Scott MacStravic, Ph.D.
The idea of identifying the profitability of individual customers, or at least of customer segments, as a basis for strategic planning and operations, a common practice in many industries, may seem foreign, even unethical, for health care. [Return on Customer Monthly (www.1to1.com)] Hospitals and physicians may offer some special services and amenities aimed at attracting and keeping more profitable customers--VIP suites, units and pavilions are common in hospitals, along with executive health programs, for example. But discriminating in terms of selecting those to serve in favor of more profitable and against less profitable customers would seem inimical to the missions of most healthcare organizations, and even illegal.
On the other hand, ROI on specific services, and the profitability of service/customer mix are certainly strategic concerns. Hospitals have often learned to their regret that “focused factory” entrepreneurs are explicitly focusing on more profitable services, leaving “full-service facilities stuck with a less profitable mix. Specialty hospitals, ambulatory facilities, along with full-service hospitals are relocating or opening “branches” in more affluent suburbs to at least balance the profitability of their customer as well as service mix.
Both hospitals and physicians have, on occasion, refused to sign or renew contracts with particular insurance plans, when these plans offered less than reasonable payment schemes. This often causes scandals because thousands of patients may be forced to change providers if payment disputes are not resolved. More often, payers discriminate among providers in terms of what they deem quality or cost issues, through “tiered” payment, patient cost sharing or preferred provider networks.
But there are at least two specific markets where consciously predicting and monitoring the profitability of individual customers and the mix thereof is both necessary and less morally objectionable. First is the general market for occupational and corporate health, where customers are businesses first, and patients second. Unless providers can achieve positive operating margins with the payments business clients deliver, it makes little sense to seek or keep their business.
Second, and perhaps a little more controversial, though equally necessary, is the proactive health market. When providers choose to operate proactive disease or risk management programs, whether for third-party payer clients or paying individual patients, there are likely to be some customers who are not profitable. And if there are enough who are not, after all, entire proactive health programs may become unprofitable.
Of four diabetes management centers opened by hospitals in New York City as its diabetic population doubled over the years, three proved not financially viable given the payments they were able to attract, and the one that re-opened, as well as the one that survives, depend on charitable donations to keep going. [I. Urbina “In the Treatment of Diabetes, Success Often Does Not Pay” New York Times Jan 11, 2006 (www.nytimes.com)]
When a 14-physician practice in Colorado tried offering diabetes management using the Chronic Care Model, it could only gain payment from one regional HMO, covering only 304 of the 650 patients participating in the program. This mix of participants and lack of additional clients produced a net loss of over $25,000 in this initiative, though the practice chose to continue to offer it in light of its significant impact on patient outcomes. [P. Mohler & N. Mohler “Improving Chronic Illness Care in a Private Practice” Family Practice Management 12:10 Nov/Dec 2005 50-56]
These examples probably reflect a combination of choosing the wrong product and the wrong customers. Diabetes patients, have not consistently proven to be profitable targets for disease management of members of insurance plans, or Medicare for that matter. DM in general has gained mixed reviews relative to net cost savings from both. [F. Diamond “DM’s Cost Effectiveness Doubted in CBO Report” Managed Care Magazine Nov 2004 (www.managedcaremag.com)]
By contrast, if employers were the clients, they can save significantly more in absence, disability and reduced productivity losses, compared to only sickness care cost reductions. In general, total losses to employers from employee sickness and injury runs two to five times as much as medical care costs alone. But diabetes is actually a disease where this multiple tends to be among the lowest, with total labor costs only about three times as great as medical care costs, while the multiple for other conditions, such as allergies, depression, migraine headaches, and other conditions range from five to twelve times as great. [S. Nicholson, et al. “How to Present the Business Case for Health Care Quality to Employers” Applied Health Economics and Health Policy 4:4 2005 209-218]
Selecting patients most likely to cooperate in proactive efforts, even “firing” those who do not cooperate as participants, can be necessary to making proactive programs viable. Entrepreneurial vendors routinely select those they predict will be the most profitable participants, for example, graduate the resources devoted to each based on their probable cost savings, or both. Even hospitals engaged in proactive health efforts aimed at their own employees graduate their investments in each based on predicted returns.
Neither deliberate “de-marketing” of services to unprofitable patients, nor graduating the resources devoted to their care are acceptable practices in reactive sickness care. Each sick patient is deemed as good as the next when planning and delivering sickness care. But in proactive health, the relative profitability of individual clients, and even of individual patients may be essential to consider when selecting targets for attraction or retention, as well as in graduating the resources allocated to the efforts aimed at each.
