Competitive Strategy in Turbulent Healthcare Markets: An Analysis of Financially Effective Teaching Hospitals.

EXECUTIVE SUMMARY

As the healthcare marketplace, characterized by declining revenues and heavy price competition, continues to evolve toward managed care, teaching hospitals are being forced to act more like traditional industrial organizations. Profit-oriented behavior, including emphases on market strategies and competitive advantage, is now a necessity if these hospitals are going to survive the transition to managed care. To help teaching hospitals evaluate strategic options that maximize financial effectiveness, this study examined the financial and operating data for 100 major U.S. teaching hospitals to determine relationships among competitive strategy, market environment, and financial return on invested capital. Results should help major hospitals formulate more effective strategies to combat environmental turbulence.

Teaching hospitals are facing a highly unpredictable and uncertain future. The once placid and stable industry that allowed teaching hospitals to practice academic medicine in a financially secure environment has been replaced by an extremely turbulent and competitive marketplace (Ginn 1990; Shortell, Morrison, and Friedman 1990). This turbulence threatens the financial viability of all hospitals, but especially the teaching hospitals, because they have never been exposed to a competitive industry, and because they have unusually large and complex organizational and capital infrastructures. Additionally, the existence of several business missions (i.e., education, research, and patient care) rather than the singular profit-maximizing mission of the industrial organization poses critical concerns for the financial viability of the teaching hospital in extremely turbulent markets (Langabeer 1996).

As turbulence increases, it becomes increasingly important for organizations to formulate and execute effective strategies that can provide a competitive advantage over other organizations, thereby enhancing financial position. While the majority of management research focuses on the industrial organization, hospitals are now finding out that in competitive and turbulent markets there is very little distinction between profit and not-for-profit hospitals, private and public hospitals, or teaching and community hospitals. The fundamental issue during turbulence is economic survival.

Within the private sector, significant attention has been paid to the links among the environment, strategy, and financial performance for the industrial organization (Buzzell and Gale 1987). However useful, these concepts have not been widely adopted within the healthcare sector, and very little empirical strategy research focuses strictly on teaching hospitals. Cleverley (1990) and Cleverley and Harvey (1992) have extensively studied the issue of strategy and finance for the community hospital, but very little research has focused on the academic teaching hospital. Therefore, the purpose of this study was to determine the relationships that exist among competitive strategies, the market environment, and financial performance in a rapidly evolving and turbulent healthcare marketplace.

Finding those strategies that influence financial performance is vital to the long-term viability of teaching hospitals. Once identified, these strategies can become part of teaching hospitals' planning and management framework, which can ultimately enable teaching hospitals to assume a leadership role in the new healthcare marketplace and to remain comfortably positioned as the cornerstone of the American healthcare system (Iglehart 1993).

RESEARCH FRAMEWORK

Because teaching hospitals represent a unique business that is actively engaged in teaching, research, and the delivery of patient care, they are especially sensitive to the demands placed on them by turbulent healthcare markets. Traditional models of strategic management have to be augmented to include variables measuring academic influences on financial performance for the teaching hospital. This study therefore used a competitive strategy model customized for teaching hospitals, as seen schematically in Figure 1.

[Figure 1 ILLUSTRATION OMITTED]

This schematic model helps to isolate and examine the effects on the teaching hospital's financial performance of a multitude of variables measuring the external environment, academic environment, and competitive strategies. This strategy model can be expressed by specifying a final functional form equation such as:

[Y.sub.F] = f[([Y.sub.1], [X.sub.1], [X.sub.2])

where [Y.sub.F] is the financial performance; [Y.sub.1] is the competitive strategies; [X.sub.1] is the market environment; and [X.sub.2] is the academic environment.

Financial performance for this study focuses on return on invested capital (ROIC). ROIC is defined as operating margin divided by capital invested in the business (i.e., total physical and financial assets). ROIC has been used as one of the most vital performance measures across all industries because it measures management's ability to generate profits with available assets. It also is a hybrid measure that links the balance sheet to the income statement, and, accordingly, those hospitals that do not achieve a return on capital in excess of the cost of capital will have a difficult time surviving economically (Cleverley and Harvey 1992; Ketchen, Thomas, and Snow 1993).

