MHA570 Health Care Leadership and Strategy Discussion 3

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Experience is a hard teacher because it gives the test first, the lesson afterwards.
—Vern Law
Learning Objectives
After you have studied this chapter, you should be able to
➤➤ demonstrate the ability to assess actual healthcare strategic planning problems and, using
the various knowledge disciplines, develop comprehensive and practical solutions;
➤➤ exercise business planning techniques and demonstrate skills in professional writing and
verbal communication;
➤➤ demonstrate a deeper understanding of the healthcare system and the management of costs,
quality, and access and make sound business decisions and develop a strategy for change;
➤➤ successfully participate in teamwork; and
➤➤ use critical thinking skills and create an environment that supports innovation and
entrepreneurial spirit.
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Essentials of Strategic Planning in Healthcare
Key Terms and Concepts
➤➤ Ambulatory surgery center
➤➤ Balanced scorecard
➤➤ Medicare Payment Advisory
➤➤ Benchmarking
➤➤ Payer mix
➤➤ Dashboard
➤➤ Safety-net providers
➤➤ Efficiency frontier
➤➤ Strategic planning
➤➤ Fixed cost
➤➤ Total cost
➤➤ Gap analysis
➤➤ Variable cost
➤➤ Healthy People 2020
I n t r o d u c ti o n
Strategic planning
Process by which
an organization
determines its future
direction by defining
the actions that
Strategic planning brings leaders and stakeholders together to position their organization
for success in an environment of uncertainty. A healthcare organization engages in strategic
planning to reduce costs, improve quality and service, and ensure access to care. An innovative strategic planning process also helps an organization allocate resources more effectively
to enhance the value of its services and better meet the community’s healthcare needs.
The US healthcare environment is changing substantially. By 2011, healthcare
employed 15.7 percent of the US workforce and reached expenditures of $2.7 trillion (Moses
et al. 2013). Healthcare as a percentage of gross domestic product has doubled since 1980
to 17.9 percent in 2013. During the same period, government funding for healthcare has
increased from 31 percent in 1980 to 43 percent. The rate of change in an organization’s
market factors or technological environment determines whether an organization’s structure
should be hierarchical or participatory.
In a stable environment, a hierarchical structure with centralized decision making
may improve overall efficiency, provided senior leaders and managers possess sufficient
knowledge and information to make informed decisions. However, in unstable environments
with white-water change, the knowledge and information required for innovation must
be distributed throughout multiple levels in the organization. A greater flow of information combined with decentralized decision making fosters innovation. Such participatory
organizational structures may be more appropriate in the current healthcare environment.
will shape it and
developing objectives
and techniques for
D e f i ni t i o n
measuring ongoing
Strategic planning is the process by which an organization determines its future overall
direction and defines the actions that will shape it. Planners gather information about the
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Chapter 3: Fundamentals of Strategic Planning
internal and external environments and have in-depth discussions about the future of the
organization. They also develop organizational objectives and techniques for measuring
ongoing performance.
The critical components of the healthcare strategic planning model are illustrated
in Exhibit 3.1 and discussed in the sections that follow.
A n a ly si s o f t h e E n vi r o n ment I ns i de th e O rgan i zat ion
Internal data focus on finances, personnel, key assets, and quality of care. A thorough
analysis of internal data reveals an organization’s strengths and weaknesses, both of which
affect its ability to meet its mission.
Exhibit 3.1
Strategic Planning
Organizational Vision and Values
Mission Statement
Analysis of the
Analysis of the
Environment Outside
Environment Inside
the Organization
• Organizational culture
• Financial resources
• Access to capital markets
• Human resources
• Barriers to entry
• Quality
• Value
the Organization
Healthcare Strategic
Plan Development
• Economic factors
• Regulatory environment
• Patient demographics
• Competitor profile
Development of Critical
Success Factors
Gap Analysis
Operational Planning
Evaluation of Performance
via Dashboard
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Essentials of Strategic Planning in Healthcare
Mission, Vision, and Values
Thomas Edison is reputed to have said that “vision without execution is hallucination.”
An organization’s mission, vision, and values provide the foundation on which its strategic plan is built. Consistency among mission, vision, and values and clear links among
all three enhance the strategic planning process and increase the chance of performance
improvement. The entire workforce must also buy into the mission, vision, and values, or
execution will be difficult.
C u lt u r e
An organizational culture is the shared values and beliefs that guide behavior in each
organization (Pellegrin and Currey 2011). An organization’s distinctive beliefs provide a
framework for behavior. Social values in its surrounding communities shape this behavior.
For example, many people believe that access to healthcare is a right, not a privilege, and
patients want to be a healthcare organization’s first priority. Incorporating these social values
in organizational culture is important to healthcare strategic planning.
Culture also guides an organization’s decisions about allocating resources and establishing priorities. For example, consumers and health professionals want access to the
best technology available. An organization that emphasizes innovation and technological
advancement needs to allocate its resources carefully to be able to fund this costly priority.
If the organization promotes lifelong learning, it should not cut education and training
budgets at the first sign of financial stress (Pellet 2013).
