Michael C. Boblitz

If you are not using market intelligence data to analyze your organization's performance, you may be missing out on some great opportunities to develop product lines

At a Glance 

Market intelligence data on hospital outpatient and inpatient services can be examined in many ways to provide insight for use in strategic financial planning. 

  • Compare growth rates in particular service areas, by hospital within the market 
  • Compare the market share of each hospital within the market, by payer and region 
  • Compare service line growth rates for each hospital in the market, by geographic area 

How do you assess how well your hospital's services are performing relative to budget and to previous year's performance? Most hospital financial leaders rely on financial and operational reports for this type of information. Such trend and variance reports are good indicators of whether a hospital is having a successful financial year.

But do internal financial and operational reports always provide a clear understanding of a hospital's performance?

Sometimes, relying on internal financial and operational reports can actually give a misleading view of hospital performance. Consider, for example, a report showing that Hospital XYZ's spine service line has experienced 5 percent growth over the previous year and that revenue exceeds the budget. Hospital XYZ's financial managers might regard such a report as an indication of success. But how successful is Hospital XYZ really if in actuality total demand for spine services in the hospital's market (and across all area hospitals) grew by 15 percent during the same time period? The answer is, "Not very." Hospital XYZ has actually lost market share to its competition.

Without taking the time to "look outside the window" and learn how utilization is changing across all hospitals in the service area, Hospital XYZ is operating with limited vision and less than optimal revenue.

The Value of Market Intelligence

Market intelligence provides powerful insight to help financial planners realize maximum opportunity for any product line within the hospital's service area. And it can add significant value during the budgeting process. 

For example, to establish a budget for the upcoming year, many hospitals simply review historical measures over several years. Indicators such as gross and net patient revenues; contractual allowances; bad debt; charity care; earnings before interest, taxes, depreciation, and amortization; operating margin; average length of stay; revenue and cost per adjusted admission; FTE per adjusted admission; occupancy rate; and case-mix index are examples of internal financial and operations statistics that indicate how the hospital is performing. These internal statistics allow management to quickly evaluate hospital performance relative to budget and the prior year's performance, identify problems, and take corrective action in the event the same problems arise during the current fiscal year.

What such statistics do not show, however, is how much revenue is being left on the table for competitors. It is critical for hospital financial leaders also to compare internal statistical trends with similar trends in the service area to determine whether their organizations have opportunities for additional growth beyond historical growth rates. By reviewing market intelligence information, such as growth rates, shifts in market share, and quality indicators, hospital financial planners can gain valuable tools to support revenue maximization, budget preparation, and service-line development. Only with such tools can they seize their organization's total revenue opportunity and establish a sufficient basis for justifying new expenditures on program development.

To truly understand all of their services and where revenue is not being captured, financial planners must evaluate market intelligence covering the full range of inpatient and outpatient services. Service-area information on historical and projected volumes for inpatient services (by diagnosis-related group and ICD-9 code), ambulatory surgery (by ICD-9 and CPT code), and outpatient activity (by CPT code) are widely available to support financial and strategic planning efforts. For example, consider the following analytical steps that use real data reflecting trends in the Greater Richmond, Va., service area, drawn from the Virginia Health Information inpatient database. 

Analyze Growth Rates in Service Areas by Hospital

The exhibit below shows a trend of joint replacement surgery in the Greater Richmond service area. The hospitals are not identified, but the data from the VHI inpatient database are real. The exhibit discloses significant growth in joint replacement surgery across all hospitals in the service area. Between CY99 and CY03, joint replacement surgery increased by 35.5 percent in performed cases. Hospital B was experiencing growth in this service, with its number of cases increasing by 23.4 percent (436 to 538) from CY99 through CY03.

See Exhibit 1


However, the exhibit shows that Hospital B actually lost market share during this period, decreasing from 25.7 percent to 23.4 percent market share. Given that Hospital B had an average gross revenue per joint replacement case in CY03 of $42,977 (according to the VHI database), if the hospital had maintained even its CY01 market share of 25.2 percent in CY03, it would have realized an increase of 24 cases and $1.031 million of additional gross patient revenue. 

Analyze Market Share of Hospitals by Payer and Region

To evaluate why a hospital might be losing market share, it is necessary to analyze market share by both payer group and geographic region. Hospitals with low market share often are at a disadvantage because they have fewer managed care contracts than do their competitors. Hospitals that identify weak market share in the commercial payer group within the market data should identify those managed care companies (e.g., HMOs and PPOs) with which they currently have no contracts and seriously consider signing with these firms.

The exhibits below summarize total discharges and market share for all obstetrics deliveries services (DRGs 370-375) within the Richmond service area. The exhibits, which display data for four actual hospitals, show some clear opportunities for product-line development related to payer groups. For example, the top exhibit shows that Hospital A has low market penetration in the HMO market, with only 16.6 percent market share. The data in the bottom exhibit show that discharges for this service line, across all hospitals, represent 1,402 total cases in CY04.

See Exhibit 2 and 3


These data reinforce the need for Hospital A to conduct a payer analysis to find out the extent of its contracts with the payers in the region. Armed with data indicating the total market demand for OB deliveries in the region, Hospital A's leaders can begin to assess the potential gain from increasing the hospital's number of HMO contracts.

If Hospital A could increase its HMO market share by 10 points (i.e., to 26 percent) as a result of increased HMO contracts, it would increase total OB deliveries from 233 current discharges to 373, a net increase of 140 total cases (assuming constant market demand for OB deliveries). With an average gross inpatient charge per case of $7,877 in CY04 (based on VHI data), the increased HMO volume would enable Hospital A to generate about $1.1 million in additional gross inpatient revenues. 

