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| ReSurge Articles Focused Community Hospitals & Regional Health Networks Health care models for the new century . . . by Rusty Shelton & Barbara Baccei Surgical Specialty Hospitals have been a major catalyst in the changing delivery of health care. The opportunity to generate continued revenue growth while keeping clinical outcomes at the core of decision-making, fuelled hospital development across the nation--and ultimately the battle to legislate physician ownership. Now, with a few years of operational history, we find it may not be the most advantageous model for many markets. The challenge is sustaining market and revenue growth long term. We are finding that, after about 5 years, specialty hospitals experience a maturing or reduction in revenue growth. Even when they successfully capture all the surgeries and procedures possible in their markets and maximize profitability, they’re still limited by the narrow book of surgery business. Like an ambulatory surgery center, their singular focus—surgery—only allows them to grow in this primary clinical service. That realization along with potential legislative changes inspired ReSurge Hospitals to re-evaluate the market dynamics. While we believe there is still tremendous opportunity for surgical specialty hospitals, expanding the market strategy and scope of services will achieve the long-term clinical and business goals that have spurred on so many physicians and hospitals. Our inquiry caused us to define two new hybrids: “focused community hospital” and “regional health network.” We believe these innovations have the expansiveness to sustain financial performance—and significantly reduce the impact of potential legislation. They clearly keep our physician partners in the driver’s seat and empower them to become key influencers in their health care communities. Focused Community Hospital “Focused Community Hospital” is our term for a licensed, acute care hospital offering surgical services, mixed with a focused range of medical and ICU services and supporting ancillaries determined by the governing board and medical staff. The wider range of services allows you to care for select surgical and medical cases that are optimal for this predictable, clinically focused setting, ICU cases (with limited complications and co-morbidity indicators), urgent care and level 1 emergencies, imaging (including MRI and CT), outpatient women’s health services and other services demanded by the local market (such as OB and rehab). Clinical diversification reduces your exposure to potential legislation banning physician ownership in a single specialty hospital, and offers other strategic advantages. With clinical diversification inherent in the model, the hospital can continue to grow its business through multiple service lines. Surgery may still be the core service, but with clinically appropriate medical and ICU cases, you are not limited by a single revenue stream. You also have continuous growth opportunities to phase value-added programs around core clinical services, such as sports medicine built around orthopedics, occupational health built around urgent care and outpatient women’s services built around gynecology and imaging. Selecting the right services and programs for your market and successfully phasing them in, results from a comprehensive, long-term market analysis of the population’s current and projected medical utilization. From a cost standpoint, a focused community hospital still enables you to focus clinically and operationally with optimal administrative infrastructure—benefits gained with the vanguard of ASCs and surgical specialty hospitals. With the increased volume and diversification of cases, you spread your administrative and other fixed costs over a wider revenue base. Efficiency goes up, costs go down and profitability increases at a higher return through the multi-service platform. Your operating margin as a percentage of revenue may be lower, but you will gain an overall, real increase in net revenue and return on investment. As a catalyst for engaging physicians, there are huge dividends. The medical services line offers an investment opportunity and referral incentive for primary care physicians—a crucial player that few have figured out how to effectively invite to the table. The focused community hospital aligns visions and incentives, motivating primary care physicians and specialists to shift approved medical cases to this less costly setting. The key is shifting cases in line with the hospital’s core clinical competencies (as determined by your market and medical staff). With the addition of focused ICU, you are able to treat medical cases and more complex surgeries that could only be performed in the full-scale hospital. You will also experience a volume increase in diagnostic outpatient ancillary services associated with the higher acuity cases. Expanded clinical capability provides an opportunity to form strategic partnerships with physicians and tertiary level hospitals in outlying markets. Such a partnership can result in mutually beneficial agreements for outpatient ancillaries to be performed at the preferred local level, with physicians bringing their medical and surgical cases to your focused community hospital. For physicians who have been responsible for specialty coverage in areas with limited specialty resources (such as primary care docs saddled with OB), the partnership provides the specialty care enabling them to keep their practice focused. To further connect your hospital to these outlying regions and ensure a steady stream of specialty referrals, you can establish satellite medical offices in the region and staff it with specialists from your medical staff on a rotating basis. You will bring higher value to physician recruitment and investment. The differentiated service model and investment opportunity will benefit your physician’s practices when recruiting new doctors and specialists to the community. You can benefit their practices by building medical offices on-site—the convenience factor of locating the practice in close proximity to the hospital will be very appealing. In terms of public relations, the addition of medical offices projects the image in the market that you are a bona fide medical campus, not just a surgery center. The ability to secure equitable, managed care and insurance contracts continues to be a major issue for many surgical specialty hospitals. With increased physician participation, lower fees based on fixed costs and the wider range of clinical services and programs, you gain a more favorable position for negotiating fees and terms with third party insurers. The playing field is more level between you and the larger hospital providers. You gain greater ability to secure financing and improve your terms for facility development, construction, equipment and working capital. Why? Because lending institutions view multiple use facilities as having a higher success potential and probability of longevity. What Are the Issues? As appealing as it all seems, there are many issues to be worked through before diving into a focused community hospital development. Most significant of which is that you will encounter an astronomically higher level of clinical complexity than a surgery center or surgical specialty hospital. The bigger and more diverse you become, the higher your risk of losing the focus of your core competencies. Therefore, it’s critically important to phase in medical services around the primary clinical competencies demanded by your market and offered by your medical staff, before introducing value-added specialties and programs. Your lean and mean clinical and administrative leadership structure necessitates that you chose where you prioritize your efforts at all times. Service mix and introduction should be key