Ambulatory Innovations: Underlying Dynamics and Emerging ...

Ambulatory Innovations:Underlying Dynamics and Emerging Business Models

Society for Healthcare Strategy and Market Development Annual Conference

September 4, 2003

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Study Outline

Ambulatory Care Overview Overall Growth in Ambulatory Care Projected Growth

The Competitive Environment Market Share and Ownership: Physicians vs. Hospitals Physician Motivators and Enablers Impact to the Hospital

Hospital Ambulatory Business Strategies Case Studies Strategy Development Key Findings

Question and Answer Session

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Ambulatory Care Overview

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Ambulatory Care Overview

The ambulatory care market is larger and growing faster than hospital-based health care

The major drivers of ambulatory care are changing the way services are demanded, delivered, paid and regulated – providers will need to understand and anticipate the future impact of these drivers in order to clearly establish their ambulatory philosophy

Non-hospital competitors are entering and capturing significant volumes and market share in the ambulatory industry, leaving many traditional hospital providers in the dust

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Ambulatory Care Encompasses a Variety of Medical Areas

Note: Visits include procedures performed in hospital outpatient departments, freestanding facilities, physician offices, emergency departments, and laboratoriesSource: Solucient Outpatient Estimates database, June 2003

Estimated Ambulatory Proceduresby Service Line, 2002

(visits in millions)

Total = 4.4 billion visits

6

Hospitals Have Experienced Significant Growth in Ambulatory Utilization Over the Past Twenty Years

Community Hospital Utilization per 1,000 Population

Vo

lum

e p

er

1,0

00

Source: AHA Trendwatch Chartbook, 2002

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In Relation, Growth in Spending for Hospital Outpatient Services Has Outpaced Growth in Other Sectors

Ch

an

ge

pe

r C

ap

ita

Source: Center for Studying Health System Change, published in Health Affairs, June 11, 2003

Annual Change per Capita in Health Care Spending

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Outpatient Services Have Become an Increasing Source of Revenue for Hospitals

Distribution of Community Hospital Revenues

35% Outpatient

Source: AHA Trendwatch Chartbook, 2002

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Overall, Ambulatory Volumes are Projected to Increase in the Future

5.8%

21.1%

Projected Ambulatory Growth2002 - 2007

Source: Solucient Outpatient Estimates database, June 2003

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This Projected Growth will Occur Across All Ambulatory Domains…

Projected Ambulatory Growth2002 - 2007

Note: Includes ambulatory procedures performed in hospital outpatient departments, freestanding facilities, physician offices, emergency departments and laboratoriesSource: Solucient Outpatient Estimates database, June 2003

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…And in Some Ambulatory Services in Particular

Service Area Growth Projection Time Period

Ambulatory Surgery 115% increase in revenue 2000 – 2010

MRI 38% growth in volumes 2000 – 2010

PET Scanners 300% increase in number of units 2000 – 2010

Home Testing 50% growth in revenue 2000 – 2004

Genetic Testing 98% growth in revenue 2000 – 2006

Outpatient Cancer Care 17.5% growth in volumes 2000 – 2010

Medical Therapies (physical, radiation, chemotherapy)

79% growth in demand 2002 – 2006

Disease Management 240% increase in covered lives 2001 – 2010

Source: Health System of the Future, HCAB, 2003; Diagnostic Imaging, SG-2, 2001; Lab Tests Online, 2001: IVD Technology, 2001; Oncology, SG-2, 2002; Solucient, 2002; Disease Management, SG-2, 2002

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Shift to Ambulatory Settings will Significantly Impact Inpatient Service Lines

Projected Change in Hospital Service Line VolumesAttributable to Outpatient Shifts, 2000 - 2010

Source: SG-2 Analysis, 2002

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Growing Ambulatory Services Present Both Opportunities and Threats for Hospitals

Pro

ject

ed G

row

th R

ate

(2

002-2

00

7)