Critical Success Factors
An organization’s strategic plan should address improvement in five core areas:
Healthcare quality
Patient access
Employee retention
Differentiation in the market
Alignment of resources
Successful strategic planning in healthcare should also include a clear connection
between current projects and programs, those that are regulatory directed (such as preventive services and community wellness), the strategic objectives of the organization (such
as evaluation of joint ventures or participation in a health system), and the measurements
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Chapter 3: Fundamentals of Strategic Planning
being used to track success. Tracking success will reflect organizational competency and
appropriate use of information technology. Implementation of the strategic plan will require
collaboration between physicians and the hospital, employee training to upgrade skill levels
in some instances, annual operating goals, and a plan to update every three years.
A n a ly si s o f t h e E n vi r o n ment O uts ide th e O rgan i zat ion
The healthcare strategic planning process is subject to considerable outside control and
rapid change. Federal and state legislation, physician involvement, third-party payers’
actions, and competitors’ actions all affect operations. In addition, as healthcare organizations focus more on illness prevention and community wellness, they will need to consider
educational, behavioral, and social interventions that have not been a part of the traditional,
episodic system of medical treatment. In short, healthcare organizations need to focus on
the external environment and future changes to the field. By gathering information from
external sources, healthcare organizations increase their likelihood of achieving success.
External information describes the market position; local demographics, competitors, and payers; and the local business environment. Such data are available through online
databases maintained by hospital associations, regional health-planning groups, the US
Census Bureau, and the US Department of Health & Human Services.
Trends in the External Environment
Hospitals planning strategically need to be mindful of trends influencing the direction of
the healthcare environment, including the advent of accountable care organizations (ACOs),
expanded insurance coverage, increased hospital participation in healthcare systems, the
impact of specialty hospitals, and the rise of ambulatory surgery centers.
The Advent of Accountable Care Organizations
As a part of the Affordable Care Act (ACA), the Centers for Medicare & Medicaid Services
(CMS) promoted the ACO. Many ACOs create a partnership among a clinic, hospital,
rehabilitation center, and nursing home. ACOs may also be a joint venture between a
group of doctors or hospitals and other healthcare providers who collaborate on providing
high-quality care at reduced costs. If the ACO is successful in reducing costs and improving
quality at all the levels of care, the parties will share in the savings from Medicare (CMS
2015). ACOs are using strategies such as population health to manage a growing primary
care base. Organizations need to consider the pros and cons of including participation
in an ACO in their strategic plan. See Chapter 9 for more information about ACOs and
population health.
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Essentials of Strategic Planning in Healthcare
Expanded Insurance Coverage
Safety-net providers
Healthcare providers
that deliver a
significant amount
of care to uninsured,
An estimated 10.3 million Americans became newly insured through provisions in the
ACA. The greatest increase was observed among minorities and young adults. This shift will
change organizational healthcare priorities to create more focus on preventive health and
community well-being. Still, as of April 2014, 16.3 percent of the US population remains
uninsured (Sommers et al. 2014). This uninsured segment is dependent on safety-net
providers such as public hospitals, not-for-profit hospitals, community health centers, and
local health departments. With this large number of people lining up for safety-net care,
the uninsured may have long waiting periods and may therefore choose to go without.
Medicaid, and other
Increased Participation in Healthcare Systems
Faced with lower Medicare reimbursement rates and the responsibility to provide care for the
uninsured, independent hospitals are experiencing weak profit margins and a growing need for
capital. As a result, they are under increasing pressure to become part of healthcare systems.
Some of the benefits of system membership include lower interest rates on loans, greater
negotiating power with third-party payers, and savings through group purchasing. However,
in evaluating the benefits of system membership, independent hospitals should consider
maintaining fiduciary control as well as local involvement in the strategic planning process
to ensure that the strategic plan prioritizes and meets consumer needs in the community.
The Impact of Specialty Hospitals
Medicare Payment
Advisory Commission
Government agency
composed of 17
members and
established by the
Balanced Budget
Act of 1997 to advise
Congress on issues
that affect the
Medicare program.
Healthcare policymakers continue to debate whether physician-owned specialty hospitals
that provide heart, orthopedic, and surgical services are desirable. The literature is mixed
on the benefits and downsides of specialty hospitals. The potential for conflict of interest
exists, but most research suggests that specialty hospitals have had little impact on general
hospitals (Babu, Rosenow, and Nahed 2011).
The number of specialty hospitals increased from 499 in 2000 to 956 in 2010—a
91 percent increase over the decade (Moses et al. 2013). In its 2006 report to Congress, the
Medicare Payment Advisory Commission (MedPAC) found that physician-owned specialty
hospitals did not have lower costs than competitor community hospitals did in their markets,
although their patients had shorter lengths of stay. The commission also found that specialty
hospitals admitted fewer severe cases and Medicaid patients than did their competitor community hospitals. Furthermore, the number of physician-owned specialty hospitals increased
the most in states that have no certificate-of-need requirement (see Chapter 1, Highlight
1.13) and a growing demand for specialty services as a result of high population growth.
Other research has found that the number of people who undergo complex surgical
procedures increases significantly when physician-owned specialty hospitals open. This trend
stems from a greater number of physician referrals—because physicians profit from the
specialty hospitals they own, they are more likely to refer their patients to them for surgery.
