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CASE STUDIES

1. Move to a Concierge Model or a Direct Primary Care– Medicine Business Model?

Michael Glen runs the General Medical Clinic, a group of 22 primary care physicians in a prosperous suburb of Philadelphia, Pennsylvania. He has held this position for just over ten years and has seen many changes to the healthcare sector. The clinic includes a spectrum of primary care providers, with six general internal medicine, six pediatricians, and ten family practitioners. The clinic has prospered, and almost all the physicians have full or near-full practices. However, in the past five years, expenses have continued to increase, while revenues remained stagnant. Although compared to national standards the physicians appear to make good salaries, their take-home pay has been flat over the past three years, and they are concerned that it may decrease if healthcare reform proceeds. Currently, General Medical Clinic's primary care practitioners make about $190,000 per year, with some variation for age, practice intensity, and other factors.

The clinic has billed insurance and sought to collect the difference from the patient or, if the patient was uninsured, would seek to set up a payment plan. Its patient load consists of 25 percent Medicaid, 40 percent Medicare, 5 percent bad debt, and 30 percent commercial insurance. Currently, it did not have any capitated contracts.

Michael recently attended a conference where he learned about concierge medicine and direct primary care (DPC). The presenter noted that more and more physicians feel overworked, revenues and salaries are flat, and many doctors spend more and more time on nonclinical paperwork. Many primary care physicians, she reported, have begun to look for practice options with alternative financial arrangements. Capitation has been one option, but it has not been very successful for most primary care practices.

Concierge medicine and direct primary care (DPC) are two relatively new options that could solve these problems, the presenter said. In concierge medicine, practices charge their patients a flat fee (monthly or annually) for enhanced services and greater access. These “enhanced” services usually include same-day access to the doctor, which might be done via cellular phone or text messaging. Such practices often also provide online consultations; unlimited office visits with no copayments; and free prescription refills, house calls, and preventive care services. Most concierge medicine services also bill patients’ insurance.

The woman also described DPC, which, like concierge medicine, charges a monthly or

Walston, Stephen. Strategic Healthcare Management: Planning and Execution, Second Edition, Health Administration Press, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=6452271. Created from apus on 2022-03-24 02:22:02.

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annual fee to patients for enhanced services and access. DPC differs from concierge medicine, as practices do not bill insurance for medical visits, and generally no third-party involvement occurs. Therefore, all of the work associated with billings, claims, and coding is eliminated (Qamar 2014). DPC services also generally include basic lab tests, vaccinations, and generic drugs at or near cost. Practices using either model derive most of their revenues from membership fees and generally experience an increase in profitability.

The proponents at the conference suggested that both models would work well for patients with complex medical conditions needing careful monitoring and help coordinating multiple specialists. As both are relatively new practice models, only a few studies exist, and they suggest better outcomes. One study showed patients in a DPC model had 27 percent fewer visits to the emergency department and 60 percent fewer hospital days, and their healthcare costs their employers 20 percent less (Beck 2017). A study on concierge medicine showed decreases in preventable hospital use, with 56 percent fewer nonelective admissions and more than 90 percent fewer readmissions (Goodman 2014).

Concierge practices generally charge monthly fees beginning at $175 a month, but they can cost more than $5,000 per year. Most practices that move to concierge medicine retain only 15–35 percent of their existing patients. A concierge physician generally maintains a patient panel of only 300 to 600 patients. DPC practices charge a bit less, however, with monthly fees of about $100. Therefore, DPC practices tend to have larger patient panels of 600–800 per physician (Colwell 2016).

Even though concierge medicine and DPC practices often target upper-middle-class families, some seek higher-income families and maintain an even more restrictive and expensive practice. A few very restrictive practices charge $40,000 to $80,000 per family for an extensive, immediate array of services. These practices may include only 50 families in their patient panels. These high-end practices can increase a primary care physician's annual income to about $600,000 (Schwartz 2017).

General Medical Clinic's primary care physicians each currently serve 2,000–3,000 active patients. The older physicians have enjoyed a relationship with many of their patients for more than 20 years. Moving to either model would mean each physician would lose over 1,000 patients—more than 22,000 individuals for the full clinic.

The insurance market in Pennsylvania has changed and will continue to do so. These changes may encourage families to consider concierge medicine or DPC. One survey shows that over half (51 percent) of workers have a healthcare plan that requires them to pay up to $1,000 of out-of-pocket costs for healthcare before their insurance covers any of the expenses. Patients also complain about the long waits in physician offices and very short physician consultation during visits. Data show that an average primary care physician in a traditional practice spends 13 to 15 minutes seeing a patient, while a physician in a DPC practice would spend 30 to 60 minutes (Ramsey 2017).

Some studies show that patients appear to like concierge medicine and DPC, as the monthly fee provides basic checkups with same-day or next-day appointments and the right to purchase medications and lab tests at or near wholesale prices. These services come with virtually round-the-clock access to a primary care doctor, which might include using FaceTime while a family is on vacation or a meeting in the office for stitches after a bad fall

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on a Saturday night. Since DPC practices do not accept insurance, patients owe no copayments or other costs beyond the monthly fee for office visits and primary care.

Yet there are a few problems—for example, up-front, prepaid fees in both models do not qualify as medical expenses that can be reimbursed from a flexible spending account or health savings account. The biggest challenge is that patients must have the financial means to pay the fees. In General Medical Clinic's case, most of the less wealthy patients would not participate. A move to either model requires that the clinic target its affluent patients.

Michael also read that a large company from Philadelphia plans to enter concierge medicine and DPC across the East Coast and announced its intent to enroll up to 800,000 workers in the next few years. It plans to offer very high salaries to attract good primary care practitioners for its expansion. Given General Medical Clinic's current business model, Michael fears that he would be unable to match any lucrative salary offers from this company, and his physicians would leave.

Michael also has ethical concerns about both models. Adopting either model forces patients to find a new physician in a market with primary care shortages. Decreasing a physician's patient panel, as both models do, would also intensify the primary care shortage. In addition, currently, primary care physicians refer many patients to specialists. Reducing the primary care panels would directly reduce the number of referrals to specialists, which might affect the clinic's ability to negotiate better commercial insurance contracts.

General Medical Clinic will hold an executive committee meeting in two days. Michael wants to be able to present both options fairly. He needs to develop an overview and make a recommendation.

Questions 1. What are the advantages and disadvantages of the General Medical Clinic moving its

primary care physicians to concierge or DPC models? 2. How would General Medical Clinic's business model need to change if it moved to either

model? Specifically, how would its value, input, processes, and revenues change? 3. Given the direction of healthcare, what would you recommend if you were Michael?

2. The Virulent Virus

Background A new disease, aguasangre, was discovered about ten years ago. It is a nonfatal but annoying infirmity that causes the soles of the feet to sweat profusely and emit a terrible smell. It has an infection cycle of about two years. Once it manifests, it takes approximately three months to reach an epidemic stage and then disappears, only to reemerge a couple of years later. Populations can receive immunizations against the disease, but the vaccines must be redeveloped each time it reemerges from its site of origin. This site varies, although it is often somewhere in the Amazon Basin. Each time the virus mutates, the site of origin changes. If someone finds the new site of origin soon enough, a vaccine can be developed and sold, but once the virus reaches an epidemic stage, the value of the vaccine drops precipitously. If the

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site is found and samples are delivered to the research center in Parana, Argentina, within three months, huge profits could be made.

Situation An outbreak occurred two and a half months ago. You had information that suggested the origination site was near Iguazu, Brazil. You immediately traveled to Brazil and have been wandering up and down the Paraguay River tributaries for two and a half months. During this dangerous journey, a large spider bit your left hand, and your hand swelled. You also mildly sprained your ankle. At this point, you are low on supplies but determined to persevere.

Amazingly, you finally discover the site and obtain the samples needed to develop the vaccine. You have exactly two weeks to deliver the samples to the research center in Parana. It has been raining off and on for three days. When heavy rains fall in the region, large areas can be flooded for a long time. If you arrive late, the epidemic will have passed and your work will have been in vain. You would like to call in a helicopter to lift you out, but your satellite phone has been damaged and does not work, and there is no other way for you to communicate with the outside world. After careful consideration, you come up with these alternatives:

1. Wait for the rains to end. Your hand and ankle will heal in the meanwhile, and you can enjoy a safe trip home and hope for better luck next year.

2. Cross the Paraguay River basin. This trip can be dangerous. With the heavy rains, parts of it may be impassible. However, you can cross it quickly; the trip takes seven to ten days —if you make it without harm. If you encounter more rain or are injured again before you arrive on the other side of the river, you probably will have to turn back. In either case, you may perish; piranhas, snakes, and other wild animals inhabit the basin, and the water is deep.

3. Go around the head of the river basin. This path is less dangerous and usually passable. It is slow and tiring, however. In good health, you could probably make it in two to three weeks.

The weather appears only moderately favorable; heavy wet clouds hover over the area. It has been drizzling, but it could clear up or rain intensely. You listen to your radio. Meteorologists are predicting that in 48 hours, they will know if a tropical depression is moving inland or outward to the Atlantic. You think of one more option.

4. Wait two to four days. At that point, choose #2 if the weather permits or #3 if it does not.

What do you do? (Circle your answer.) #1 #2 #3 #4

3. The Case of Humana and Vertical Integration

Humana, Inc., is one of the largest publicly traded managed care companies in the United States. The company has about 6.2 million enrollees in 16 states. It offers primarily HMO and PPO plans, along with Medicare and Medicaid insurance products and other

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administrative health services. Early in its history, however, Humana pursued and seemingly failed to carry out a vertical integration strategy. The company began in the nursing home industry, developed into a sophisticated integrated healthcare company, and then divested to become a managed care company. This case poses many questions regarding the value and difficulty of becoming a large, vertically integrated company.

