinctive competencies in its operations?
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Stevens, R., & Silver, L. S. (2015). Course Material [Electronic version]. Retrieved from https://content.ashford.edu