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The Rise of Ambulatory Surgery Centers and Outpatient Surgery
In the twenty-first century, freestanding, outpatient ambulatory surgery centers (ASCs)
were growing because they charged less than hospitals did. Most ASCs are for-profit and are
located in large metropolitan areas. In 2013, 5,364 ASCs treated 3.4 million fee-for-service
Medicare beneficiaries, and the Medicare program spent $3.7 billion on ASC services.
Medicare bases its payment rates on average cost of care, acuity of patients, and
other factors. In addition to procedure rates, ASCs often receive professional fees for the
individual physician. A high percentage of ASCs are for-profit organizations, and some
argue that CMS is supporting hospital-based outpatient programs in an effort to ensure
the survival of the hospitals. From 2008 through 2012, the number of Medicare-certified
ASCs grew by an average annual rate of 1.7 percent, but in 2013, the number increased
only by 1.1 percent. The government has shifted to higher Medicare payment rates in hospital outpatient departments (HOPDs), resulting in relatively slower growth of ASCs. In
2015, the Medicare rates were 82 percent higher for HOPDs than for ASCs. This payment
difference may help explain why many hospitals have recently expanded their outpatient
surgery capacity. In addition, physicians have increasingly sold their practices to hospitals,
and these physicians are more likely to perform procedures at the hospitals that employ
them than at freestanding ASCs (MedPAC 2015).
Ambulatory surgery
center (ASC)
Facility at which
outpatient surgeries
(i.e., surgeries not
requiring an overnight
stay) are performed,
often at a price that is
less than that charged
by hospitals.
G a p A n a ly si s
Gap analysis is a comparison of an organization’s internal and external environments
for the purpose of revealing, as the name suggests, gaps. Gaps are differences between the
organization’s current standing and its target performance. These gaps become the focal
points that shape the strategic plan.
For example, say an organization’s analysis of its internal environment reveals that
its mission, vision, and values are not aligned. A primary strategic goal, then, would be
to make these elements consistent with each other. Imagine that the organization finds
that one of the critical success factors discussed in an earlier section is not in place—for
example, its staff lacks certain skills. Organizational strategy would need to include plans
for employee training to get staff up to speed.
Two of the most important gaps in organizations today are in information technology and diversity. These elements are discussed in the following sections.
Gap analysis
Comparison of an
organization’s current
standing and its target
H e a lt h I n f o r m at i o n T e c h n o l o g y a s a C o m p e t i t i v e A d va n ta g e
Investments in health information technology (HIT) steadily increased over the first decade
of the twenty-first century, reaching $33 billion in 2011 (Moses et al. 2013). This investment
promises to increase efficiency in the healthcare system and improve quality of care through
better coordination. Currently, 95 percent of US hospitals have electronic health records
(EHRs) and are spending an average of 3 percent of total expenditures on HIT. Some large
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Payer mix
Percentage of revenue
coming from private
insurance versus
government insurance
versus individuals.
The mix is important
because Medicare and
Medicaid often pay
hospitals less than
what it costs to treat
Essentials of Strategic Planning in Healthcare
healthcare systems, such as the US Department of Veterans Affairs and Kaiser Permanente,
are investing 4–5 percent of their revenue on HIT. Clinical information systems have the
potential to improve both the inpatient and outpatient medical delivery systems. While
some documentation of medical records in the United States is still paper based, EHRs
offer an opportunity for the seamless exchange of clinical information. Studies examining
the use of EHRs have found, in general, that EHRs have increased quality of care, reduced
medication-related errors, improved follow-up on test results, and improved care coordination and communication within the care team (Nguyen, Bellucci, and Nguyen 2014).
EHRs allow the passage of real-time information to multiple users and timely feedback, both of which can foster more rapid quality improvement. In addition, users can pull
information from a centralized database to supplement evidence-based research on clinical
treatments. EHRs ease administrative decision making and the allocation of healthcare
resources. For example, an EHR provides detailed information on patient services and
current payer mix. This information can be linked to billing software to project reimbursement levels and measure the profitability of new business initiatives. These improvements
can provide competitive advantage.
To encourage the adoption of electronic information systems in the healthcare field,
the Health Insurance Portability and Accountability Act (HIPAA) designated a standard
electronic framework for electronic claims submission (see Highlight 3.1). Further, as part
of the 2009 stimulus plan, President Obama called for a nationwide EHR system to be
implemented by 2014. The program was managed through CMS and is called Meaningful
Use. In 2013 the program reported that approximately 80 percent of eligible hospitals and
more than 50 percent of eligible professionals have adopted EHRs and received incentive
payments from Medicare or Medicaid (CMS 2013a).
As consolidation of healthcare organizations increases, more effective linkages are
critical to the success of integrated delivery systems. From a risk management perspective,
EHRs and supporting clinical information systems have the potential to reduce medical
malpractice costs. Disjointed communication and incomplete records could become things
of the past.
