Health Care Strategy for Uncertain Times / Edition 1

Health Care Strategy for Uncertain Times / Edition 1

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Health Care Strategy for Uncertain Times / Edition 1

An AHA Press/Jossey-Bass Publication

Learn to reconceptualize strategy development in today's uncertain environment. This book introduces three specific techniques—scenario planning, decision analysis, and game theory— that have been developed in the corporate world and tailored to the unique needs of the health care industry. The book also shares practical implementation approaches, presents numerous real life case studies and lessons learned, and provides guidelines for reducing financial risks during plan implementation.

Product Details

ISBN-13: 9780787955052
Publisher: Wiley
Publication date: 10/10/2000
Series: J-B AHA Press Series , #38
Pages: 304
Product dimensions: 6.30(w) x 9.15(h) x 0.99(d)

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Health Care Strategy for Uncertain Times

John Wiley & Sons

ISBN: 0-7879-5505-1

Chapter One

Understanding Risk and Uncertainty

Margo Kelly and Dennis V. Kennedy

Is your market in turmoil? Are the physician or hospital systems that once seemed invincible currently disbanding, divesting, or rethinking their core strategies? Do you hear board members or physician leaders lamenting the lost stability of the health care environment of even five years ago? If so, you are not alone. This chapter explores the new reality of health care: that uncertainty is here and will not go away.

To show how uncertainty affects health care organizations, this chapter develops a framework for understanding and characterizing risk and uncertainty. We then discuss how an organization can manage risk through its planning and implementation approaches.

The Reality of Uncertainty

Most health care professionals, whether board members, managers, or physicians, generally would say that the environment they face today is much more uncertain than it was even five years ago. Why? Because, as indicated in Table 1.1, many past predictions have not been realized. Which so-called experts would have predicted that, today, tuberculosis once again is widespread? That capitation is not? That single-signature contracting is not valuable? And that physician practice management companies (PPMs) have been so weakened?

Despite the hopes of many, uncertainty in health care is likely to increase. Figure 1.1 presents but a few ofthe many major sources of future uncertainty in the industry. Certain sources, such as potential Medicare reform or payer initiatives, directly affect an organization's bottom line. Other sources of uncertainty, such as the timing and extent of medical advances, hint at a profound affect on health care delivery. Every system with a cancer center, faced with the capital costs associated with upgrading imaging and radiation therapy technology, has to consider the likely timing of future introductions of effective gene therapies. Will an investment in cancer care have a useful life of three years? five years? The answer could change the willingness to invest on the part of the decision makers in a system. Without such investment, a system could not support state-of-the-art cancer care, and what would a system or hospital without oncology services be like?

The Impact of Uncertainty on Strategic Planning

Uncertainty confounds the planning process by invalidating the rules of the game under which the industry has operated, without revealing obvious new rules. This lack of direction (rules) increases discomfort and frequently results in a perception of greater risk than what actually exists. For example, many providers established managed care plans that not only required new management skills and operated under different rules but also assumed the responsibility for extending an uncertain amount of care for a certain price, thus increasing their real risk. Although management paid lip service to absorbing actuarial risk, the magnitude of the losses generated by many of these provider-sponsored managed care initiatives was unexpected. The assumed risks extended beyond the narrow focus of providers' investments. Many providers failed to realize that "the risks of getting into managed care include not only the potential of direct losses that must be replaced by cash reserves but possible contamination of the parent system's credit rating" (Moore, 1999b, p. 2).

Uncertainty further confounds the planning process by clouding strategic imperatives. Management and board members of many health care organizations developed strategies based on the perceived "certain" futures described in Table 1.1. As these assumptions failed to materialize, organizations often were left with strategies ill-suited to the resultant environments, but they refused to acknowledge their failure and develop alternative strategies. A good example of this is primary care practice acquisition. Many hospitals acquired primary care because of the assumption that gatekeeper models of managed care could and would channel patients to selected providers. Most of them have since experienced significant losses in their primary care practices and, with the decline of the gatekeeper model of care, have not enjoyed the benefits of channeling (Peters, 1999). In 2000, many organizations are continuing to allocate considerable resources in an attempt to make their physician practices profitable, without first addressing the question of whether it still makes sense to own practices at all.