Analyze Volume Trends by Geographic Area

Many hospitals located in urban markets are finding those markets are reaching population capacity. With the population in many urban markets spiraling out to more distant, less developed areas, these hospitals should closely monitor the change in healthcare demand within every patient county of the service area. Indeed, market size and market growth are key elements when evaluating development opportunities.

To support business planning efforts, therefore, the financial leaders should conduct trend analyses to determine which geographic regions within the service area are currently experiencing growth in inpatient and outpatient services, and which areas are likely to experience high growth in these services in the future. Planning products are available to facilitate these types of analyses, providing historical inpatient discharges at the patient zip code level, as well as five-year projected inpatient, ambulatory surgery, and outpatient utilization.

In regions that show high historical and projected growth relative to high competing pressures, hospitals may need to consider creating satellite facilities in those regions to capture the demand.  The exhibit below provides a trend analysis of total surgical discharges by county/city in the Greater Richmond service area from CY02 though CY05. Surgical discharges represent all DRGs that are assigned as a "surgical" group under the Medicare 2005 relative weight schedule (excluding any OB or gynecology DRGs).

This trend analysis provides insight to which geographic regions are experiencing the most significant increase in demand for inpatient surgery in the region.

The exhibit shows that total surgical discharges, across all hospitals, increased by 3.2 percent across all counties and cities in the region from CY02 through CY05, ending CY05 with 24,550 total surgical discharges (excluding OB or gynecologic surgical cases). From these data, it is apparent that County D saw the greatest increase in total number of discharges among counties and cities during this time period. This trend analysis can be compared with a given hospital's trend of discharges to identify which geographic regions present a potential opportunity for expansion of surgical services.

As an example, exhibits that follow show the trends of total surgical discharges and total surgical inpatient market share in these same counties for Hospital B. The first of these two exhibits shows that Hospital B experienced a significant decrease in surgical discharges (25.7 percent) in County D from CY02 through CY05, even though the top exhibit at right indicates that County D had the most significant increase in surgical discharges (10.8 percent) across all hospitals during this period. Given that Hospital B did not keep pace with the County D growth rates for total surgical discharges, the next exhibit, showing the trend in Hospital B's market share, not surprisingly indicates that Hospital B experienced a significant decline in market share, decreasing from 23.1 percent to 19.7 percent (23.4 market points) during this same four-year  period.

See Exhibit 4, 5, 6


Using the data in the three exhibits immediatley preceding, Hospital B's financial planners can plainly see which geographic regions should receive attention during the development of surgical services strategic plans. 

Compare Ambulatory Surgery Performance

Given the intense competitiveness surrounding ambulatory surgery in most markets, use of market intelligence to understand a hospital's performance relative to competitors is especially important in this area. Most states have been participating in a data-sharing program for ambulatory surgery procedures, similar to the data-sharing program for inpatient volumes. As a result, there is good information available to help hospital financial planners evaluate outpatient surgery performance and determine whether any revenues are being lost to competing hospitals. The same type of information seen in the first two exhibits of this artcile can also be obtained for certain ambulatory surgery procedures, such as outpatient cardiac catheterization laboratory procedures.  For those states that do not have an ambulatory surgery data sharing program, this information may be obtained from proprietary organizations.

Hospitals commonly use the regional and national benchmarks for expected length of stay for all DRGs that the Medicare program and other, proprietary organizations have to assist hospitals in evaluating operational performance. Unfortunately, these benchmarks do not provide insight into how a hospital compares with competing hospitals within its local market. Thus, these LOS "expected" or "norm" benchmarks provide no way for a hospital to know how much better its performance target could be if it were to use other competing or neighboring hospitals' performance as the benchmarks.

Regional market intelligence data are available, however, that can be used to gain such insight. The exhibit below, for example, uses VHI data pertaining to CY04 total open-heart surgery discharges, by hospital, in the greater Richmond patient service area. The exhibit immediately below provides total open-heart surgery average LOS, by hospital, for the greater Richmond service area.

The exhibit that follow shows that in CY04, Hospital A was the most efficient institution in performing open-heart surgery in terms of average LOS. For the highest volume DRG, Coronary Bypass with Cardiac Catheterization (DRG 107), Hospital A had an average LOS of 10.7 days in CY04. Assuming that other evidence suggests Hospital A's open-heart surgery program also delivers high-quality care, competing hospitals can use this information as a benchmark for improving their programs.

See Exhibit 7 and 8


Time for Intelligence

No matter what the financial or operational measure, financial managers and hospital administrators should take time to compare internal financial and operational reports with market intelligence data to verify that what appears to be success from an internal reporting perspective is indeed success relative to one's market. Market research and competitive intelligence functions in most hospitals are responsibilities of the strategic planning office, rather than of the CFO. But with market intelligence information becoming stronger than ever, it is time for the CFO to assume a more active role in evaluating market intelligence. To ensure revenue and operational efficiencies are optimized, a strong relationship should exist between market research and finance in hospitals. Without looking at "outside" data, a hospital's financial leaders will have only a myopic view of the organization's overall performance.

They need to keep in mind the basic message inherent in the quote by Kaplan and Norton at the opening of this article: If the indicators you are using to assess your organization's performance are helpful only for maximizing current and short-term net income, you may be missing out on some larger realities. In short, you may not only miss opportunities to optimize long-term revenues, but also damage your organization's long-term financial outlook.

Michael C. Boblitz is director, planning, Upper Chesapeake Health, Hartford County, Md., and a member of HFMA's Virginia Chapter (michael.boblitz@earthlink.net).

Publication Date: Saturday, July 01, 2006

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