Humana is a good subject for analysis and highly relevant to typical corporate healthcare decision making because it has experienced multiple stages of diversification and development, on both a product line and companywide basis. At one time, it was one of the largest hospital companies in the United States, known for its efficiency and centralization. It fervently pursued expansion into health insurance and offered this product first in January 1984.

Humana's History In 1961, four friends put up $1,000 each to found a nursing home. Subsequently they expanded into more than 40 facilities, and by the late 1960s their company, Extendicare Inc., was one of the largest nursing home companies in the United States. With the passage of Medicare, they branched into the hospital business and by 1970 owned ten hospitals, which became so profitable that they divested their nursing homes in 1972.

They changed the company's name to Humana in 1974. Through intense cost controls, centralization, and high volumes from growth, Humana achieved economies of scale and continued to earn significant profits. By the early 1980s Humana was one of the largest hospital companies in the United States. Humana determined that owning its own insurance products could benefit its hospitals by garnering 70 percent of referrals, and so it began to offer health plans. However, in reality Humana was unable to attract more than 46 percent, and difficulties and conflict erupted among its hospitals, insurance divisions, and medical staff members.

By the late 1980s, Humana's net income plunged, prompting the company to restructure its hospital and insurance businesses. By the early 1990s, its managed care plans were generating more than $2 billion in revenues and had become more profitable than its hospitals. Finally, in 1993, Humana spun off its hospital division of 76 facilities into a company called Galen Health Care Inc., which merged with Columbia Hospital Corporation six months later (see www.fundinguniverse.com/company-histories/humana-inc-history/).

A number of significant problems motivated Humana to divest its hospital business. The first problem was the conflicting economic objectives of the health insurance business and the healthcare-providing business. The purpose of a health insurance company is to sell insurance policies by keeping its premiums low. The best way to control its expenses is to minimize its customers’ use of healthcare services. The majority of a health insurance company's savings result from lowering the incidence and length of hospitalization. In contrast, healthcare providers increase their income by increasing utilization. They have an incentive to give their patients the best and most of everything. In this way, they maximize their patients’ welfare and their own.

Second, transfer pricing encouraged the use of non-Humana hospitals. Humana, like all integrated companies, used transfer prices (see chapter 4) to account for the sale of its

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http://www.fundinguniverse.com/company-histories/humana-inc-history/

hospital services to its insurance division. Generally, transfer pricing may be set at full charges, at cost of goods, or at a discounted rate. But surprisingly, despite the financial expertise of Humana cofounder David Jones, Humana set the transfer prices for its own hospitals higher than the market prices for its competitors’ hospitals. As a result, Humana's insurance division preferred to refer its patients to non-Humana hospitals. After all, the hospitals that were not owned by Humana charged the insurance division less. Ironically, the vertically integrated firm was paying to put its patients in competitors’ hospitals while beds in its own hospitals stayed empty.

Third, Humana's relationships with its physicians were problematic. Predominantly, Humana organized its HMOs around physician practices known as IPA-model HMOs instead of employing doctors directly, as did staff-model HMOs. What Humana recognized too late was that the IPAs often did not represent Humana's best interests. Humana's HMOs, like others in the industry, tried to trim costs by cutting the amount of money they paid doctors. Because Humana's doctors were not on the company's staff but under a contractual relationship with Humana as well as other HMOs, the doctors could—and did—retaliate when Humana lowered the amount it paid to the IPA physicians, referring patients away from Humana's hospitals and into competitors’ beds.

Another problem concerned doctors not selected to be on Humana's HMO panels. Physicians who had been excluded from the Humana insurance plan were often angry—so angry that they also started referring more of their patients to non-Humana hospitals. Humana welcomed these physicians too late into the insurance plan. When it finally included them, yet another problem surfaced: Humana had diminished its power to influence these physicians’ behavior. Humana's health insurance plan was not a significant part of these newly included doctors’ practices; it covered only a few of their patients, and Humana therefore had little power over them. This lack of incentive and influence bred indifference among physicians and occasioned an increase in the length of Humana enrollees’ hospital stays—and many of these extra hospital days were spent in non-Humana facilities.

The fourth problem was costs. Humana's hospital costs grew because the hospital division's management was distracted by many of the company's new acquisitions and lacked experience in the insurance area. David Jones had started the health insurance division precisely because of the large number of empty beds in Humana's hospitals. The salaried physicians in Humana's primary care centers did little to enhance referrals to Humana's hospitals. Humana's tightly centralized hospital management had no experience in guiding salaried physician practices and could offer little advice to their physician managers. The physicians earned the same salary regardless of the number of patients they saw, and many of them failed to develop a patient following in their communities. As an owner rather than a renter, Humana was forced to pay the full costs of its hospitals and full salaries to its physicians whether they had patients or not.

In the early 1990s, Humana found that owning both HMOs and hospitals put it at a disadvantage when it came time to sign contracts. Jones stated,

After the strategies began to appear to some extent incompatible, we started having trouble carrying water on both shoulders. It seemed that if we solved a problem for the hospital it would create a problem with the health plan, and [vice versa]. We could see that conflict, but amazingly enough, it did not surface for a number of years. We started in

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1983 being an integrated company, and the strategy worked reasonably well for a while. But it got more difficult as we got larger, which surprised me. I would have thought it would have gotten easier as we got larger. (Luke, Walston, and Plummer 2004, 243)

After the hospital divestiture, Humana divested and outsourced other operations. It exited numerous underperforming markets, divested a unit that sold and administered flexible spending accounts, sold its wholly owned health centers, transferred the risk and administration of its long-term disability products to Duncanson & Holt Services, and sold its Medicare supplement and workers’ compensation businesses.

These transactions enabled Humana to focus on a core business of health insurance and to invest in technological enhancements. The company sought to position itself as a leader in the “digital health plan industry” and possibly as the first health plan to operate fully through the Internet. During the 1990s, Humana made more than 20 corporate acquisitions and became one of the United States’ largest managed healthcare plans. By 2011, Humana's medical benefit plans had grown to about 11.2 million members and its other specialty products to approximately 7.3 million people, with 76 percent of its revenues coming from contracts with the federal government (Humana 2012).

At one time, Humana was one of the most powerful vertically integrated players in the healthcare field. As a result of both environmental pressures and the difficulties of sustaining a vertical organization in healthcare, Humana has become a strong health insurance business.

Questions 1. What can hospitals considering vertical integration learn from Humana's mishaps? 2. Why did Humana integrate and then evolve into a managed care company? 3. Did Humana act most efficiently by divesting its provider assets? What might the

company have done to overcome the problems inherent in managing both provider and insurance operations?

4. Did Humana have difficulty transferring managerial knowledge across business lines? Why or why not?

5. Was vertical integration an issue as a result of the four problems mentioned in the case, or is it an issue in all large organizations? How can largeness affect the managerial ability of a company such as Humana?

6. What problems did Humana's choice of transfer pricing present? Why were the transfer prices of Humana's hospitals set higher than market prices? What recommendation would you have given to Humana?

7. What were the specific reasons physician relationships and incentives caused problems? What structural or incentive plans might have helped resolve these problems?

4. An Orthopedic Group Decides to Construct a Specialty Hospital

The “About Us” web page of OrthoIndy, an orthopedic group practice based in Indianapolis, Indiana, states: “With over 80 physicians providing care to central Indiana residents from

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more than 10 convenient locations, OrthoIndy provides leading-edge bone, joint, spine, and muscle care.”

OrthoIndy has adjusted its practice over time. For years its physicians took patient emergency calls for all hospitals in the area and provided services to all types of patients. As the market became more competitive and the physicians’ incomes declined slightly, OrthoIndy decided to reduce calls and cover only key facilities (Methodist Hospitals based in Gary, Indiana, and Indianapolis-based St. Vincent Health) and stopped treating Medicaid patients. This decision upset most of the hospitals in the area, as well as orthopedists who were not affiliated with OrthoIndy. Some of OrthoIndy's partners were concerned about the ethical and political ramifications of the decision, but ultimately all parties agreed with it. Although these choices improved the income and lifestyle of the practicing physicians, they wished to augment their salaries further. The group practice already owned a large, profitable surgical center.

The OrthoIndy group had always been supportive of community activities, especially sports. It served more than 15 teams, including professional football, basketball, and racing teams, as well as high school teams. OrthoIndy's patient commitment is stated on its website (Revolvy 2017):

The physicians and staff at OrthoIndy and IOH are committed to our patients. The following is our commitment to YOU:

At OrthoIndy, our physicians set out to create a patient experience unlike any other in Central Indiana. The result, the Indiana Orthopaedic Hospital [is] one of the highest ranked facilities in the country for patient satisfaction.

Our patients are at the center of everything we do, and their collective experience—both clinically and personally—is the result of every interaction they have with each person in our hospital. And that's why we strive to treat our patients as members of our own family in a like-home environment. At OrthoIndy and IOH, our highly- skilled physicians and staff are committed to our patients’ health, safety and the comfort of their individual orthopaedic care.

The opening (or impending opening) of four specialty heart hospitals in the Indianapolis area caused OrthoIndy to analyze the potential for a joint-ventured orthopedic hospital. From many of the physicians’ perspectives, the cardiologists working at the new heart hospitals were gaining a new stream of revenue and, along with their partners, would be able to provide new, beautiful facilities and equipment to attract better-paying patients. Following lengthy and somewhat heated arguments, OrthoIndy decided to proceed with a for-profit, partnership-style organization—a state-of-the-art hospital that would specialize in musculoskeletal care. Only members of the group could become partners in the new Indiana Orthopaedic Hospital. Those with ethical or other reservations could distance themselves from the venture.

