Case Study $$ Background Reading $$ Strategic Management $-$ Brabender

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 $$9\mathrm{.}2$ 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 $2025,$ 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 $$1,795.$ They have an average charge per visit of $$4,650.$

Over the past ten years, St$.$ Sebastian has been active in pursuing several 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 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$$ with different strategic initiatives, preferring instead to focus on cost efficient care. They do not have clinical institutes, research divisions, a PHO or a Business Health division. They have $228,500$ visits per year, with an average cost of $$1,500$ per visit and an average charge of $$4,500.$

$2.$ 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 employ essentially all of the pediatric subspecialists and have a PHO, which includes $75\%$ of the region$$s primary care pediatricians. They will have $202,000$ visits this year, with an average cost of $$2,100$ per visit and an average charge of $$5,000$ per visit.

$3.$ General University is an adult teaching hospital affiliat