This research used regression methods to model each of these factors. The functional equation required selection of independent variables on the basis of previous empirical studies that suggested them to be indicators of the realized strategy and environment and to have theoretical associations with the dependent variable. Using ordinary least squares multiple stepwise regression, 20 independent variables were operationalized to represent each of the elements of the equation; the dependent variable was financial return on invested capital. Table 1 presents the variables used in this study and summarizes how each variable was measured.

Table 1 Summary of Variables and Operational Definitions

Competitive Strategies ([Y.sub.1])
Product Market Strategy
  Outpatient volume               Net outpatient revenue x 100 /
                                    total revenues
  Case-mix index                  Average level of severity/
                                    complexity of medical cases
                                    treated
  Medicare volume                 Medicare discharges x 100 /
                                    total discharges
  Medicaid volume                 Medicaid discharges x 100 /
                                    total discharges
Positioning Strategy
  Market share                    Hospital revenues from operations
                                    / total revenues in county
Pricing Strategy
  Price-cost ratio                Average adjusted price per
                                    discharge / average adjusted
                                    cost per discharge (adjusted
                                    for case mix and wage index)
Capital Investment Strategy
  Capital intensity               Total fixed capital / total
                                    number of patient discharges
  Age of plant                    Accumulated facility depreciation
                                    / depreciation expense
  Scale                           Total number of patient beds
                                    available
Cost Leadership Strategy
  Cost per discharge              Average adjusted costs per
                                    discharge
  Labor productivity              Total employees / total
                                    discharges
  Length of stay                  Average patient days / total
                                    discharges
  Occupancy rate                  (Patient days x 100) / (365 x
                                    licensed beds)
Diversification Strategy
  Service lines                   Total number of service lines
                                    offered
  Alternative revenue             Total patient revenue / total
                                    hospital revenues
Market Environment ([X.sub.1])
  Competition                     Total number of competing
                                    hospitals in same county
  Managed care index              Rating of the degree of managed
                                    care of the urban market
                                    (UHC and APM consultant)
Academic Influences ([X.sub.2])
  Medical school                  Type of affiliation with medical
                                    school: Common ownership of
                                    medical school = 1; Affiliation
                                    agreement only = 2
  Medical trainees                Number of medical interns and
                                    residents on staff
  GME expense                     Total expenses on graduate
                                    medical education including
                                    operational costs salaries,
                                    stipends and programs
Dependent Variable ([Y.sub.E])
  Financial                       Return on invested capital
                                    (ROIC); operating margin/total
                                    assets

The data set consists of a cross-sectional sample of 100 of the general, multispecialty, urban, acute, nonfederal institutions located in major cities in the United States. Although roughly 1,100 hospitals are involved in graduate medical education, the sample was systematically selected from the major members of the Association of American Medical College's Council of Teaching Hospitals (COTH) and represents roughly 25 percent of the total population. COTH membership is restricted to only those hospitals with the largest commitment to the missions of academic medicine. Specifically, COTH teaching hospitals must participate in at least four medical residency programs (of which two should be in medicine, surgery, obstetrics/gynecology, pediatrics, family practice, or psychiatry) and must have a signed agreement with a school of medicine that is accredited by the Liaison Committee on Medical Education.

Data for each of the variables was obtained from a variety of sources, including the Medicare cost report, the Center for Healthcare Industry Performance Standards, the American Hospital Association, and the Association of American Medical Colleges. All data was for 1993.

RESULTS AND DISCUSSIONS

The average financial return on invested capital for the entire sample was 1.72 percent, the average operating margin was 1.20 percent, and nearly half the sample had negative margins. Clearly, for any organization to continue operating long term, a reasonable return on capital has to be earned to continue required investments into property, plant, and equipment. Approximately 70 percent of the hospitals in the sample were private nonprofit, 27 percent were non-federal government, and the remainder were investor owned. Table 2 presents the descriptive statistics for all independent variables, including variable means, medians, and standard deviations.