The plan was to fast-track the opening of Indiana Orthopaedic Hospital by shortening its construction time by six to ten months. OrthoIndy's leaders justified the venture by asserting that their stand-alone, state-of-the-art facility owned and operated by OrthoIndy physicians would provide patients higher-quality care and better treatment options.

By offering various services, OrthoIndy aimed to differentiate the new hospital from the other general hospitals practicing orthopedics in its market area. From admission to discharge, patients would enjoy a “like-home” atmosphere, complete with satellite television

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and access to e-mail and the Internet. Patient rooms would be spaciously and well appointed and would include a work or reading nook for friends and family members. After discharge, patients would enjoy additional conveniences, such as coordinated postoperative appointments with their physician's office and referrals to the state-of-the-art, on-campus physical therapy center.

With great effort, construction crews completed the hospital on time. The following announcement was published on its opening day (PR Newswire 2005):

INDIANAPOLIS, March 1—OrthoIndy announced today the opening of the Indiana Orthopaedic Hospital, central Ind.'s first and only orthopaedic specialty hospital located at I-465 and West 86th Street. Spanning 130,000 square feet, the hospital represents a $50 million commitment to the city of Indianapolis, its residents and to the patients who will receive care at this state-of-the-art facility….

The Indiana Orthopaedic Hospital was built when OrthoIndy physicians saw an increasing need to deliver specialized orthopaedic care in a patient-focused environment. Approximately 60 physicians from central Ind. will practice at the hospital that will focus on complex surgical procedures, including total joint replacements and spinal cases. Amenities include 10 spacious and technologically advanced operating suites, 37 patient rooms, 39 pre and post-operative rooms, 16 post-anesthesia care unit (PACU) rooms, an imaging center with digital radiography, Magnetic Resonance Imaging (MRI), and CatScan (CT) availability, in and outpatient therapy services, a pharmacy and cafeteria. Additionally, each patient room features a workspace area for guests and is equipped with the GetWellNetwork™ which provides patients with an Internet connection, satellite television and access to patient educational materials.

Interestingly, about a year later, one of the larger hospitals in the area—St. Vincent Health—spent $9 million to improve its orthopedic services by forming a 61-bed orthopedic center and to create “something that will be the best in the Midwest for orthopedic care.” Other area healthcare leaders were expected to respond to St. Vincent's investment in orthopedics and increase the competition in this market (Murphy 2006).

Questions 1. What strategy perspectives did OrthoIndy employ in determining to build its own

hospital? 2. Do you believe OrthoIndy's strategic tactics worked? Why or why not? 3. Was the strategy congruent with OrthoIndy's mission? Why or why not? 4. What effect do you think the new construction had on consumers? 5. Do you think that a specialty hospital such as Indiana Orthopaedic Hospital would

increase or decrease the costs, quality, and availability of care for consumers? 6. How were the general hospitals near the specialty hospitals affected? Why did St. Vincent

Health create its own orthopedic center? 7. How did OrthoIndy's business model differ from those of other competitors?

5. The Struggle of a Safety Net Hospital

The costs of caring for uninsured and underinsured patients are shouldered by both public and private organizations but often fall primarily on older, publicly owned facilities. The cost pressures and demands for care often far exceed the budgets and resources of many public

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providers. Wishard Health Services, located in Indianapolis, Indiana, is an example of a public

provider that has struggled to position itself strategically to achieve its mission to care for the poor of Marion County. Its mission, vision, and values are as follows (Wishard Health Services 2013):

Our Mission The mission of Wishard Health Services is to:

Advocate Care Teach Serve

with special emphasis on the vulnerable populations of Marion County.

Our Vision Wishard Health Services will enhance continuously our ability to meet the needs of the underserved and all people of Marion County, will be sound economically, and will lead innovatively in clinical care, research, education, and service excellence.

Our Values

Professionalism Respect Innovation Development Excellence

By 2003, Wishard was under tremendous pressure. The hospital was owned and operated by the county and, as noted, had a mission to care for the vulnerable and underserved population of the county. Although there were almost a dozen other hospitals in its service area that provided some care to the indigent, the county hospital was seen as the main provider for this segment of the population. Although the other hospitals did not refuse to provide emergency care for the poor, most elective Medicaid and indigent patients were routinely sent to Wishard's facilities. Almost 90 percent of its patients were covered by a government program or had no insurance coverage. As a result, revenues were always short, operating losses had to be subsidized by tax revenues, and capital projects were constantly deferred. With no funds to expand or refurbish its facilities, Wishard Hospital and Wishard's clinics were extremely crowded and looked old and worn. The facilities’ condition, coupled with their location in a poor part of Indianapolis, Indiana, discouraged the patronage of insured patients.

In 2003, the situation seemed to be worsening further. Wishard was in deep financial trouble, and its executives discussed ways to reduce the system's losses. Wishard's CEO publicly stated a deep concern about the 144-year-old institution's future. Wishard Health Services included its 492-bed hospital, six community health clinics, and Midtown Community Mental Health Center, which together served about 800,000 patients per year. According to Dr. Robert B. Jones, the hospital's medical director, 50 percent of those patients

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were insured by Medicaid or Medicare, and 40 percent had no insurance. City officials also were worried about the financial health of Wishard and talked about a

potential shortfall of between $20 million and $80 million out of a $385 million budget. The best estimate was that Wishard was on track to end the year with spending at $35 million, but it could turn out to be much worse. The hospital did have cash reserves that could cover this deficit in 2003, according to Wishard's president Matthew Gutwein. But if the deficit continued and worsened in 2004 as expected, this reserve would be completely empty, and Wishard essentially would be broke by the end of 2004 with even worse years to come.

Wishard's ability to survive and fulfill its mission was seriously challenged. The primary factors contributing to the deep losses included the following:

Declining reimbursements from the Medicare and Medicaid programs for the elderly and poor (For every $1 in hospital bills submitted to the two federal programs, Medicare paid just 82 cents, compared to 89 cents four years earlier. Medicaid paid 70 cents for every dollar of service, down from 90 cents.) Increasing numbers of patients without insurance to pay their bills (Nationwide, the number of uninsured had reached 43 million residents, 700,000 of whom were in Indiana.) Continual hikes in the prices of drugs and new equipment and in wages for nurses and specialists, who were always in short supply Stiff competition from specialty hospitals and surgery centers that appealed to well-off, paying patients, whom mainline hospitals depended on to earn their profits A weak stock market that sent hospital endowment investment income plummeting

Something had to be done, and Wishard was seriously considering almost all of its options, including these:

Closing Wishard's heavily used and highly respected emergency department Merging with Clarian Health, which operates Indiana University, Riley Children's, and Methodist hospitals, or entering joint ventures, potentially involving construction projects Building a hospital to replace Wishard facilities, some of which had been built in 1914 Increasing copayments for outpatients to reduce unnecessary outpatient visits

Wishard's CEO stressed that construction of a new hospital would not be likely for another 5, 10, or even 15 years, depending on the pace at which fundraising set aside sufficient monies for construction or on the ability to pass a county bond to fund the construction. The construction would be very expensive; replacement of the whole facility could cost up to $750 million.

While Wishard was struggling to decide what to do, a construction boom occurred and competition increased among area hospitals. Hospitals around Indianapolis were spending lavishly, investing more than $700 million in new or updated facilities, most with interior decor and lobbies fit for luxury hotels. These elaborate new facilities made Wishard appear even worse off.

This new focus on consumerism and profligate spending in the hospital business gave rise to what Daniel Evans, president of Clarian Health, called “mindless competition.” For

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example, the $60 million Heart Center of Indiana in Carmel, which opened in December 2002, offered cooked-to-order meals. City-focused Clarian, the largest healthcare system in the area, expanded its market to the suburbs by building a $150 million hospital in Hendricks County and a $235 million hospital in Carmel. The Hendricks County Medical Center was situated in a parklike setting that included a half-mile of walking trails in a serene environment intended to reduce the stress of a visit or stay in the hospital. To keep patients and attract new ones, both St. Vincent and Community Hospital took on physician groups as equity partners in their heart hospital projects, while Clarian sought to partner with physicians at its two for-profit suburban hospitals. St. Vincent opened a $24 million children's hospital in 2003, becoming the first facility to compete head to head with Clarian's Riley Hospital for Children, previously the only children's hospital in central Indiana. St. Vincent also opened a $15 million cancer center, complete with a serenity garden and an indoor waterfall, while Clarian planned to counter with an even larger cancer center near IU Hospital.

Area hospitals’ struggle to compete was compounded by the market entry of national for-profit providers. For example, almost all local hospitals offering cancer care lost business to an aggressive for-profit operator, U.S. Oncology, which opened four cancer treatment centers in the Indianapolis area in the previous six years under the name Central Indiana Cancer Centers. These freestanding centers were projected to treat more than 43,000 patients in 2003. The cancer centers could handle patients at a lower cost because they lacked large hospitals’ overhead stemming from their big maintenance staffs, parking garages, and building needs.

The hospitals also faced competition from OrthoIndy, a large orthopedics practice that was building a $30 million orthopedic hospital, and the 60-room Heart Center of Indiana, which featured a highly trained staff, one of the first all-computerized patient record systems, and furnishings befitting a Fortune 500 firm. Other hospital sites also demonstrated opulence. Clarian's futuristic $40 million People Mover was designed to ferry doctors and staff over city streets to its scattered hospitals, and the lobby of Clarian's two-year-old, $30 million cardiovascular center featured a terrazzo stone floor.

