Creating a market strategy for 'brand loyalty.' - strategic planning in healthcare organizations - includes related articles - Cover Story

Healthcare Financial Management, Oct, 1991 by G. Martin Hutter, Edward A. Kazemek, Dwayne Worthy

For many healthcare organizations today, patients and capital are in short supply. A facility's survival may depend on allocating scarce resources to product lines with the greatest potential to contribute to the bottom line. For this reason, long-range planning must rely on detailed market and financial analyses, not on conjecture or intuition.

In the past, healthcare financial management consisted of a fairly predictable set of textbook functions. Financial managers created reports needed to meet regulatory requirements for government agencies and vouched for the integrity of that information. Run-of-the-mill financial management usually involved developing accounting systems, recording assets, and capital planning. From choosing televisions for patient rooms to selecting office furniture, chief financial officers (CFOs) also made or approved many purchasing decisions. (a)

Competitive forces and declining resources have altered the picture. CFOs no longer simply control revenue but must look for ways to enhance their organizations' abilities to produce revenue. In turn, their responsibilities have outgrown routine financial matters. Their participation in marketing and strategic planning decisions is common at many healthcare facilities because financial managers can put critical cost assessment skills to work. CFOs can make important leadership contributions by creating value for their organizations.

"The historic aspect of financial management for health care involves keeping the books and creating reports," said Thomas G. Colwell, vice president of finance and treasurer at St. Francis Hospital in Wilmington, Del. "However, the ability to evaluate and project is becoming increasingly important."

To survive continued change in the industry, hospitals must integrate financial and strategic planning, according to a recent report, The Practice of Planning, published by the American Hospital Association's Society for Healthcare Planning and Marketing. (b) A facility's planning process must fall in line with its financial realities. In many cases, a healthcare organization's finance division already gathers information needed for strategic planning.

With the emergence of product line management, integrated financial and market planning has become increasingly important. Product line management essentially calls for a focus on specific services and markets that create a niche or a specific reason for choosing a hospital. One study reported that, although hospitals see product line management as offering increased control of revenue, costs, and market share, one-fifth had difficulty in determining their costs. (c)

A hospital that has adopted product line management may provide a core of general patient services and a few specialized services, such as outpatient surgery or obstetrics. Each product line requires different resources and may serve different markets. The return on investment for these resources varies widely across product lines. A healthcare facility must identify services with the greatest potential for success, then focus on enhancing and marketing them. This is why CFOs commonly play major roles in decisions to add, drop, or further invest in revenue-earning services.

Setting a direction

The challenge for hospitals is to offer revenue-earning services that convince current and prospective "customers" that the facility is uniquely prepared to meet their needs. In the natural world, the law of competitive exclusion says that no two species making their living in the same way can co-exist. (d) The same principle may apply in health care. Two hospitals providing the same services and attempting to reach the same market cannot continue equally. Eventually, one will gain a greater market share.

Hospitals must differentiate themselves through product lines. They can create and compound a competitive advantage by investing in capital equipment and marketing activities that create value for their "brand" of care.

Strategic market planning usually is defined as the process of matching a hospital's capabilities with opportunities in its area, then determining how best to allocate resources. A facility should identify areas in which it outshines competitors and take advantage of those strengths. The key, of course, lies in selecting product lines that can contribute to the hospital as a whole rather than benefitting a single area or service.

The first step is to conduct rigorous market and financial evaluations of existing and proposed product lines, enabling a hospital's CFO and other planners to make decisions on allocating resources intended to generate long-term success. Members of a strategic planning team can develop forecasts to determine whether a product line will materially support a hospital's mission and its strategic plan. A CFO can collect data needed to conduct cost assessment analyses. This information lays a foundation for developing a strategic direction and pursuing specific product lines.