components of your overall strategic plan. To be successful, you must have a comprehensive strategic and business plan that includes a thorough analysis of your market, including the growth corridors offering rich opportunities for expanded outreach. The plan must also address the outreach of physician services into those growth corridors, thus providing an integrated business plan that benefits the hospital and its invested physicians. A quick financial model and data search will not do the trick—nor will they provide sufficient details for securing financing or your private placement memorandum. Outstanding clinical outcomes must be at the heart of the business. Physicians must be invested in the concept because they believe it is the best long-term strategy for being the drivers of medical outcomes in their community. If they are attracted strictly as an investment, there will likely be a huge dissatisfaction factor and erosion of goodwill in your medical staff. That is because profitability and distributions will not happen overnight; distributions are typically seen after the first 6 quarters of business. Physician leadership and participation in the ownership, governance, operations, financial rewards and financial risk are essential. It is very hard to change referral patterns—if physicians are not financially vested, they will not have adequate incentives to shift their patients to your hospital. Invested physicians must view themselves as business owners in addition to individual practice owners. For a successful development, you should have at least 3 to 5 physician leaders who are committed to the project and able to dedicate the time needed to see it through from concept to opening. Selecting the right architect for your facility design is an imperative. You must have an architectural firm that is well versed in the complexity of a hospital—and brings an ambulatory care mindset. The firm must understand the unique med-surg operational flow process, that is, the influence of spatial design and positioning on efficiency. The facility master plan must include provisions for phased-in expansion. Service mix will expand and volumes will ramp up, so you must be able to retrofit spaces around changed usage, build out shelled space and construct additions without disruption to operations and business. Expansion phasing must be connected to your strategic plan for outreach into your market growth corridors. Finally, a successful venture is contingent on having a development partner that shares the vision of the physicians and (if it is a physician-hospital venture) the hospital. The development partner must understand the value that a focused community hospital offers as opposed to an ASC or specialty hospital—and must understand all the complexity of business and clinical operations involved. That is, the developer must have a macro and micro view. A full-scale hospital may have outstanding leadership, but they probably have too many layers of bureaucracy to function as the developer. Your development partner must see the value of physician input and be willing to constantly seek it. If you desire to be privately held, the partner must share your long-term strategy, rather than be focused on going public and cashing in on the investment short-term. Regional Health Network A regional health network transforms the dynamics in health care, resulting in maximum market gain with long-term growth opportunities. It is a radical—and common sense—departure from the dated, bricks and mortar concept of health care. Instead of patients having the burden of traveling to a facility for all of their care, the regional health network takes service to the population corridors. You offer the value the market demands today: outstanding medical services locally packaged for convenience. Instead of one point of entry, the regional health network provides consumers multiple sites of local entry all feeding into your core hospital business. This effectively extends your penetration into outlying regions and increases your public goodwill, while giving you remarkable opportunities to continuously grow your market. Ideally, a regional health network is structured around a core focused community hospital with satellite outpatient services (ASCs, imaging centers, urgent care, medical specialties demanded by the local market) in strategic outreach areas. The network enables you to work in partnership with your physicians to extend the geographic penetration of your core business and to boost the practices of your physicians by giving them a presence in those key markets. You may also extend an investment opportunity to physicians in the remote areas (as long as they retain staff privileges in the core hospital), giving them the same financial rewards and risks as your core investors. And you have an opportunity to partner with community hospitals in outreach areas being leveraged out of the market by the behemoth hospital competitors. It is a pro-active competitive strategy, and improves your negotiating power with 3rd party insurance payers. There are even greater cost advantages to be enjoyed through the network. Under strict criteria for hospital outpatient departments, you can create a unified billing structure for the entire network. This allows you to bill for all outpatient services under the core “acute care hospital” license. From a cost standpoint, you will be able to spread fixed costs over the additional centers of operation. The larger business scope makes the most advanced clinical and business technology more affordable. Since the costs are shared by a wider range of services, you can better afford to purchase the best and upgrade it routinely. This will be a huge value add to rural areas feeding into your network; they gain access to the most advanced technology. For example, through your PACS system, remote physicians—including your rotating medical staff—will have real-time access to digital imaging reports. The emphasis on outreach empowers you to directly impact the volume of specialty cases feeding into your focused community hospital and increase your physicians’ sphere of influence in the region. One strategy is to establish satellite medical offices in outreach areas staffing them on a rotating basis with specialists from your medical staff. The patients needing surgical and hospital procedures are referred to the focused community hospital if appropriate. This also opens you up to forming strategic partnerships with area hotels to offer preferred accommodations and rates to your patients and their families who must travel to the focused community hospital. In this consumer market there are many opportunities for you to provided value-added service and patient experiences to build loyalty extending through generations of families. The model will inspire you to think outside of the traditional health care box and employ the marketing tactics successful in other consumer-driven industries. Relationship Building Undertaking a regional development of this scope can seem daunting. Here, too, you must have a comprehensive strategic plan for phasing in regional development, based on analysis of the opportunities in projected growth corridors. It is a holistically different development model than creating a facility. Relationship building with physicians, providers and community leaders is as crucial as any floor plan—in fact; relationship building is the floor plan. Regional health networks are successful because they effectively dial in physicians, providers and patients—especially those who have felt marginalized by the larger health systems. Your long-range plan can be launched with ancillary service centers that you establish in the outreach markets, then using this foundation to build inward to the core hospital. © 2005. ReSurge Hospitals. |
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