Independent Hospitals Require Critical Mass

2:2 February 6, 2023

Last month I offered some insights into future prospects for independent hospitals and promised to address critical mass as it pertains to this topic. Forgive the length of this newsletter but, as you will see, it is complex. Critical mass is actually derived from nuclear physics, most prominently from atomic energy. It refers to a threshold required to cause a sustained nuclear reaction (e.g. atomic reaction). Merriam-Webster defines critical mass as “a size, number, or amount large enough to produce a particular result.” Where the result is to remain independent as a hospital, what factors will define was is required to obtain this result?

The essence of the concept is that whatever outcome is sought, it will only occur if critical mass is achieved. In its simplest form, size comes into play as achieving critical mass means being large enough to achieve its purpose. But size can be measured in many forms (people, assets, revenues, buildings, space, skills, services). Critical mass also involves scope. The right amount of the right ingredients is required. Understanding critical mass is enormously important in determining strategies for healthcare providers. Indeed, correctly understood, critical mass is likely to determine the success or failure of any hospital or health network to survive the economic chaos of the current market.

As applied to business, critical mass is about the relationship of an organization to its market. Critical mass is achieved and sustained when the offerings of the business (scope) meet the needs/wants of a sufficient number of customers in the markets on a continuing basis (i.e., sustainability in growth, profits, and brand). In its simplest form, critical mass allows the offerings of an organization to reach a threshold sufficient to be continuously noticed and acquired by the consumer.

Of course, the concept of critical mass is more far-reaching than that. Achieving critical mass is one thing, sustaining it is something else altogether. But here is the rub, how does a business account for the fact that customer needs and wants (preferences) are constantly changing? Matching customer interests to the offerings of a business is the key to success. More precisely, critical mass involves achieving, adjusting, and scaling services in pursuit of this customer loyalty relationship. Thus, for an independent hospital, critical mass requires having the capacity (space and talent) to consistently offer a scope of services that is sufficiently attractive and sought by a threshold number of patients/customers where it is located. This involves a trust relationship with a recognized brand. Further, over time it is necessary that this set of services evolve with the changing demographics of the region (extended beyond just local). Hospitals are used differently today than just a few years ago. As the population is changing in size (increasing or decreasing) or getting older, having more babies, or experiencing more/less disease, the capacity of the organization to manage both the volume and nature of services required by that population must change. Reduced to its finest points, critical mass in healthcare is really about size and complexity. This includes a number of consequential issues: clinical services, capacity (resources, talent, technology, quality, and access), and brand. Allow me to elaborate by addressing each of these areas in more detail.

Clinical Services

Clinical services are referred to as service mix. It represents the portfolio of offerings that a hospital or health organization is able to provide. It is my experience that service mix is often taken for granted. For any particular hospital, the current mix of services may not have been purposeful or deliberate as it evolved over time. Further, “mix” may be a bit deceiving in that it may connote that the services work together. We all know this is not always the case. Indeed, coordinating services remains one of the most vexing challenges in healthcare. Notably, many services have components that are offered in different settings requiring “handoffs.” This can include ancillary services (lab, imaging) and/or sites (bed, doctor’s office, emergency room, home). Like in sports, handoffs are often where problems arise. As in the game telephone, what gets handed off can be fumbled, misunderstood, or just not done well. Service quality can also vary considerably. Some settings may be relatively simple (e.g. a pediatrician sees a limited number of diagnoses repeatedly among the hundreds of patients that come through their office every month) compared to others (e.g., an adult internist who may be exposed to literally hundreds of different ailments in a month).

Capacity

Resources. In this economically challenging time, it is easy to simply focus on financial resources. Monitoring and incorporating needed elements of the changing dynamics of healthcare takes resources. And hospitals are clearly limited in their access to such resources, especially in smaller, more rural locations. Taken together, the mix of services must allow for at least a breakeven financial picture (including funded depreciation) if it is to be sustainable. Many services lose money, and a rather limited and declining number of services have a positive contribution margin. The financial dimension has become particularly tricky in light of managed care and the growing percentage of government beneficiaries (customers) who don’t cover the full cost of their services[1] .

