Over the past two years, the number of independent hospitals joining systems through full asset mergers has rapidly increased. According to Irving Levin Associates, the number of transactions is on track to top 100 deals in 2011, up from only 52 in 2009.[1] For small systems and independent hospitals, there is often significant concern about taking on the future alone.
If an organization decides to remain independent, its future success depends on eight factors (see Exhibit 1). Some factors, as discussed below, offer a very strong strategic advantage; some can be significantly influenced by management action, while others are of lower impact on the future success of the independent hospital.
1. Geography. Both geographic coverage and long distances to other competitors offer a strong advantage to the independent hospitals that enjoy them. While location is difficult to influence, geographic coverage can be improved with careful planning and physician partnerships.
2. Physician alignment. Aligning physicians under the three elements of the physician-hospital alignment triangle [2] — economics, clinical activity and purpose — is the key to strong physician relationships. Because physicians influence all parts of the continuum's growth and effectiveness, strong physician alignment is the number one indicator of success as an independent hospital. Moreover, physician alignment is an element that can be developed by the hospital.
3. Payor relationships. The payor mix of various communities plays a large part in determining the financial resources available to hospitals. Markets with large concentrations of payors or high percentages of lower-reimbursing payors have a large risk and low margin for error. Additionally, hospitals that have not developed the relationships and infrastructure necessary to manage risk-based payments or even bundled payments are facing significant challenges in the future payment environment.
4. Cost and revenue structure. Those hospitals that have dramatically reduced overhead and, through partnerships, have leveraged economies of scale outside their organizations, have strengthened their financial position and thereby their ability to remain independent. Moreover, systems will not offer as much by way of cost savings to these organizations, reducing the value of joining a system.
5. High-quality inputs, processes and outcomes. Providing high-quality care is nearly fully within the hospital's sphere of influence. Hospital leadership's role in defining the quality signature of the organization will be of increasing importance in a more transparent world. Moreover, creating a high-quality signature in the market can be difficult for competitors to emulate, as it requires coordination and cooperation with various stakeholders, especially physicians.
6. Capital asset base. Organizations that have not advanced their facilities and technologies, or those that have a poor balance sheet position, are likely to face challenges if they remain independent. The future environment will demand financial flexibility.
7. Community support. Strong commitment by the community to maintaining independence can be influenced by the value provided by the hospital and can create a strong advantage to remaining independent. Communities with strong ties will reduce opportunities for competition from physicians or outside organizations and can in some cases support the success of the independent organization directly through tax revenues or philanthropy.
8. Managing a continuum. Being an integral part of the continuum of care has always been important for hospitals' continued success. With increasing emphasis on population health, the ability to lead and manage the continuum of care provides a strong, durable competitive advantage beyond simply providing only the acute care, hospital component. Organizations that have developed an effective and cohesive continuum of care have a strong competitive advantage over other organizations in the market.
Independent hospitals positioned strongly in each of these eight areas are likely well positioned to remain independent. Leaders of independent hospitals should carefully analyze their position and create strategies to strengthen each factor that can be influenced. By combining and strengthening these elements, organizations that desire to remain independent can do so for the foreseeable future.
Luke Peterson and Kate Lovrien have focused their careers on advising community and regional referral hospitals and health care systems on their strategic, physician alignment and organizational challenges. They can be contacted at luke.peterson@kurtsalmon.com and kate.lovrien@kurtsalmon.com.
Footnotes:
[1] Irving Levin Associates, www.levinassociates.com
[2] Luke Peterson, Kate Lovrien, and Thomas Dixon, Physician Hospital Alignment, Becker’s Hospital Review 2011, www.physicianhospitalalignment.com
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If an organization decides to remain independent, its future success depends on eight factors (see Exhibit 1). Some factors, as discussed below, offer a very strong strategic advantage; some can be significantly influenced by management action, while others are of lower impact on the future success of the independent hospital.
1. Geography. Both geographic coverage and long distances to other competitors offer a strong advantage to the independent hospitals that enjoy them. While location is difficult to influence, geographic coverage can be improved with careful planning and physician partnerships.
2. Physician alignment. Aligning physicians under the three elements of the physician-hospital alignment triangle [2] — economics, clinical activity and purpose — is the key to strong physician relationships. Because physicians influence all parts of the continuum's growth and effectiveness, strong physician alignment is the number one indicator of success as an independent hospital. Moreover, physician alignment is an element that can be developed by the hospital.
3. Payor relationships. The payor mix of various communities plays a large part in determining the financial resources available to hospitals. Markets with large concentrations of payors or high percentages of lower-reimbursing payors have a large risk and low margin for error. Additionally, hospitals that have not developed the relationships and infrastructure necessary to manage risk-based payments or even bundled payments are facing significant challenges in the future payment environment.
4. Cost and revenue structure. Those hospitals that have dramatically reduced overhead and, through partnerships, have leveraged economies of scale outside their organizations, have strengthened their financial position and thereby their ability to remain independent. Moreover, systems will not offer as much by way of cost savings to these organizations, reducing the value of joining a system.
5. High-quality inputs, processes and outcomes. Providing high-quality care is nearly fully within the hospital's sphere of influence. Hospital leadership's role in defining the quality signature of the organization will be of increasing importance in a more transparent world. Moreover, creating a high-quality signature in the market can be difficult for competitors to emulate, as it requires coordination and cooperation with various stakeholders, especially physicians.
6. Capital asset base. Organizations that have not advanced their facilities and technologies, or those that have a poor balance sheet position, are likely to face challenges if they remain independent. The future environment will demand financial flexibility.
7. Community support. Strong commitment by the community to maintaining independence can be influenced by the value provided by the hospital and can create a strong advantage to remaining independent. Communities with strong ties will reduce opportunities for competition from physicians or outside organizations and can in some cases support the success of the independent organization directly through tax revenues or philanthropy.
8. Managing a continuum. Being an integral part of the continuum of care has always been important for hospitals' continued success. With increasing emphasis on population health, the ability to lead and manage the continuum of care provides a strong, durable competitive advantage beyond simply providing only the acute care, hospital component. Organizations that have developed an effective and cohesive continuum of care have a strong competitive advantage over other organizations in the market.
Independent hospitals positioned strongly in each of these eight areas are likely well positioned to remain independent. Leaders of independent hospitals should carefully analyze their position and create strategies to strengthen each factor that can be influenced. By combining and strengthening these elements, organizations that desire to remain independent can do so for the foreseeable future.
Luke Peterson and Kate Lovrien have focused their careers on advising community and regional referral hospitals and health care systems on their strategic, physician alignment and organizational challenges. They can be contacted at luke.peterson@kurtsalmon.com and kate.lovrien@kurtsalmon.com.
Footnotes:
[1] Irving Levin Associates, www.levinassociates.com
[2] Luke Peterson, Kate Lovrien, and Thomas Dixon, Physician Hospital Alignment, Becker’s Hospital Review 2011, www.physicianhospitalalignment.com
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