Internal and External Assessments for Strategic Planning

STRATEGY CHALLENGE

Alan M. Zuckerman

What Would You Do? '

are freestanding emergency centers an idea whose time has come?

The Problem

The relatively fragmented, underserved, sparsely

populated but now rapidly growir\g market to the east

of Small City General Hospital has been "discovered"

by providers further east at the periphery of a large

metropolitan area. To secure its position in this newly

emerging battleground, Small City General Hospital

is considering a bold move—developing two freestanding

emergency centers. Does this make sense strategically

and financially?

The Situation

Small City General Hospital is one of the two large hospitals located in an old. declining, small industrial city ahout 60 miles from a large Midwestern city (see map). As the hig city has grown and expanded, its suhurhan areas have gradually crept closer to Small City General Hospital's service area. Right now, a "no-man's land" huffer of ahout 10 miles exists hetween the edge of the small city and the big city's suhurhs. This hucolic. rural area is heginning to he

developed and the projections for the foreseeable future are for rapid growth (see tahle helow).

Some of the hospitals and health systems on the eastern end of the emerging hattleground are contemplating initiatives in this area. Although nothing is definite yet, rumors ahound. The potential exists for expansion west into the area of one or more of the large system-affiliated medical groups, development of major amhula- toiy care centers, and possihly, despite certifi- cate-of-need barriers, a satellite hospital. Small City General Hospital is concerned ahout this march west and southwest by formidable com- petitors. What, if anything, shotdditdo?

Alternative Considerations

Small City General Hospital reviewed a full range of possible alternative pre-emptive strikes and responses, including many of the initiatives its competitors appear to be contemplating. Given

the nature of the competition and the high stakes

SMALL CITY GENERAL HOSPITAL PROPOSED PRIMARY SERVICE AREA POPULATION 2005 TO 2010

Ages

0-17 18-44 45-64 65+ Total

2005

38,200 53,970 43,690 19,490

155,350

SKal

2010

39,930 57,370 51,100

23,660 172,060

% Change

4.5 6.3 17.0 21.4

10.8

Site 2

2005

58,650 78,470 56.950 19,060

213,130

2010

62,840 84.000

71,410 25,220

243,470

% Change

7.1 70

25.4 32.3 142

> Both site 1 and site 2 primary service area populations are projected to increase 11 percent to 14 percent by 2010. > Largest increases are projected for the 45-64 and 65+ age cohorts. > The site 2 primary service area is more populous than the site 1 primary service area and is projected to

increase at a faster rate across all age cohorts.

Source: Claritas, 2006.

114 AUGUST 2007 healthcare financial management

PROPOSED SITE 1 A N D SITE 2 SERVICE AREAS

Legend

H Site 1 Primary Service Area

Site 2 Primary Service Area

Competitor Centers

D Medical Center A

B Medicai Center B

O Medical Center C

D Hospital D

u Family Care Center of Hospital H

O Hospital E

B Hospital F

n Hospital G

jfj{ Family Care Center of Hospital H

^ 2-mile radius

^ B 5-mile radius

involved, it determined that a hold, but inher- ently risky, move was prohably required to differ- entiate Small City General Hospital from its competitors and retain and grow its share in this rapidly developing region. After some research and brainstorming by the senior management team, it settled on the freestanding emergency concept as a priority alternative to consider.

> Serve as a referral source for affiliated physicians. > Generate incremental utilization of hospital-hased

services. > Mitigate competitive threats.

Freestanding emergency centers generally must meet the same requirements as hospital-hased emergency centers. Most operate 24 hours per

In a preemptive strike

against the contemplated

march west and south-

v/est by some formidable

competitors. Small City

General Hospital studied

two possible sites to

erect its freestanding

emergency centers.

The rationale for developing a free- standing emergency center is similar to the rationale that hospitals rely on for developing ambulatory care centers:

> Enhance access to care and meet increasing demand for emergency and ancillary services.

> Develop sites and services that differentiate the organization from competitors.

> Tap into new markets and increase market share.

Although a relatively new concept, 15 states have one or more freestanding emergency centers, with many m.ore centers currently under development.

day. seven days per week. Assuming the center is underthe same provider license, payment is typically the same at the freestanding center as it is in the main hospital. Most freestanding emergency centers are located within lo miles of the main hospital campus, although in rural

h f m AUGUST 2007 115

STRATEGY CHALLENGE

CURRENT MEDICAL/SURGICAL INPATIENT MARKET SHARE FOR PROPOSED FREESTANDING EMERGENCY CENTER SERVICE AREAS

Site 1 Primary Service Area

29.4%

5.4%

Site 2 Primary Service Area

16.9%

10.7%

39.9%

Hospital D

Small City General Hospital

Medical Center C

14.5% • Medical Center A

• Another

15.3%

7.6% 12.1%

10.9%

Hospital F

Hospital D

Hospital E

Small City General Hospital

Medical Center C

Hospital H

Hospital G

A n o t h e r

> Hospital D has the dominant m a r k e t share in the site 1 PSA.

> M a r k e t share in the proposed site 2 PSA is distributed among a n u m b e r of hospitals.

C o m p e t i t i o n in b o t h

service areas is fairly

diverse, suggesting c o n -

siderable o p p o r t u n i t y

f o r Small C i t y G e n e r a l

Hospital's freestanding

e m e r g e n c y centers.

or underserved areas, tbey are sometimes located as far as 3o miles away from the main hospital campus. Existing freestanding emer- gency centers report that tbey typically transfer 6 percent to lo percent of patients to the main hospital for care.

Although a relatively new concept, 15 states have one or more freestanding emergency centers, witb many more centers currently under devel- opment. Representatives of mature freestanding emergency centers generally state that they have met or exceeded volume projections and financial performance targets.

Still, is this concept feasible in Small Gity General Hospital's service area?

The Decision

Small City General Hospital's CFO led the charge

to explore the feasibility of development of two free-

standing emergency centers as depicted on the map

on page 115.

From a strategic standpoint, the feasibility study

indicated that given population growth and the

resulting increased demand for emergency services,

if Small City General Hospital is first to market, the

hospital should be able to develop viable freestanding

emergency centers that will both enhance access to

healthcare services for residents and improve the

market position of the hospital.

Financial findings were as shown in the table below.

Clearly, site 2's financial projections are excellent,

and there was no question about whether to proceed.

After some discussion, the indirect benefits associated

with site 1, including synergies with collocated

ambulatory services and downstream referrals to

ancillary and other hospital-based services, were

sufficient to convince Small City General Hospital's

senior team to proceed with both freestanding

emergency center initiatives immediately, m

Alan M. Zuckerman, FACHE, FAAHC, is president, Health Strate- gies & Solutions, Inc., Philadelphia {azucl(erman@hss<inc.com).

VOLUME ESTIMATES FOR TWO PROPOSED FREESTANDING EMERGENCY CENTERS

Visits

Contribution margin

Site 1: Moderate Volume Estimate

Year 1 , Year 3 Year 5

(2008) 1 ^ I 7,900 15,100 18.400

$(925,000) $545,000 $970,000

Site 2: Moderate Volume Estimate

Year 3 Year 5Yeari (2008)

11,200 20,600 24,900

$60,000 $2,200,000 $3,000,000

116 AUGUST2O07 healthcare financial management