Current Hospital Capture (2002) HighLow

High

Diagnostic Radiology

Invasive Procedures -

Minor

Injections

Surgical Procedures - Minor

Medical Diagnostics

Laboratory

Visit/Consultation

Source: Solucient Outpatient Estimates, 2003

Medical Therapies

Major Imaging

Nuclear Imaging

Invasive Procedures -

Major

Surgical Procedures -

Major

Opportunities and Threats

Opportunities and Threats

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Summary

Ambulatory care represents both a threat to inpatient business as well as an opportunity for new or expanded services to be offered by traditional hospital providers

The market is continuously changing and evolving. The future is expected to offer additional threats and opportunities for health care providers

The ambulatory care market is ripe with growing demand and competition from non-hospital providers, especially physicians

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The Competitive Environment

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For-Profit Companies and Physicians are Competing with Hospitals in the Ambulatory Market

Ease of market entry by competitors makes the ambulatory industry very different from the inpatient hospital market.

HospitalsHospitals

PhysiciansPhysicians

For-ProfitsFor-Profits

For-Profit Examples:

Ambulatory Surgery• AmSurg• HCA• HealthSouth• United Surgical Partners• NovaMed Eyecare

Diagnostics• Center for Diagnostic

Imaging• Radiologix• BodyScan, Inc.• Quest Diagnostics

Medical Care• U.S. Oncology

Disease Management• American Healthways• LifeMasters• Accordant

• Physician joint ventures

• Specialty outpatient centers

• Reference labs

• Office-based surgery• Physician-owned

surgery centers• Office-based imaging• Urgent care centers

Ambulatory Care

Market

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Several Non-Hospital Ambulatory Providers, Including Physicians, Have Experienced High Growth Rates in Recent Years

An

nu

al G

row

th R

ate

Source: 2001 Service Annual Survey: Health Care and Social Assistant Services, U.S. Census Bureau, 2002

Estimated Annual Non-Hospital Ambulatory Revenue Growth

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Private Offices Provide the Vast Majority of Ambulatory Services

Estimated Outpatient Proceduresby Site of Service, 2002

(visits in millions)

Visits = 4.4 billion visits

Note: Estimates do not include home/self-care

Source: Solucient Outpatient Estimates database, June 2003

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Physician Offices are Now Capturing a Significant Share of the Ambulatory Market, Including Ambulatory Surgery

Ambulatory Surgery Volumes1981-2007

Vo

lum

e (

00

0)

* EstimatedSource: SMG Marketing Group Market Report, 2002; VHA Analysis

CAGR

13.8%

13.4%

8.1%

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The Number of Freestanding Ambulatory Surgery Centers Continues to Grow and the Vast Majority are Owned by Physicians

Source: SMG Marketing Group, Guide to Health Care Market Segments, 2003

Number of Freestanding Ambulatory Surgical Centers

Freestanding Ambulatory Surgery CenterOwnership Type

Nu

mb

er

of

Ce

nte

rs

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Physicians Also Own Majority of Urgent Care Centers

Source: U.S. News and World Report, 2001 North American Association for Ambulatory Urgent Care, 2001

Number of Urgent Care Centers in the U.S.

Ownership of Urgent Care Centers

2001

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Physicians are Major Players in the Growing Freestanding Diagnostic Imaging Market

Number of Freestanding Diagnostic Imaging Centers

Source: SMG Marketing Group, Diagnostic Imaging Centers Market Report, 2001: “Imaging the Future,” Modern Healthcare, November 2001

Ownership of Freestanding Diagnostic Imaging Centers, 2001

Includes: university facilities, government facilities, hospital-owned facilities, and public companies

Nu

mb

er

of

Ce

nte

rs

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Physician Motivators

Physicians are facing challenging issues that threaten their practices and are motivating them to take action.

