Mark E. Grube
Walter W. Morrissey

At a Glance

To determine appropriate levels of care and access, while maximizing quality and capital resources, a service distribution plan fully defines:

  • How the organization will serve the market  
  • How each of the system's operations will relate to other operations  
  • How clinical resources will be organized and deployed  
  • The financial impact of the service distribution plan on the overall organization  

Two Indiana healthcare organizations joined forces to create a regional service delivery plan in south central Indiana.

The transformation of U.S. health care is under way as a new business model that incentivizes providers to deliver high-value services is replacing the fee-for-service care delivery and payment system model in place since the mid-1960s - one that offered incentives to deliver a high volume of services. As the pressures of the coming strategic and capital challenges drive community hospitals to join regional health systems, parent systems will need to integrate their hospitals, outpatient facilities, and physician networks to deliver a coordinated "system of care" and gain efficiencies of scale.

To drive the level of operating performance needed for success under the new model, these organizations also will need to aggressively address each dimension of value. Strategic cost management, focused on capital avoidance and cost reduction, and quality improvement will be key goals. For many organizations, structural work will likely be required to reshape the programs and services offered across their geographic markets.

This process, called service distribution planning, will be aimed at determining the appropriate level of care, access, and quality to achieve desired outcomes at a cost that considers the needs of patients and payers, while maximizing capital resources and ensuring the organization remains financially competitive. The end product is a plan that drives improved operating performance through the optimization of care delivery across a geographic area without compromising quality and outcomes.

Reducing organizational costs will continue to be critical into the future. Service optimization across an organization's delivery system will play a major role in ensuring that cost-reduction targets are met. Given the new environment, regional and super-regional systems will begin focusing beyond aggregation of providers to optimize delivery system resources.

Defining the Most Advantageous Position in the New Landscape

Health system executives are now working to define their roles in local communities, ensure that their organizations deliver value-based care, and manage the transition. Their boards and management teams are asking critical questions that require difficult decision making:

  • What services should we be offering in each location (and to what scope and scale), with consideration to the care needs of the population and access, cost, and quality objectives?
  • Are there services that we currently provide in multiple locations that should be concentrated at fewer sites (e.g., resource-intensive tertiary services)?
  • Are there other services that require broader access (e.g., primary care) and services that should be covered in lower-cost-intensity settings?
  • If we were able to start "fresh," what would be an optimal care delivery system across our inpatient and outpatient network?
  • How can we migrate from our current situation toward this more optimal system?

These decisions might have been deferred in the volume-based environment but cannot be put off now. The considerable challenges include:

  • Revamping executive/management incentives to focus on success at the system rather than local level
  • Improving physician relationships
  • Developing population health management expertise and value-based contracts
  • Enhancing performance as measured through quality and cost-effectiveness indicators
  • Addressing geographic barriers (e.g., roads,rail lines, rivers) that create the perception of market isolation
  • Enhancing cultural characteristics such as leadership/management style, openness to change, and communication skills
  • Addressing community stakeholder issues, such as expectations that all care must be provided locally

For example, a health system with six hospitals in different local markets will need to tie the incentives of local hospital CEOs and management teams to systemwide performance. As part of this process, local CEOs may need to "give up" higher-level or lower-level services for which quality or cost-effective indicators are lagging behind those of another hospital in the system.

Consider, for example, a market area that is "oversaturated" with a particular service offering. Perhaps the system's ambulatory facilities in the market don't require 10 magnetic resonance imaging (MRI) machines; five may be the right number to avoid unnecessary duplication that reduces overall operational efficiency.

A multihospital system needs to stretch clinical, technological, and human resources through a regional approach to care delivery. But leadership should be willing to confront the inevitable pushback from physicians and others who are resistant to the necessary changes. Strong board support will be required to provide "the cover" necessary for executive management to work through obstacles.

As healthcare is transforming rapidly, a delay in addressing these issues increases the probability that markets will shift around organizations that are not optimizing their service distribution, as relationships among payers, physicians, hospitals/health systems, and other providers are secured in the new environment. Inefficient service distribution also stresses an organization's clinical, facility, technological, human, and capital resources, making the organization less viable as a value-based provider.

The following approach is used with hospitals and health systems to develop and implement a service distribution system that optimizes all of the required elements under a value-based model.

The Planning Process

Board, management, and physician education on the importance of restructuring the service delivery system is the starting point. All key constituents should be educated about the changes occurring in the environment and why the organization needs to address these changes and reposition itself for sustained success. A clear and concise objective statement should be crafted and reaffirmed continually throughout the planning effort.