Amid all of this change, most hospitals were receiving lower reimbursements from insurers than they had previously, and the growing demand for charity care decreased the profitability of three of Indianapolis's four largest hospital networks. The following table shows these three networks’ revenue, earnings, and full-time equivalents in 2002 and the percentage change in revenue and earnings from 2001. The figures for St. Vincent, the fourth network, are from the first eight months of the 2002–2003 fiscal year and include its hospital in Carmel.

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Although their reimbursements and profits decreased, all of the healthcare systems except Wishard still made money in 2002.

What Should Wishard Do? Some believed that the days of a stand-alone Wishard were over. Dr. Brater, dean of the IU Medical School, believed that there were strong reasons to consider bringing Wishard into the Clarian network in a formal way. Few (if any) inner-city, tertiary hospitals providing high-level, specialized care could survive within a one-mile radius of each other. In 1995 Methodist Hospital merged with IU's hospitals, which were located less than one mile from Wishard. A merger would potentially eliminate duplication of services and create economies of scale.

Would Clarian agree to take on Wishard's massive community burden of indigent care? What effect would this liability have on the competitiveness of Clarian Health Partners, especially after the construction and financial commitments it had recently made?

Short of a merger—which was not a foregone conclusion—Clarian and Wishard discussed ways to collaborate and save money. They considered options that would be invisible to patients and the public, such as joint billing and purchasing. Collaboration on medical initiatives, even joint ventures involving construction, also was a possibility. Some collaboration already existed between the two. Wishard did not provide open-heart surgery, so it sent its open-heart surgery patients to Clarian. Wishard operated a burn unit, whereas Clarian's local Methodist Hospital did not, so Clarian sent its burn patients to Wishard.

Wishard was recognized as an important part of the area's healthcare system. The other area hospitals and community knew that closing Wishard would have a devastating impact on area healthcare providers in that they would have to absorb the indigent care. Indigent patients would also have a much more difficult time finding care.

Mark Mueller, a patient whose perspective on Wishard had changed with his own fortunes and health problems, exemplified the struggle of indigent people to obtain care. He counted on Wishard for almost all of his healthcare—in fact, his life depended on it. He had been diagnosed with diabetes, and his kidneys had failed. He had been unemployed for six years and lived on disability. He had lost his insurance coverage, so Wishard was the only

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place he could go for care. “I wouldn't have any options,” said Mueller, a widower. “I just don't see how the poor…well, a lot of them won't survive if Wishard goes down the tubes” (Penner 2003a).

An Interim Solution Wishard had to do something to stem its losses. Frustrated, Wishard's board realized that most of the options it had considered were too long-term or impractical. However, it seriously discussed yet another option—increasing and enforcing copayments. While the overall purpose of Wishard was to care for the poor, the more poor patients it served, the greater the hospital's losses. In an effort to reduce the number of visits by poor patients, Wishard implemented a new copayment policy on October 1, 2003, that dramatically increased copayments for patients visiting physician clinics and using emergency department services. Although revisions of this policy in 2004 decreased the amount of up-front (time of service) copayment required of self-pay patients, copayments still ranged from $35 to $120, a significant amount for most indigent patients.

Collection of copayments also became vigorously enforced. In the past, the clinics and the emergency department often overlooked it, understanding that many of their patients had little or no money. Beginning in late 2003, each clinic, hospital, and emergency department was required to collect copayments from all nonemergency patients up front.

Some board members and physicians were concerned that this policy would discourage vulnerable patients from seeking care. They speculated that pregnant women might skip physician visits and wind up rushing to the emergency department at the time of delivery. They also feared that patients with diabetes and hypertension might self-treat and seek care only in emergencies, which could increase hospital stays and the overall cost of care.

Wishard continued to struggle to find its strategic direction. The only certainty was that the future would become only more difficult for all healthcare providers, especially those like Wishard that primarily served poor and vulnerable populations.

Sources: Penner (2003a, 2003b); Swiatek (2003).

Questions 1. What was Wishard's competitive situation? 2. Did Wishard have direct competitors? If so, in what areas did it compete? 3. What strategic leverage did Wishard have over the other area hospitals? 4. From a societal perspective, what problems occur by having a stand-alone public hospital

with a primary mission of serving the indigent population? 5. What strategic steps would you recommend for Wishard?

6. St. John's Reengineering

St. John's Hospital, a medium-sized hospital located in Seattle, Washington, was established in 1894 with a primary mission of caring for the sick and downtrodden. The hospital had grown and developed as a solo facility until 2000, when it merged with a suburban hospital,

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St. Agnes. This merger caused many changes in the organizational structure of both hospitals. A corporate office was established and located approximately halfway between the facilities. The president of St. John's, Abhishek Ghosh, was promoted to the position of corporate president, and the president of St. Agnes became the senior vice president.

The early 2000s was a busy time for the corporate office. By 2002, it had 45 employees. The hospitals diversified their organization by purchasing a number of urgent care centers, physician office practices, and skilled nursing facilities. Ghosh was certain that integration would create stability and financial success. However, the urgent care centers and the skilled nursing facilities barely broke even, and the physician office practices lost almost half a million dollars per year. As the years progressed, it became increasingly critical for the hospitals to generate enough cash flow and profit to subsidize the other parts of the corporation.

Both hospitals did reasonably well in the early 2000s, but with reductions in Medicaid and Medicare reimbursements, their margins narrowed. By 2003, both hospitals were earning less than a 2 percent net profit margin, and the prospects for 2004 seemed worse. In 2003, patient revenues did not cover expenses for the first time. After seeing these figures, Ghosh called an emergency executive session. Those in attendance included the presidents of both hospitals, Ghosh, and corporate legal counsel. The only item on the agenda was to figure out what to do to get back into the black.

The first to speak was Joe Alexander, who at that point had served as corporate counsel for four years. He had been a staunch promoter of total quality management (TQM) since it had been introduced in 1993. However, because the system had not prospered recently, he and many others had become discouraged with the principles of TQM. Something stronger was needed to reenergize the hospitals and corporation. A few weeks prior to the meeting, Alexander was pondering this dilemma as he opened the afternoon mail. Among his many letters, a bright mailer caught his eye. It was an invitation to a local seminar on hospital reengineering. He had read material about reengineering in Fortune and other popular magazines and knew that prominent companies like Taco Bell and AT&T claimed they had experienced huge improvements as a result of their reengineering efforts. The local seminar cost only $250, so he decided to attend. He finished the seminar the day before the emergency executive session.

“I just came back from a seminar that may be the ticket to saving our hides,” said Alexander. “Reengineering has been widely used in many industries to radically improve firms’ costs, quality, and speed. I wish we had learned more about this opportunity earlier; we might not have wasted so much time on TQM.”

“Tell us more about it,” said Ghosh. “Well, it's a way to improve processes. Everything we do in an organization involves

processes. Reengineering involves designing and implementing the most efficient, needed processes. It dramatically lowers costs—some say as much as 30 percent—and improves quality.”

Additional discussion ensued, during which the decision was reached to put Alexander in charge of an effort to reengineer both hospitals.

With great enthusiasm, Alexander took the corporate chief financial officer (CFO),

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Yoon Tae Chong, to another conference to learn how to implement this great process innovation. They wanted to be thorough, so they worked with an external consulting firm and developed a series of principles on which to focus. Alexander presented them to Ghosh for approval.

Alexander stated, “Thank you for the opportunity to develop this process. I think with our team and these guiding principles we can really reduce our costs and strategically position ourselves for competitive advantage.”

Ghosh said, “Tell me again the seven principles you developed.” Alexander responded, “First, process-oriented organization, benchmarks set as

achievement goals, and blank sheets (biases are too strong among established people). After those three, standardization between the hospitals and employee-led teams (which are the most efficient structure because they reduce the need for middle managers). Then we shift to three key areas of focus: access, materials, and delivery of care. And finally, dealing with union issues de facto. I just need your approval to get moving and to get Yoon to help us start saving money.”

“Joe, I think you've done a wonderful job,” replied Ghosh. “Get to work and let's get this hospital system in shape.”

Alexander quickly began to organize an implementation team. He brought in Second Chance Consulting Inc., and with the CFO, selected 36 employees from each of the two hospitals to design changes. These employees were divided into three groups. One group was put in charge of access, one in charge of materials, and one in charge of delivery of care. The consultants set benchmarks of 20 percent reductions in costs in each area. Alexander was concerned that staff in the key areas might be resistant to changing their processes, and he wanted a fresh perspective. He therefore asked that all of the people invited to participate be assigned to areas outside their own. He also decided not to include any of the hospital managers and department heads, believing they would not represent the best for the hospital as a whole.

The teams spent a total of six weeks intensively designing new standardized processes that could be implemented across the two hospitals. At hospital roadshows, corporate personnel talked about the great changes that the teams were designing. Staff were told that the changes would save the hospitals from ruin and reverse their fortunes.

However, some expressed skepticism. As the date of implementation neared, the hospitals’ administrators—perturbed by what they considered a show of disloyalty—told managers that those who did not support the effort should look for other work. Dissent immediately went underground, and the administrators believed they finally had all managers on board.

At the end of the six weeks, leadership drafted a detailed “battle plan” to reengineer the organization. Four from each team were retained to implement the designed solutions. The rest of the team members disbanded. Each employee involved in designing the changes was given a laptop computer as thanks for her work.

The first action was to eliminate two-thirds of the nursing middle managers. This change was projected to yield savings of $2 million per year. It was instituted to promote team-based authority among the nursing units, although many nurses feared that quality and

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communication would suffer. Other changes soon followed. The cafeteria was eliminated; patient food menus were minimized; a new position combining food service, housekeeping, and transportation was created; and the admissions staff was cut by half, among other major changes.