Physician Motivators

Desire for autonomy and efficiency

Dissatisfaction with current hospital relationships

Decreasing income

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Physicians Desire Efficiency and Autonomy

1. Increased efficiency

2. More control over operating room – no emergency cases to disrupt the schedule

3. Easier access to care site – for both physicians and patients

4. Decreased costs

5. Additional revenue resource

Physicians’ Top Motivators for Building an Ambulatory Surgery Center

(based on 5,000 surgeons’ survey responses)

Source: Earnhart & Associates as cited in “Cutting into the market: Rise of ambulatory surgery centers,” AMNews, 2002

While revenue/income is 5th on the list of priorities, most of the other top reasons are linked to the ability to generate additional revenue.

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Physician Incomes Are in Jeopardy

Percent Change in Average Physician Income, Adjusted for Inflation

1995 to 1999

While most professions enjoyed increased incomes during the 1990s, physicians experienced a decrease in their real income.

Source: “Behind the Times: Physician Income, 1995 to 99,” Center for Studying Health System Change, 2003

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Income Decline Driven By Increasing Expenses

Median Operating Expense as a Percentage of Total of Medical Revenue

1965 to 2000

Source: MGMA Cost Survey, MGMA, 2002

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Income Decline Also Fueled by Decreases in Reimbursement

Change in Medicare Physician Payment1995 to 2004*

* CMS Projections

Source: Center for Medicare and Medicaid Service, 2003; “Medicare pay: 2004 forecast looks gloomy,” amednews.com, April 7, 2003; and ““MedPac hears that pay cut hurts access,” amednews.com, Oct 7, 2002.

• Physicians avoided a 4.4% fee cut in 2003 but may face other decreases in the future

• Fee cuts are forcing physicians to change their business practices

• In 1999, 76% of physicians accepted new Medicare patients compared to 69% in 2002

• In 2002, 11% of surveyed physicians changed priorities in appointment schedule this year- mostly to downgrade priority for Medicare patients

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Physician Strategies for Income Control

Physicians are acting to increase their bottom line by seeking to decrease their costs and increase their revenue. Many revenue strategies can negatively impact health systems.

COSTS

REVENUES

• Charging patients for non-billable services and overhead

• Declining to accept Medicare patients

• Requesting or implementing hospitalist programs

• Refusing on-call services or seeking compensation from hospitals for on-call services

• Offering more out-of-pocket services to patients

• Doing more outpatient surgeries in office or owned ASC

• Capturing ancillary services

• Investing in specialty hospitals

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In General, Specialists are Likely To Be Less Satisfied with Their Current Business Relationships with Hospitals

(% Well)

How Well the Hospital Performs in Each of the Following Areas by Specialty

Source: 2003 VHA Physician Research, VHA, 2003

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Physician Enablers

In addition to strong motivators, physicians are finding enablers that allow them to pursue new ventures.

Physician Enablers

Advances in technology

Availability of willing partners

Loopholes in current regulations and legislation

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Technology Continues to Decrease the Intensity of Care and to Impact the Location of Care

• As technology advances, surgeries and procedures that required hospital resources can be migrated to a less acute setting

• Advances in technology can also lower acquisition costs making it more reasonable for physicians to purchase for their own use

• Technology also increases physician efficiency, patient satisfaction, and revenue

Technology Advances

Impact

Minimally invasive surgery

Allows surgeries to be done in less acute settings such as ASCs or physician offices

Miniaturization

Faster, smaller, and less costly technologies allows physician groups to purchase own equipment

Diagnostic imagingVariety of imaging modalities creates new markets for physician groups

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New Ventures Are More Likely to Occur in Markets Without CON Laws

Source: “State scrutinize big-ticket purchases by group practices,” amednews.com, Dec 23 2002.