A solid fact base that covers the organization's markets and strategic and financial positions, and describes the impact of current and possible future trends on markets and positions, provides the framework and context for understanding future barriers or challenging issues. Within the planning framework, key realities and assumptions must be defined related to payment mechanisms, the competitive environment, physician market characteristics, and core competencies required for provider success.

A comprehensive financial fact base is also essential, including capital position and requirement analyses, financial projections, and a debt capacity analysis. In the current uncertain environment, scenario modeling and sensitivity analyses are imperative to understand how changes in utilization, payment, capital, and other assumptions would impact future strategic and financial performance.

Most organizations will need to define/rescope core community service offerings and develop regional offerings to optimize overall capital, management, and clinical resources.

Exhibit 1


IU Health: A Regional Approach to Distribution of Services

To effectively deliver high-value patient care across a geographic area, Bloomington Hospital in Bloomington, Ind., and IU Health, formerly Clarian Health in Indianapolis, started service distribution planning in late 2008.

The organizations wanted a regional service delivery plan in place that would optimize the delivery of the combined entity's services in south central Indiana prior to their 2010 merger. "We wanted a guide map of regional synergies," says Mark Moore, CEO of Bloomington Hospital.

"Historically, when IU Health integrated new affiliates into the system, we focused on support services, including purchasing, payroll processing, and other services," says Scott M. Black, vice president of business development for IU Health. "For the south central region, our integration planning focused on the patient experience, with the goal of improving the overall health of the communities served."

Among other goals and benefits, a regional plan for south central Indiana would enable the newly combined organization to serve patients as close to their homes as possible, improve referral processes and physician support, improve care coordination, enhance the quality of services provided, and ensure a seamless care delivery system.

Bloomington Hospital and IU Health assessed a thoroughly developed strategic and financial fact base to better understand their markets and strategic and financial positions, and the impact of current and future trends on their markets.

With the fact base in hand, the organizations used a team-based approach to service distribution planning. Board members, executives, physicians, and staff served on committees and provided information and perspectives to help ensure success at the implementation stage.

A management steering committee, including systemwide leadership and executive management from each of the organization's hospitals or major facilities, provided oversight.

Clinical task forces, composed of key physician and administrative leaders in each service line and clinical site, served as the core planning groups for service lines. They developed preliminary plans for where services would be offered and to what scale, considering both existing and potential new locations. "The challenge was to make sure that care would be rendered in the appropriate place and to fill any identified care or service gaps in a collaborative, integrated fashion," Moore says.

A facility planning task force reviewed facility priorities and investment needs and provided direction on how investments should be prioritized. The team based its recommendations on the volume/capacity, operating impacts, and capital requirements of specific strategies or initiatives identified by the other teams.

Exhibit 2


Teams followed a tight schedule of activities to accomplish goals. The management steering committee identified roles for each of the system's major hospitals/medical centers:

  • IU Health Bloomington (290 beds) would serve as the primary provider of most tertiary and inpatient care to the South Central Region.
  • IU Health Paoli (25 beds), formerly Bloomington Hospital Orange County, would provide basic outpatient and low acuity inpatient care (including surgery) for patients in the southern portion of the region.
  • IU Health Bedford (25 beds), which was owned by Indiana University Health prior to the merger, would provide routine inpatient and outpatient services for patients east and west of Bedford.
  • IU Health-Indianapolis (2,000 beds) would provide sophisticated quaternary care throughout the region, including a dedicated Children's Hospital, telemedicine support, and sub-specialty physician outreach. 

A service distribution plan outlines the strategic roles envisioned for entities within Bloomington Hospital and IU Health.

An analysis of the regional strategic plan's financial impact on the combined organization followed. With approval of financial goals, the service distribution plan was fully developed, with a fully defined service delivery system. The plan consisted of market, program/service, physician, operating, and other strategies to achieve the desired goals, projections of facility impacts, organizational structure and implementation considerations, and financial objectives.

By focusing and optimizing their geographic footprint, Bloomington Hospital and IU Health aimed to ensure appropriate coverage to serve their markets, without unnecessary saturation or overextension of clinical, human, or technological resources in ambulatory or inpatient settings. For example, Bloomington Hospital Orange County in Paoli would focus on basic outpatient and low-acuity inpatient care, while Bedford Regional Medical Center, 20 miles north of Paoli, would offer more complex treatments in a few selected areas. This approach would allow patients in surrounding counties to receive certain care locally, instead of driving another 20 miles north to Bloomington Hospital. By providing a more sophisticated level of selected services at one of its small hospitals, the system could avoid operating an underperforming program at each location.

