Strategic plans provide lasting solutions to rural crisis

Healthcare Financial Management, April, 1990 by James C. Folger

Strapped for money and time, many rural hospitals could be tempted by temporary fixes to their financial struggles. Strategic planning helps develop a broader, long-range blueprint for survival. Its steps include making financial evaluations of services; undertaking market and patient origin studies; assessing competitors; involving community leaders; and defining possibilities for joint projects and facility mergers.

For hospitals in rural America, the financially austere 1980s took an especially heavy toll. Of the 81 U.S. hospitals that closed during 1988, more than half were located in rural areas.

For the next several years at least, the outlook is equally grim. A 1989 telephone poll of rural hospital chief executive officers (CEOS) found 44 percent of hospitals with fewer than 100 beds reporting inadequate cash reserves to hold off a financial crisis during the next three years.(b)

Impending financial disaster usually leads decision makers to rely on operations management to control costs. As a result, executives tighten staff ratios, strive for more effective purchasing, hold down expenses, and improve billing and accounts receivable management.

While important, these efforts usually offer short-term answers to financial problems. For lasting solutions, some rural hospitals are turning to strategic planning.

Why strategic planning?

Strategic planning's greatest value lies in its focus on one- to three-year issues that may significantly affect an organization's success or failure. Benefits of strategic planning include:

* Financial evaluation of service components. Despite increased attention to cost consciousness, some rural hospitals remain uncertain about whether their services are profitable or unprofitable. Strategic planning forces the issue.

Through planning, hospital decision makers can determine profitability and target services that need better management.

* Patient origin and market area. By taking time to examine ZIP code origins for inpatients, a hospital develops an understanding of its geographic service area. Doing so helps define its potential for attracting patients from outlying or secondary areas, as well as establishing its market share in the primary service area.

Quite often, hospitals fail to reach their potential in primary service areas-which should be a top priority.

In one situation, a hospital carried only 48 percent of its primary service area, which is defined as the five-mile radius surrounding a facility. Even allowing for a 20 percent loss to a tertiary care center approximately 30 miles from the hospital, the remaining 32 percent of local patients sought treatment elsewhere. This called for placing emphasis on marketing within the primary market area-and secondary attention on far-flung satellite operations.

* Defining potential system links. One avenue of survival for rural hospitals involves agreements with larger urban institutions. For example, specialists from urban hospitals may rotate through rural hospitals, with primary care still provided by rural physicians. Strategic planning would investigate the advantages and disadvantages of these agreements.

* Competitive prices and service quality. Poor understanding of competitors' strengths and weaknesses plagues many hospitals, especially rural facilities. By developing a comparative list of services offered by competing hospitals and determining which facility excels in each area, a hospital can define its marketplace niche.

* Focusing management on priorities. Rural hospital administrators often have a broader range of responsibilities than their urban counterparts. Because operations issues usually demand immediate attention, they may forget true leverage points that could enhance their hospitals' performances.

One CEO developed a strategic plan that included eight major goals and 52 strategies. Not surprisingly, the administrator encountered difficulty in convincing the hospital's management team to commit to the unfocused plan.

* Creative approaches to problems. Rural administrators often learn about new management techniques well after their urban counterparts. Strategic planning encourages them to step back from day-to-day tasks and look at the hospital with a fresh perspective.

* Community involvement. By bringing physicians, business leaders, and civic representatives into the planning process, a rural hospital can ensure continued community support-while it heightens awareness of the hospital's problems and opportunities. To make progress, however, consensus must be established among the parties involved.

Launching the plan

With daily operational hurdles, financial stresses, and employee shortages, some rural administrators may balk at undertaking planning efforts. To ensure that a plan is created within a reasonable time frame (three months to six months), the process should be part of the formal hospital structure.

In other words, each task should be assigned to an appropriate individual. Meeting dates, activity reports, and follow-up communication are needed to maintain momentum for creating a workable strategic plan.