This article was originally published in the spring 2012 issue of B. Magazine.
In 2011, two Opus College of Business faculty members launched a study of more than 70 health care organizations. The outcome will assist these organizations in meeting the demands and challenges of a new, more transparent and more competitive market.
By Jack Militello, Ph.D., and Mick Sheppeck, Ph.D.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. On March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law. The two laws are collectively referred to as the Affordable Care Act (ACA). The ACA includes a wide variety of provisions designed to provide more health care choices, to enhance the affordability and quality of health care for all Americans, to hold insurance companies more accountable and to lower care costs; however, the ACA does not give direction to health care-related organizations as to how to implement its legislation. Implementation is the strategic challenge of every health care provider.
Two strategic theories underlie the expectations set by the ACA. The first is that, with the proper incentives in place, costs can be contained as better service is provided. The second is that a fully functioning and competitive market for health services will achieve the goals of the legislation. Any strategic responses to these theories of funds-flow and markets have to be taken in relationship to each other and in the context of the broader health care system.
A discrete response to the administrative-pricing directive of the ACA is quite simple: cut costs and retrench to meet pricing constraints while seeking new venues to gain revenue. The former is currently undertaken through a number of initiatives accepted within the industry. These include analytically based cost containment, operational-improvement protocols and employee-motivation programs. These initiatives are necessary but not sufficient to strategically succeed in the reform environment urged by the ACA and must be teamed with revenue-generating initiatives. The latter demands the application of each of these tools with the addition of an engagement with competing business models, potential partnerships, community and governmental relationships, generational-culture differences, and the power of the consumer. In short, it demands a systems perspective on a cash-flow strategy that addresses both costs and markets.
The health care delivery system offers myriad business models, ranging from nonprofit services through return-on-investment models for publicly traded companies. The core of the health care delivery system is the patient-provider relationship, but it then takes in all the suppliers of goods and services that support the core interaction. Each model is driven by a mission that aligns itself to the health care system as a whole. But first an internal organizational alignment of mission to the management of costs and markets has to occur.
An organization’s purpose should express its vision, either implicitly in its goals or explicitly in a statement of mission. Mission statements are often high-minded but lacking in connection to the actual operational management of the organization’s assets. A good mission should state long-term goals and determine how to measure progress toward reaching them, as well as providing the organization with a business model that defines a distinct competitive advantage. That advantage should be expressed in the value it provides to its customers, patients and stakeholders. An analysis of the alignment of mission with organizational operating factors would equip any health care provider with insight as to how to approach its markets.
Over the last eight years we have been collecting data through a survey that links a set of organizational variables with the strategic
mission of an organization. The database contains information from more than 500 firms in a wide variety of industries. We have used the data as a basis for consulting and research. We are now directing our focus to the service providers in the health care industry.
Our work is designed to assist health care organizations to strategically integrate the management of funds-flow with the generation of market power. We have focused on creating an alignment criterion that contains the health care provider’s business design, market approach and human-asset management. This should allow for a robust strategy that enables the health care organization to perform well in its markets.
We assume that the proper alignment of a set of operational variables will result in market success, which will lead to enhanced revenue and efficient control of costs. Our research model aligns the following variables:
- Environment – a deep understanding of the external forces affecting an organization, which leads to a continuous anticipation of and rapid response to significant shifts within the health care system.
- Market Strategy – market advantage is achieved by providing either higher perceived value or lower delivered costs than competitors; these approaches form the basis for a successful market strategy.
- Workforce Competencies – employee competencies are the key tangible resources that drive an organization’s market performance and competitive advantage.
- Organizational Culture – organizational culture serves to allocate and leverage resources by focusing human activities toward the functional goals of the organization.
- Workforce Practices – workforce practices affect organizational performance by increasing skills, empowering decisions and motivating contributions to the organization’s success.
- Business Processes – all organizations should be engaged in processes designed to obtain market intelligence, anticipate competitor
actions, convert information into innovations and deliver a superior output to patients/customers.
The Data Set
We examined 73 health care providers that were contained in our research database of more than 500 firms. This sample sorted itself into three distinct configuration models. The first cluster, 40 percent of our sample, showed a defined strategic focus, representing a minority of health care providers that differentiate themselves either by developing new services not found at other competitive organizations or developing unique forms of patient care. It also indicates that, after lagging behind other industries in management development, a number of progressive health care organizations are increasing their efforts to become viably competitive through their management of talent.
The second cluster, 34 percent of our sample, contains organizations with variable scores near the mean of each variable. They represent firms taking a cautious approach to branding their organizations, given the volatility of the industry today.
Managers of these organizations may need to pay more attention to individual elements represented in our model. This lack of strategic attention may be due to: little or no awareness of the internal relationships within the organization itself; a dominance of functional perspectives over strategic perspectives; an over reliance on industry best practices rather than unique approaches; or a deeply conservative approach to management. Caution is a reasonable approach for those organizations that are waiting to see what happens in Congress or are dealing with limited financial resources.
The third cluster, 14 percent of the sample, represents organizations that have exhibited very low scores across most variables used in our study.
These organizations may be structurally or organizationally unable to move in any direction. The structural constraint may be rooted in their societal roles, such as the one of a social safety net. These providers may be greatly restricted to making do with government support, without offsetting these restrictions with other streams of income. They may have no way out of this predicament in the near term.
These figures are not encouraging. Much of the ACA implementation expectation is based on the belief that strong market competition will drive improved overall provider performance. This might be due to the legacy role of the consumer in health care. There cannot be a true market without the involvement of customers.
It often is stated that health costs are especially high because consumers are not engaged in the purchasing process. Third-party payers cover most of the costs and the actual customer does not do the buying. The ACA will encourage more consumer involvement through fostering accountable-care organizations, health savings accounts and transparency in pricing. These initiatives will be building meaningful markets. The requisite response from health care providers should be an internally aligned organizational design by a well-defined customer value proposition.
The Need for a Strong Market Focus
Our study indicates that health care providers overall do not exhibit a strong market focus. This may be changing as a more knowledgeable consumer class is participating in the health care choices in which it has more financial involvement. There is a strategic imperative for health care organizations that will encourage them to meet the requirements of the ACA. It is the ultimate alignment of their business model, market approach and human assets that allows for a robust strategy. The clear statement of aligned purpose brings these factors together into a successful strategy.
Our sample size is small and results are descriptive rather than significant. We now are expanding our research efforts through a series of studies based on broader sampling and case development. Our research should be of importance to health care providers in building their understanding of how they can approach the growing health care market. The understanding of the alignment process should give them a sense of how they serve their customers and the need to integrate the entire organization around providing a distinctive value. In turn, this should assist these organizations in faring well in the increasingly competitive market for health care services, resulting in the outcomes anticipated in the ACA.
About the authors
Jack Militello, Ph.D., is director of the Health Care and Executive UST MBA programs and professor of management. His research focuses on health care sector management, leadership development and its link to strategic management, and strategic planning. Mick Sheppeck, Ph.D., is associate professor of management. His research specialties include competency modeling and employee attribute assessment, employee performance management, employee staffing, human resource management strategy, and management succession planning and development.