Hospital executives required that employees implement changes, but managers and rank and file found that many were impractical. Some issues caused by the changes were not addressed, such as admitting Medicaid patients after half of the admissions staff had been eliminated. Access to the hospital slowed to a crawl because many Medicaid patients had to wait for verification of benefits. The elimination of the cafeteria forced employees to bring in food or leave for meals, reducing employees’ work time. The minimization of patient food menus was a disaster. The three same menus were rotated over and over, and dinner on Wednesdays was always the same: corned beef and cabbage. Patient complaints about food skyrocketed.

The hospital unions also complained and refused to cooperate. The new position required a lot of cross-training, and the union demanded wage increases for each new skill employees had to acquire. Most new positions increased existing personnel's wages by about $1.00/hour. Materials management was decentralized, and 18 new people had to be hired as a result; this change seemed to increase, not decrease, costs.

Although the changes clearly were not producing positive results, managers were reluctant to express their concerns to hospital administrators. The executives remained positive and were certain that the changes would save their hospitals. Alexander continued to be a big supporter of reengineering and cited sabotage and bad attitudes as reasons for the lack of success. His focus was to stay the course and fully implement the plan. He reminded managers that loyalty and commitment were required to move forward.

After a tumultuous year of implementing the changes, the hospitals’ financial losses accelerated. Costs did not decline significantly, but the number of patients declined. Employee and patient satisfaction were at an all-time low. St. John's board of trustees became concerned and began to question the organization's direction.

Questions 1. What problems arose during the reengineering at St. John's? 2. How could the executives have improved the process of change at St. John's? 3. What next steps would you have recommended to the corporation's board?

7. The Battle in Boise

One would not expect Idaho, a state with fewer than 2 million residents, to be highlighted nationally as an example of heightened conflict among physicians and hospitals. Nevertheless, competitive pressures and the trend of physician employment have profoundly changed the state's healthcare market. In 2012, the dominant St. Luke's Health System and its smaller competitor, Saint Alphonsus Health System, employed about half of the 1,400 doctors in southwestern Idaho.

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St. Luke's is a regional health system consisting of seven medical centers in southwestern Idaho. Its largest facility is a 399-bed hospital in Boise. The system has expanded in the recent past and controls hospitals in Twin Falls (228 beds), Jerome (25 beds), Ketchum (25 beds), and McCall (15 beds) (St. Luke's 2013). The system also aggressively prepared itself for the changes that will be instituted by the Affordable Care Act.

Saint Alphonsus, on the other hand, belonged to Trinity Health, a large national system of approximately 30 hospitals. Saint Alphonsus had two facilities in southwestern Idaho: the 381-bed Saint Alphonsus Regional Medical Center in Boise and a 152-bed hospital in Nampa (Trinity Health 2017).

By 2012, according to an article in the New York Times, many independent doctors were complaining that both hospitals in Boise, especially St. Luke's, had too much power and control over their medical practices (Creswell and Abelson 2012b). The doctors accused St. Luke's of dictating which tests and procedures to perform, how much to charge, and which patients to admit. Independent specialists claimed that their referrals from the physicians employed by St. Luke's had dropped sharply and that patients frequently paid more for treatment at the hospital than they would pay at an independent physician's office.

At the same time, employed physicians voiced growing pressure to meet the financial goals the hospitals had set for them, which in the physicians’ opinions often entailed unnecessary tests, procedures, and hospital admissions.

Although the two hospitals have competed for decades, their rivalry intensified in the years just prior to 2013. Saint Alphonsus, trying to slow St. Luke's perceived domination, even sought a court injunction to stop St. Luke's from buying physician practices. This legal maneuver claimed that St. Luke's market dominance allowed them to raise prices and to demand exclusive or preferential agreements with insurance companies. As an example, Saint Alphonsus claimed that the price of a colonoscopy had quadrupled, and that St. Luke's charges for laboratory work were nearly three times the fees charged by others in the market. Saint Alphonsus argued that St. Luke's dominance was hurting Saint Alphonsus's business and creating steep declines in hospital admissions and referrals from physicians employed by St. Luke's.

St. Luke's justified its actions, saying it was positioning itself to better compete and improve its ability to coordinate patient care when it was to become an accountable care organization (ACO). ACOs require close coordination between hospitals and physicians and are predicted to cut healthcare costs by eliminating unneeded procedures and tests and keeping patients out of the hospital.

As a result, the Federal Trade Commission (FTC) and the Idaho attorney general began to investigate St. Luke's. Jeffrey Perry, an assistant director in the FTC's Bureau of Competition, was quoted in the New York Times: “We're seeing a lot more consolidation than we did 10 years ago. Historically, what we've seen with the consolidation in the health care industry is that prices go up, but quality does not improve” (Creswell and Abelson 2012a).

The number of independent physicians in the United States is rapidly decreasing. In 2000, 1 in every 20 physician specialists was a hospital employee. By 2012, 1 in 4 was employed and 40 percent of primary care physicians were hospital employees. By one estimate, Medicare is paying upward of a billion dollars more annually for the same services

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because hospitals can charge more when their doctors are employees. For instance, laser eye surgery can cost $738 when performed by a hospital-employed doctor, compared to $389 when done by an independent doctor. Likewise, an echocardiogram can cost $319 if done in a hospital versus $143 if performed in an independent doctor's office.

Employed physicians in Boise also stated that they were strongly encouraged to refer to other doctors working for their employer, even if those doctors were not the best choice of provider for their patients. (Hospitals employing physicians have financial incentives to retain referrals and admissions.) In Boise, doctors employed by St. Luke's were pressured to refer only within the St. Luke's system, according to Saint Alphonsus's complaint. Saint Alphonsus claimed a 90 percent drop in admissions to its hospitals by physicians employed by St. Luke's. The complaint also contended that independent doctors in a nearby community often sent patients 40 miles away for CT scans because of the much higher prices at St. Luke's.

Mr. Pate, St. Luke's CEO, stated in the New York Times that prices for some of their services had increased, but he justified the increase by suggesting that the services had been exceptionally underpriced. He believed that overall costs would decline at St. Luke's as a result of physician employment because it would be better able to coordinate care, prevent expensive emergency department visits, and eliminate redundant tests. Nevertheless, many area physicians remained skeptical that patients would be better served, especially after the price increases.

Sources: Creswell and Abelson (2012b); Jameson (2012).

Questions 1. The Affordable Care Act encouraged vertical integration and consolidation to improve

the coordination of care. However, too much consolidation can give one organization too much market power. What could be done to balance the need to coordinate care and maintain some level of competition?

2. What are the advantages to directing physician referrals within one system of care? Disadvantages?

3. Why could costs (or charges) increase if services are performed within a hospital setting versus in an independent physician's office?

4. How could virtual integration be used to coordinate care without raising fixed costs?

8. Response to St. Kilda's ACO Offer

In January 2013, St. Kilda's, a healthcare system located on the West Coast, was selected by the US Department of Health & Human Services (HHS) to form a new accountable care organization (ACO) to encourage greater physician and healthcare provider coordination and higher-quality care. At that time, HHS had assisted in setting up 250 ACOs for Medicare beneficiaries that set standards for quality and furnished shared savings for providers. Quality measures were guided by the 33 indicators that the Centers for Medicare & Medicaid

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Services (CMS) had established. St. Kilda's reasons for creating the ACO included the following:

Taking a leadership role in providing effective, evidence-based care that truly serves the needs of today's patients, families, caregivers, and communities Building a strong network of primary care—a medical home where patients build a real relationship with their healthcare team Focusing on prevention to keep patients healthy and out of the hospital Moving toward a system that rewards providers for quality care, successful outcomes, and cost-efficiency—not just for the number of procedures they perform Eliminating waste in resources, time spent waiting, and duplication of tests

By 2015, St. Kilda's reported having over 24,000 patients participate in its ACO and having saved nearly $5 million, but, even with this, it did not reach the necessary 2.4 percent minimum savings to achieve the government's shared-savings payment. However, St. Kilda's leaders thought participating in this program was worthwhile, as it allowed the organization to harness new and innovative ways to improve health. Its leadership believed that “as we move away from the fee-for-service model and get closer to a fee-for-value approach, we must master the concept of population management. To make that happen, we must step up our efforts in prevention and health maintenance.”

In 2016, St. Kilda's Health Partners (SKHP), a wholly owned subsidiary of the St. Kilda's Health System, had an integrated network of approximately 1,400 employed and affiliated healthcare providers in its ACO. It was anticipated that by January 2017, SKHP would be in value-based arrangements with multiple payers to provide care for approximately 170,000 members. The anticipated patients spanned the health–illness continuum from healthy to high-risk disease conditions.

As most of the value-based business, existing and anticipated, would be paid by capitation, SKHP sought ways to reduce its costs. For example, in November 2016, a request for proposals (RFP) identified high-cost services unavailable in its system and sought to establish preferred providers and centers of excellence that would be willing to meet both quality and cost criteria. It requested responses in the following specialty areas:

Transplantation, including single organ, multiple organ, and bone marrow Women's health Gastroenterology Bariatrics Oncology Neurosciences and spine services Musculoskeletal and orthopedics Cardiology Urology Rehabilitation Behavioral and mental health Endocrinology and diabetes

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Pediatrics

Successful bidders would have to improve access to quality care and ensure seamless care and communication with primary and specialty care providers. The bid listed the following “value propositions” that successful bidders would have to address:

Improved quality Improved value Reduced barriers to access Enhanced patient and caregiver comfort and convenience Standardization Efficiencies Patient satisfaction Physician satisfaction Improved processes Improved communication

Respondents to the bid were asked to provide a long list of specific data pertinent to their area of expertise and specialty related to the above criteria, including

Length of stay Risk-adjusted mortality index Procedural infection rate Operating room time Procedure volume Patient compliance to treatment plan Disease-specific improvement rates (e.g. diabetes control, weight loss) Transplant wait time Transplant graft survival rate Experience with CMS or payer and employer bundled payments Readmission rate Cost per case Ability to demonstrate affordability and convenience to patient and caregiver while seeking care away from home (e.g., access to low-cost or complimentary lodging, utilities, meals, transportation) Patient perception of ease of access and timeliness of appointments Clinical Group Hospital Consumer Assessment of Healthcare Providers and Systems and the Hospital Consumer Assessment of Healthcare Providers and Systems Patient communication with healthcare team Accreditation information Ability to demonstrate accessibility and timeliness of care Ability to demonstrate a plan to manage the care of SKHP population Proof of a multidisciplinary, patient-centered approach to care delivery

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Respondents were also requested to submit a cost proposal that would delineate the method and amount the respondent would charge St. Kilda's for agreed-on services, including, but not limited to, medical expenses, necessary travel, overhead, supplies, and miscellaneous costs. The cost proposal had to be valid for at least one year. Contracts were to be for three years, beginning April 1, 2017.