Table 2 Descriptive Statistics

Variable                           Mean            Median

Outpatient volume                 22.310            22.000
Case-mix index                     1.648             1.663
Medicare volume                   26.207            25.000
Medicaid volume                   24.512            21.500
Market share                      22.209            14.050
Price-cost ratio                    .931              .960
Capital intensity              9,559.949         8,601.553
Age of plant                       7.848             3.262
Scale (number of beds)           627.660           582.000
Cost per discharge             5,205.913         5,056.947
Labor productivity                  .153              .144
Length of stay                     6.395             6.550
Occupancy rate                    74.845            75.709
Service lines                     63.444            65.000
Alternative revenue                 .900              .948
Competition                       18.880            17.500
Managed care index                 2.124             1.950
Medical school                     1.660             2.000
Medical trainees                 262.665           233.265
GME expense               20,407,900.000    15,968,900.000

Variable                             Standard
                                    Deviation

Outpatient volume                       7.163
Case-mix index                           .218
Medicare volume                        10.620
Medicaid volume                        15.400
Market share                           21.805
Price-cost ratio                         .131
Capital intensity                   5,665.600
Age of plant                            7.337
Scale (number of beds)                264.498
Cost per discharge                  1,109.750
Labor productivity                       .041
Length of stay                          1.381
Occupancy rate                          9.225
Service lines                           8.441
Alternative revenue                      .141
Competition                            12.385
Managed care index                       .567
Medical school                           .476
Medical trainees                      170.800
GME expense                    15,087,900.000

Table 3 contains the full-model regression results for all 20 independent variables. The model had an adjusted [R.sup.2] of .34. Thus, the explanatory power for this model is similar to most analyses in strategic management research (Nath 1988). A plot of the regression residuals found no evidence of any fan or vertical spread patterns, with no clear violation of linearity, independence, or normality. Specifically, market environment was found to have a weak relationship with financial performance, and academic environment had only a mild influence on financial performance. Two competitive strategies had significant influences on financial performance. In the following sections the results are described and the findings for the independent variables are discussed.

Table 3
Regression Results

                                        Coefficient    p (2-tailed)
Competitive Strategies ([Y.sub.1])
Product Market Srategy
  Outpatient volume                        -.401         .000(*)
  Case-mix index                           -.201         .051(**)
  Medicare volume                          -.216         .001(*)
  Medicaid volume                           .093         .372
Positioning Strategy
  Market share                              .005         .400
Pricing Strategy
  Price-cost ratio                        15.785         .002(*)
Capital Investment Strategy
  Capital intensity                        -.177         .087(**)
  Age of plant                              .193         .062(**)
  Scale                                     .084         .417
Cost Leadership Strategy
  Cost per discharge                        .028         .784
  Labor productivity                        .008         .936
  Length of stay                           -.175         .101
  Occupancy rate                           -.169         .102
Diversification Strategy
  Service lines                            -.056         .592
  Alternative revenue                      -.146         .157
Market Environment ([X.sub.1])
  Competition                               .178         .085(**)
  Managed care index                        .087         .400
Academic Influences ([X.sub.2])
  Medical school                           -.002         .982
  Medical trainees                          .008         .043(*)
  Graduate medical education expense       -.094         .364

[R.sup.2] = .34; p < .001.

(*) Statistically significant at p < .05.

(**) Statistically significant at p <. 10.

Market Environment

While the focus of this research is to identify those variables under management control that can positively influence financial performance, strategy is often dictated by environmental conditions. This study therefore used regression methods to model rather turbulent healthcare markets during the 1990s. Market environment was defined as both the level of turbulence that exists in the market, as well as the level of competition that exists in the environment.

The rating of each metropolitan area's level of evolution toward managed care and away from the stable fee-for-service arrangements of the early 1980s (i.e., HMO participation, decrease in number of beds, hospital mergers, decrease in physician supply for specialties) indicates a relative amount of turbulence or change. One readily available measure of turbulence already used by academic medical centers is the University Hospital Consortium/APM Consultant's index of market evolution (UHC) (University Hospital Consortium 1993). This four-stage model depicts the progression of the teaching hospital from a traditional unstructured hospital to an environment characterized by managed competition. This model helps describe a market shift from a noncompetitive, fee-for-service environment that has an oversupply of services and beds to a fully competitive, consolidated, managed care world in which specialist's fees are driven down and supply and demand are brought to equilibrium.