D i v e r s i t y i n t h e W o r k p l a c e a s C o m p e t i t i v e A d va n ta g e
Healthcare is the fastest-growing sector of the US economy and currently employs 18 million workers, 80 percent of whom are women (CDC 2015). The US hospital workforce
has had an annual growth rate of 2.1 percent since 2000, when it totaled 17 million (Moses
et al. 2013).
Demographic evidence shows that the US population is becoming more diverse and
multicultural. In 2002, the Institute of Medicine released a report titled Unequal Treatment:
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Chapter 3: Fundamentals of Strategic Planning
HIPAA was passed in 1996 to protect the privacy and security of patient health information, particularly health information that can be used to discover a patient’s identity, by
• setting national standards for the security of health information that has been
stored electronically,
• permitting the confidential use of health information so that healthcare providers
can analyze patient safety events and improve patient care, and
• affirming that patients own their health records and have the right to access their
Under HIPAA, all hospitals and healthcare providers must meet minimum information security and privacy standards. These standards allow data to be transferred
between providers and other health-related entities, but the information must be coded
securely and the parties doing the sharing must meet a certain list of administrative,
physical, and technical safeguards and their required and addressable implementation
specifications (CMS 2013b). The rules regulating information exchange are called HIPAA
Transactions and Codes Sets and are based on electronic data interchange standards.
The rules apply to healthcare providers, retail pharmacies, health plans, healthcare
clearinghouses (organizations that do not provide care but do standardize information
for providers), and covered entities (separate healthcare providers that are under one
ownership). HIPAA has set rules for many types of transactions, including
• submitting claims to payers (e.g., insurance companies);
• requesting information about a patient’s eligibility for certain treatments and
responding to such requests;
• obtaining referrals for additional care from specialists and authorization to
ensure the additional care will be covered by the payer;
• enrolling members in a health plan; and
• supplying information on patient demographics, diagnoses, or treatment plans
for a healthcare services review.
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Essentials of Strategic Planning in Healthcare
Confronting Racial and Ethnic Disparities in Health Care. Since that time, healthcare organizations have made efforts to improve their cultural competence. The goal of cultural
competence is to create a healthcare system and workforce that are capable of delivering
the highest quality of care to every patient, regardless of race, ethnicity, culture, or language
proficiency. Such a system would be equitable, of high quality, and free of disparities based
on individual patient characteristics (Armada and Hubbard 2010). The American College
of Healthcare Executives (2012) believes that diversity in healthcare management is both
an ethical and a business imperative. Thus, to improve profitability and have a positive
impact on the health status of the community, healthcare organizations should diversify
their workforces. By integrating diversity into the strategic planning process, hospitals
should be able to reduce health disparities in the communities they serve.
Improvement in cultural and gender diversity can be a competitive advantage for
businesses. In a more diverse and inclusive workforce, individual discretionary effort improves
by 12 percent, intent to stay improves by 20 percent, and team collaboration and commitment improve by about 50 percent (CEB 2012).
Greater diversity among healthcare providers can minimize language barriers and
cultural differences. Improved communication between providers and patients leads to
improved quality of healthcare. Under optimal conditions, the makeup of a hospital’s
workforce mirrors the population it serves (HRET 2011).
P l a n ni n g A r e a s
Strategic plans, at a minimum, need to address certain core areas in healthcare. These core
areas include
◆◆ financial planning,
◆◆ efficiency,
◆◆ quality and value,
◆◆ management of healthcare personnel,
◆◆ current and long-term strategies,
◆◆ mix of products and services, and
◆◆ operational planning.
Each of these areas is addressed in the following sections.
Financial Planning
The healthcare environment has become more competitive, and healthcare leaders must
improve their ability to manage resources and reduce costs. Faced with inadequate
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Chapter 3: Fundamentals of Strategic Planning
reimbursement, greater price competition, and a growing shortage of professional staff,
healthcare organizations are forced to improve financial performance to gain greater access
to capital and remain competitive. Hospitals are responding to these challenges by trying
to provide higher volumes of care within limited financial resources. In addition, many
hospitals are benchmarking against outstanding organizations—examining other organizations’ business practices and products for purposes of comparing and improving one’s own
company—to improve internal operating procedures, enhance quality, maximize efficiency,
and improve the value of healthcare services.
Strategic planning needs to ensure that proposed new services will attract a sufficient
volume of patients to support an investment in new facilities. Before a proposal is approved,
the organization should conduct a detailed study to determine whether the new service
will likely generate enough revenue to justify the investment. This study should clearly
define the new service line to be implemented; accurately forecast the volume of patients
who will use the new service; and project construction costs, revenue, operating expenses,
and overall profitability. Poor forecasting of clinical workload can lead to the approval of
unnecessary and unprofitable projects.
As discussed in Chapter 1, an organization’s status—for-profit or not-for-profit—
affects its strategic financial planning. In general, not-for-profit hospitals have a lower
return on assets, lower debt, higher occupancy rates, older facilities, and higher operating expenses per discharged patient. They also are larger and offer more clinical services.
Although for-profit hospitals have higher long-term debt, they are more profitable because
they use the money to invest in newer facilities. Not-for-profit hospitals have lower levels
of debt because they often have difficulty borrowing money to fund facility improvements
and technological advancements. Because they do a significant amount of charity care and
earn lower revenues, nonprofits have difficulty paying back debt.
