Using strategy: the evolution of a medical practice.

As the managing partner of an eight provider primary care clinic, I am well aware of the challenges that face medical groups today. As with any successful business, a clinic cannot function without the careful coordination of operational effectiveness and service delivery that translates into back office/managerial functions and clinic service.

There is, however, another aspect of the business of medicine that gets little attention from most clinics--strategy. Physicians ignore the vital tool of business strategy at their own peril. Business strategy can result in improvements in operations and care delivery. It can also result in innovations that improve the profitability of individual practices and address the economic crisis of health care in general.

My personal experience with medical management taught me the importance of business strategy. Several years ago I became managing partner and president of my practice. We were in a time of dramatic transition. Having just terminated our relationship with a hospital system that had purchased our clinic seven years earlier, we re-established ourselves as a private group.

Our past president had admirably addressed the various barriers that stood in the way of our practice and our freedom. But once we became private again, we faced a vast array of problems. As our new president, my challenge was to create a more efficient and effective practice that was operationally comparable with other primary care practices.

Catching up with the crowd

Years of being managed by a hospital system that had little experience in running an outpatient clinic took a great toll on our practice. Our clinic had been in existence at its current location for almost 20 years prior to being purchased in the mid-1990s. Even with our long history as a private clinic, we were largely unprepared for the challenges confronting clinical medicine when we acquired our freedom again in 2002.

Most of the physicians who helped manage the operations of the practice prior to the hospital's purchase had retired. In addition, the environment of outpatient medicine had changed so dramatically that the experiences of our retired partners probably would not have had a major impact on our transition

The old clinic was a fee-for-service, cash-at-checkout model that thrived for years. Each physician operated autonomously, supported by a small operational support staff that collected payments and answered the phones.

By the time our clinic was private again, the landscape had completely changed. Managed care contracts, third-party payers and co-payments required additional staff with experience that we lacked. We decided to run an "in house"' laboratory even though we lacked knowledge of the necessary equipment and systems to monitor the cash flow of specific tests. We retained our practice manager from our hospital days even though her experience was in human resources, not practice management.

Suffice it to say, our clinic faced an uphill struggle. With the patience and generous assistance of the partnership, I was able to guide our practice onto a sound operational course. We met our benchmark goals of comparing positively with other practices of our size and specialty. In most cases, we exceeded desirable goals such as volume and growth of office visits, collection rates, and expense ratios. From an operational standpoint, our clinic was successful.

When viewed from a distance, however, our success was hollow. The salaries of senior partners were the same, if not lower, than those they had been earning when the hospital owned the practice. We were struggling to maintain our stagnant income while our partners worked harder. Our expenses increased annually although our third-party reimbursement rates decreased. Operational success was of no consolation to a practice that was struggling to survive financially.

More to life than benchmarking

At this point I realized there is more to running a business than operational effectiveness and clinical outcomes. Although both are absolutely necessary for a medical practice to be a success, they are not sufficient. Something else is needed.

For my practice, and, I believe, for the medical clinic community in general, that "something" is strategy. To thrive in the current environment as well as enhance the quality of patient care, medical leaders must learn to integrate strategy into their business plans.

In his seminal article, "What is Strategy?" Michael Porter addressed the critical distinction between operational effectiveness and strategy. (1) Although Porter directed his comments toward general business theory, not medical economics, his point is relevant for physicians in medical practice. Individual practices and our society as a whole can discover new opportunities to enhance patient care and improve fiscal strength by exploring the application of business strategy to medical practice management.

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Porter defines operational effectiveness as "performing similar activities better than rivals perform them." In medicine, one overriding activity trumps all others--providing the highest possible level of patient care.

This means achieving clinical benchmarks, preventing or decelerating the advance of chronic illness, and eliminating sources of medical errors. The purpose of medicine is to provide the highest standard of medical care. The operational effectiveness of a physician and a clinic must always take precedence over other business concerns, including strategy.

During the last decade, physicians and clinic managers have begun to pay attention to the critical importance of operational management. As a result, a small population of physicians is obtaining the basic skill sets of accounting, finance and management that are needed to address these issues.

Just as importantly, physicians are recognizing the value of acquiring assistance from external consultants who specialize in aspects of practice management for which they lack internal expertise.

Although acceptance of the importance of operational effectiveness is growing, there is still a lack of strategy in our industry. Porter defines strategy as "performing different activities from rivals' or performing similar activities in different ways." (1)

It is this process of differentiation, of seeking new activities for the business to provide to its customers, that is generally neglected in the business of medicine. Attention to strategy must become a new stage in the evolution of the modern medical clinic.

On a personal and professional level, my task was to improve financial status of my practice while improving value for the patients. The industry had tried the traditional routes of achieving such goals, such as seeing more patients or reducing expenses with little tangible success. Our practice needed to find new ways to succeed and to differentiate itself from other clinics.