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Loopholes in Current Legislation Enable Physician Ventures

Legislation Loophole Ramification

Stark

Does not cover ASCs as a designated health service

Physicians are able to own ASCs and refer to their own centers

Anti-Kickback

Creates safe harbors to protect some physician-owned facilities

Physicians ownership is protected if a surgeon derives at least 1/3 of all his/her yearly medical practice income from performing Medicare-covered services from procedures at owned facility

Surgeons are motivated to do procedures at their owned-facility

Source: “Freestanding Outpatient Surgery Centers Market Report: 2002 Edition,” SMG Marketing Group, 2002

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A Variety of Partners Are Willing to Meet Physician Needs

Various groups tout several advantages to attract physicians:

“Efficient case scheduling maximizes physician productivity with an 18% decrease in turnover time over a six-month period.” - United Surgical Partners

“We have extensive experience in the management of surgery centers. Our success is dependent upon the strength of our physician partnerships. Although we are the managing partner, we govern the center with equal representation from the physician partners and AmSurg on the ASC's Operating Board.”- AmSurg

“We are in a number of markets across the U.S. and growing rapidly. We are willing to explore building a practice around your desired location.” - CDI

“With features such as shared ownership, common economic interest and mutual governance, physicians control the medical affairs of their practice, provide input in the management, and are able to align their interests with those of the collective group of Radiologix practices to promote company growth, operating efficiencies and a greater competitive edge.” - Radiologix

Sources: http://www.unitedsurgical.com/frames_facilities.htm, March 2003 Presentation., ttp://www.amsurg.com/asc/partner_benefits.asp?asc=dev; http://www.cdirad.com/cdi/tectrix/program/content/physicians_employ.php?nav=docs; http://www.radiologix.com/profile/36.shtml

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Evolution of Service Lines: Physicians Now Have the Potential to “Own” Most Services

Doctor’s Office Surgery Center Hospital

Location of Surgery

Cas

e A

cuit

y

Dermatology

Gastroenterology

Oral Surgery

Ophthalmology

Cosmetic

Urology

ENT

Arthroscopy

Hand

Hernia Shoulder

Backs Cardiac

Total Joint

Trauma

Complex Oncology

Brain

Hysterectomy

Early ASC

Later ASC

ASC with Overnight Stay

Surgical Hospital

Source: Specialty Hospitals, SG-2, 2002

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Hospital CEOs Are Concerned About Physician Competition

Hospital CEO Concerns Regarding Physician-Hospital Relationships

Source: Top Issues Confronting Hospitals, www.ache.org/PUBS/research/ceoissues.cfm, ACHE, 2002

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Any Competitive Moves by Physicians Can Greatly Impact Hospital Revenue

Inpatient and Outpatient Average Revenue Generated for Hospitals by Physician FTE

Source: “2002 Physician Inpatient/Outpatient Revenue Survey,” Merritt, Hawkins, & Associates, 2002

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As The Hospital Mix Changes, So Do Operating Profit Margins

Source: A Delicate Balance: Managing the Inpatient Enterprise for Profitable Growth, The Advisory Board, 2001

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Summary

Hospitals are facing intense competition in the ambulatory care market

Local physicians have been pulling many services and are experiencing a faster growth rate than hospitals

Physicians are seeking to meet their own business needs when they pursue ambulatory ventures

Physician competitors can have a significant impact on a hospital’s financial performance

Hospitals are wondering whether to “share” the pie or to “take” the pie in the ambulatory care market

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Hospital Ambulatory Business Strategies

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Ambulatory Strategies: Case Studies

As discussed in the previous section, the market for ambulatory care services is both threatening and promising for hospital providers

Eleven VHA case study organizations were identified and interviewed about their ambulatory care strategies, success factors and lessons learned to identify the important factors in ambulatory care strategy development

Three key dimensions in ambulatory strategies were identified – strategic philosophy, market context and configuration

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Eleven Ambulatory Care Case Interviews Were Conducted

Health First

Gwinnett Health SystemWillis-Knighton Health

System

Butler Health System

Our Lady of the Lake Regional Medical Center

Cardinal Health System

MaineHealth

Lancaster Health Alliance

Memorial Health System

St. Luke’s Regional Medical Center

Pendleton Memorial Methodist Hospital

Case organizations represent a variety of market situations, competitive threats and ambulatory strategies

Each case study interview focused on the key identification of the important factors in ambulatory care strategy development

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Three Key Dimensions in Ambulatory Strategy Development

