Case Study – Background Reading – Strategic Management – Banks

The CEO of St. Sebastian Health System, a moderate-sized hospital system in a mid-sized, Midwest city has hired you to help turn things around. The CFO is projecting an $8.9 million operating loss this year, which will be more than offset by non-operating income. However, the board has made it clear that the situation must improve. If the system cannot produce a positive operating margin in 2021, someone else is going to be the CEO. The CEO and CFO have asked you to recommend strategic approaches to selling their services in the community that will help turn the financial ship around.

Your Health System

St. Sebastian is a community-based health system. The senior management team has an average tenure of 17 years. The exception is the Chief Medical Officer (CMO). She has been in her position for two years and is the fourth CMO in that role in the past ten years. The CEO and COO have each been in their current roles for ten years. The system is comprised of the following:

1. Two large, acute care hospitals
2. Two long term care facilities
3. Two skilled nursing facilities
4. One long-term acute-care hospital (LTAC)
5. Four geographically distributed outpatient centers
6. Four Urgent Care Centers
7. Two free-standing ambulatory surgery centers (ASCs)
8. A 400 member employed physician group that includes 180 Primary Care Providers (PCPs). All 28 PCP practices are certified Level III Patient Centered Medical Homes by NCQA.

The remainder of the 1,000 member medical staff is generally comprised of large, independent groups who have varying degrees of ‘loyalty’ to the system. The Radiology and Emergency groups, for example do 100% of their work at St. Sebastian and have no ownership of any outside facilities. The Gastroenterology group, on the other hand, does work at the hospital, but also owns their own, freestanding endoscopy center. The orthopedic group does 75% of their work at St. Sebastian, but maintains privileges at other facilities. They do not own their own ASC.

In the current year, St. Sebastian is projecting 221,700 patient visits (combined IP and OP) with an average cost per visit of $1,775. They have an average charge per visit of $4,600.

Over the past ten years, St. Sebastian has been active in pursuing a number of different strategic projects including:

1. They have established ‘clinical institutes’ in cardiovascular, orthopedic, oncology, maternity and neurologic care. Each of these has been built through a co-management agreement between the system and the internal or external physician group who would be most logical. Each institute is led by a dyad of an administrator and medical director.
2. Five years ago, they consolidated maternity programs to one facility, a move that justified investing in a Level III Neonatal Intensive Care Unit (NICU)
3. They have established a research division in the hopes of working with national pharmaceutical companies and/or tertiary care hospitals in the Midwest.
4. They have established a Physician Hospital Organization (PHO) and intend to become an Accountable Care Organization (ACO) that can participate in the Medicare Shared Savings Program (MSSP) and/or enter into global risk contracts with third party payers. The PHO is currently evaluating whether or not they should purchase an insurance license so that they could offer commercial, Medicare Advantage and Managed Medicaid insurance products.
5. They have established a Business Health division to service the corporate health needs of the employers in the region. This would include things like EAP programs, on-site wellness, drug screening, on-site clinics, etc. This division also recently built two large, full-service fitness centers.

The competition – The community is currently served by three other major health providers:

1. Mercy is the competitor acute care system in town and has two hospitals and various outpatient centers. They have not been active in physician employment – they employ a group of 60 PCPs, but no specialists. Similarly, they have not been engaged in ‘branching out’ with different strategic initiatives, preferring instead to focus on cost efficient care. They do not have clinical institutes, research divisions, a PHO or a Business Health division. They have 228,500 visits per year, with an average cost of $1,450 per visit and an average charge of $4,450.
2. General Pediatric is a pediatric teaching hospital. Five years ago, they signed an affiliation agreement with Johns Hopkins to gain access to clinical and research capabilities that would have been beyond their reach, given their size. They employee essentially all of the pediatric subspecialists and have a PHO, which includes 75% of the region’s primary care pediatricians. They will have 202,000 visits this year, with an average cost of $2,050 per visit and an average charge of $4,950 per visit.
3. General University is an adult teaching hospital affiliated with the local university’s medical school. They staff the region’s free-care clinics and historically, have been the region’s hospital for indigent/uninsured patients. They are the region’s Level I trauma center and are well regarded for intensive services like trauma, stroke and cancer care. However, their location and reputation for taking indigent patients means that they are not preferred for ‘normal’ medical care by commercially insured or Medicare patients. Besides the community health centers, they own an inpatient rehab hospital, but not other facilities. They have explored affiliations with national leaders in academic medicine, but so far have not signed any such agreements. They see 185,000 visits per year with an average cost of $1,825 and an average charge of $5,600 per visit.

There are no other hospitals currently operating, though there are 23 skilled nursing facilities (SNFs) and 3 inpatient rehab facilities throughout the region. They are independent actors and for the most part are struggling to stay profitable. There are several single-specialty physician groups who operate ambulatory surgery centers and one chain of independent diagnostic treatment facilities (IDTFs). Three years ago, there was a significant change in the state government, and that resulted in the long-time Certificate of Need (CON) program being all but scrapped (Skilled Nursing Facilities are still heavily regulated). Several for-profit hospital companies have recently done some analysis around entering your market, but have not done so yet.

The Community – The community is a Midwest city and surrounding suburbs in the midst of a transition from a manufacturing employment base, which unfortunately accelerated with the 2008 economic downturn. The hospitals have seen this over the past several years in a tightening of benefits offered by local employers. Benefits continue to be offered, but increasingly are likely to have a significant deductible associated with them. Unemployment has been above the national average and is projected to remain that way. This means that the average wage in the region is actually below where it was in 2008, when the last recession hit. The number of Medicare-age residents are projected to rise over the next 10-20 years, while working age patients are projected to stay flat or fall slightly. Similarly, birth rates are expected to fall slightly over the coming decade.

The community is 60 miles south, 45 miles east and 50 miles north of other, similarly sized cities. Until 20 years ago, that made this city effectively an island unto itself. Increasingly, however, the suburbs of each of these communities have become very close to each other. As that has happened, providers in each community have followed and established practice sites and free-standing outpatient centers.

The payers – The community has a normal looking mix of Commercial, Medicare and Medicaid patients. Because the state’s governor was fiercely against the Affordable Care Act, the Medicaid expansion that happened in other states hasn’t happened here. Thus, the community also has a sizable population without insurance today. As you’d expect, different hospitals see a different mix of these patients. The local health council was able to provide you with the most recent year’s payer mix by hospital – below:

Reimbursement – the CFO was able to supply you with their best estimate for what various payers are reimbursing for services. In general, the commercial plans are paying 50% of charges, regardless of location, except at General Pediatric. There, the monopoly on pediatric services has allowed them to negotiate rates of 80% of charge, but only for the commercial plans. Medicare currently pays 30% of charges at all hospitals, and Medicaid pays 25% of charges everywhere. Uninsured patients are generally paying 2% of charges.