5 New Ways to Look at Generating Revenue

Arthur C. Sturm, Jr.

Sometimes getting a pie thrown in your face is a good thing. Especially if it helps you generate revenue.

At a Glance

• A healthcare organization’s “strategic pie” has four pieces: physician retention, brand, patient retention, and patient acquisition.
• When allocating strategic effort among these pieces of the pie, leading hospitals are following the lead of other industries, focusing on concepts such as churn rate, downstream value, strategic halo, promotable products, and the relative power of different metrics.
• A risk-reward metric offers an important means of assessing factors that would influence how much you would be willing to spend for specific purposes, such as acquiring new patients.

It’s not a bakery pie, but what we’ll call a strategic pie. A strategic pie helps you allocate resources into areas most critical for growth and financial health. The slices of the pie are:

• Brand
• Patient acquisition
• Patient retention
• Physician alignment

The challenge, of course, is slicing or apportioning these four elements to bring about the financial or strategic return you are looking for. The “slicing process” can be as simple or complex as you and your organization can tolerate. Let’s look at some of the metrics used by other industries and leading hospitals to help you adopt new tools and rules that you can apply in the slicing process.

Churn Rate
A concept prevalent in retail and telecommunications industries, churn rate is becoming a key leading indicator for health care as the industry becomes increasingly dynamic. Simply put, churn rate is a ratio that tells you how many of your patients are “new” (often defined as “not seen in the past two years,” but any time period will do) and how many are “existing” (have had services at your facility within the chosen time period).

Hospital churn rates can vary greatly, but a target range is 15 percent to 25 percent new patients every year. If you achieve that rate, it’s likely you are both replacing lost business and still growing. But while your churn rate can mean good news, it can also indicate a big threat.

Your churn rate is good news if you are trending in the suggested range consistently from year to year. A low churn rate, however, such as that seen in the exhibit , suggests a strong likelihood that a hospital will “run out” of patients as they migrate out of the area or simply die.

Your churn rate poses a big threat if the cohort of existing patients starts to decline substantially. Invariably, the existing cohort is the larger of the two. No hospital can afford to lose those patients, particularly if that loss reflects a poor patient experience as measured in your satisfaction scores.

Your ability to influence your churn rate depends on factors reflected in two leading indicators: consumer preference as evidenced by market surveys and patient satisfaction.

Consumer preference reflects your ability to attract new patients. If people want to come to your hospital, then you need to find ways to make that happen. If they don’t, you need to give them a compelling reason. Patient satisfaction reflects your ability to retain customers. The correlation is obvious: Bad experience equals loss of loyalty.

Downstream Value
In the retail world, the value of a transaction is a small indicator of financial success. If for example you go to the hardware store and buy a hammer and nails for $20, the owners don’t say, we have a $20 customer. They say what else we can do to get this customer to come back again and again to spend more money with our store. How can we get him to buy lumber for his deck, patio furniture once it’s built, and a shiny new grill to show off to friends and neighbors?

Hospitals tend to think in terms of transactions. For example, let’s say Mr. Sturm comes in for a cardiac catheterization procedure. The hospital says, “Great. That generated some revenue. That’s his value to us.”  Not so: In a wide range of analyses, those hospitals that have looked at the downstream revenue—the dollars spent after the initial transaction—have found that patients are worth anywhere from two to 10 times the value of the original transaction, or even more, within two years of the initial transaction.

Using downstream value can provide your hospital with a better foundation for strategic planning and resource allocation. With changes in reimbursement driving transactional revenue down, it becomes imperative to find ways to build a strong relationship with patients that produces an ongoing revenue stream from repeated and clinically appropriate visits for health care.

Strategic Halo
Healthcare services do not occur in a vacuum. They don’t “just happen” as events unto themselves, but are typically part of a customer’s continuing pattern for health care. This pattern can be measured by what is called a strategic halo, which—much like the four-legged stool or other such metaphor—provides a mean depicting the interdependence of services in different service areas (see exhibit).

Take cardiology for example. The exhibit below depicts one hospitals total visits for cardiovascular services (24,588). The hospital found that about 35 percent of its cardiology business originated in four other services, which are called upstream feeders because those services feed business into cardiology. The strategic halo shows the dependence of the hospital’s cardiology services on those four services: For example, if you remove endocrinology from your product mix, you would cut off 14 percent of your feeder business to cardiology.

