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What Would You Do? What Type Of Expansion Makes Sense?

The Problem

Growth and development of a Midwestern metropolitan area has resulted in a pocket of opportunity for a significant healthcare presence in the expanding southern suburbs. Sisters Health Care System (SHCS) has historically considered this area to be its market, but believes a major facility in the market may be required to preserve its position. What should that presence be?

The Situation

Like many mature urban areas, this Midwestern metropolitan area has a relatively stable but graying population. Over the past 40 years, the population has been relocating to the suburbs; while overall population has remained essentially static, there has been healthy growth in the suburbs at the expense of the city. The most recent area of development has been the far southern suburbs, extending into an adjacent county that historically has not been considered part of the metropolitan area in question. In fact, this recent population migration is causing the large metropolitan area and the small one to the south to begin to blend into one larger metropolitan area.

SHCS is one of three major healthcare organizations operating in the region. SHCS has four hospitals in the large metropolitan area and two in the small southern one. As shown on the map, the two hospitals in the southern area are the most proximate to the growing southern suburbs, and the system also has a few owned medical practices operating in the area. Historically, SHCS has captured about 40 percent of the inpatient business from this area, with 30 percent going to the largest system in the region, 20 percent to the other system, and the remaining scattered among the children's hospital and others.

The growth and development of this area is attracting a great deal of attention from all three systems, and the largest system is rumored to be shopping for a parcel on which to build a healthcare facility. Within a seven-mile radius of the center of this area, more than 250,000 people now live, and the population is expected to grow to 275,000 in five years. Within this area, healthcare services are modest, nearly all being small medical practices.

SHCS is concerned about this competitive threat and recognizes that this area is probably underserved. What, if anything, should it do?

Alternative Considerations

SHCS's management team fleshed out alternative ambulatory care configurations for this market, as shown in the table, and also developed three general options for development on the south side:

* Build a freestanding ambulatory care center with a full range of outpatient diagnostic and treatment services oriented to women, families, and other targeted groups, as appropriate

* Build a 100-bed hospital with extensive ambulatory care services

* Develop a phased implementation of inpatient and ambulatory presence

--Phase I (2010): 50-bed hospital with ambulatory services and expansion capabilities

--Phase II (2015): Expand to a 100-bed hospital with a full range of ambulatory services and a medical office building

It was clear that the market would support any of the options. The main considerations were:

* Would a larger and more significant endeavor deter competitor initiatives or result in an overly saturated market?

* What impact would any of the initiatives and likely competitor responses have on SHCS's current hospitals and financial performance ("cannibalization" of volume and redundant, duplicative services)?

The management team carefully identified all the different scenarios and estimated probabilities of each occurring, but, at the end of the day, they realized it was just guesswork; they would have to make a decision based on their professional judgment, instincts, and the facts available. All agreed that it would be a mistake to do nothing, because this would likely lead to the worst possible outcome for their system. If you were in SHCS's situation, what would you do?

The Decision

The management team went back and forth for weeks on this issue. Capital for any of the proposed alternatives was not a problem, but ROI and cash flow were problematic for all alternatives in which SHCS's major competitor moved forward, too. finally, the team agreed that it should assume the competitor's initiative was a given (it would probably be a large-scale ambulatory care center), and base its analysis and decision on this near certainty.

With this key variable removed, the risks and rewards became much clearer. The team agreed that developing a major ambulatory care center made the most sense and opted for the concept of a center for family health and wellness to serve this young, middle-class population.

by: Alan M. Zuckerman
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What Would You Do? What Type Of Expansion Makes Sense?