The strategic planning team should review key financial data as well as hospital operations data to ensure an efficient use of hospital resources, including personnel. Healthcare
organizations can improve incoming cash flow by developing procedures for timely submission of correctly executed claims, rapid review of claim denials, and compliance with the
organization’s policy on charity care. Specifically, healthcare organizations should review their
policies on charity care to ensure they are consistent with their mission and then monitor the
level of charity care provided on an annual basis. In addition, healthcare organizations should
perform an annual price analysis to confirm that the prices they charge for specific procedures
are higher than authorized reimbursement rates so that they receive at least the maximum
authorized reimbursement. This price analysis will also ensure that the reimbursement will
cover the organization’s fixed cost. Healthcare organizations should implement an audit
program that reviews the accuracy of their billing and coding systems (Waugh 2014). Such a
program ensures the accuracy of financial information used in the strategic planning process.
Payments from the federal Medicare program as well as from the combined state
and federal Medicaid program now provide 30 percent of total hospital revenue (Harrison,
Spaulding, and Mouhalis 2015). This level of government reimbursement is significant
because it is set by regulation rather than market factors. As a result, much of a hospital’s
Examination of
other organizations’
business practices and
products for purposes
of comparing and
improving one’s own
Fixed cost
Cost incurred despite
volume or use of a
particular service.
Examples of fixedcost elements include
buildings, equipment,
and some salaried
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Variable cost
Cost that changes with
volume or use and
Essentials of Strategic Planning in Healthcare
reimbursement for care does not adjust based on supply-and-demand factors. More important, in many states, Medicaid payments do not meet the variable cost of care or the total
average cost (total cost) of care.
can be saved by the
hospital if a service is
not provided. Examples
include medication,
test reagents, and
disposable supplies.
Total cost
All hospital
expenditures, including
facility operating costs.
Efficiency frontier
The best investment of
resources for the best
possible profits and
outcomes of care.
As the population continues to age and more Americans become insured, the healthcare
field is under growing pressure to improve efficiency as well as profitability. An efficient
organization reduces its use of resources without worsening the outcomes of healthcare
services (Harrison, Spaulding, and Mouhalis 2015). An efficiency evaluation compares
organizations that share common characteristics in both clinical and administrative areas.
For example, a comparison of two for-profit hospitals would be appropriate because they
have similar missions. Individual hospital performance can be benchmarked against the
efficiency frontier of “best-in-class” facilities, which model the maximal use of inputs
(investment of resources) for the best possible outputs (profits and outcomes of care).
Efficiency increases with greater hospital size (Harrison, Spaulding, and Mouhalis
2015). As discussed in Chapter 1, during the past ten years the number of not-for-profit
hospitals with 400 or more beds has grown 15 percent and large for-profit hospitals have
seen a 293 percent increase. Efficiency combined with improved quality represents greater
value for healthcare services—an important consideration in the healthcare field as reimbursement for hospital services moves from a volume-based model to a value-based model
as a result of the ACA.
Quality and Value
Strategic planning in healthcare is often conducted by administrators focused on the business components and clinicians focused on patient care and quality. Striking a balance is
important. Ongoing tension is often present in healthcare organizations between the valuedriven approach and the volume-driven approach to service delivery. In times of economic
strain, the temptation to decrease resources dedicated to quality is great; however, now,
more than ever, quality and safety cannot be ignored in the strategic plan. The importance
of publicly reported quality measures and patient experience scores will continue to increase
and will be tied to reimbursement (Knight 2014).
The challenge in the planning process is finding a differentiating factor related to
quality. Everyone is striving to be “the best,” but doing so will require more than developing a quality scorecard. Thoughtful exercises in brainstorming what clients need or want is
a part of considering quality and value. Some areas for consideration are improving access
and patient flow, using Lean processes to improve efficiencies in care processes, leveraging
technology, aligning with providers, managing population health, and creating a positive
patient experience (Knight 2014).
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Chapter 3: Fundamentals of Strategic Planning
One definition of value is that for which the customer would willingly and knowingly pay. The consumer decides on the timeliness as well as the quality level of the product
or service she is purchasing. The government even calls this value-based purchasing (see
Chapter 12). Although consumers would prefer to purchase healthcare of the best quality,
resource limitations tend to redirect their focus on cost. This is where the consumer starts
to look hard at the best value for her time and money.
M a n a g e m e n t o f H e a lt h c a r e P e r s o n n e l
Healthcare organizations should continually monitor personnel costs and productivity
against industry benchmarks. In particular, they should routinely perform salary surveys
to compare their salary rates with those of local and state peers.
Hospitals require adequate numbers of well-trained and highly credentialed healthcare
professionals. Research has shown there is a strong relationship between adequate nurseto-patient ratios and safe patient outcomes (ANA 2014). Ensuring adequate staffing levels
has been shown to reduce medical and medication errors, decrease patient complications,
decrease mortality, and improve patient satisfaction. Yet 54 percent of nurses report excessive workload. One in three nurses report inadequate staffing levels. Two in five units are
short-staffed (ANA 2015).