Traditional Approaches Fail to Address Uncertainty

According to Michael E. Porter, "every firm deals with uncertainty in one way or another. Uncertainty is not often addressed very well in competitive strategy formulation, however" (1985, p. 18). Traditional strategic planning approaches often failed to adequately incorporate uncertainty because they approached it in a "binary" way of thinking, that is, seeing the world either as certain and predictable or as uncertain and entirely unpredictable (Courtney, Kirkland, and Viguerie, 1997). Neither approach develops strategies well suited for the dynamic, uncertain health care environment.

"The World Is Certain"

Organizations that think or want to believe in a world of certainty typically develop a single vision of the future and then craft appropriate, discrete strategies to succeed in the future envisioned. This approach to planning downplays the presence of uncertainty, often by averaging out uncertainties in order to develop a "most likely" future scenario. By doing so, they develop a vision and strategies that may not reflect the future environment in which they will operate. Organizations accustomed to approaching the future as one knowable outcome often find it difficult to create a new culture that is able to embrace, or even recognize, uncertainty.

"The World Is Uncertain"

At the other extreme, some organizations tend to think that right now everything is uncertain; therefore they question the value of planning. This attitude is especially prevalent in those organizations disappointed with or disillusioned by the results of their strategic initiatives over the past five years. The danger of this approach is that it frequently leads to one of two equally dysfunctional courses of action: (1) to abandon analysis and base strategies on instinct, or (2) to be so overwhelmed by uncertainty as to develop strategic paralysis.

Organizations that rushed to invest in primary care practices before such practices were bought by competitors exhibited behaviors consistent with the former response. Members of many system boards have been unpleasantly surprised to learn that their organizations invested in primary care practices not to expand market share (as they understood the intent); instead, the systems in effect purchased and now subsidize their own primary referral sources.

Organizations that have adopted wait-and-see plans are examples of the latter course of action (or in their case, inaction). Many organizations have focused recent efforts only on improving existing operations by reengineering. In doing so, they have successfully cut costs and streamlined processes but nonetheless seen their financial positions erode thanks to lack of a long-term vision or cohesive strategy for managed care positioning.

Ramifications on Planning

If uncertainty is a given and traditional approaches to strategic planning do not adequately address uncertainty, then new planning approaches, tools, and processes are required. This book focuses on updating traditional planning techniques, where appropriate, and introducing new techniques that address uncertainty more effectively so that health care organizations can develop dynamic strategies and cultures that meet the challenges of an uncertain health care environment.

A Framework for Conceptualizing Risk and Uncertainty

By understanding more about uncertainty and what causes it, managers can begin to combat the binary approach to thinking about uncertainty. There are varieties and varying degrees of uncertainty, and properly assessing its level assists health care organizations in quantifying the risks they take and developing strategies better suited to uncertain environments.

What Is Risk? What Is Uncertainty?

Although related, uncertainty and risk differ. Uncertainty is defined as the condition of being uncertain, or doubt; risk is the probability of loss. In true uncertainty, it is impossible to imagine all potential outcomes or assign probability to any one particular outcome. With risk, by definition, it is quite possible to assign a probability to a particular outcome.

Information, where available, can help one move from uncertainty to risk-that is, from being in doubt to knowing the odds. Organizations confronting profound uncertainty may reduce some of the perceived unknowns by obtaining and using credible data. However, as discussed later in this chapter, not all uncertainties can be eliminated by information.

What Are the Sources of Uncertainty?

To develop strategic planning approaches that accept and address uncertainty, it is important to understand its basic sources. As illustrated in Figure 1.2, uncertainty can arise from any of five sources: demand structure, supply structure, competitors, externalities, and time (adapted from Wernerfelt and Karnani, 1987).

