Strategy Challenge

Alan M. Zuckerman

The Problem

Two small health systems were planning to merge in December 2011. Although they do not face immediate threats or significant obstacles to a successful postmerger operation, they recognize that the environment is changing rapidly and that they cannot afford an uncertain start or any major errors. Opportunities and challenges abound. What should their strategic priorities be after the merger to launch the new organization successfully?  

The Situation

Regional Medical Center (RMC) and Metro Health System (MHS) are relatively small health systems serving the southern suburbs of a large metropolitan area. RMC has a 300-bed hospital, a 300-member employed physician group, and some tertiary services. MHS has two hospitals, a total of 350 beds, about 50 employed physicians and 500 active voluntary physicians, a broad range of secondary acute care services, and a well-developed post-acute business line. Collectively, they have approximately a 20 percent share of the market they serve. Each has revenues of approximately $500 million, and their operating margins have ranged from 1 percent to 4 percent for the past five years, averaging around 2 percent. Total net assets are approximately $600 million.

The metropolitan area in which RMC and MHS operate is ultra-competitive. The metro area population of about 3 million is currently served by three large and financially successful systems that are primarily city-based. In the suburbs, these systems have a modest, but growing, presence amid a number of freestanding, and mostly financially solid, community hospitals. Physicians are similarly organized, with large employed groups associated with each of the systems, one large independent group spanning the metro area, and many small, primarily single-specialty groups in the suburbs.

Consolidation has been progressing rapidly for the past three years, with 10 of the region's 60 hospitals having been absorbed into the systems and just 15 hospitals remaining freestanding. Physician employment has grown from 5 percent of the region's physicians to 25 percent. Local experts foresee continued consolidation throughout the delivery system due to commercial payer dynamics (only three large payers remain after significant insurance industry consolidation) and healthcare reform. With seemingly unlimited resources and appetites for growth, the three major systems appear poised to consolidate the providers regionwide.

RMC and MHS are joining together to create a fourth major system in the region to function as a largely suburban-based alternative to the other systems. They believe that an opportunity exists for a high-quality, relatively low-cost alternative to the large systems and that a value-based, accessible alternative to the existing systems would have great appeal to the remaining freestanding hospitals and unaligned physicians and, ultimately, to insurers and consumers. But the market is consolidating so quickly that time is a huge threat. Can RMC and MHS come together expeditiously and effectively and establish the new system as a real player and force in the market before the market is fully consolidated?

Alternatives Considered

Senior management grouped the critical strategic issues facing the new system (which would be assuming the name of one of its founders, Metro Health System) into four categories, as shown in the exhibit below.

Exhibit 1

sc_exh1

Within this framework, new MHS senior staff identified numerous critical short- and long-term strategies. In all, 18 critical short-term and 19 critical medium- to long-term strategies were delineated. MHS senior staff recognized that implementation on all fronts equally would be impossible and, if attempted, would doom the new system to failure. Thus, senior staff set out to prioritize initiatives within each of these categories.

Each initiative was presented to the group by its primary sponsor and a wide-ranging discussion ensued about the likely impact and value of the initiative. When all 37 initiatives had been presented, discussed, and debated, the leaders used a multivoting process to hone in on the priorities. This process yielded clear results fairly quickly, which senior staff agreed made sense. How many and what type of initiatives should the new system take on as priorities to be successful in its overall strategy in this difficult market?

Exhibit 2

sc_exh2

The Decision

The multivoting process resulted in five high priorities for the short term and five additional high priorities for the medium to long term (see the exhibit above). Although the initial high priorities were concentrated in just two of the four critical topic areas-system integration and network growth-senior leaders understood that priorities would change as the system develops and matures, and efforts would need to become more distributed. Short-term efforts would need to focus on building the base for long-term success and cultivating others who share the system's vision to join it. Once the ball is rolling, although core development and growth would have to continue, efforts to maintain and sustain the system would need to become broader and deeper.


Alan M. Zuckerman, FACHE, FAAHC, is president,Health Strategies & Solutions, Inc., Philadelphia (azuckerman@hss-inc.com). 


 

Publication Date: Tuesday, May 01, 2012

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