The UHC model classifies each of the major healthcare markets and provides an index ranking ranging from 1.0 for placid and stable markets to 3.4 for extremely competitive and turbulent markets. This rating indicates the level of fundamental change in the structure of the financing and operations for the industry; therefore it is an adequate indicator of the level of turbulence faced by the hospitals in their respective market environment.

Another measure of the market environment is the number of competitors within the same geographic vicinity, representing the level of concentration. Competition was measured through an assessment of the number of competitors that existed in each of the metropolitan markets surrounding the teaching hospital; this was similar to the competitive assessment performed in previous healthcare strategy research (Shortell et al. 1987).

The overall degree of turbulence was fairly high among all teaching-hospital markets, indicating a relatively turbulent environment. The variance and standard deviation for the variable was extremely small, however, which explains why the multivariate methods used found no significant relationships between turbulence and financial performance.

In analyzing competition, however, this research found that as the number of competitors increases, so too does the return on invested capital. This seems to indicate that competition actually serves to provide incentives for hospitals to improve operations and financial condition. There was no significant relationship between the amount of competition and the hospital's average costs per discharge or price per discharge. Competition somehow influenced financial performance indirectly, probably because hospitals were forced to use strategies other than price differentiation to improve their positioning in the market.

Overall, the market environment had only a mild influence on hospital financial condition. While environmental turbulence had no effect on performance, the amount of competition in the market had a directly positive relationship with ROIC.

Academic Environment

Teaching hospitals have complex internal environments because of their multifaceted academic missions of patient care, research, and medical education. Such diverse business purposes require internal structures and systems that are somewhat different from those in the traditional organization. This study therefore categorized the academic environment using three variables to explore its impact on financial performance. The variables included (1) the type of relationship between a medical school and the hospital (i.e., joint control/ownership of both institutions, independent affiliation agreement only); (2) the number of medical trainees, interns, and residents on house staff at the hospital; and (3) the level of expenditures for all graduate medical education programs. Together, these variables represent the extent to which the academic environment influences performance.

Only one of these variables--number of medical residents--had any influence on performance, and its relationship was extremely mild at best. Contrary to researcher expectations, this study discovered that the more committed the teaching hospital is to the academic mission of the hospital, as represented by increased employment of medical trainees, the higher the expected financial performance will be. This could be viewed from one of two perspectives: (1) teaching hospitals with high levels of medical trainees performed significantly better only because they receive high proportions of Medicare reimbursement (and Medicare provides a high level of reimbursement for graduate medical education costs); or (2) there were strong relationships between these variables because of potential labor cost advantages resulting from the use of medical residents in lieu of more expensive, more experienced medical doctors. There is strong support for both of these perspectives.

Although this study can offer no definitive reason why the positive relationship exists between the number of medical residents and financial performance, a third perspective can be offered based on economies of scale. As previously noted, teaching hospitals require significantly greater levels of investments in infrastructure (i.e., technology, buildings, equipment), and only as economies increase and commitment toward medical education reaches some threshold can returns gradually begin to increase. It is therefore possible that increased numbers of residents represent a gradual shift in the economic cost function, and as hospitals employ greater numbers of residents, costs decrease and financial performance increases.

Regardless of the reason, the finding that the number of medical residents positively influenced the financial performance validates that academic healthcare is not necessarily threatened by turbulent, evolving markets.

Competitive Strategies

The process by which a hospital attempts to align its plans and resources with the external market and internal environments is called strategic management. The specific actions deployed are called competitive strategies--systematic actions taken to gain a competitive advantage through the selection and management of key variables that will hopefully improve overall performance. For this study, six broad competitive strategies were defined: positioning strategy, pricing strategy, investment strategy, cost leadership strategy, diversification strategy, and product market strategy. Two of the six competitive strategies modeled in this study had substantial influence on financial position: pricing strategy and product market strategy.

Product Market Strategy. Product market strategy represents the type of market to which the teaching hospital tailors its service line offerings; in hospitals, product market strategy equates to a selection of the optimal patient mix. Medicare case-mix severity, patient age and demographics, financial status, and specialty versus general programs all represent typical outcomes of product market decisions. As teaching hospitals choose to focus on general medicine, primary care, and basic healthcare services (or, alternatively, advanced surgical and specialty procedures), a strategic shift in product market strategy begins to formulate to determine how and with whom the hospital will compete for resources. This study confirms that the product market strategy is one of the most fundamental elements that hospital administrators should consider when formulating a strategic plan.