In December 2016, Elizabeth Narvaez-Luna, director of strategy at a large, nationally known pediatric medical center, was contemplating the bid with her staff. In the past, its medical staff and administration had enjoyed a positive relationship with St. Kilda's and certainly wanted to maintain this rapport. They did not want other facilities to siphon away the pediatric volumes currently coming from St. Kilda's primary market area. However, a number of significant issues, both positive and negative, caught the staff members’ attention. These included the following:

1. St. Kilda's Hospital (not its ACO) had been incrementally adding pediatric capabilities for years. Some of these services were appropriate for their population, but recently some were venturing into areas believed potentially unsafe, as well as inefficient for the larger region (such as a pediatric blood and marrow transplantation program for a handful of patients or a pediatric cardiac surgery program). Partnering with Narvaez-Luna's pediatric medical center would allow St. Kilda's to eliminate or diminish these marginal programs and get high-quality services to its community through the contract.

2. The bid did not guarantee or even address channeling patients. It contained no provision for directing patients into pediatric specialty care. Prior experience suggested that responding to such bids takes a lot of work and data sharing on the medical center's part, but the pediatric medical center gains little in return, because the bids allow patients to go any hospital they wish. Currently, St. Kilda's pediatric oncologists refer to a large number of pediatric oncology programs across the west. Without a steering mechanism, the staff was concerned that the medical center would receive no additional volumes. On the other hand, working through this bid might help better position individual providers at St. Kilda's, to expand their referral networks.

3. The bid asked broadly for cost information, but the type of requested proposal was unclear. The medical center had a very powerful cost accounting system and could price services quite accurately—therefore, the pediatric medical center has experience providing care under capitation and bundled payments. There are advantages and disadvantages to each payment system.

4. The RFP called for bids in three weeks. It was not reasonable to develop bundled payment proposals in that period. In addition, the staff felt some fundamental opposition to bundled payments, seen as a “race to the bottom,” in which much energy is expended to set a price that is soon to be undercut by a competitor, triggering yet another cut. The hospital had experienced this cycle in the past in other opportunities to set bundled payments. One option is to share the hospital's overall cost position compared to competitors (which is very good) but not to commit to specific prices.

Discussion continued. Ultimately, the director and staff knew they had to develop a

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recommendation to their CEO. Some of the points they would have to cover in the recommendation included the following:

1. What is the value in responding to the proposal? 2. How should the medical center address the lack of patient-steering mechanisms in the

proposal? 3. What type of cost proposal or cost information should be included in the bid? 4. What could be the anticipated response from competitors?

9. Deciding on a Population Health Referral Contract Approach

Jackie, the director of strategic planning at Healthy Hospital, was working with her CEO to determine what strategy their organization should take for specialist providers to whom they refer their capitated business. Currently, 15 percent of their business was paid on a population health or capitated basis, but when specialists were required, patients were referred to outside doctors and paid out of the capitated pool of money. This amount has become significant, with most payments made at full cost. Jackie's boss believes there must be a way to lower costs and, at the same time, improve quality by creating a smaller specialist panel.

She realizes that the continued move to population health, in effect, restricts more of Healthy Hospital's market's patients by contract to specific providers and, as it accepts more fully capitated arrangements, it needs to expand its network from employed providers to a group of specialists, which would effectively lock down the referral patterns.

Rather than only looking at the financials, Jackie has written the assumptions it has used to date. These include the following:

1. Although capitated payments have been slow to materialize, the number of patients covered by such payments will double in the next two years and quadruple in the next four years.

2. Payers would prefer to have fully capitated population contracts. 3. High-quality specialist providers are willing to contract to promote population health. 4. Healthy Hospital has the ability to screen potential providers for efficiency, quality, and

effectiveness. 5. Better quality of care can be delivered by a population health focus. 6. Large provider systems are required to provide population health.

She has also listed the hospital's possible choices:

Do nothing and continue to pay billed charges for referrals. Establish a pay-for-performance contract. Contract with specialists for improvements in overall cost and quality. Move to bundled payments. This system works best for high-volume, elective procedures

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with some predictability in costs. It could lead to a race to the bottom. Enter into traditional capitation for all patients. More patients would be present to moderate variability, but it would be challenging because of the breadth of contracting. Enter into specialty capitation for the highest cost patients. A smaller number of patients creates higher variation in patient costs. Enter into a specialty capitation for a broad group of conditions across multiple specialties. This arrangement would require contracting with a large group of multispecialty providers.

Jackie plans to present the assumptions and possible choices to her CEO to determine which options are realistic to pursue.

Questions 1. Are all of Jackie's assumptions credible? Have any of these changed or are changing? 2. How could Jackie strengthen her presentation by incorporating her organization's

mission, vision, and values? 3. What additional problems may arise with each of the choices she presents?

10. Build a New Service Because of a Large Donation?

You are the regional vice president of a midsize healthcare system in West Hadley. A wealthy philanthropist has served with you for years on the system's board. Recently, his youngest brother in Little Barrington developed kidney problems and required dialysis. However, the community, with only 40,000 residents, lacks dialysis services. This shortfall necessitated a 50-mile drive, three times a week, to the nearest dialysis center. As the travel time and four hours of treatment at the center took up three full days a week, this scarcity was a significant burden on this family.

The philanthropist wanted to improve the care and met with Little Barrington's mayor and the CEO of a hospital in your system. During the meeting, he announced that he was willing to give $8 million to establish a dialysis center in the community. The mayor was ecstatic, while the CEO was publicly appreciative but privately a bit apprehensive. After the meeting, the mayor issued a press release praising the forthcoming donation and the CEO immediately called you to discuss the matter.

The healthcare system had struggled with this issue in the past. Donors had offered to give a large financial gift for a service (an intensive care unit, pediatric wing, or other expensive item). These individuals were generally highly aligned with the health system and frequently prominent in the community. In addition, the donor was almost always highly committed to her pet cause. Frequently, however, community volumes made the service unsustainable. On top of this, the volumes at the new services would sometimes cannibalize the volumes at a larger site within the system, making the new service even less efficient systemwide. Quality of care could also be affected by the halved volumes after the loss of critical mass and support services needed round the clock and the difficulty of hiring people into specialty roles without adequate volume to keep them busy.

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You discuss the situation with the CEO, recognizing the aforementioned issues and acknowledging that the $8 million that was offered was enough capital to begin the service but would not provide funds for continuing operation costs. The state currently has one dialysis center for every 76,000 residents, few being profitable. Given this, it is probable that the proposed dialysis center could run at a loss. The CEO would like direction from you.

Questions 1. Who are the key stakeholders in this case? Who would be the most influential and

engaged? 2. If you were the VP, what type of analysis would you ask the CEO (or his/your staff) to

complete prior to making a decision? What are the key decision factors? 3. How could/should the mission of the health system and individual hospital be tied to your

decision? 4. What alternatives to a fixed dialysis center might you suggest to the philanthropist?

11. Dissolving a Long-Standing Affiliation and Moving On

By Khanhuyen Vinh

Partnerships and affiliations may last a long time. However, when they dissolve, animosity and increased competitiveness may result. A renowned medical school had a productive working relationship for decades with a hospital. However, increasing clashes and perceived competitive moves caused the school to sever the decades-old affiliation. As a result, the hospital is urgently seeking to initiate immediate changes through the development of several initiatives. The changes will help attract superstar surgeons and researchers to partner with the hospital in its quest to become a world-class academic healthcare provider, while seriously damaging its former partner.

L Hospital (LH) is an 800-operating bed teaching hospital in an extraordinarily financially strong healthcare system that includes three community hospitals and a home health agency. LH, as the flagship hospital, was affiliated with J School of Medicine (JSM), a local medical school ranked among the top 15 in the country by US News and World Report. LH was accustomed to winning annual accolades for several of its service lines.

However, when the medical school terminated its affiliation with the hospital, LH's leadership was angry and almost immediately began aggressively pursuing multiple initiatives to combat the loss of the former affiliation and fulfill its goal of becoming a top- tier academic healthcare institution. The new initiatives consisted of employing primary care physicians and establishing a graduate medical education (GME) program, building a research institute, and building a new outpatient clinic—all of which would be located near the hospital and owned primarily by the hospital. LH also sought an affiliation with another medical school. Although perhaps strategically sound, these developments tested the relationships and loyalty of key physicians, required immense financial resources, and taxed administrative and clinical leaders.

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LH had experience in employing primary care physicians. In previous years, the hospital simultaneously pursued both foundation and equity models to acquire primary care physician practices throughout the city. The foundation model later dissolved, while a modified framework of the equity model remained. Following the termination of the partnership, LH chose to directly employ primary care physicians and place their office practices physically adjacent to the hospital, thereby establishing its own general medicine service and, to a lesser degree, contribute to the pipeline of patients admitted into LH. Direct employment, as opposed to relocating an acquired practice into the hospital facility, would expedite assimilation into the LH culture, as LH was attempting to build its medical service swiftly.

