MANAGED CARE March 1997. ©1997 MediMedia USA
...and other critical marketing questions for integrated health care systems
Thinking about joining other providers in your area in an integrated health care delivery system? To ensure that your IDS isn't just a "field of dreams," be sure to take into account how you will market it.
Like many physicians, you may be considering joining or developing an integrated delivery system. You may even be in the process of setting one up. And after you and your fellow organizers together have spent tens or hundreds of thousands of dollars, maybe you've reached the point where you've actually put together this new venture and are ready to open your door for business, confident that you have successfully met and addressed the challenges of the changing health care landscape.
On the other hand, you may have created the Edsel of health care — a product that looks great on the drawing board, doesn't sell and is a financial disaster.
A recent study by Ernst & Young, Navigating Through the Changing Currents, concluded:
"Integrated health care systems are essentially start-up ventures with little infrastructure, unclear commitment from management and a lack of well-developed plans for the future.... They are emerging in a health care environment that is undergoing rapid transition and are not yet being run as a business. Their management's lack of knowledge of revenues, utilization levels and attainment of enrollment targets suggests they are not yet regarded as major business ventures by their parent organizations."
Even so, they are being discussed, developed, capitalized and launched at a phenomenal rate. One study predicts that by 2000, virtually all health care executives expect to be working in at least a loosely integrated system and two-thirds expect to belong to a fully integrated system.
According to Hospitals and Health Networks, more than 150 agreements to sell or merge hospitals were signed during the first nine months of 1996, and across all sectors of health care, the first half of 1996 saw 700 deals. About 60 percent of urban hospitals have executed mergers and alliances.
Success and viability in the creation and development of integrated delivery systems goes beyond the need to protect an organization's financial interests or desire to insulate against managed care pressures. Stated simply, IDSs that have a strong marketing perspective will have a competitive advantage and be more likely to achieve success than systems without this perspective.
The areas treated below must be considered from the system's onset, not as an after-the-fact exercise.
For our discussion, an IDS is an organization of health care providers that takes financial risk for delivery of inpatient and outpatient medical services under a contract with a payer responsible for administration and plan marketing.
For many physician groups, conceiving, developing, organizing, operating and participating in an IDS will require two significant changes in thinking: (1) understanding and acting on the fact that payer contracts are the basis for the IDS's revenue, but the members they deliver are patients who generate costs and affect IDS income and viability, and (2) realizing that the pricing of IDS services will be driven by market needs and realities, not the costs or revenue needs of the organization.
There are many reasons why an IDS could fail:
- Too few members
- Too many sick members
- Too few participants (e.g. physicians, hospitals, labs) in the network and/or the wrong type of participants
- Too few locations for service
- Inability to deliver on promises
- Ill-conceived pricing strategy
Not only do you have to build a product that appeals to a bewildering array of customer types, you have to get actively involved with the payer to make sure that you understand what, where, why and how it is marketing the plan and whom it will attract, and along the way ensure that your risk and reimbursement strategy will provide enough compensation to keep your IDS viable.
We offer 11 critical marketing questions that will contribute to your business planning process and help ensure that if you build it, they will come, and when they come, your IDS will be a financial success.
Will They Come?
If you don't create something that the market wants or needs, you will be no better off than you were before integrating. In fact, a strong argument can be made that you will be worse off — thousands of dollars poorer and stuck in a failing business arrangement.
Your IDS, be it based on a independent practice association, a physician-hospital organization, a management services organization or some other structure, must be positioned, packaged, placed, promoted, priced and — ultimately — sold.
Over the next five to ten years, organizations that make marketing a fundamental part of IDS development and operation will achieve competitive advantage and long-term viability.
The mere fact that you've built an organization — regardless of energy, time, resources, capital and anguish expended — is no guarantor of success. This perspective needs to be present from the moment of conception and carried through the organization's development, implementation and operation.
Who Are The Customers?
Marketing and selling an IDS is made particularly complex by virtue of the fact that there are a number of different types of stakeholders who must be pleased. They have different motivations. For each, the IDS must be positioned, placed, promoted and priced uniquely, and ultimately, a sale must be made.
