Market-Based demand forecasting promotes informed strategic financial planning - Statistical Data Included

Healthcare Financial Management, Nov, 2001 by Alfred J. Beech

The demand forecast also should assess the extent to which patients within an organization's service area use services in a neighboring state that does not gather discharge data or for which the data are not available. If this utilization pattern occurs, the patient-level data collected by the organization's home state will not accurately portray the service area's market size, utilization rates, and market share.

Forecasting market share poses a challenge because the forecast must account for the effects of the organization's strategy, as well as the effect of possible responses by competitors. For example, an increase in market share may be a reasonable assumption only if it is based on well-defined strategic initiatives and a reasonable certainty that competitors will not mount effective initiatives to retain their market share. Conversely, an organization may anticipate a market share decrease if it expects its competitors to become more aggressive and successful in attracting patients.

Market-share data are essential to a demand forecast, but an organization also needs to be able to measure how competitive its service area is so that it can assess the potential volatility of its own market share. A measure that can help make market-share data more meaningful is the Index of Competition (IOC). (f) A market's IOC is calculated by squaring each market-share percentage expressed as a decimal, adding the squared values, and subtracting the total from 1.0. High values suggest greater competition and potential market-share volatility For example, the IOC for a monopoly is 0.0, whereas if the market has 10 competitors with equal shares, the IOC is 0.9. The IOC will be even closer to 1.0 in markets that have a larger number of competitors, each with a very small share.

Demand. Total demand for a healthcare organization's services is calculated by multiplying an organization's market size by its market share for each service line within each service area, then adding discharges from outside the service areas. In the demand forecast, discharges for areas outside the organization's service areas often are held constant at the level of the most recent year because the organization cannot influence the level of those discharges.

CASE STUDY

To illustrate the application of market-based demand forecasting, examples below are based on the experiences of a 150-bed suburban hospital located in a rapidly growing metropolitan area, in which both inpatient and outpatient activity have increased substantially over the past 10 years. The hospital used market-based demand forecasting to develop various demand scenarios for 2000 through 2004 to be used in developing a five-year strategic financial plan.

Service area. The hospital defined its service area as follows:

* PSA--zip codes accounting for the first 70 percent of discharges;

* SSA--zip codes accounting for the next 25 percent of discharges; and

* Other--all remaining zip codes, including those from out of state.

Population. The service-area population is described in Exhibit 1. The PSA population is less than one-third the size of the SSA population, but it is growing at a faster rate. The PSA population also is younger, on average, than the SSA population, with only 6 percent of its population projected to be age 65 or older by 2004, as compared with 9 percent of the SSA population. By comparison, almost 12 percent of statewide population is age 65 or older. Although the hospital's overall service-area population is growing rapidly, the female population between the ages of 15 and 44 is not growing.