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The Newsletter for Hospital Strategists

Volume 19, Number 8, August 2001

 Strategic Prophecy

By Louis Pavia, Jr.

Healthcare providers now have a unique opportunity to determine their own future. Strategy historically has been a matter (albeit not an easy one) of predicting the future and finding the best fit for your organization. The market is now ripe for you to define your own future and to make that vision reality. That is Strategic Prophecy.

Lessons from the past

Just as the healthcare industry has evolved over the past 50 years, so too has the fundamental approach to strategic planning. During the decades of the 1950s, ‘60s and ‘70s, healthcare provider strategies were based on an extrapolation of historical growth trends into the future. Resulting strategies focused on expanding capacity and attracting physicians. This worked well until the advent of managed care. During this era, projecting current developments into the future drove strategy. Declining utilization, reimbursement pressure and powerful payers resulted in strategies to control access to patients, reduce costs and find new business opportunities.

Those organizations that recognized the shift in the industry and adjusted their strategy did relatively well. While tactics and execution effectiveness varied widely, basic strategies were the same.

Healthcare is now entering a new era, the consumer driven Era of Knowledge (see Healthcare Strategic Management, February 2001, p12). This new paradigm shift once again requires healthcare leaders to rethink the fundamental assumptions underlying their strategy. Those who recognize this shift and adapt quickly will gain a competitive advantage. However, is this era strategies can be very different.

Defining the future

There is a series of paradoxes in healthcare today.

§         Employees don’t want co-pays or deductibles but will pay hundreds and even thousands of dollars out of their own pocket for a “heart scan”, laser eye surgery or alternative medicines.

§         Consumers think hospitals are expensive and over charge for services but donate time and money to them.

§         People are in awe of medical miracles but are afraid to go to the hospital.

§         Physicians and hospitals by and large believe they provide quality care but medical errors are one of the leading causes of death in the US.

§         Medical knowledge is expanding exponentially but the 40% of the chronically ill do not get the appropriate treatment.

§         Medical technology is getting faster, cheaper and better but only half of some invasive diagnostic tests (i.e. angiography) are done competently enough to be interpreted accurately.

§         Productivity in non-manufacturing businesses (output per labor hour) has been increasing by over 3% per year but in healthcare is declining (adjusted census per FTE).

§         Healthcare costs are increasing at double-digit rates but managed care is out of favor.

§         Employers want manageable healthcare costs but don’t want to manage the drivers of cost.

Healthcare organizations that do not define their vision for the future and develop a strategy to achieve that reality will be on the defensive or resigned to competing on other’s terms.

Achieving your vision

These paradoxes or conflicts in perceptions, performance and expectations make room for truly distinct strategies for healthcare providers. This differentiation will also blunt the trend toward commoditization of healthcare services. Rather than developing a strategy designed to provide incremental improvements in market share or operating performance, an entirely new strategic focus can be created (e.g. health restoration, health information, health management, healthcare gateway). The needs of the target market segment can then be clearly articulated and the scope of services designed. The culture and values of the organization may need to be reshaped for this future. No matter what direction your organization selects, there are four requirements for success. 

1.      Face Reality. This type of fundamental market shift and its implications will not be recognized or agreed upon by everyone. Change creates winners and losers and there will be resistance to any new direction. Tough decisions will need to be made with limited, imperfect information. Yet there are some hard facts that must be considered:

Healthcare expenditures are rising and demographic, technological and cultural factors support the continuation of that trend

 As much as one third of healthcare services may be unnecessary, non-beneficial or harmful

Nurses are viewed as most ethical and most trusted part of the healthcare system

Physicians are a more credible source of healthcare information than hospitals

The internet is the most common source of information on hospital quality

Consumers understand there are significant differences in quality among hospitals and doctors

Quality in healthcare is among the worst in all industries

There is no proven strategic model to follow and mistakes will be made. If your organization does not have strong leadership and commitment at the Board, Medical Staff and Management levels, a new vision is risky. The greatest risk, however, may be having a strategy from a bygone era.

2.      Fix the Service Problem. A recent VHA survey found that 49% of consumers or their families had a bad experience with a hospital or doctor in the past three years. About one third of the time the cause was the treatment by or attitude of the staff. Providers must also be responsive to the expectations of the customer. According to Cyber Dialogue, there are over 40 million adults using the Internet for health information and their needs are not being met:

50% are interested in using a web site operated by their physician but only 9% have physicians with one (29% say they would be likely to switch doctors to do so)

37.5 million adults would like to communicate with their physician via email, but only 13.5 million even know their address (33% said they would be likely to switch doctors to do so)

When patients’ needs are not met through traditional means they become receptive to, even seek out alternatives. There are some 300 therapists providing counseling services online, pharmaceutical companies spend $2.5 billion per year in direct to consumer advertising, Quest Diagnostics is providing lab tests and their results directly to consumers and Medtronic is making adjustments to pacemakers remotely using advanced technology. It is five times more expensive to attract a new customer than it is to retain an existing one, but if providers don’t delight their customers they will lose them to innovative competitors with a new vision era.

3.      Close the Quality Gap. Most US industries currently operate at close to three sigma (99.7% of products are defect free). Companies like GE and DuPont are striving for six sigma (3.4 defects per million processes). The airline industry has achieved a rate of 11 deaths per million departures (about 5.5 sigma). In healthcare, there are about 24,000 preventable deaths per million admission of heart disease (Chassin, Health Affairs, 1997), just over 1 sigma. Lesar et al estimates that in a prestigious tertiary care hospital there were nearly 4,000 medication errors per million transactions. Another study found about 10,000 errors per million decisions in intensive care units. In the VHA survey, among those having a bad experience with a hospital or doctor, 23% cited a mistake in diagnosis.

Reducing errors in healthcare is not easy. Only those organizations that take it deadly serious and accept nothing less than six-sigma perfection will succeed. The process requires not only commitment but also expertise and discipline in measuring, analyzing, improving and controlling processes. There are a tremendous number of opportunities for medical errors that do not necessarily result in morbidity or mortality but do have significant cost and service implications. The wrong meal delivered to a patient, billing information recorded improperly, scheduling snafus, the wrong medicine dispensed even if it is not given to the patient, an unnecessary test ordered and test results not timely recorded all result in rework and loss of patient trust and confidence.

Clinical errors, although more complex to eliminate, cannot be ignored. Errors must be defined and critical-to-quality factors such as legible orders, results turnaround time, access to information and skills training must be determined. The tools and resources must be made available to not only identify and measure errors but also to change the processes to eliminate problems. This requires up front investments in training and technology; communication of the current state-of-the-art and best practices; and cooperation among physicians, nurses, administrators and others. Companies like GE have demonstrated that the return in increased revenue and margin can be 10 fold. The value of the patient trust gained is immeasurable.

4.      Accelerate the Vision. Both the vision and its rationale must be understood throughout the organization. Everyone must understand both how it benefits them and how their actions can help achieve it. A bold new vision is not accepted, it is promoted. Creating your own future also means establishing stretch goals.

Strategies to achieve incremental improvement and dramatic change are very different. That means bureaucracy must be eliminated, the organization simplified and those people in direct contact with patients (i.e. nurses) must have greater decision making authority and less paperwork responsibility. You must embrace technology to improve communication, productivity and clinical performance. You must nurture a culture of innovation and measured risk taking.

Strategic prophecy is not right for every organization. Those that cannot or do not embrace these requirements for success should not attempt this strategic approach. Those that do will lead the way for providers to regain the mantle of the leadership for the best healthcare system in the world.

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