And to make matters even a bit more complex, each type might be composed of a number of different segments, each with its own agenda and needs.
Building a system without accounting for whether your product has meaning and value for these different stakeholders is irresponsible and a waste of time, money and effort. You must take them all into account from the onset of development, not as an afterthought once contracts and capitalization have been secured.
Are We 'Hitting Them Where They Ain't'?
At the turn of the century, one of the most famous and successful baseball players was Wee Willie Keeler, a spray hitter with a lifetime batting average of nearly .400 and membership in the Baseball Hall of Fame as one of its charter inductees. How'd he do it? "That's easy," he explained. "I just hit 'em where they ain't!"
Willie's approach also works for strategic marketing and planning. To be successful, the emerging integrated delivery system shouldn't duplicate what currently exists in the market, but should strive to create something new and unique that has meaning and value to potential customers and other stakeholders: In Willie Keeler's words, "Hit 'em where they ain't."
The process involves responding to three critical questions: (1) Why do they want or need products? (2) What can we provide that they're not currently getting? and (3) Why should they buy from us?
View your product or services from your prospect's perspective. If you can't provide a positive response to any of these queries, then it is highly likely that either you have not done your homework or you've created an entity that has little or no meaning or value outside of the interests of its creators.
Answers to these questions are, to a large degree, a function of market research (i.e. homework) followed by critical analysis and creative thinking.
How Do We Seek and Secure Competitive Advantage?
Competitive advantage involves willingness to fight for market share and position and for continually increasing sales. It means establishing strong ties between the organization and its customers and capitalizing on strengths of the organization and the weaknesses of its competitors. It means seizing or making opportunities to expand a type of service, or even to encourage demand for that service, and it involves an ability to recognize and respond to threats before they do damage.
Some payers, physician organizations and hospital organizations — mostly those that operate on a for-profit basis — have recognized the value of competitive advantage and are driving the industry. Companies like U.S. Healthcare, Oxford, PhyCor, Columbia/HCA and many others have bulldozed market entry barriers and carried the concept of competitive advantage to the point where other established systems are actually in the position of reacting to their presence, rather than proactively creating and sustaining their own competitive advantage.
The ability to create and sustain competitive advantage involves the interaction, integration and blending of internal and external activities. The internal set — market intelligence, competitive intelligence, positioning, brand identity and planning — address the research, planning and positioning needs of the health care system. External activities — marketing communications, sales, distribution, product mix, customer service — are directly involved in creating awareness and driving preference.
Together, and only together, will these components create competitive advantage.
Who Are Our Competitors and What Are Their Threats?
Creating and launching a product without analyzing the competition will be hazardous to the health of your developing health care system.
Remember: Competitors, too, are positioning, placing, promoting, pricing and selling to the same customers and customer segments that you are trying to reach. Therefore, discerning competitors' strategies is crucial to creating a product that is different and has its own unique and motivating characteristics.
After analyzing the competition comes a technique called SWOT analysis — strengths, weaknesses, opportunities and threats. SWOT analysis shows how your system stacks up against its competition, and indicates areas where resources should be allocated to capitalize on your strengths and opportunities while addressing your weaknesses and the threats you face.
How Will We Raise Awareness and Drive Preference?
They won't come unless you tell them about it! Fortunately, many mechanisms and media are available, from public relations to paid advertising, from direct mail to the Internet. Coordination and timing of these media go far beyond "Let's make a brochure and mail it out." Consider, for example, that it may be necessary to use different media with different messages for each type of stakeholder (physicians or hospitals, for example) or each category of customer (or even customer segment).
How you reach and what you say to an HMO to secure a contract will be different from how you reach and what you say to a physician you're trying to recruit.
What Can We Do to Sustain Customer Loyalty And Retention?
An American Management Association study, replicated many times, found that it costs five times as much to capture a new customer as to keep an existing one. Unfortunately, most health care organizations still define marketing as encouraging trial rather than retention.
Consequently, it makes sense to build a customer-retention and loyalty program into an integrated health care delivery system. Just as there are different types of customers and customer segments, so too must there be different types of customer retention and loyalty programs, which can range from periodic meetings with major customers to complex outreach programs that depend on relational data bases.