To be a teaching hospital requires a pipeline of medical residents. LH realized that it either must depend on another medical school to provide this pipeline or build its own source of medical residents. Typical of its “going solo” mentality, LH decided to build its own GME program to be accredited by the American Council for Graduate Medical Education (ACGME). Medical students would apply directly to LH for residency, thereby bypassing the hospital's dependency on a medical school.

The new research institute served the purpose of attracting researchers at the forefront of their fields by providing a venue for well-funded, cutting-edge research. The combination of preeminent researchers conducting novel investigations that may redirect the course of medicine would elevate the hospital's image and secure its position as a top-tier academic medical center.

Medical advances have allowed for more procedures to take place in an outpatient setting without requiring an inpatient hospital stay. The hospital's current outpatient building, located across the street, had reached capacity. A new outpatient building would accommodate additional volume to capture downstream patient revenue, especially as managed care increasingly directed payments to outpatient procedures.

A merger with another medical school would be critical to the hospital's vision of being a premier teaching hospital and formed the basis for developing these new initiatives. This medical school needed to be reputable, so that LH could attract prominent physicians and researchers.

The dissolution of the hospital and medical school affiliation represented a novel phenomenon. LH and JSM built their 50-year relationship on a foundation of power and prestige. JSM boasted nationally recognized physicians and research programs. LH brought its extensive financial resources to fund the medical school's academic services and research, a state-of-the art institution, and patients for medical residents to study. The hospital treated celebrities, a former US president, international royalty, and established patients across the city and nation. A world-renowned cardiovascular surgeon claimed affiliation with both institutions. Together, both entities aimed to claim a position on the national and international stage. Because of their top physicians and research programs, JSM believed it contributed increasingly to LH's profitability. However, LH believed its financial success resulted from its own strategic initiatives and not from its relationship with JSM.

The increasingly tumultuous affiliation between the institutions ultimately crumbled because of the desire for control, as well as the personalities involved. LH had been providing approximately $50 million annually to JSM's academic services and announced it

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wanted an accounting of these expenditures. On the other hand, JSM wanted to build its own outpatient clinic to generate revenue. Furthermore, JSM wanted only its academic physicians to make decisions, thereby usurping all authority held by private physicians. LH vehemently refused a JSM-controlled outpatient clinic, fearing competition with its hospital. The affiliation agreement required both parties to concur on such construction. LH insisted that its private physicians be included because they brought in more than 60 percent of hospital revenues.

The personalities of senior leadership from the entities also seemed to constantly clash. Board members from both facilities consisted of individuals with strong roots in the community. The JSM chairperson came from a prominent family with multigenerational philanthropic contributions to the arts and sciences throughout the city. The newly recruited JSM president was touted as an experienced negotiator. The LH chairperson was the former leader of a Fortune 500 company, while the LH system CEO held deep-rooted ties to the hospital and local community for more than 20 years. All four people failed to understand the opposite party's needs and seemed willing to battle to the end.

Distrust by both parties led to stalled discussions. Aggravating the situation, numerous internal leaks to the press revealed that the sides had labeled each other “antagonistic,” “dishonest,” and “not forthright.” The breaking point was reached when JSM publicly announced it had entered into negotiations to affiliate with St. X Hospital, a competitor of LH, which would offer JSM more autonomy but less financial support. LH took this announcement to be a de facto termination of its affiliation with JSM and, subsequently, LH responded by announcing its change initiatives.

LH's and JSM's primary stakeholders consisted of academic physicians and private physicians, both of whom counted superstar surgeons among their ranks. The chiefs of service at LH also traditionally assumed department chair positions at the medical school. The severed affiliation between JSM and LH forced the academic physicians to choose sides. They had to assess their roles at each entity and weigh the future of their research programs, which were supported by LH's deep pockets and stellar facilities and equipment. The private physicians were incensed that JSM wanted to exclude them from negotiations, thereby severely limiting their influence on hospital decisions.

Other primary stakeholders included the boards of both the medical school and hospital. The JSM board wanted more financial autonomy, control, and decision-making authority but stood to lose substantial funding, as few hospitals in the country possessed LH's financial capability. The LH hospital board desired an affiliation with a brand-name medical school to attract top physicians and lead cutting-edge research to elevate the hospital's reputation and prominence.

The secondary group of stakeholders consisted of patients, who traveled from across the city, country, and world to receive care. These patients were well insured or cash-paying. Their social prominence augmented the hospital's reputation.

The system- and hospital-level CEOs at LH, along with the renowned chief of neurosurgery, maintained routine communications with both the large physician practice groups and the individual academic and private physicians. Those communication efforts served to open the flow of information between the leadership and the physicians. The board

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and senior hospital executives aggressively sought to attract academic and private superstar surgeons, while inviting all physicians who would join forces with LH. To this end, they announced an initial commitment of approximately $100 million for the research institute and $70 million for the outpatient center.

The LH CEO established committees for each initiative change (physician employment, GME, research institute, and outpatient center), which were cochaired by a hospital vice president and a chief of service (or an influential physician designee, in cases where the service chief had remained loyal to JSM). Other physicians participated in the committee work groups by providing input to create a successful implementation plan. Each work group met weekly or biweekly to flesh out details, provide updates, and identify next steps. The chair of the board, system and hospital CEOs, consultants, and legal experts handled approaching another medical school with which to pursue an affiliation.

At the same time, LH implemented policy changes. A new policy required its chiefs of service to admit the majority of their patients to LH. As a result, chiefs of service could not concurrently maintain their department chair positions at the medical school and admit the majority of their patients to a competing hospital. This measure forced the academicians to identify their affiliation with either entity explicitly. In addition, office leases for academic physicians in the LH buildings were to soon expire. LH hinted at either eviction or a rate increase for its nonaffiliate physicians. The hospital justified rate increases to meet fair market value, as rates had not been comparably adjusted for about a decade.

Established academicians with deep ties to both entities sought for reconciliation through letters to both boards and multiple meetings. Once it was clear no reconciliation would result, physicians who supported LH welcomed the new direction. The private physicians, in particular, rejoiced in the absence of JSM. However, many academic physicians were both concerned and upset about the division.

LH proceeded with its changes, ultimately resulting in completion of all the planned initiatives. A hospital physician organization was created to employ general medicine doctors, thereby establishing a medicine service at LH. The GME program was established for medical and surgical services. Approximately a decade after the dissolution, LH offers 36 GME programs accredited by ACGME. The hospital purchased land within walking distance, demolished the existing building, and built a research institute. As of 2015, the research institute supports 277 principal investigators and scientists performing more than 840 ongoing clinical studies conducted in 540,000 square feet of space, and has received $70 million in grant funding.

To build an outpatient center connected to its existing buildings, the hospital purchased an adjacent lot from a local university, constructed a building for the university at another location, demolished the former university building on the lot, and then constructed the outpatient center. These land purchases represented a significant feat because the hospital was landlocked, and real estate in that vicinity commanded premium prices as a result of high demand. As of 2015, the outpatient center consists of 14 operating rooms, 36 pre-op beds, and 30 postanesthesia care unit beds located in a 1.6-million-square-foot building. While a few prominent chiefs of service remained with the medical school, a greater number of chiefs of service pledged their loyalty to the hospital. Finally, LH announced a $100 million merger

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with an Ivy League medical school as its primary academic affiliate; at that time, US News and World Report ranked this medical school higher than its former partner. Physicians from LH were to be granted academic privileges at the Ivy League medical school. Over the years, the LH System added community hospitals and physician practices. The 2013 consolidated financial statement for the LH System reported gross revenue of $2.6 billion and net revenue of $683 million.

Questions 1. What caused the long-standing affiliation between LH and JSM to dissolve? What could

or should have been done to rectify the problems that led to the dissolution? 2. Was LH ultimately better off without JSM? Why or why not? 3. What factors do you think contributed to the success of LH's change initiatives? 4. How did LH involve primary stakeholders in its decision-making processes? 5. How did participation by physicians in the various work groups affect the outcome? 6. What elements in this scenario were beyond the control of hospital management? How

could or should these be mitigated?

12. Value in Capitation for Hospitalists?

By Khanhuyen Vinh

A business opportunity arose for a hospitalist physician practice (MCHA) to partner with an insurance payer (Healthsprings) to manage the insurance company's dual-eligible patients admitted to the hospital where it currently treats patients. Healthsprings currently has a contract with a competing hospitalist physician group but is dissatisfied with its performance. This partnership would position MCHA to manage this patient group at the hospital exclusively. Although an exciting option, partners have questioned whether this capitation contract with Healthsprings will add value for the group of hospitalists.

MCHA is a 20-physician hospitalist group practicing at a large, prestigious, teaching hospital in the Southwest with just under 900 beds. The hospital recently transitioned to a closed panel for hospital medicine physicians, which gave hospitalist groups exclusive care for all medicine patients. Currently, the hospital has contracted with six hospitalist groups that manage approximately 1,300 patient cases monthly.

MCHA is the largest group and manages the highest volume of patient cases. It performs competitively on hospital key performance indicators consisting of length of stay (LOS) index, mortality index, 30-day all-cause readmission, patient satisfaction, and core measures. In particular, MCHA usually leads on the LOS index measure and reported the lowest LOS index of all groups from January through May 2015. MCHA operates on a fee-for-service model with no capitation contracts. Its payer mix consists of 44 percent Medicare or Medicaid, 54 percent private insurance, and 2 percent self-pay.

Referrals by specialists and other primary care physicians (PCPs) provide the primary source of patient volume for all six hospitalist groups, thereby increasing competition.