Using strategy to differentiate our practice

I began to look at what we did well and how we could enhance these attributes in a manner that would be unique in our environment.

My other partners had more experience in clinical medicine, and there were certainly many clinics in the area with leaders that had decades more experience than I could offer. I felt I had already exceeded the expectations of my partnership by stabilizing the operational performance of our business. Championing an evolution in our business model was a daunting prospect.

As I gained formal administrative training, through my responsibilities as president and through formal MBA training, the importance of strategy became apparent. Our practice needed to start to find new-areas of growth; new opportunities to improve the value of our patient care while enhancing the practice's long-term stability.

My lack of experience in the traditional outpatient medical clinic business model was becoming anything but a liability. As a physician who had not spent his early years in practice in the business environment of our senior partners, I had a unique perspective to offer. We needed the ability to think outside the box.

Once I understood how to combine our many years of clinical experience with a new strategic vision, I gained confidence in my ability to guide the practice toward evolution.

Our improvements were rapid and successful. The strategy for the clinic was straightforward: to enhance and expand our clinical services. The idea itself was far from novel. The difference was the utilization of business strategic planning in our adaptation and implementation of the services.

Acquiring a new service is easy; creating a business plan, undertaking a financial analysis, and creating a profitable, value added service by utilizing practice strengths was a challenge. Physicians are not trained to evaluate the economics of a potential service or add a strategic focus.

Several factors contributed to the success of our plan. One key factor was our recognition of rapid advances in clinical diagnostic technology. Digital radiography, in-house ultrasonography and cardiac testing were now practice services in medium-sized clinics. By providing such services, we offered convenience of location and scheduling to our patients and providers.

Increasing in-house diagnostic testing gives us as primary care providers a more appropriate level of compensation given the risks inherent in evaluating and treating their patients. Primary care providers always have responsibility for the initial assessment, triage, and diagnostic/therapeutic work up. Our role contains a great deal of risk and liability.

Now, we are more appropriately reimbursed for our role, as opposed to referring more lucrative diagnostic tests to a sub-specialist. With the improvement in technology, we can provide the same quality of diagnostic testing with added value and convenience to the practice.

The second key factor in our success was the realization that our patients wanted us to provide more diagnostic testing at our office location rather than referring elsewhere for the same test. They already trusted our clinical staff, and they embraced the value of our new services.

By improving the experience of our patients and adding profitable cutting edge diagnostic services, our practice successfully differentiated itself in the marketplace. This strategic differentiation achieved its ultimate goal by benefiting both the practice and the patients.

The benefits of strategic positioning are well known and practiced by large health care systems, hospitals, and managed care companies. Smaller provider networks/clinics are less likely to embrace the approach even though the benefits of differentiation on a smaller scale are numerous.

Some clinics could pursue a low-cost position, creating avenues for small business and the uninsured to obtain quality affordable health care. If clinics offer higher-end diagnostic services in a primary care setting they can increase demand for companies to provide smaller, more cost-effective diagnostic equipment, which in turn could drive down costs of such machinery as more companies enter field. Differentiation can create new niches. This creativity, coupled with more players in the field and driven by market forces can usher in a new paradigm for health delivery.

Finally, leadership plays a critical role in strategy. In Porter's view, many companies have allowed leadership to become hollow and guide operational enhancements and deal making.

Leadership can be, and should be, so much more. It must provide guidance and direction to drive company strategy. As Porter states, "General management is more than stewardship of individual functions. It is the core of strategy: defining and communicating the company's unique position, making trade-offs, and forging fit among activities. The leader must provide the discipline to select the industry changes and customer needs to which the company will respond, while avoiding organizational distractions and maintaining the company's distinctiveness." (1)

The medical community must make more efforts to foster leadership with its own ranks. Physicians must be ready to assume leadership roles and obtain the necessary additional training to implement strategic planning.

Medical organizations should identify potential leaders and encourage young physicians to assume leadership roles. It is physicians who are uniquely qualified to understand the necessity of putting patient needs first, while at the same time striving for economically viable institutions.

The challenge is for physicians to rally behind the concept of clinician business leaders.

In the end, medical care is about providing the highest quality of care to patients. This goal should be the purpose of strategic positioning of clinics and other health care organizations. Strategic business planning at the level of small health care systems can yield much more than improved profits and clinic economic viability, as is the case with my clinic.

In addition, it can lead to advances in patient care and safety. It can create a more competitive and responsive medical marketplace, create more cost-effective care in diverse locations, and address the very economic fury over increasing medical costs that is affecting our society.

Randall Curnow, Jr. MD, MBA, CPE, is president of Boylan Medical Associates in Raleigh, N.C. He can be reached at 919-645-6583 or [e-mail].

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Reference:

1. Porter ME. "What is Strategy?" Harvard Business Review, Nov-Dec, 1996.

By Randall Curnow, Jr., MD, MBA, CPE