All customer retention and loyalty programs, regardless of sophistication, must be built on data. Virtually every HMO, for example, uses customer satisfaction surveys, and, increasingly, provider organizations are doing the same.
Will Our Information Systems Support Our Marketing Efforts?
One thinks of information systems in terms of financial, operational, clinical and planning/ analysis functions, but these same systems can be used to support product positioning, placement, promotion and pricing. Additionally, an information system can add value by identifiying useful products or services for your customers, whether they be payers, employers or patients, and providing a competitive advantage.
The relationship between information systems and marketing begins with understanding how "typical" system information needs and reports have marketing implications. For example, patient demographic data, when plotted against a map, may reveal areas of the IDS's strength or weakness. Or the health status of patients might lead to development of programs that can be made part of the IDS's, or HMO's, marketing platform.
Information systems allow a significant number of activities to occur, from creation of simple mailing lists to program development that adds value for customers. You can't manage what you don't know, and you can't hit 'em where they ain't if you don't understand your customers and the market. Even creating a simple competitive intelligence data base will help you to find the gaps and opportunities to improve your product and marketing.
Did We Budget for Marketing?
Reviewing the start-up and the administrative and operational budgets of integrated health care systems, we often find that funding for marketing is nonexistent or inadequate. Marketing and marketing communications can be expensive, and there are no rules of thumb for how much to spend.
Your budget for marketing and communications, however, should be driven by strategic, not tactical, objectives. In other words, determining what needs to be done before determining how it will be done is fundamental. Don't be surprised, though, if you experience sticker shock. You may have to make adjustments.
The IDS's marketing budget can be divided between its internal needs and external needs. Internal needs deal with such activities as recruiting participants and keeping participants informed of IDS activities. External activities might include marketing directly to employers and/or consumers. For an IDS that would contract with an HMO, it is highly likely that you will not need to spend money on consumer-level marketing. However, you should secure a voice at the table to ensure that the payer's marketing activities fit your strategic framework.
Should We Be a Price Leader or a Quality Leader?
Product pricing is a fundamental marketing function that has the potential to destroy any IDS at any point. Pricing represents the character and philosophy of the organization and it can differentiate you from your competition. However, it can also be a developmental minefield as IDS organizers struggle with determining whether the IDS should be the price leader or the quality leader.
Being both the price and quality leader is a noble goal, but given the dynamics of the health care industry, attaining these positions is difficult. IDSs must design, place, promote and price themselves to deliver medical services according to what the market will bear, not according to how much revenue they need.
An integrated delivery system must act like a business, not a provider: It has to produce and deliver at market rates or it will not secure payer contracts. There is a significant danger, however, in being the market's price leader, as volume (number of enrollees), while appropriate for delivering market share, is not a guarantor of financial viability. For example, an IDS willing to lose $1 per member per month to gain volume and capture share will see its chances to fail rise exponentially.
On the other hand, an IDS that takes the quality position regardless of costs may price its services out of the market. Balancing price and quality will be difficult for years to come.
This balance has four marketing implications. First, the marketability of the IDS to participants will be a function of how product pricing affects their income. If price leadership means a significant hit to participants' income, they will seek other opportunities. Second, pricing cannot be accomplished in a vacuum — it is critically important to remember that competitors are also submitting bids to the payer, and a lack of sensitivity to their pricing strategies can be disastrous for your IDS. Third, if patients don't believe that your IDS can deliver high quality care, it will fail. And fourth, brands tend to create opportunities to realize higher prices.
For the most part, IDSs have done an inadequate job of establishing brand identity and accruing benefits from it. In the future, the brand will become the real capital of the IDS. In fact, competitive innovation will be associated with IDSs that can create and increase brand identity, ultimately leading to competitive advantage.
More than ever, the IDS's viability requires a sensitivity to market conditions that heretofore may have been given short shrift.
How Does the Payer's Marketing Affect Our IDS's Viability?
It can be strongly argued that viability means financial viability — the art and science of making a profit (or at least, not losing any money). Shockingly, Ernst & Young found that only 30 percent of the IDSs it surveyed were profitable. Even more shocking was that more than three out of ten IDSs don't even set financial goals!
