Managed Service Restructuring in Health Care

A Strategic Approach in a Competitive Environment

William Winston, Robert L Goldman, Sanjib K Mukherjee

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9781560248965
• eBook ISBN:
  9781317939085
• Topic: Business
• Subtopic: Business General
• Index: Business

Survival in the growing managed care environment requires the integration of financial analysis, market appraisal, and administrative management. The authors of Managed Service Restructuring in Health Care provide a unique tool for readers to enable them to make these successful management decisions in restructuring services. The unique approach in this book assists health care managers and prospective managers as they seek to solve the problem of how to deal with health care services that appear to be no longer productive. In Managed Service Restructuring in Health Care, the authors provide a solid theoretical base for what they have developed in MSR (Managed Service Restructuring)--a conscious--not crisis--management tool. They prepare readers for implementing MSR techniques by describing them in detail for their application to readers'situations. MSR approaches to planned health care management, as introduced in this book, help administrators channel scarce resources to the services the community wants and needs most. Facts and cases are offered as examples of when and how MSR techniques have been applied successfully. The authors also include failure cases where, if MSR techniques had been followed, health care providers would have survived in several communities.Incorporate the information in this book to enhance long-range planning and prevent closure of health care services needed by the community. Along with financial and marketing tools necessary for long-range planning, Goldman and Mukherjee list warning signals that alert professionals to the need to review the services and products offered. They also fully explore these areas:

• Product Life Cycle
• Boston Consulting Group's Portfolio of Business (Growth Share Matrix)
• Product Development
• Product Planning
• Public Service of Health Care Providers
• Centers of Excellence
• Service Diversification/Consolidation
• Investment/Disinvestment Criteria
• Marketing in Competitive Environment for Health ServicesHealth care managers, hospital administrators, and students in health services management programs can benefit from the focus on conscious planning in Managed Service Restructuring in Health Care. While many of the examples take place within acute care hospitals, the MSR approach and this book are designed to assist any health care administrator or manager. With knowledge of when and how services can be prolonged, professionals can more effectively lead their health care provider into a more competitive environment. The analyses used in the book should enhance many readers'knowledge of basic marketing and financial principles and theories important to restructuring and providing health services today.

Chapter 1

The Historical Basis of Managed Service Restructuring

INTRODUCTION

To remain competitive and efficient, hospitals and other health service institutions must continually redefine themselves. This may mean introducing, eliminating, or otherwise modifying services. However, decisions are sometimes based on inadequate or faulty analytical techniques and erroneous assumptions.

Since the advent of the Prospective Payment System, hospitals have been forced to cut marginal services. Even when such a strategy is in conflict with the hospital’s mission statement, service elimination often proceeds with the justification that the hospital must survive.

However, as health care continues to evolve toward an integrated, managed care system, the key players will need to make additional changes. The next decade will require the integration of financial analysis, market appraisal, and managerial skills. When price becomes less significant through managed care strategies, consumers will select providers based on quality and service.^1,2 This chapter explores the theoretical and analytical foundations for making successful restructuring decisions. It introduces Managed Services Restructuring (MSR), a deliberate and orchestrated management effort.

If the service must be eliminated, MSR provides the procedures that avoid last-ditch efforts to save an unsalvageable situation and are the least damaging to the institution and the public. Like products, services have life cycles and must be viewed differently as they move from one stage to the next. We begin the MSR analysis by reviewing the market position of the service based on product life cycle theory and related works. We then discuss several decision-making paradigms and finally examine actual situations in which the MSR approach has or could have been applied.

Goldman and Schore, in developing the concept of managed service restructuring, observed that the demand for acute hospital services is declining.³ Advance planning, with simultaneous analysis of the financial and marketing elements of a service can avoid elimination of a potentially profitable service.

Such an analysis can be the basis of a realignment plan that can satisfy all publics: the community, the medical staff, the organization’s employees, and its administrators. The worst time to make a restructuring decision is when a crisis arises. Thus, early detection of problems is critical.

THE PRODUCT LIFE CYCLE

Roberts offers another important element, stating that an organization must understand its position vis-à-vis the life span of each service it offers.⁴ For example, hospitals may adopt new technology at different times in the product life cycle depending upon their mission or position.

Hospitals can be early adopters if they are research institutions or they may offer a service later in its life span if they are community hospitals. Thus, the MSR analysis of a service must take into account what type of hospital is being analyzed and where the service is in regard to its life span.