High-quality healthcare is provided by teams of physicians, nurses, and allied health
professionals trained in more than 50 different medical specialties. Good communication
and close collaboration are required to ensure that the 200 or more professional interactions
that occur during an average hospital admission result in high-quality care (Nancarrow et
al. 2013). Research has shown that healthcare organizations with well-coordinated teams
report lower long-term illness and mortality. Patient satisfaction also improves when healthcare professionals communicate clearly, express empathy, and demonstrate good listening
skills. Good communication skills can be taught, and healthcare organizations must foster
an environment in which good provider–patient communication is a priority.
C u r r e n t a n d L o n g -T e r m S t r at e g i e s
Excellent strategic planning is a key for healthcare organizations that have proved profitable in the long term. Strategic planning provides a framework for integrating marketing,
efficiency, personnel management, and outstanding clinical quality while ensuring financial
performance. The development of process improvement teams is vital, and so is the use
of real-time data to monitor performance on key metrics. Accurate data on community
demographics, market share, payer mix, costs, and medical staff performance allow executives to make sound decisions.
By comparing these internal data with competitor and industrywide benchmarks,
leaders can develop sound strategic plans and financial targets. Good data enable them to
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Essentials of Strategic Planning in Healthcare
accurately forecast future demand over the next five to ten years. Short-term performance
also must be monitored to make sure it is consistent with the organization’s long-term vision.
Once new business initiatives become fully operational (typically 24 months after start-up),
the organization should evaluate them to ensure that they are fulfilling the objectives of the
strategic plan. (Performance measurement and evaluation will be covered in greater detail
later in the chapter.) In addition to performance measurement, creativity and a focus on
community needs are important to long-range strategic planning.
Mix of Products and Services
Hospitals’ reimbursement rates have been decreased as a result of federal government spending cuts, and insurance payers are following government strategies. Patients are reconsidering
healthcare spending because of the economic downturn and growing insurance deductibles.
The impact of these trends on a hospital’s bottom line can be significant. One response is
significant cost reductions, but cutting costs can often restrict a hospital’s ability to increase
revenue, creating a downward spiral for the facility. Healthcare leaders should find ways to
redirect current resources to create more effective growth strategies. Growth is paramount
in this very tumultuous time (Clark and Lindsey 2013).
Many hospitals located in growing communities are expanding their inpatient
and outpatient capacities. While many services are profitable, these organizations need to
operate unprofitable services such as obstetrics, pediatrics, and emergency services. As a
result, many of these hospitals are participating in joint ventures with physicians to improve
clinical quality and develop a more varied product mix. Healthcare organizations should
routinely monitor their medical staff network to maximize clinical services while ensuring
a profitable mix. Such an assessment should take into consideration changing community
demographics and needs and the product mixes that competitors offer. Healthcare organizations can gather information on changing community needs from community leaders,
board members, hospital employees, and physicians on the medical staff.
Joint ventures enable organizations to preserve capital, expand services, and better
meet community healthcare needs. A healthcare organization seeking a joint venture should
identify potential partners that demonstrate ethical, cultural, and quality-of-care factors
that are consistent with its strategic plan. Once these model partners have been identified,
the strategic planning process can pinpoint clinical areas in which joint ventures may be
most appropriate. Such areas could be new service lines, the development of facilities that
are more convenient or easier for patients to access, or high-level services that enhance the
hospital’s reputation. Any new service should be financially profitable and provide long-term
value to the organization. Value may take the form of increased clinical volume, greater
market share, or limited competition from other hospitals.
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Chapter 3: Fundamentals of Strategic Planning
O p e r at i o n a l P l a n n i n g
Operational plans set strategic plans in motion and carry out the tasks they prescribe. Each operational plan should be assigned to a senior leader and linked to specific activities with deadlines.
Responsibilities should be assigned to individual leaders who are held accountable for performance.
By pushing operational goals down the ranks of the organization, the strategic plan becomes a
reality for all staff and creates a unified endeavor. The strategic plan should prioritize operational
goals according to the resources available to the organization at any given point in time.
E va l u ati o n o f P e r f o r m a nce
Once strategic plans are in operation, organizations must evaluate the results of strategic
actions. To align behaviors, clear goals must be linked with the measurement of outcomes.
Organizations that are able to create such an alignment are more likely to be successful,
but they should monitor their performance on a routine basis. For example, performance
data could be collected monthly and then evaluated over time.
One useful tool for linking strategic goals to annual operating performance is called a
dashboard. Like the gas gauge, speedometer, and temperature gauge on a car dashboard, an
organizational dashboard contains numerous indicators of performance. Just as the indicators
on a car dashboard must all reflect good performance for the car to reach its destination,
an organization’s strategic success depends on the collective performance shown by the
indicators on its dashboard. An example of a hospital dashboard is shown in Exhibit 3.2.
Dashboard measures might include quality of care (nosocomial infection rates1 and
30-day readmission rates2), patient satisfaction, market penetration, operating efficiency
(by emergency wait time, average length of stay, or cost per procedure), and financial performance (net operating income and cash on hand). The dashboard should include visual
cues, such as green representing favorable performance, yellow representing areas of growing
concern, and red representing areas of poor performance.