Strategic Philosophy

Market Context

Configuration

• Organization goals and vision• Importance of ambulatory

care to overall organizational strategy

• Level of demand in market for ambulatory services

• Intensity of competition for ambulatory care

• Strength of physician relationships

• Location of services (campus centric or satellite settings)

• Structure of ownership (sole venture or partnership)

• Services included in ambulatory portfolio

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CASE STUDIES

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Ambulatory Strategies: Planning

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Ambulatory Strategies: Planning

Organizational Strategy

Market Context

BusinessConfiguration

1. Develop an organizational strategy

2. Understand the market context

4. Design the operational approach

3. Determine the business structure

5. Manage the ambulatory portfolio over time

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1. Develop an Organizational Strategy


1. Develop an organizational strategy• Identify organizational goals and

vision• Determine the importance of

ambulatory care to the overall organizational strategy

1. Develop an organizational strategy• Identify organizational goals and

vision• Determine the importance of

ambulatory care to the overall organizational strategy

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1. Develop an Organizational Strategy

Success Factors Best Practices

Identify organizational goals and vision

Establish a clear vision of the future of the hospital organization Use the organization’s vision to support and drive its business initiatives,

including any ambulatory care ventures

Determine the importance of

ambulatory care to the overall

organizational strategy

Building upon the vision and strategy of the organization, identify and quantify the contribution that ambulatory services can make to the organization’s efforts to achieve its overall strategy

Establish measurable criteria that define the importance of ambulatory services to the organization (e.g., percent of revenues or volumes)

Ensure that current business processes, technologies and incentives are aligned to support the ambulatory strategy

Source: VHA member Interviews, 2002-2003

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2. Understand the Market Context


Market Context

2. Understand the market context• Identify and understand your target

market(s)• Identify and understand your key

physicians• Know your competition and position

in the market

2. Understand the market context• Identify and understand your target

market(s)• Identify and understand your key

physicians• Know your competition and position

in the market

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2. Understand the Market Context


Identify and understand your

target market

Identify consumer demographics including key neighborhoods Develop realistic growth projections for population and utilization Utilize community surveys to identify important consumer selection factors

including:o Convenienceo Proximity to physician officeso One-stop-shoppingo Comprehensive diagnostics

Identify and understand your key

physicians

Identify the location of key physicians and their proximity to desirable consumer segments

Determine the composition of area medical groups and understand their goals

Know which physicians have the potential to become your competitors Don’t be on the fence with competing physicians – either fully involve them in

hospital initiatives or fully exclude them

Know your competition and

position in the market

Stay abreast of new entrants and their discussions with physicians in your market

Be the “first-mover” in a market to preempt entry by existing competitors or new entities

Leverage your market image, name and staying power to remain competitive


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3. Determine the Business Structure


Market Context


3. Determine the business structure• Understand the ambulatory business• Separate the ambulatory

management and culture from the inpatient hospital

• Involve physicians in the development and management of the ambulatory business

• Be flexible

3. Determine the business structure• Understand the ambulatory business• Separate the ambulatory

management and culture from the inpatient hospital

• Involve physicians in the development and management of the ambulatory business

• Be flexible

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3. Determine the Business Structure


Understand the ambulatory business

Seek assistance if you are not an expert, especially in structuring legal relationships and managing new ambulatory businesses

Be flexible

Be willing to give up some ground in order to stay in the game (“It’s better to split the pie than have no pie at all)

Structure deals and design facilities with some level of flexibility to handle future challenges and opportunities

Separate the ambulatory

management and culture from that of the

inpatient hospital

Empower an independent management team to run the business Utilize a separate board of directors for joint ventures Change the mindset of leadership and staff

Involve physicians in the development and management of the

ambulatory business

Get physicians committed to the ambulatory strategy - work with the committed physicians, don’t worry about the others

Cultivate solid and long-term relationships with physicians Strive for win-win agreements Involve the maximum number of physicians in joint venture agreements Make hospital-physician agreements exclusive Locate ambulatory facilities adjacent to physician offices Involve physicians in the ongoing management of the business


