Essay Instructions: (Financial Planning)
1. Discuss the steps involved in formulating a strategic plan within health care organizations.
2. Discuss how health care organizations benefit from financial planning.
3. Discuss how scenario analysis and scenario planning differ from traditional methods of planning in health care organizations.
(Reading material)
In today's volatile healthcare environment, traditional planning tools are inadequate to guide financial managers of provider organizations in developing managed care strategies. These tools often disregard the uncertainty surrounding market forces such as employee benefit structure, the future of Medicare managed care, and the impact of consumer behavior.
Scenario analysis overcomes this limitation by acknowledging the uncertain healthcare environment and articulating a set of plausible alternative futures, thus supplying financial executives with the perspective to craft strategies that can improve the market position of their organizations. By being alert for trigger points that might signal the rise of a specific scenario, financial managers can increase their preparedness for changes in market forces.
Managed care plans and providers face tremendous uncertainty regarding the future of the industry, as a variety of healthcare policy scenarios are being offered by candidates in this year's presidential election campaigns. Health care's loss of stability demands that new strategic-planning tools that determine the potential impact of uncertainty on financial performance be implemented.
Scenario planning is a tool that can be used to explore the impact of different possible futures for health care. a Scenarios provide a structured framework for imagining and assessing uncertainty, allowing the distillation of complex market interactions into a limited number of plausible alternatives that can be used to determine an organization's most appropriate strategic initiatives.
Managed Care Market Forces
Scenario planning is especially useful for analyzing the current healthcare climate, which is characterized by a significant level of uncertainty regarding critical market forces. These market forces include:
Collective bargaining for physicians. To what degree will physicians legally be able to negotiate collectively with payers?
Consolidation of health plans. Will health plans continue to consolidate until only a handful of payers compete in each market, or will new plans aggressively enter markets, leading to fragmented healthcare coverage across many payers?
Employee benefit structure. Will employers continue to provide employees a defined benefit that allows them to choose from a limited number of health plans, or will they shift to a defined-contribution approach that allows employees free rein to determine how to spend a fixed sum?
Federal healthcare reform and universal access. Will health coverage continue to be provided through fragmented channels, or will there be a shift to universal coverage guaranteed by the Federal government?
Medicare managed care. Will the number of Medicare beneficiaries covered by managed care plans significantly increase or decrease?
Healthcare inflation. What will be the relationship between the increase in healthcare costs as measured by the medical price index (MPI) and overall economic inflation as measured by the consumer price index (CPI)?
Health plan models. Which health plan model will emerge as the dominant structure?
Impact of consumerism. Will consumers continue to play a relatively passive role in healthcare decision making, or will they become more active, demanding more information about provider prices and quality of care?
Provider payment structure. What will be the primary payment mechanism for hospitals and physicians?
Physician practice structure. Will the majority of physicians participate in multispecialty or singlespecialty group practices, or operate solo practices? Will group practices be large or small?
For purposes of scenario analysis, planners should select from among the identified market forces two forces that are anticipated to have a great potential impact on the organization. These forces should be used to form a matrix that presents four plausible futures, or scenarios. These four scenarios represent the extreme outcomes of the market forces at work.
Scenarios and Strategies
In Exhibit 1, two opposing possible developments in healthcare inflation (the magnitude of the MPI vs. the CPI) and the role of the healthcare consumer (active vs. passive) are combined to construct a matrix illustrating four possible managed care scenarios. These four possible scenarios can be called the Two-Tiered System, Freedom of Choice, Flashback to the Mid-1990s, and Healthcare Reform Revisited. Exhibit 2 illustrates the strategic implications of each scenario for hospitals and physicians.
Two-Tiered System. In this scenario, the increase in medical costs greatly exceeds general inflation, and the consumer chooses to takes an active role in healthcare decision making. Employers would move to a defined-contribution approach to health coverage and providing employees with a fixed dollar amount every month. Consumers would make their own decisions regarding the purchase of insurance and healthcare services, seeking value from hospitals, physicians, and insurers. The combination of individual purchasing discretion and greater demand for information would lead to new models of contracting. The Internet may emerge as the low-cost channel for individuals to use to purchase insurance and healthcare services either on their own or as part of a group.