On the basis of these indicators, the organization can modify its strategy to improve
areas of poor performance. For example, say a hospital wants to build a particular service
line, but its dashboard shows that it does not have enough staff to do so. The hospital
would then need to focus on recruiting and training additional staff while ensuring that it
can afford to compensate the new staff and will still make a profit.
As shown in Exhibit 3.1, evaluation of performance ends the strategic planning
cycle, but not the strategic planning process. Strategic planning is a continuous activity. In
healthcare, change occurs rapidly, both internally and externally. Once a strategy has been
implemented and evaluated, the cycle begins again. An organization modifies its strategy
as needed, reimplements it, and evaluates it again, and new strategies are developed in
response to the changing environment.
Tool that links strategic
goals to operating
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Essentials of Strategic Planning in Healthcare
Exhibit 3.2
Sample Hospital
XYZ Hospital Dashboard 2015
30-Day Readmissions
Average Emergency Department Wait Time
Inpatient Satisfaction
Mental Health
60 20
Net Operating Income in Millions of Dollars
Balanced scorecard
Tool that allows
organizations to
assess their missions
by evaluating specific
objectives and metrics
across multiple
Another tool is the balanced scorecard (BSC), which allows a corporation to view
its performance. The BSC is a strategy and management system that focuses an organization on several areas of performance measurement. Prior to the introduction of the
BSC, in most cases, performance was measured on the basis of financial achievements
The BSC shows, at a glance, an organization’s goals and how it aims to achieve them.
The BSC is divided into several areas that the organization considers important to achieving
its mission—for example, human resources, patient satisfaction, financial position, quality
and safety outcomes, or employee professional development. For each area, the organization states objectives and identifies specific measurements that will demonstrate how it is
progressing in that area. Target results are also listed to indicate what an organization hopes
or expects to achieve. For example, the human resources section of the BSC might measure
and list targets for employee turnover that include the turnover rate, cost per hire, length
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Chapter 3: Fundamentals of Strategic Planning
of employment, and so forth. The BSC allows everyone in the organization to see easily
what the organization’s priorities are and which areas need improvement.
Specific metrics should meet the following criteria: (1) importance to organization
and staff, (2) measurability, (3) data validity, and (4) actionability. The BSC is balanced
because it meets four goals. First, it provides a broad view of performance; second, it creates
transparency and accountability; third, it communicates goals and engages staff; and last,
it ensures the use of data in the strategic planning process.
P l a n ni n g at t h e L o c a l , R egi onal , and N at ional L evels
Organizational planning at the local level is different from regional and national healthcare
planning. As a result of the growth in health systems, many healthcare organizations are
doing more regional and national planning.
Local Planning
In general, healthcare in the United States is a local commodity produced to meet local
demand. For this reason, much of an organization’s strategic plan is developed using local
data. A good understanding of community needs is necessary for local healthcare planning.
More important, local governmental entities and other organizations in the community
can provide additional funding and thus significantly influence the allocation of healthcare
Measuring the availability of physicians, allied healthcare providers, hospital beds,
and long-term care resources in the local geographic area is a responsibility of the local
health-planning council. State government also assesses the effect of its communities’ economic status on the availability of healthcare services in the area. Economic factors affect
individuals’ ability to pay for healthcare services, the number of uninsured, and, ultimately,
the community’s overall health. Common economic factors affecting local planning include
per capita income and the percentage of unemployed in the community.
Regional Planning
As healthcare complexity increases in the United States, a case can be made for allocating
healthcare resources at the regional (e.g., state) level. Such an approach could reduce costs
through improved efficiency and ensure a consistently high level of healthcare quality.
Regional planning at the state level includes an analysis of population demographics
and the development of mathematical models designed to determine the need for health
services in local communities. These activities address a variety of questions associated
with regional health planning, such as the location of hospitals; the number of hospital
beds, hospitals with open-heart surgery units, ASCs, imaging centers, and nursing homes;
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Essentials of Strategic Planning in Healthcare
and the availability of hospice programs. Typically, academic medical centers generate the
strongest presence on a regional level, followed by larger tertiary community hospitals.
Some hospitals have differentiated themselves by affiliating with academic medical centers
or health systems (Beckham 2014).
The ACA broadened Medicaid’s role, making it the foundation of coverage for nearly
all with incomes up to 138 percent of the federal poverty level. However, the 2012 US
Supreme Court ruling on National Federation of Independent Businesses v. Sebelius made the
decision to implement the Medicaid expansion optional for states. For those that expand,
the federal government will pay 100 percent of Medicaid costs of those newly eligible for
Medicaid from 2014 to 2016. The federal share will phase down gradually to 90 percent in
2020, where it remains well above traditional federal medical-assistance percentage rates. As
of March 2015, 29 states (including the District of Columbia) had adopted the Medicaid
expansion, though debate continues in other states (Dorn et al. 2015). The low-income
population and its increased access to medical care should be considered in the planning
process depending on the state’s position on Medicaid.
