Divide and compete: a new look at service lines: service lines are back. The concept that first surfaced in health care in the mid-1980s is once again in vogue and on point

Healthcare Financial Management, March, 2004 by E. Preston Gee

The main difference with this iteration is that the model is better understood and more widely applied. So, the question on the table (and in the executive suites) is, "Will service lines succeed?"

The answer is an unequivocal depends.

The forces driving the interest in and the push behind the model are quite different from what they were nearly two decades ago. In the first wave of service-line strategy, the main impetus for the concept (product line management in those days) was the emerging nature of interhospital competition. That trend, coupled with the rising prevalence and prominence of the marketing function in hospitals healthcare systems, was likely the reason why the initiative was widely and incorrectly viewed as primarily a marketing centered strategy.

Second Time's the Charm

This time around, which could be viewed as the second wave, there are fundamentally three driving forces for service-line strategy: First, there is the rapid rise of new competitors such as specialty hospitals, ambulatory surgery centers, and/or physician-owned medical facilities (some of which fall into the first two categories). Second, there's the economics of this tightly constrained payment era, which the Advisory Board Company refers to as "profitless growth," characterized by the realization that hospitals cannot rely solely on volume to improve, or even maintain, their financial strength. And finally, there is a surfacing recognition that hospitals cannot provide all services to all people--at least not if they expect to remain financially viable into the future.

Consequently, service-line strategy is not viewed as just a marketing function this time around. This time, senior managers seem to be on board--and they- realize that the concept not only holds great financial promise, but also offers potential for gaining a competitive edge.

Service-line strategy is, in essence, a way to divide and compete. The service-line model offers an elegant mechanism or organizational framework to identify those service lines or strategic subcomponents of the hospital or healthcare system that are absolutely critical to the long-term success of the organization. Service-line strategy also narrows senior management's focus and therefore resource allocation (i.e., capital allocation, managerial time, marketing expenditures) on those areas that will produce the greatest return and highest value to the stakeholders--whether they be physicians, board members, patients, the community, employees, or shareholders.

How to Proceed

For those organizations that are relatively new to the concept of service-line management or those that may feel like they are not optimally executing the model, some basic rules help establish a successful orientation:

* Define the service lines.

* Measure what matters most.

* Narrow down to two or three lines.

* Create the organizational design.

* Assess market position by service line.

* Develop business plans for each line.

* Compete aggressively and strategically.

* Apply the model throughout the organization.

Define the service lines. The fundamental step for organizations is to determine the criteria they will use to define their service lines. Many organizations choose a standard DRG designation that will correspond with the definitional guidelines of benchmarking data firms--at least for the inpatient segment of the business. Some organizations may choose to expand the definition to a more in-depth data classification using ICD-9 codes. Others may want to include APCs for outpatient considerations.

Whatever criteria are used, the definition of the service lines should be data driven and market comparable. Market comparable means the hospital or healthcare system should be able to make basic comparisons with competitive hospitals within the market area or peer hospitals throughout the nation. At the same time, the data orientation should allow the hospital or healthcare system to rank (and eventually prioritize) the relative position of the service lines within the hospital. This step is important when selecting the two or three designated service lines to initiate the process.

If the organization does not have the existing internal resources (data information system or cost accounting system) to sufficiently compile and analyze by service line, outside data management firms are an option. Whichever route is chosen, one of the inherent advantages and ultimate aims of service-line strategy is to enable the organization to become more data driven and results oriented.

Measure what matters most. Once the data criteria are selected that will identify the service lines, hospitals should designate metrics to determine success. These are the measures on which the organization is evaluated, such as net revenues, market share, operating margin, mortality and morbidity gauges, and satisfaction scores. It's important to note that not all metrics need to be quantitative. They also can include qualitative measures, such as awareness and perception in the community. These qualitative criteria can still be measured, but they may not be as data-objective as other metrics.