The organizations' leaders made difficult decisions. For example, the hospital in rural Paoli would retain its obstetrical services, but those services would close in the Bedford hospital because patients could drive 30 minutes for services at Bloomington Hospital. "Paoli had lower service volume, but access for patients was critical," Moore says. "This shows the tradeoffs that must be made. Value-based metrics must drive decision making."

IU Health-Indianapolis and Bloomington Hospital complemented each other's services to avoid competing for patients. Bloomington Hospital retained its coronary artery bypass graft surgery program, in place since the mid-1990s, while the quaternary Indianapolis-based hospital assumed responsibility for the most complex, critical heart cases requiring the highest level of clinical and technological sophistication. The cardiovascular surgery group at IU Health-Indianapolis placed two full-time surgeons at Bloomington Hospital when needed. Exhibit 3 provides a sample of the depth of distribution planning by service line.

The completed service distribution plan has enabled the Indianapolis hospital to avoid "over-building" facilities to accommodate volume that actually required a lower level of sophistication. To make the best possible use of capital and clinical resources, the plan, in fact, reshaped how the organization looked at plans for major facility renovations in Bloomington and Bedford. The combined organization also benefitted from the transfer of service line planning and clinical knowledge from the large quaternary and tertiary hospitals to the smaller hospitals, which enhanced the quality of care provided in those smaller facilities.

A regional approach to care delivery also has helped providers rapidly improve quality and outcomes for patients experiencing Level 1 heart attacks (ST-segment elevation myocardial infarction, or STEMI). By working with ambulances across the region to install 12-lead electrocardiogram (EKG) machines, the organization received EKG interpretations earlier, allowing triage of all Level 1 patients to Bloomington Hospital. This collaborative, rather than competitive, approach among hospitals has significantly improved "door-to-balloon" time for patients and has yielded "immense synergies" in physician coverage and recruitment for the system, Moore says.

Moore urges other healthcare leaders to set expectations and structure for planning early, but allow time for relationship building. "With any key decisions about service distribution and integration, there is no substitute for trusting relationships," he says. "These take time to build. People have to understand the need for a regional approach and may have to transition from being direct competitors to being part of the same family."

A Balancing Act

Given the value proposition of the new business model-best possible quality and access at lowest possible price-leading multihospital systems are increasing their planning efforts to reshape their services. Whatever the size of a system, service distribution planning and optimization provide guidance and allow organizations to improve levels of operating performance across their geographic areas while meeting access, quality, and outcomes targets.

"This service distribution planning process is being considered for the entire system and should help us achieve our goal of providing the same preeminent level of patient care in the most cost-effective environment at all of our affiliated hospitals," says IU Health's Scott Black.

"Living in today's world and preparing for tomorrow is a balancing act," says Moore. "As a regional system, we believe our cost base four or five years from now will need to be 15 to 20 percent less than it is today. So we start working backwards from that number and effectuate structural efficiency changes on a year-by-year basis to get to the point we need to be."

By optimizing clinical services and technology, facilities, IT, physician integration, and other items, service distribution planning is capable of changing an organization's cost structure. By changing the cost structure, the organization shortens the time required to position itself for ongoing competitive financial performance.

Exhibit 3


Mark E. Grube is managing director, Kaufman, Hall & Associates, Inc., Skokie, Ill.,and a member of HFMA's First Illinois Chapter (

Walter W. Morrissey, MD, is vice president, Kaufman, Hall & Associates, Inc., Skokie, Ill., (


Service Distribution Planning and Optimization  

Service distribution planning and optimization produces five essential take-aways:

  • A recommended geographic footprint and distribution of access points, clinical services, and technology
  • Physician and clinical integration required to support care delivery
  • Facility needs and recommendations
  • Recommended organizational partnerships and relationships across the care-delivery spectrum
  • Strategic and financial projections for the optimized system

Key benefits include:

  • Improved care management, quality, and outcomes achieved through the right physician access to support the level of specialization and volume of care in each setting
  • Reduced costs through elimination of unnecessary/duplicative clinical programs, services, and technology
  • Optimized ambulatory and hospital facilities and geographic footprint, offering the right mix in the right location to support access and quality/cost considerations
  • Best possible use of capital and human resources

Source: Kaufman, Hall & Associates, Inc. Used with permission.


Publication Date: Tuesday, November 01, 2011

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