Management teams, when asked to identify desirable attributes tied to success in today’s market, often refer to agility. Achieving organizational agility often takes access to significant resources[2] . The capacity to support latest ideas and promote innovation can be stilted to the extent that there is no clear path to funding that may be required to support such activities. Fundraising has become an ever more vital component of successful healthcare organizations that are generally organized as non-profit organizations.

While some changes may not require significant added resources, many changes do. In viewing the full continuum of care, the array of necessary facilities quickly expands beyond the traditional hospital to include urgent care, retail medicine, telemedicine, and other potential modes of delivery that might all be involved in one episode of care. This gives rise to the next consideration, which is talent.

Talent. Clearly, healthcare is challenged to attract the best and brightest in light of the extreme turnover that is being experienced today. Healthcare has historically been a haven for job security for doctors, nurses, and also executives. Burnout has become the curse of healthcare at all levels, especially for first responders. While measurable improvements are noted with respect to burnout[3] , it must be recognized that critical mass has a role to play in the talent arena. A health system with a large number of facilities in different communities has more options to offer the typical executive. For example, a regional health system tends to have more success than others due to the fact that it can offer far more options to newly minted physicians and executives as they began their career journey[4] . The traditional career path for an executive is to start small and graduate to larger, more complex organizations. Health systems can boast of a number of captive openings each year under average turnover (10% per year?). The attraction to the ambitious executive is that internal candidates are favored over others. Again, the learning curve attendant to a diverse set of resources is increasingly being exploited by such systems, as there is increasing recognition of the competitive advantage related to capturing such learnings.

In order to offer a service, one must have the right number of people trained to support the volume of service that is being demanded (i.e., scale). More services have been shuttered or dropped in recent years due to staffing shortages than any other reason. This was rarely the case in the past but has taken on new meaning within the great resignation and quiet quitting. More than merely fitting a body count to a threshold (e.g., the ratio of caregivers of 1:4 patients) this increasingly is about talent—skills. Skills intensity tends to increase with patient severity (though not always). Add to this any number of ancillary staff (e.g., case managers), and the mix can get complicated quickly. With the advent of clinical service lines (of which I am a proponent) things get even more specialized. Done right, this means that patients/customers will seek a provider of service lines where the experience is far more amenable to customization (i.e., not a one-size-fits-all situation). This approach better incorporates the unrivaled experience that patients themselves often bring into the equation, especially where chronic disease or disability is involved. But as things get more specialized, recruiting of professionals gets more challenging, along with the requisite on-boarding and training (including continuing education).

The theory behind the dramatic growth of regional systems (and the for-profit chains; see under Brand below) is that collaboration can yield tangible financial benefits, not only in shared purchasing (a key area) but also in managerial and clinical best practices. Knowledge transfer remains elusive in healthcare management, despite the efforts of many to improve upon this. The simple reality, at least in my experience, is that healthcare executives are somewhat limited in their willingness/ability to codify best practices and disseminate such knowledge[5] more widely. Larger health systems (and for-profit chains) seem to approach such innovation as “proprietary information.” While this is disappointing at one level, it leaves mostly to consultants, various associations/academies, and academics to capture and transfer novel management practices. Similar to the global consulting firms, many of the larger health systems have achieved scale (i.e., critical mass) and focused on innovation giving rise to exemplary internal training and leadership development programs. These programs have become a compelling attraction in recruiting savvy new executives. Independent hospitals that lack such scale may find it difficult to effectively compete on this basis.

Technology. Technology seems to always be positioned by the vendors as making jobs easier for caregivers, but my impression is that this is rarely viewed that way by caregivers, especially in the absence of greater standardization. It would help greatly if vendors (device and system) could do a better job of agreeing to standards than they have thus far (e.g., consider the incompatibility among health records). In conducting a certain procedure, it should matter less which vendor product is being used (agnostic). Clearly, having the right technology should support the growth of a program or service. Digital technology and enhanced data gathering should also allow for more seamless customization. There is no denying that technological advances have added new more effective treatments to many patients dealing with chronic diseases or other disabilities. Technology innovation will continue to be a critical component of improving the healthcare experience. But technology can be expensive. I know of several hospitals that were forced to join a health system simply to cover the excessive cost of installing a digital health record system.