A review of the Product Life Cycle Theory and Portfolio Analysis will assist in understanding the MSR concept. Levitt describes four stages in the life of a product (or service) as shown in Figure 1:⁵

Stage 1:	Market Development [Introduction]–This is when a new product is first brought to market, before there is a proven demand for it, and often before it has been fully proved out technically in all respects. Sales are low and creep along slowly.
Stage 2:	Market Growth–Demand begins to accelerate and the size of the total market expands rapidly. It might also be called the “Takeoff Stage.”
Stage 3:	Market Maturity–Demand levels off and grows, for the most part, only at the replacement and new family-formation rate.
Stage 4:	Market Decline–The product begins to lose consumer appeal and sales drift downward, such as when buggy whips lost out with the advent of automobiles and when silk lost out to nylon.^6

Even in his early article on Product Life Cycle Theory, Levitt was looking at ways to modify the life of what the Boston Consulting Group (BCG) would later call the “Dogs.” He showed that the decline stage may be delayed by one or more strategies including “Frequent Usage, Varied Usage, New Users and New Uses.”⁷

THE PRODUCT LIFE CYCLE APPLIED TO HEALTH SERVICE ORGANIZATIONS

Starkweather and Kisch demonstrated that the life cycle may be modified within each industry.⁸ Health services organizations pass through the following four phases:

Search:	Characterized by newness, innovation and a sense of ascendancy as the organization proceeds to establish its identity. During this phase, the administrative structure is typically open and informal.
Success:	During this phase, patients, staff, and resources are procured. The management becomes more formalized in order to handle a larger operation.
Bureaucratic:	This phase is characterized by relatively rigid compliance to rules and procedures. The organization receives less feedback from its clients, creating an isolation. A decline may occur in this stage because of failure to respond to environmental changes.
Succession:	New ways of providing services are developed often by the evolution of new units within the organization.

FIGURE 1: The Product Life Cycle

The need for restructuring can be prevented if the organization avoids moving into the Bureaucratic Phase. However, if this error cannot be avoided, then a need for service restructuring develops. The Succession Phase is when the restructuring of services and realignment of the organization takes place. Of course, this is the most costly way of rebuilding an organization.

PORTFOLIO ANALYSIS

A decade after Levitt’s initial product life cycle work, Day and the BCG took a slightly different approach to product or service management.^9,10,11

A diversified firm’s operation is viewed in terms of a “portfolio of businesses.” This technique categorizes different products or product lines in an organization’s portfolio and determines optimal resource allocation.

This method has two determinants: an industry’s growth rate and the relative market share of a firm’s specific product(s). These reflect the product’s competitive position and the net cash flow required to operate the business. The analysis involves a matrix divided into quadrants as shown in Figure 2.

The four categories are:

Rising Star:	High potential growth, modest (positive or negative) cash flow.
Cash Cow:	Large cash flow, modest or little growth.
Question Mark:^12	Large, negative cash flow but high growth potential.
Dog:	Poor growth and cash flow.^13

Since business units in each quadrant have different cash flow positions, they must be managed differently. This has an impact on the firm’s overall operational strategy.

A later modification of The Boston Consulting Group’s (BCG) approach is known as the General Electric/McKinsey Business Assessment.¹⁴ Porter states, “Depending on where a unit falls on the Company Position/Industry Attractiveness Screen Matrix, its broad strategic mandate is either to invest capital to build position, or to harvest or divest. Expected shifts in industry attractiveness or company position require reassessment of strategy.”¹⁵ Plotting a hospital’s portfolio of businesses on such a matrix can help to ensure that the appropriate allocation of resources is made.

This approach requires a thorough analysis of each business unit, but does not consider remedial action. However, once a decision to divest is made, there is no opportunity for turnaround.

RESTRUCTURING MAY TAKE PLACE AT ALL LEVELS WITHIN AN ORGANIZATION

Leatt, Shortell, and Kimberly state that restructuring can affect the overall size of the organization as well as individual units.¹⁶ It can also affect phasing out and/or shifting of managerial responsibility.

FIGURE 2: Growth/Share Matrix

For example, a few years ago some surgical procedures, due to advances in technology and changes in reimbursement, were transferred from the classical in-patient surgical unit to a surgi-center. This required a change in management structure. In numerous cases a joint venture structure was developed with physicians that encouraged them to use the new surgi-center over one owned by a competing hospital. This response to competitive environmental forces was reasonable in the 1980s and worked relatively well. In the 1990s such situations would call for restructuring.

The recent change in the legal environment, i.e., changes in the Medicare Fraud and Abuse regulations, have placed traditional hospital-physician joint ventures in jeopardy. New ownership and management structures are being developed to respond to these changes.

Another significant change is moving from non-profit to for-profit status. While this change, on the surface, is limited to the organization’s tax category, in reality it requires a radical change in the way management views itself. While we believe that today’s nonprofits are as interested in capturing market share and improving the bottom line as any for-profits, there is still a difference in the types of funding mechanisms used and the justification for continuing services with weak demand.

Non-profit hospitals still provide charity care and solicit donations from the community to do so. A for-profit would find it difficult to attract cont...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• About the Authors
• Preface
• Chapter 1: The Historical Basis of Managed Service Restructuring
• Chapter 2: MSR Defined
• Chapter 3: Applying Managed Service Restructuring
• Chapter 4: Preventing Service Line Deterioration
• Chapter 5: MSR in Practice
• Index