Demand Structure

First, uncertainty can arise from not knowing what the future market will be, including the overall size of a market or how it will be segmented. For example, a hospital with an open-heart surgery program that is considering upgrading or expanding its surgical and intensive care capabilities needs to consider clinical advances in less-invasive approaches such as intracoronary stents and radiation and transmyocardial laser revascularization. If the less-invasive approaches cannibalize coronary bypass surgery, open-heart surgery volumes decrease significantly and demand for operating rooms and intensive care beds can decline. The hospital faces uncertainty in the ability to amortize its investment in open-heart surgery, even if the total number of invasive cardiac procedures performed at the hospital increases.

Supply Structure

Second, uncertainty can arise from changes in how products or services are supplied or provided. Such structural changes can result from unforeseen adaptations of internal operations as well as from developments in technology. For example, many urban health care providers expected that there would be an adequate supply of trained, experienced individuals to staff operations. Many providers are now dealing with a shortage of qualified staff, not just in nursing but at all levels. To address these shortages, providers are enhancing on-site training programs and reevaluating traditional approaches to care delivery.

A parallel example from another industry may further illuminate health care's staffing supply dilemma. Consider how the role of and expectations for a cashier have changed. Twenty years ago, cashiers generally were expected to recognize a product, ring up the price marked on it, and give the customer the correct change, even if the process required subtracting. Today's cashier at a fast-food restaurant is no longer even expected to translate a verbal order into words on cash register buttons. He or she translates the order into a picture or icon that automatically rings up the correct price. Today no fast-food cashier needs to determine what change a customer is owed; the register computes it for the employee. Some chains have even eliminated the need for the cashier to count out the correct coinage. A fast-food chain requiring a cashier with yesterday's skill set could not compete in today's labor market. Those who gambled correctly on the systems that support today's employees gained competitive advantage.


Third, uncertainty can arise from not knowing how your competitors will act, or from not being able to predict who your future competitors will be. For example, in Pittsburgh in 1999, Highmark Blue Cross Blue Shield proposed to finance the purchase by West Penn Health System of the failed AHERF hospitals. If yours is another system or hospital in the city, by traditional thinking is your hospital competitor now an insurer-one that says it will have no say in operations (Robinet, 1999)? Is the traditional insurer now de facto a competing provider?


Fourth, uncertainty can arise from such externalities as government intervention and social norms or societal pressures. These uncertainties generally are the least controllable and can cause major changes to occur rapidly. For example, many states have certificate-of-need (CON) rules that regulate provision of selected services. Planning in a state such as Florida, which as of the end of 1999 had CON legislation in place, would be vastly different if CON requirements were eliminated. Overnight, profitable services that have been protected by the CON franchise could face price pressure, as they become subject to increased competition from new market entrants.


Jeffrey Williams, who writes on business strategy, has said that "the significance of time in business goes beyond the reality that markets and companies are moving faster. There is a more interesting force at work. Business time is not only speeding up-business time is splitting markets apart, as well as the companies that compete within them" (1998, p. 1).

The final source of uncertainty originates in not knowing when and how fast a phenomenon will occur. Further, the parts of a health care organization face different strategic imperatives brought about by such issues as advances in technology and economic pressures. In 1998, the economics of home care were radically altered by changes in Medicare reimbursement. Systems with home health agencies faced a financial imperative to plan more quickly for home health services than for their other services.

The Level of Uncertainty

It is essential to differentiate levels of uncertainty based upon the extent to which it is possible to know of or understand an aspect of the future. Although there are no facts about the future, some aspects are clearer than others. A common framework classifies uncertainty into three levels: clear trends, unknowns that are knowable, and residual uncertainty (Courtney, Kirkland, and Viguerie, 1997). The extent to which an outcome can be understood ultimately determines its level of uncertainty.

Clear Trends

The future may be uncertain, but there are usually some clear trends that are knowable, easily researchable, and generally predictable.


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Table of Contents


Understanding Risk and Uncertainty.

Strategy Formulation in Health Care.

Reducing Planning Risks through an Environmental Assessment.

Envisioning the Future through Planning Assumptions.

Tools to Address Uncertainty.

Defining Strategic Intent.

Developing Strategies and Measures of Success.

Financial Planning in an Era of Uncertainty.

Ensuring Success in Implementation.

Summary and Conclusions.

Glossary of Terms.


Suggested Reading.

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