Quality. Critical mass in healthcare can also refer to well-established concepts related to quality. Volume has been established as an important indicator of quality in certain (but not all) circumstances. The surgeon who performs more surgeries (coupled with good outcomes) will tend to be favored over the surgeon with less volume (and poorer outcomes). As data has become more available such measures are not lost on the discerning consumer. The prominent movement toward High Reliability Organization status is emblematic of this focus.

Not only must a relevant portfolio of services be offered but the quality of outcomes must be acceptable. Merely possessing the right number of trained personnel and technology to support them, while essential, is still insufficient to sustain growth if the service delivery component is lacking. These are each factor inputs to the production process, but they must result in a consistent outcome that meets or exceeds quality thresholds, as well as related consumer metrics (e.g., preferences). It is also true that many services rely upon a team of caregivers who are challenged to synchronize their work on behalf of the patient. As noted earlier, coordination of care remains one of the great challenges. Among doctors, an episode of care can involve diagnosticians, surgeons, and proceduralists (e.g., radiology and pathology). Then there are the other providers, including a growing alphabet soup of professionals such as social workers, occupational, speech and physical therapists, nurse practitioners, physician assistants, and the like. When it comes to quality of healthcare, there is no substitute for experience.

Access. Unless people know a program exists and can gain access to it (financial and physical), then it is not likely to succeed. Marketing and positioning are essential, especially in a crowded market. For less competitive markets (i.e., more concentrated), critical mass may be less important than simply offering the service. As things get tighter financially, hospitals are required to examine their portfolio and see which services might be adjusted/eliminated due to low volumes and/or prohibitive costs. Distribution is also a factor, especially considering social determinants of health issues (SDOH[6] ). Strategists need to be careful when eliminating such services in that a critical mass of needed/wanted services must remain if the hospital is to continue in its role as an essential resource to its local community (i.e., remain competitive). For example, closing an emergency room could be the death of a hospital both in terms of finances and mission/brand.[7]

Brand

All providers are attempting to position themselves as “essential” in the eyes of their customers. In this way, healthcare is no different from the branding of a preferred retailer. It is surprising that branding remains relatively new to healthcare. We in healthcare organizations are all gaining a greater appreciation for what it takes to obtain and remain in this vaulted role of trusted partner[8] (i.e., essential).

Reconfiguring service mix will be a popular strategy for most hospitals in the future. Doing so must be based not only on sound financial considerations but also on market needs. The retail concept of consumer preference is at play here. Where options exist, what does it take to be the preferred provider? Where there are few options, it is more about educating the consumer regarding how to best access a service. Having a dominant position in a market may be coincidental (i.e., absence of competitors) or intentional (securing a dominant brand). Many markets are not large enough to support more than one provider (although some of these still do). Ultimately, it is about positioning your brand as one that enjoys both recognition and conscious choice by the consumer. Maintaining the recognition as a viable brand able to offer the right services in the right settings, that consistently meets with approval by local users is what enables the organization to continue in the future, whether as an independent entity or as part of a regional system.

Going for-profit is an optional approach to becoming part of a regional not-for-profit system in order to attract capital[9] and talent. Some of the for-profit firms have gained significant brand recognition (e.g., HCA). In some cases, for-profit firms have built needed facilities in new locations. However, the cost of capital and significant regulatory barriers today make this strategy more difficult to execute. It is probably the complexity inherent in the business that prevents new entrants into the industry (except for certain specialty facilities like rehab). With this complexity comes the growing challenge to attract and retain the necessary talent to sustain the services required in a given community. Clearly, healthcare is a challenging business, as noted many years ago by the business guru Peter Drucker[10] when he stated that hospitals were among the most complex organizations ever created.