Ernst & Young also found that only 28 percent of the entities they surveyed met their enrollment targets in 1995, and a staggering 47 percent did not know if they met their enrollment targets!
We know of no stronger argument that can be made for the inclusion of marketers in the development of IDSs, particularly since enrollment correlates with revenue and ability to meet fixed operating costs.
The IDS must have an understanding of actuarial and insurance principles to understand how payer marketing affects IDS viability, and the IDS's marketing function must participate in the payer's marketing program.
Back to the beginning
All of these issues must be addressed early when designing an IDS. Philip Kotler in The Journal of Marketing presents an excellent perspective on the role of marketing and of the marketer for the development of an integrated health care delivery system:
"The marketer is a professional whose basic interest and skill lies in regulating the level, timing and character of demand for a product, service, place or idea. If demand is negative, it must be disabused; if non-existent, it must be created; if latent, it must be developed; if faltering, it must be revitalized; if irregular, it must be synchronized; if full, it must be maintained; if overfull, it must be reduced and, finally, if unwholesome, it must be destroyed."
We see providers from different specialties and disciplines sitting around a conference table discussing governance and organizational and contracting policies for their developing integrated health care system. As the hours tick by, as options are discussed and argued, as compromises are reached, and as participants gather up their papers and begin heading out the door, we envision one person standing up and saying, "Hold it folks, there's one question we haven't explored. If we build it, will they come?"
It is at this moment that the real work of the participants will begin — the work of creating a market-driven organization that is responsive to customer wants and needs and that will withstand the rigors of the changing dynamics of the health care industry.
Payer marketing activities that can affect IDS viability
|Payer's marketing activity||Impact on IDS/product viability|
|Product design by the health care plan||The IDS must have the right mix and location of primary care physicians, specialists and hospitals with appropriate, aligned financial incentives, utilization controls and management systems to deliver the payer's product.|
|The IDS must be able to deliver the benefits offered by the health plan.|
|The IDS must be able to track limited and lifetime benefits accurately.|
|The IDS must have the ability to deliver outcomes measurements, but enough enrollment in the payer's plan is also necessary in order to deliver statistically valid results.|
|A poorly designed health plan (i.e., low benefits, high costs) will not attract members, and if the IDS's reimbursement is based on the payer's attaining certain membership levels, the system's revenue stream and profitability will be compromised.|
|A poorly designed health plan (i.e., high benefits, low costs) may result in adverse selection, leading to inadequate representation of the population.|
|Willingness and capacity to accept risk can be an integral component of the IDS's design, marketability and competitiveness, but without knowledge of various risk arrangements and means to manage risk appropriately, the IDS's viability will become tenuous.|
|If the IDS is taking risk, the population must be large enough to be able to predict utilization, and the product must be designed to achieve a large enough population of members.|
|In designing the structure of the IDS, incentives must be aligned to increase efficiency of medical delivery. This not only affects profit potential, but may create competitive entry barriers as competitors will be attracted to markets where poor utilization management creates entry opportunities.|
|Placement||The IDS should know where the payer's plan is to be offered and with which benefit packages, as the potential for adverse selection may result in utilization that ultimately affects profitability.|
|The payer's plan should be offered to an appropriate cross section of businesses, and if the IDS is accepting risk, it should have a voice in how and where the product is being placed.|
|The IDS should seek to place its product (the medical delivery system) with more than one payer to minimize risks associated with exclusivity.|
|Pricing||The price of the payer's plan needs to be adequate to cover medical delivery system costs.|
|The IDS needs to recognize that the market is driving health care plan prices down, and in turn, payers are driving IDS reimbursement down. IDS viability becomes a function of how to do more (or the same) for less.|
|If the IDS is taking risk, it should have a voice in how and why the product is being priced.|
|Promotion||The IDS needs to know how/why/when/where the payer's plan is being promoted to analyze potential for adverse selection and adequacy of population to ensure actuarial soundness.|
|If the IDS is taking risk, it should have a voice in how and why the product is being promoted, so as to establish its identity and raise awareness in the market|