The most viable process for improving margins is through the strategic selection of an appropriate portfolio of products and services to be offered (i.e., product market strategy). The process of internally analyzing and effectively managing all hospital service lines becomes essential for managing the service portfolio and, consequently, selecting the appropriate product market strategy will enhance pricing strategy and boost return on invested capital.

For this sample, two measures of the product market strategy (Medicare volume and outpatient volume) have statistically significant negative relationships with financial performance. Because both are negatively correlated with performance, the higher the percentage of Medicare patients and outpatients treated (as a percentage of total patients), the more financial performance suffers. Contrary to the direction of the evolving healthcare market, this study confirmed that the greater the number of inpatients and, alternatively, the fewer outpatients treated, the better the hospital performed. Additionally, hospitals with a majority of patients received under Medicare programs exhibited a weak financial position. Additionally, as hospitals select more complex and specialized procedures, as indicated by the adjusted case-mix index, the expected financial performance decreases.

While in the short run hospitals cannot entirely change the types of patients they serve, they can gradually identify and specialize in certain types of procedures, expand referral bases for only specific types of cases, and concentrate additional resources in one direction over another. This study confirms that just as the industrial organization must make strategic selections about which markets to enter and exit, so too must the teaching hospital make strategic selections if it is to compete in an increasingly turbulent market.

Positioning Strategy. This strategy reflects how effectively an organization has positioned itself to compete in the marketplace, and it describes the use of a narrow or a broad focus on the overall market. Consistent with the profit impact of market strategy (PIMS) strategic management research, market share has been used to operationalize competitive positioning (Buzzell and Gale 1987). In the present study, however, and contrary to the contemporary principles of strategic management, market share was shown to have no relationship with financial performance. While Pearson correlations showed that the hospitals with higher market share had lower average costs (r = .386, p [is less than] .001), this relationship did not directly affect overall financial return on capital. Despite the important role traditionally given to positioning strategy, it is not viewed as one of the most important elements of strategic management for teaching hospitals.

Pricing Strategy. Pricing strategy has been defined as the method for expressing the value of a product from the seller's perspective. Obviously, price should be set somewhere above the costs for that product and equal to the value that the customer perceives the product to possess. Price skimming and penetration pricing reflect the two polar pricing strategies for an organization. As teaching hospitals push for higher premium prices, they must work with insurers and customers to ensure that the overall quality and service justify prices that are higher than those charged by a community hospital or another healthcare provider. Penetration pricing, which strives for low cost and minimal markup, suggests that the hospital choose to compete on the basis of lower price rather than on higher quality or reputation.

In this study, the single most significant competitive strategy for improving financial performance was pricing strategy. Those organizations that maximized the spread, or margin, between prices and costs were most likely to be economically viable organizations. The price skimming or premium pricing strategies worked best for this sample. Because there are only two components of pricing strategy at a macro level--price and cost--organizations have two options to increase their margins.

The first option would allow teaching hospitals to charge the same price as their competitors as long as they have a substantially lower cost advantage. In this sample of teaching hospitals, t-tests confirm that organizations with higher margins did not have significantly lower costs (t = -.16, p = .873). Cost leadership alone, although widely purported to be an optimal strategy, was therefore not found to be the determinant of improved pricing strategy and enhanced financial performance for this sample.

The second option for increasing the price-cost ratio is by charging higher prices than competitors, which the high-performing hospitals in this sample were able to do. Interestingly, while this second option appears to give hospitals higher margins, the evolution of managed care reform efforts by commercial insurers and HMcs will not allow providers as much control over prices in the future, because healthcare is increasingly moving toward stricter price competition. Clearly, the ability to charge higher prices, even for higher quality and better positioned services, could soon become much more difficult.

Strategic management of teaching hospitals requires improvement of pricing strategies by focusing on both sides of the price-cost equation: reduction of costs and improvement of internal efficiency while prices for services are maintained or increased where possible.