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4. Design the Operational Approach


Market Context


4. Design the operational approach• Create procedures and operations

that are specific to the ambulatory business

• Select high performing employees• Utilize ambulatory-specific pricing

and contracting strategies• Foster high levels of patient

satisfaction

4. Design the operational approach• Create procedures and operations

that are specific to the ambulatory business

• Select high performing employees• Utilize ambulatory-specific pricing

and contracting strategies• Foster high levels of patient

satisfaction

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3. Design the Operational Approach


Create procedures and operations that are

specific to the ambulatory business

Create new procedures, don’t “borrow” from the inpatient hospital Focus on efficiency and effectiveness Design operations to be “physician-friendly”

Foster high levels of patient satisfaction

Focus on convenience to the patient and patient satisfaction Ensure quality of both care and experience by offering a pleasant setting,

high service levels, and sufficient staffing

Select high-performing employees

Ensure that employees possess multi-tasking abilities, a drive for efficiency and an understanding of the consumer perspective

Use a screening agency to determine desirable candidates (e.g., Talent Plus)

Provide all employees with ongoing customer service training

Utilize ambulatory-specific pricing and

contracting strategies

In highly competitive markets, price ambulatory services at market value to limit market share loss to competitors

Use hospital leverage in contract negotiations as a means to exclude new competitors from the market

Invest in technology

Provide the best technology to attract and retain physicians Take the lead in acquiring capital equipment Use system-wide information systems to drive efficiencies


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5. Manage the Ambulatory Portfolio Over Time


Market Context



• Stay current on the trends driving the evolution of ambulatory care

• Develop and implement methods to assess the impact of technology change

• Continuously evaluate community needs


• Stay current on the trends driving the evolution of ambulatory care

• Develop and implement methods to assess the impact of technology change

• Continuously evaluate community needs

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5. Manage the Ambulatory Portfolio Over Time


Stay current on the trends driving the

evolution of ambulatory care

Continuously review and evaluate industry trends related to the driving forces behind ambulatory care including: technology, payment, consumers, physicians, and legislation/regulatory changes

Understand when services need to migrate

Develop and implement methods to assess the impact of technology change

Proactively identify the impact of new technologies on operations, finances, physician relationships, consumer demand, etc.

Design and implement a technology evaluation process across the organization

Continuously evaluate community needs

Understand changing demographics, health status and use rates within the service area

Be aware of provider shortages/excesses and capacity constraints/excesses throughout the community

Identify and anticipate changing consumer and physician perspectives and expectations


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Key Study Findings

Know your market Hospital and physician market structure and relative market power are key in

determining your strategy Organizations located in areas without CON laws are more likely to face

competition from new ventures Markets with existing physician ventures can be vulnerable to a “domino effect”

with other competitors and ventures proliferating the market

Be aware and be prepared Understand areas of hospital vulnerability Stay attuned to physician activities in and out of the hospital and have contingency

plans in place in case a threat arises Physicians often surprise hospitals with their plans for new ventures

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Key Study Findings

Understand what physicians are seeking Ownership is not often the primary issue for physicians Physicians who seek to own their facilities often do so to gain autonomy and to meet

other needs that are not currently being met Communicate regularly with physicians to understand their needs Seek solutions that address physician needs (e.g. efficiency hospital operations to

increase physician throughput)

Determine your physician strategy Understand the strategic importance of service line to your organization Organizations may need to select specific groups to work with based on overall

physician strategy Approach chosen may vary by service line or market

Align interests No matter what the approach, find initiatives that seek to align physicians’ interests

with hospital interests (e.g. financial, operational, clinical)

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Key Study Findings

Efficiency, efficiency, efficiency For physicians, the ability to increase volumes through improved throughput will

have the most impact on their income

There is no “magic bullet” Focus on mutual needs in addition to structuring “the deal” The model implemented is less important than the relationships cultivated in

determining success

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Questions and Discussion

Ambulatory Innovations: Underlying Dynamics and Emerging ...

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