As new purchasing channels emerge, providers would need to develop relationships and redefine contract parameters with another set of payers. Branding and product differentiation would become important strategies for providers. Scoring well on public "report cards" would be crucial. Direct consumer evaluation of the price/quality trade-off would reward "value" providers. Additionally, hospitals and physicians would need to more closely evaluate strategies traditionally used to sell consumer goods, such as pricing, discountcoupon distribution, and product bundling.
Freedom of Choice. The Freedom of Choice scenario reflects an active consumer and medical inflation that generally is in line with the nation's inflation rate. Because employer healthcare costs would not be growing significantly faster than general inflation, companies would continue to offer their employees a choice of plans and providers with a defined benefit. Consumers would take an active role in making healthcare decisions within the defined limits of their coverage. Although freedom of choice would exist, the market forces of supply and demand would serve to ration care and access.
Enlarge 200%
Enlarge 400%
EXHIBIT 1:
EXHIBIT 2:
Consumer-driven choice and low inflationary pressure have several strategic implications for hospitals and physicians. Participation on every managed care panel would not be essential. Consumers would migrate to their provider of choice, increasing provider leverage with payers. Consumer watchdog groups, employer coalitions, and payers would attempt to define and measure quality. If these attempts were unsuccessful, consumers would make choices based on their perceptions of quality, causing many providers to put greater emphasis on market visibility and brand recognition.
Flashback to the Mid-1990s. The third scenario, Flashback to the Mid1990s, combines relatively low increases in medical costs with consumer passivity. In this scenario, managed care payers would be the dominant market force, setting contracting and coverage parameters and, thus, making the greatest profits. In an attempt to define and measure provider quality, payers would require providers to submit information that would allow quality evaluation to occur. Because of consumer indifference to choice among healthcare providers, there would be a shift from open-access products to closed-panel models presided over by gatekeepers. Federal legislation would wane because employers would be content with the relatively low rate of medical inflation, and consumers would not demand government intervention because perceived problems would be minor.
Hospitals and physicians would consider aggressive responses to the payers' strong market position. Hospitals would consider consolidation in an attempt to increase their bargaining power. Physicians would renew their interest in independent practice associations (IPAs) or group practices as their primary contracting organization. Providers faced with the daunting choice of major rate concessions or exclusion from panels would refuse to enter into contracts with payers who would not pay minimally acceptable rates.
Healthcare Reform Revisited.
High medical cost inflation and passive consumers create the fourth scenario, Healthcare Reform Revisited. Concerned with the high rate of medical inflation, the Federal government would pass a series of reforms that would establish active Federal oversight and regulation of both providers and payers. Faced with increased Federal scrutiny, providers would focus a significant portion of their resources on corporate compliance and policy development. Risk would be shifted from payers to hospitals and physicians primarily through capitation.
Hospitals and physicians would reevaluate the role of the integrated delivery system to optimally match their organizational structure with the industry's risk-based payment system. Hospitals would reconsider purchasing primary care physician practices to link with their hospital services. IPAs and physician-hospital organizations (PHOs) would be revived as contracting organizations. Risk-management skills and information technology would become essential as providers would be asked to develop risk-sharing, incentive-based systems. Additionally, hospitals would develop quality-measurement systems to meet Federal regulations.
Using Scenario Analysis
Each of the four scenarios given above examines a different possible future for health care brought about by the interactions of critical variables. Healthcare finance executives can use scenarios to identify strategies that would be successful under various future conditions and those that would be especially valuable in a specific scenario. By being alert for triggers that might indicate the onset of a particular scenario, financial managers can begin to adjust strategy to prepare for a shift in the healthcare marketplace. For example, if major purchasers of health care lobby Congress to regulate health care more closely, the Healthcare Reform Revisited scenario might be on the horizon.
Scenario planning and analysis provide a systematic method to recognize and address the major uncertainties facing healthcare organizations. It is most useful when a high degree of uncertainty exists around critical market forces, such as government reform or policy changes, competitor consolidation or expansion, and changing attitudes of the healthcare consumer. By identifying and discussing the implications of each scenario, healthcare financial executives will be able to develop a set of robust and adaptable strategies that allow their organization to stay one step ahead of the market. *