Capital Investment Strategy. As teaching hospitals' portfolios of services and programs increase, it becomes strategically necessary to manage the allocation of resources or investments into the fixed capital (i.e., property, plant, and equipment) that supports the business. Capital intensity is reflected by the overall level of resources invested into the assets of an organization, as well as by the average age of the capital infrastructure.

For this study, capital intensity was found to be significantly related to performance. As the average age of the facilities and plant increases, representing a decreasing investment in fixed assets annually, the hospital increases its financial returns. Alternatively, the more capital invested into fixed assets, the lower the expected returns. Consequently, capital investment strategy is a strategic component of hospital performance for this sample.

Cost Leadership Strategy. More than any other strategy, being a low-cost provider of services has been described as a generic method for achieving a competitive advantage (Porter 1985). Achieving the lowest total cost is obviously ideal for traditional industrial organizations, which, because they largely produce commodities, focus on price with little differentiation in product lines. Cost leadership can be used by manufacturing firms that have mastered the experience curve or by companies, that have achieved superior distribution systems or more efficient processes.

Low-cost strategies have been validated time and again as being the most effective method for competing in stable and predictable environments. The use of a low-cost strategy has not been proven as optimal in an extremely turbulent and rapidly changing marketplace. Indeed, research has identified that hospitals that emphasize low cost focus almost entirely on internal processes and neglect the more important external market conditions (Ashmos and McDaniel 1990).

This research confirms that a low-cost strategy has no influence on financial performance. Although the industry appears to be changing its focus, for this sample and for the time period studies, cost leadership was not a viable strategy for enhancing financial performance.

Diversification Strategy. While product market strategy may be seen as an indicator of the nature of the umbrella of services in a hospital's portfolio, diversification strategy reflects the intensity and scope of that portfolio. Diversification reflects either a focused penetration on specific segments of the market or a broadly diffused coverage of the entire market. This strategy was measured both by the total number of service lines offered by the hospital and by the percentage of resources coming in through diversified or nonpatient care funding sources. A physical count of the number of service lines a hospital offers has been used as the primary measure for hospital diversification strategies in leading healthcare research (Shortell et al. 1987). The level of diversification of the product lines offered by teaching hospitals has not been the focus of many empirical analyses.

For this study, because all of the teaching hospitals are large research-oriented institutions, the average number of service lines offered was extremely large--about 63 different service lines. Because the standard deviation for this measure was fairly small, there was virtually no recognizable influence on financial performance. Consequently, the number of service lines offered was not selected as one of the most important components of strategic management for the teaching hospital.

CONCLUSION

Teaching hospitals are indeed operating in a much more turbulent and competitive environment than in previous periods. To survive this turbulence, academically based organizations will have to learn to counter the effects of a rapidly changing marketplace. Therefore, the purpose of this study was to determine if the environment was responsible for determining financial performance or if managerial decisions and business strategy controlled financial effectiveness. Based on the statistical findings of this analysis of teaching hospitals, the following recommendations can be given to enhance the formulation and execution of effective strategic plans for competitive markets:

1. Carefully select the portfolio of services to offer. While hospital financial condition may not be the only determinant of the service lines to be provided to the community, it must be recognized that certain services add economic value while others actually contribute to financial problems and operating losses. In this study, Medicare, case-mix index, and outpatient volumes all were statistically significant components of the product market strategy for teaching hospitals.

2. Boost margins by differentiating services from other hospitals. The financially effective hospitals in this study did not have substantially lower cost curves than the lower-performing hospitals. The financially successful hospitals were, however, capable of charging higher prices relative to the competition, which indicates that payors and customers recognize that price is only one variable in the decision of which hospital to use. Higher quality, higher perceived value, better reputation, or other organizational differentiation allowed certain hospitals to charge incrementally higher prices for the same services while maintaining the same average costs per discharge.

3. Develop a capital plan and find alternative methods for investing in new facilities and equipment. While upgrades to newer property, plant, and equipment may be required to serve a changing patient base, substantial efforts must be used to minimize overall investment in capital, relying instead on finding alternative methods to achieve the desired outcomes. Joint ventures, cost sharing with other institutions, and renovating existing facilities are potential methods to control hospital capital investment. Additionally, the use of more sophisticated capital-justification financial tools, such as net present value and economic value added, should be more fully integrated into decision making about capital investment. Hospitals must develop a capital plan using these advanced financial tools and must stick to it.