For whatever reason, endocrinology, orthopedics, gastroenterology, and pulmonary will inevitably be part of any hospital’s cardiovascular strategic halo. And every product has a strategic halo. Once you understand what it is, you should be able to find a new way to leverage volume of the downstream product by increasing volume upstream through a focused effort to create highly satisfying experience in those upstream service areas.

Promotable Products
Why is it that many hospitals think everything they do deserves an ad? Retailers certainly don’t. Grocery stores typically will stock around 35,000 items. There’s no economically viable way to promote all of those items. A hospital has 550 DRGs and more than 1,000 outpatient procedures. Need I say more?

Often retailers will take selected products and promote them as items of value, uniqueness, or customer interest. Bananas are a good example of heavily promoted products. Grocery stores often promote them at a low price point to bring customers in for higher margin products on the shelf.

The healthcare version of this approach starts by realizing what a consumer can realistically “purchase” on his or her own. Open heart surgery, for example, is not a promotable product. But a calcium scoring test is, and it can feed into a higher-margin procedure, such as catheterization.

Steps to identify promotable products are as follows:

• Step 1. Identify a high-margin service.
• Step 2. Calculate the downstream value of the patient (two years after the initial transaction).
• Step 3. Identify a low-threat, low-cost entry event (e.g., screening, lecture).
• Step 4. Develop a conversion strategy for at-risk individuals (e.g., call backs).
• Step 5. Assess success at appropriate time frames (no less than six months; no more than 18).

The key point to remember is you can expect people to “buy” or act on only those things that are within their realm of comprehension and comfort. Hi tech may be a part of your brand, but telling people they need to use your da Vinci robot may be a stretch. Better to say you can have a better experience or outcome because we have the da Vinci.

Meaningful Metrics
If you want to look at different ways of generating revenue, then you need to entertain new metrics to measure success and create reasonable expectations.

Some of these metrics have been defined by Bill Gombeski, director of strategic marketing at UK Health Care in Lexington, Ky. Gombeski’s lexicon describes two primary groups: leading indicators and lagging indicators.

Lagging indicators are what many hospitals use today. Often referred to as “rear view” looks at your hospital, they tell you where you have been. Market share is a lagging indicator. Because the data trail real time often by years, market share is very much backward-looking benchmark. Other lagging indicators are volume, case mix, brand preference scores, and percentage of customers willing to recommend your hospital. In today’s dynamic market, lagging indicators have some, but arguably declining, value.

Leading indicators on the other hand are prospective indicators that help create expectations for what could occur in the future. Call-center volume, for example, indicates how busy your physicians are and, viewed over time, gives a sense of how busy they might be. If the call volume is declining, there’s a reasonable expectation that utilization might decline, as well. Other leading indicators are attendance at screenings and lectures, calls to nurse triage centers, and follow-up calls to discharged patients (to determine levels of satisfaction).

On the economic front, hospitals should develop a risk-reward metric. It’s a different way of looking at business development by asking yourself questions such as, “How much am I willing to spend to acquire or retain a patient?” The dollar amount of expense is what we will call your “acquisition cost”—that is, to a get patient worth “X” dollars, you would be willing to spend Y dollars.

There is no standard formula for what that ratio should be. In fact, it could be a dollar-for-dollar trade off. Following are examples of factors that would influence how much you would be willing to spend to acquire or retain a patient.

You are introducing a new product in a highly competitive market. That’s an expensive proposition because you will be creating demand for your product in what can assumed to be an established market.

You are not highly preferred. Your effort could be costly because there is not a market predisposition to your hospital.You would be building on an already well-recognized service area. An example would be adding a neonatal intensive care unit when you are already known for your women’s care services. Such an effort would be relatively easy and hopefully not as expensive as starting from scratch.

You are protecting market share. A competitor has decided to invade your turf. You may decide to defend your share even if it means sacrificing short-term margins for long-term security.

You are aggressively seeking to build market share. See above. It’s the flip side of the argument, but with the same economic rationale.

Certainly there are other considerations for developing a risk-reward scenario, and in the end, you may elect to stay with conventional metrics. But a market as dynamic as health care requires a finer cut of the pie and a keen sense of your likelihood to succeed.

A Fair Slice
Hopefully, your hospital will respond to today’s challenges through innovation, experimentation, and pure bull-headedness. Having these qualities coupled with applying all of the metrics you need for a thoughtfully sliced pie should yield welcome results.