Application: Facilitating Strategy Formulation

STRATEGY CHALLENGE

Alan M. Zuckerman

What Would You Do?

what type of expansion makes sense?

The Problem

Growth and development of a Midwestern metropoli-

tan area has resulted in a pocket of opportunity for a

significant healthcare presence in the expanding

southern suburbs. Sisters Health Care System

(SHCS) has historically considered this area to be its

market, but believes a major facility in the market may

be required to preserve its position. What should that

presence be?

The Situation

Like many mature urban areas, ihis Midwestern

metropolitan area lias a relatively stable but graying

Competitor hosprtals Sisters' hospitals Sisters' physician offices in service area

population. Over the past 40 years, the popula - tion has heen relocating to the suburbs; while overall population has remained essentially static, there has been healthy growth in the suh urhs at the expense oFthe city. The most recent area of development has been the far southern suhurhs. extending into an adjacent county ihat historically has not been considered part of the metropolitan area in question. In i'aci. this recent population migration is causing the large metro- politan area and the small one to the south to begin to hlend into one larger metropolitan area.

SHCS is one of three major healthcare organiza- tions operating in the region. SHCS has four hos- pitals in the large metropolitan area and two in the small southern one. As shown on the map, the two hospitals in the southern area are the most proximate to the growing southern suhurhs, and the system also has a few owned medical practices operating in the area. Historically. SHCS has cap- tured about 40 percent of the inpatieni business from this area, with 3o percent going to the largest system in the region, 20 percent to the other system, and the remaining scattered among the children's hospital and others.

The growth and development of this area is attracting a great deal of attention from all three systems, and the largest system is rumored to be shopping for a parcel on which to build a health- care facility. Within a seven-mile radius of the center of this area, more than 250,000 people now live, and the population is expected to grow to 275,000 in five years. Within this area, heallb- care services are modest, nearly all beingsmall medical practices.

122 OCTOBER 2008 healthcare (inancial management

STRATEGY CHALLENGE

SHCS is concerned about this competitive threat

and recognizes that this area is probably under-

served. What, if anything, should it do?

Alternative Considerations

SHCS's management team tlesbed out alternative ambulatory care configurations for this market, as shown in the table, and also developed three general options for development on the south side:

> Build a freestanding ambulatory care center with a full range of outpatient diagnostic and treatment services oriented to women, families, and other targeted groups, as appropriate

> Build a loo-bed hospital with extensive ambu- latory care services

> Develop a phased implementation of inpatient and ambulatory presence

—Pbase IC2010): 50-bed hospital with amhula-

tory services and expansion capabilities —Phase II (2015); Expand to a 100-bed bospital

SHCS's POTENTIAL AMBULATORY CARE CENTER CONFIGURATIONS

Potential ACC Configurations

Original concept:

Large-scale multipurpose

Alternative concept:

Center ior family health and Wellness

Alternative concept:

Smaller-scale site

Would provide excellent base for potential future hospital

Population base is sufficient to support

Needs broad range of physicians referring to site

May not be distinctive enough if competition intensifies

Urgent care, primary care, and medical fitness would provide anchors

Would include core of basic snciilaries (imaging, lab, rehab)and health-related retail

Would include a few distinctive multidisciplinary programs (where aggressive champions can be identified)

Would provide opportunity íor more distinctive market position and more direct-to-consumer appeal

Would be similar to an SHCS west suburban site

Leaves more options open while ether initiatives (physician relationships, SHCS's south side medical center facilities development, and other sites) move forward

Probably would be too limited to have much market impact

witb a full range of ambulatory sei-vicesand a

medical office building

It was clear that the market would support any of

the options. The main considerations were: > Would a larger and more significant endeavor

deter competitor initiatives or result in an overly saturated market?

> What impact would any of the initiatives and likely competitor responses have on SUCS's current hospitals and financial performanre ("cannibalization" of volume and redundant. duplicative services)?

The management team carefully ideniil'ied all the

different scenarios and estimated probabilities of

each occurring, but. at the end of the day. they

realized it was just guesswork: they would have to

make a decision based on their professional

judgment, instincts, and tbe facts available. All

agreed that it would be a mistake to do nothing,

because this would likely lead to the worst possi-

ble outcome for their system. If you were in

SHCS s situation, what would you do?

The Decision

The management team went back and forth for weeks

on this issue. Capital for any of the proposed alterna-

tives was not a problem, but ROI and cash flow were

problematic for all alternatives in which SHCS's major

competitor moved forward, too. Finally, the team

agreed that it should assume the competitor's initia-

tive was a given (it would probably be a large-scale

ambulatory care center), and base its analysis and

decision on this near certainty.

With this key variable removed, the risks and rewards

became much clearer. The team agreed that develop-

ing a major ambulatory care center made the most

sense and opted for the concept of a center for family

health and Wellness to serve this young, middle-class

population, m

Alun M, Zuckerman, FACHE, FAAHC, is president, Heallh Strate- gies & Soiutions, Inc.. Philadelphia (aiuckerman^hss-inccom).

124 OCTOBER 200B healthcare financial

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