Buyer: Seeks to buy innovations that solve strategic needs for the health system. This category is the most defense-minded.
Investor: Seeks to invest and generate returns through equity in early-stage companies accretive to the health system’s mission, regardless of utilization.
Creator: Seeks to create innovations from within to generate returns, engage staff and monetize core competencies.
Change agent: Seeks to lead alternative revenue creation systemwide and in the community through acquisition, investment and business creation. This is the most offense-minded category and was exemplified recently by the Intermountain-led launch of Civica Rx, the not-for-profit pharmaceutical distribution company.
Pathways to success in growth strategies
An organization should start by assessing its financial persona and then considering opportunities to participate in peer collaboration networks with complementary personas that can enhance the organization’s core competencies, Hathaway said.
“An investor goes well with a buyer,” he said. “Investors and buyers go well with change agents. Creators need buyers and investors because they need to launch platforms. There’s a very natural, noncompetitive interchange that exists today through the different financial personas.”
Such partnerships allow for collaborations on business ventures in noncompetitive relationships. Advantages include:
- Access to expertise, resources and technologies that can be built at scale
- Opportunities to benefit from improvements provided by a partner at no incremental cost
- Risk mitigation through syndication
Organizations should seek to collaborate with “like-minded partners, synergistic personas, to maximize collective strengths and opportunities,” Youmans said.
Measuring the success of growth strategies
HealthEco has developed the metric equivalent net patient revenue (eNPR) to gauge the outcomes of hospital and health system growth initiatives.
It’s defined as “the equivalent acute care billing that would be required to reproduce a margin gain from alternative revenue strategies” and is calculated by dividing total margin by operating margin.
For example, if a health system has an operating margin of 2.2% and generates $5.5 million in EBIDTA through an alternative revenue strategy, the eNPR is $5.5 million/2.2% = $250 million of NPR that would be required to produce the same margin gain through core services.
“In a lot of instances, we’re starting to see the markets consolidate, and you can’t get there,” Hathaway said, referring to equivalent growth through traditional strategies.
“These strategies now need to look at not just what their margin gain is going to be and what they're going to generate as far as an equation against cost of capital, but they also need to look at what the equivalent net patient revenue is that they can generate.”
For example, Children’s Hospital of Philadelphia netted a $450 million margin gain from the sale of its spinoff Spark Therapeutics, a gene therapy company. Yet when viewed against the system’s margin at the time, the transaction generated $3.6 billion in eNPR.
“That’s a staggering number and one they would not have been able to recreate for themselves through a growth-through-acquisition strategy or probably even service line expansion or any other traditional growth strategy,” Hathaway said.
a. HFMA and HealthEco recently announced a partnership to help health systems diversify revenue streams and boost margins.