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Referrals from these two sources are largely based on professional relationships and physician preference for practice styles. Although MCHA manages twice as many patient cases on average as the second-largest hospitalist group, it continues to compete for patient volume.

The group's goal is to continue to increase patient volume from various sources. The group is also one of two groups that have expanded their practice to cover emergency department (ED) services. MCHA physicians also manage patients at Long-Term Acute Care Hospital (LTACH), which serves as another source of patient volume for the group. MCHA believes that expansion opportunities include caring for patients at LTACH and taking on capitation contracts.

To understand more thoroughly where the hospitalists groups compete, MCHA's director created the following figure, which displays sources of patient volume as compared to level of competition among the six hospitalist groups. The strategy canvas illustrates three hospitalist physician groupings. Four hospitalist practices (groups 1–4) together represent one category because they demonstrate the same patient volume characteristics. Group 5 constitutes the second category because it currently has the dual-eligible capitation contract with Healthsprings, and MCHA is the third category. Only group 5 and MCHA manage the ED's “no-doctor” admissions. Admitted to the hospital from the ED, these patients either do not have a PCP who has hospital privileges, have a doctor who does not want to make rounds at the hospital, or simply do not have a PCP.

The hospital exclusively approached MCHA to provide patient care at the LTACH located on the west side of the city. This exclusive partnership has benefited both parties with more efficient care for the hospital and greater billings for MCHA.

Although managed care and capitation payments have not yet taken hold in its metropolitan area, MCHA wants to look beyond the traditional referral sources to augment its patient volume. Because few other providers currently have managed care contracts, the business opportunity with Healthsprings provides MCHA an entry to a potential first-mover advantage. MCHA believes that with this contract it could capture another immediate source of patient volume and position itself for a future in which capitation becomes the norm. The capitation contract with Healthsprings would also allow MCHA to manage the dual-eligible patient population exclusively. Given the group's ability to provide quality patient care while managing LOS, the contract could yield a net profit depending on the negotiated reimbursement amount per patient case and number of patients expected from this specific payer. The additional costs could be marginal unless Healthsprings were to increase its high patient volume dramatically—given MCHA's current physicians and existing capacity, it would not need to add physicians initially.

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While MCHA feels it needs new sources of patient volume, the profitability from this new patient base remains uncertain. Medicare patients, on average, have more comorbidities and require a higher level of medical care, and they form the majority of Healthsprings patients. Healthsprings also tends to transfer its patients from community hospitals to the teaching hospital at which MCHA practices. These patient transfers translate to Healthsprings’ enrollment of sicker patients who require more specialized medical services and often prolonged treatment in the intensive care unit. As a result, Healthsprings patients have longer LOS. Initially, the insurance company offered a capitation contract of $550 per patient per admission for an anticipated 15 patients per month. Healthsprings also would require MCHA physicians to meet with the Healthsprings’ case managers twice a week. This patient volume would constitute only a small percentage of MCHA's total volume, but the longer LOS and additional meetings would result in more work per patient for MCHA physicians.

The group was discussing the positives and negatives of this possible arrangement. The members did not know whether Healthsprings would provide a larger patient volume or an increase in their capitated amount.

Questions 1. What are the advantages and disadvantages of this offer? 2. What are the specific risks MCHA will take under capitation? 3. What could it do or negotiate to modify the risks? 4. What would be MCHA's marginal cost and opportunity costs of this proposal? 5. What other information would you want from Healthsprings? 6. Given the information you have, what would you recommend to the group?

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13. Bozeman Health's Competitive Dilemma

By Eric Connell

Bozeman Health is a not-for-profit health system that operates in southwest Montana. The main hospital in Bozeman has 86 beds, a Level 3 trauma center designation, and a medical staff of over 200. It has patient revenue of approximately $350 million. Bozeman is home to Montana State University (approximately 15,000 students) and is a haven for outdoor recreation because of its proximity to mountains, rivers, and Yellowstone National Park. The population of Bozeman is 40,000. Bozeman Health is the primary healthcare provider for Gallatin County, which has a population of 100,000. The community continues to be one of the fastest growing micropolitan areas in the United States.

You are the new CEO of Bozeman Health (BH) and have inherited an organization that has its share of challenges. Following a long-tenured CEO, at BH for over 20 years, the last two CEOs have been unable to stay long. One CEO resigned after nine months, stating differences with the board of directors. Rumor was that the CEO was pushing for productivity increases and staff reductions, upsetting certain doctors, who used their personal relationships with the board to force the CEO out.

The next executive was fired for ethical issues. He had failed to disclose a criminal conviction during the hiring process. Although the offense occurred over 30 years before his hiring, the board's public explanation was the CEO had failed to be completely honest and lied on his application that he had never had a felony criminal conviction. Although this was the board's public position, rumors spread that the ethical consideration was only an excuse. Stories surfaced that the CEO was actively engaged in trying to merge the hospital with Sanford Health, a large health system in the Dakotas—and being paid under the table by Sanford. In a short time, the CEO pushed the organization to implement an electronic health record system hosted by Sanford, despite contrary recommendations from BH's information technology department. The implementation was a failure. The CEO also made a unilateral decision to join Sanford's group purchasing organization (GPO) and change the name of the organization from Bozeman Deaconess Health Services to Bozeman Health, which was too similar for many to Sanford Health.

You know that the BH culture is very stable, and its leaders are deeply entrenched in the way the organization operates. You are worried that it could be a serious threat to BH's long- term viability. During the interview process, you recognized that most of the senior leaders at Bozeman Health are closer to the end of their careers than the beginning and estimate that most will be retiring within the next five years.

The main hospital in Bozeman is neither loved nor hated in the community, and this lukewarm response is also troublesome. You know that your biggest advantage is that Bozeman Health is the only hospital in the county, essentially giving the organization a monopoly. But Bozeman has a relatively high percentage of commercial payers and a growing population. You recognize that eventually there may be another hospital in your primary market.

Billings Clinic, which operates a women's health clinic, has an interest in the market. It

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had previously expressed plans to build a hospital in the resort town of Big Sky, 45 miles from Bozeman. Bozeman Health viewed this as a threat and fast-tracked its own plans to build a hospital in the town. Because BH already owned the land, it was easy to turn the first shovel of dirt and keep the Billings Clinic from entering the market. The four-bed hospital opened in December 2015 and was largely a defensive move. The Big Sky Medical Center is unlikely to break even for the next eight years.

The main campus in Bozeman is a sprawling web of various construction projects intended to meet the services demands in the growing community. The original hospital building was constructed in 1986. A $10 million addition to the emergency department was completed in 2012; an additional office tower was completed in 2015; and in 2016, BH opened a $10 million, 37,000-square-foot outpatient clinic in a bedroom community nine miles from Bozeman.

It seems as though every department is asking for additional space. Your family birth center, for example, had 1,300 births in the last year and was frequently required to divert patients to other hospitals because of a lack of space. Nurses struggle to operate in tiny ICU rooms that were designed in the 1980s and are now filled with life-sustaining equipment. Operating in spaces that are not optimized for workflows creates additional work and stress for providers and staff members. Patients rightly complain of limited parking. Fortunately, the organization owns hundreds of acres of land adjacent to the campus that were doanted to the organization and has yet to determine how to use the space.

After speaking with key physicians, board members, and department heads, you wonder what you have gotten yourself into. You face a multitude of challenges and a very uncertain future. If you are unable to implement an effective strategy, it is highly likely that the organization will struggle and you will lose your job. Estimate that you have two to three years to get Bozeman Health on a path to success, but you want to take a few months to get to know the organization better before you lay out a detailed plan.

However, time is not your friend. Four months before you started, the Billings Clinic announced the following in the Bozeman Daily Chronicle.

Billings Clinic Buys 54 acres in Bozeman By Lewis Kendall, Staff Writer, Jan 6, 2016

Billings Clinic announced Wednesday that it has purchased 54 acres of land as it prepares to expand its medical services in Bozeman.

The lot, purchased for an undisclosed amount, is located west of Costco near the North 19th Avenue interchange. Clinic officials will now meet to decide what type of facility to develop, said Julie Burton, the clinic's director of communications.

“We will have that conversation and make decisions when the time is right,” said Burton. “It will have to run its course.”

For comparison, the lot size of the adjacent Costco is about 13 acres, while Bozeman Health Deaconess Hospital sits on approximately 34 acres, according to state tax records.

The clinic has long been looking to grow its offerings in Bozeman, Burton added. “This was an opportunity that came up and the location of the land was ideal,” she said. “We thought this was

the perfect place to look forward.” The clinic already operates an OB-GYN facility on Highland Boulevard, which has been around for more than

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a decade. Founded in 1911, the nonprofit employs around 4,000 people in Montana, Wyoming and North and South

Dakota.

The Billings Clinic is a formidable foe. It has been aggressive in the region but had done relatively little in Bozeman. You have spoken with Billings Clinic providers, and they suggest that the Billings Clinic might move slowly, but this pace cannot be guaranteed. You are concerned that the clinic might seek a capital partner should it decide to move quickly in Bozeman.

Today you arrive at BH at 7 am for a brainstorming session to outline key issues with your vice presidents. You know that you just do not have the necessary time to construct a thorough and vetted strategic planning process. In fact, you may only have months to develop a strategic direction. You need to formulate an agenda and desired outcomes for your upcoming meeting now.

Questions 1. Given the challenges, how would you structure a strategic planning process? 2. In your competition with Billings Clinic, who are the key stakeholders? 3. What alliances and partnerships could you consider to improve BH's competitive

position? 4. What should your public position be regarding the possible entry of the Billings Clinic

into Bozeman? What would your internal, strategic positioning toward Billings be?

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