During the consideration of joining an existing health system, the implicit assumption is that the new brand will bring additional goodwill (i.e., have more value). That may or may not be the case and is a tricky thing to prove a priori. There are relatively few global brands in healthcare. Those that have gained such recognition are already leveraging their brands in a variety of expansion strategies (e.g., Cleveland Clinic, Mayo Clinic, Kaiser). While some of these involve joint equity (typically in programs but not globally), most tend to be one-way partnerships renting their brand (usually at a considerable cost). This is one approach to collaboration without totally giving up all independence. The key question in this scenario is the level and nature of the value boost, if any, that such an arrangement may give to the original brand.

Summary Conclusions

Clearly, success in healthcare is defined by many factors. There is an argument that those executives who succeed while leading an independent hospital are rewarded with more freedom of action and a more fulfilling career compared to their peers who are part of burgeoning health systems. Maintaining a strong connection to the community will ultimately determine the future course for most hospitals. Just how to do that will vary for every community. Healthcare today is part public utility and part competitive retail.[11] Not an easy mix to master. Remaining competitive as an independent entity requires managing many challenges well.

Giving up independence is among the most problematic decisions that can ever face a business. For a voluntary board, it is tantamount to voting themselves out of existence. Not an easy task. For a hospital, it is trading one brand for another or, more accurately perhaps, subsuming one brand into another. Clearly scale comes into play. It is the rare independent hospital that has sufficient scale or brand recognition to dominate a market.

Among other considerations, leadership must have a clear view of when or if a point is reached where joining a health system becomes the better way to approach the future. If this all sounds a bit complex, it’s because it is. “Perfect is the enemy of good,” as they say. There is no perfect solution regarding this choice. Remaining independent will not happen by chance. Giving up certain freedoms is not easy but attempting to maintain independence beyond “an expiration date” (e.g., absent a captive market) can have devastating results. It is becoming rarer for a hospital to remain independent without access to key resources and extraordinary talent. Achieving and sustaining critical mass can allow any hospital to succeed in fulfilling its role as a vital health resource-- whether managed independently or part of a larger health network. Ultimately, the hope is that the path of least resistance will prevail based on informed decisions. Being informed includes mastering the concept of critical mass as it applies to each hospital in each community it serves.

[1] See January newsletter Is the Independent Hospital Dead? | LinkedIn

[2] It could be argued that ultimate agility is only achieved through financial independence.

[3] I confess to a bit of confusion regarding the management of provider shifts in comparison to airline pilots. Their time off is regulated regarding consecutive shifts. Not one to advocate for more regulation, I remain surprised that clinicians don’t have similar requirements in light of documented human clinical errors.

[4] Kaiser Permanente was rumored some years to employ as much as 10% of physicians graduating from their residency programs. Imagine approaching a physician and offering one of 15 locations to practice.

[5] Clearly, one of the limitations is the time necessary to effectively do so. These are demanding jobs that place significant emphasis on performance (emphasis on financial). Rarely is innovation and mentoring recognized sufficiently in executive compensation.

[6] See Mason, The Healthcare Consultant’s Handbook (Chicago: Health Administration Press, 2021), p 236-237

[7] Closing services is not always easy as Franciscan Health is finding in Hammond, IN. They are stuck in a court battle as they attempt to shut down their 225-bed hospital in that town and convert it to an ambulatory care center. At issue is their inability to properly maintain an open ER, the subject of their appealing an injunction issued by the court requiring that they keep this open for a period of time. Franciscan says keeping ER open, per court order, is unsafe (beckershospitalreview.com)

[8] This is no different from achieving the status of trusted advisor as an independent consultant, which I cover in Mason, The Healthcare Consultant’s Handbook: Career Opportunities and Best Practices (Chicago: Health Administration Press, 2021)

[9] since converting to for-profit requires funding a community foundation to manage the proceeds from sale of a nonprofit facility

[10] Peter Drucker, 1988. “The Coming of the New Organization.”: Harvard Business Review 66(1): 45-53. https://bhr.org/`988/01/the coming of the new organization.

[11] as I explain in more detail in my latest book Mason, Executive Turned Consultant See Chapter 3: The Mounting Challenges of Executive Roles