4. Remain committed to the principles of academic medicine. A commitment to medical education did not negatively affect financial performance for this sample of academic hospitals. In fact, the higher the number of medical residents and interns employed, the higher the expected financial performance was shown to be. While some may argue that academic healthcare may be jeopardized by competitive marketplaces, these findings suggest the opposite.

5. Strategically analyze market conditions and hospital strategies. Most important, hospitals must become more adept at monitoring market conditions and tailoring strategies to compete with and combat turbulence on an ongoing basis. Developing portfolio management tactics, collecting market intelligence, and using advertising to differentiate service lines and customers' perceptions of hospital quality are all essential to strategically analyzing the marketplace and responding with sound business strategies. Economic survival for the teaching hospital in the turbulent times ahead will increasingly depend on administrators' skills in these strategic management areas.

References

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Cleverley, W. 1990. "Improving Financial Performance: A Study of 50 Hospitals." Hospital and Health Services Administration 35 (2): 173-87.

Cleverley, W. O., and R. K. Harvey. 1992. "Competitive Strategy for Successful Hospital Management." Hospital and Health Services Administration 37 (1): 53-69.

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Iglehart, J. K. 1993. "The American Health Care System: Teaching Hospitals." New England Journal of Medicine 329 (14): 1052-56.

Ketchen, D. J., J. B. Thomas, and C. C. Snow. 1993. "Organizational Configurations and Performance: A Comparison of Theoretical Approaches." Academy of Management Journal 36 (6): 1278-1313.

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Porter, M. E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press.

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RELATED ARTICLE: PRACTITIONER RESPONSE

Rudy Guerrero, Assistant Vice President for Planning and Management Systems, The University of Texas Medical Branch at Galveston, Galveston, Texas 

Dr. Jim Langabeer's analysis of the conditions that affect the financial viability of teaching hospitals in today's marketplace provides a set of planning principles that healthcare administrators and planners can use to evaluate and set the strategic direction of their enterprises.

The article points out that the healthcare enterprise is becoming increasingly competitive. Whereas teaching hospitals were in the past somewhat immune to competition on price and quality, the evolving healthcare market does not favor teaching hospitals solely based on their educational focus. Despite the cultural reluctance to treat academic healthcare as a business, this article helps to present more clearly to large teaching hospitals the need for profit-oriented behavior. It is easy to lose sight of the strategic elements of financial performance. Large teaching hospitals traditionally end up funding the same service lines on an ongoing basis, without clear sight between the profitability they generate and the related markets they serve. In the competitive world, both revenues and expenses can and will fluctuate, so hospitals must learn to focus on maximizing revenues with an optimal product market strategy while minimizing costs. This means using the annual planning and budgeting process to isolate the service lines that are really adding value to the hospital's portfolio and to eliminate those that are not. All of this will help competitiveness, which will support continued reinvestments in academic and healthcare programs.

This article helps to illustrate that the academic mission of the teaching hospital may not necessarily be in conflict with becoming a competitive healthcare provider. The finding that academic institutions may continue to be effective in educating medical students, providing research for the community, and delivering exceptional healthcare in a fully competitive marketplace is refreshing, although challenging.

Dr. Langabeer's article helps to lay the groundwork for enhancing the planning and marketing capabilities of a teaching hospital. Continually changing market conditions will necessitate the development of tailored marketing programs to generate new and maintain old customers.

The article does not mention that as teaching hospitals become managed more like a business, with a complex mix of goals and missions, the role of leadership must evolve. The focus must shift to strategic vision, planning and marketing capabilities, adding and eliminating service line portfolios as necessary, and financially analyzing the institution to understand how competitive price pressures may affect the future of the teaching hospital. For these reasons, this article helps to establish a model with a continual focus on the strategies that academic healthcare can formulate and implement during this period of turbulence. As a strategic planner at a large academic medical center, I can use the information developed by Dr. Langabeer to assist my colleagues and me in the strategic planning process.

Jim Langabeer II, Ed.D., University of Houston, Downtown Houston, Texas