N at i o n a l P l a n n i n g
Healthy People 2020
A comprehensive
analysis of the US
population’s healthcare
needs and a statement
of goals and measures
by the US Department
of Health & Human
Services, around which
local and regional
planning can take
place. Also the name
of a ten-year effort to
achieve the goals it
A framework for healthcare strategic planning at the national level is important. The passage
of the ACA provided the foundation of a national strategic healthcare plan that integrates
the priorities of key stakeholders, including patients, employers, plans, healthcare providers, and medical suppliers. The strategic plan was developed by the federal government and
then implemented by governmental authorities at the local and regional levels.
The United States experienced significant improvement in the health status of its
population between 2005 and 2015. However, research demonstrates that minorities suffer
disproportionately from many diseases. The federal and state governments are working to
reduce these disparities through such projects as the Healthy People 2020 report—a statement of healthcare objectives, around which local and regional planning can take place,
produced by the US Department of Health & Human Services. Also the name of a ten-year
effort to promote the goals it outlines, this comprehensive analysis of the US population’s
healthcare needs specifies healthcare improvement goals and measures by which progress
toward those goals can be monitored.
Healthy People 2020 contains 42 topic areas with more than 1,200 objectives. The
Healthy People 2020 objectives, called Leading Health Indicators, were selected to communicate high-priority health issues and actions that can be taken to address them. Great
strides have been made over the past decade: Life expectancy at birth has increased; rates
of death from coronary heart disease and stroke have decreased. Nonetheless, public health
challenges remain, and significant health disparities persist.
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Chapter 3: Fundamentals of Strategic Planning
The Healthy People 2020 Leading Health Indicators place renewed emphasis on
overcoming these challenges as we track progress up to the year 2020. The indicators will
be used to assess the health of the nation, facilitate collaboration across sectors, and motivate action at the national, state, and community levels to improve the health of the US
population (HHS 2015).
Many believe local communities have the greatest understanding of healthcare needs
and therefore should have significant influence over healthcare planning decisions. As such,
local communities should be included in the strategic planning process and in any national
healthcare reform initiative.
E n d n o te s
Nosocomial infections are infections that are not caused by a patient’s condition but
are acquired in hospitals and other healthcare facilities.
A 30-day readmission rate is the percentage of patients who were treated for a
particular condition and discharged from the hospital but who had to be
readmitted to the same or another hospital within 30 days of the initial discharge.
Strategic planning is a process by which healthcare organizations determine their future
direction. An important part of strategic planning is the allocation of resources to maximize
the delivery of healthcare services. Research suggests that good strategic planning leads to
lower healthcare costs, improved quality of care, and greater patient satisfaction.
Healthcare strategic planning is grounded in an organization’s mission, vision, and
values. Building on this foundation, the organization develops a strategic plan based on
analyses of the internal environment of the organization and the external environment in
which it operates.
As part of the process, organizations identify factors necessary to achieving outstanding performance and then complete a gap analysis designed to identify where improvement is
needed. At the operational level, developing programs and services that support the overall
strategic plan and turn plan objectives into action is important for healthcare organizations.
An effective tool for linking the strategic plan to operating performance is a dashboard
analysis. Measurement of performance via a dashboard is part of an ongoing feedback
process that drives future strategic planning. Programs are implemented, performance is
measured, and any remaining performance gaps prompt the cycle to begin again.
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Essentials of Strategic Planning in Healthcare
Review Questions
1. What roles do boards of directors, senior leaders, physicians, employees, and community organizations play in a healthcare organization’s strategic planning process?
2. Do you agree that healthcare organizations should monitor key business metrics
throughout the year? Evaluate this idea and provide an example from the chapter
that illustrates the monitoring of organizational performance.
3. Should a healthcare organization do a community health assessment as part of its
strategic planning? Why or why not?
4. Does the diversity of a healthcare organization’s staff have any impact on organizational performance?
C o a s ta l M e d i c a l C e n t e r E x e r c i s e s
According to Chapter 3 and the Coast Medical Center (CMC) case study, does CMC have the
organizational capabilities for future success?
Richard Reynolds, the newly hired CEO, has been actively investigating the declining performance of CMC. During the hiring process, the board of directors assigned him
the responsibility of getting the organization back on track. Help Mr. Reynolds develop a
strategic planning process that will place CMC on a new road to success by considering five
new business initiatives, creating a dashboard, and evaluating CMC based on these metrics.
Outline a strategic planning process appropriate for CMC.
C o a s ta l M e d i c a l C e n t e r Q u e s t i o n s
1. Many stakeholders described the past CEO of CMC, Don Wilson, as a visionary who
helped the organization grow and prosper for more than 20 years. His successor,
Ron Henderson, took the organization from profitability to significant financial
losses within two years and was fired as a result. Name five areas in which Mr. Henderson’s performance was weak.
2. Of the five areas of new business initiatives to improve performance, which one
should be the first priority?
3. How is CMC positioned relative to its competitors?
4. How should CMC create new and innovative approaches to community needs?
5. What do you see as the future of strategic planning at CMC?
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Chapter 3: Fundamentals of Strategic Planning
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Get It Right.” Accessed August 12, 2015.➤
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Anatomy of Health Care in the United States.” Journal of the American Medical Association 310 (18): 1947–64.
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