Eighteen months ago, I completed a tour of duty as a regional senior vice president for Columbia, a foot soldier in the battle to wrestle market share away from the tax-exempt hospitals.
As I watched from the fields, the company grew from a running and gunning, entrepreneurial firm managing 93 hospitals into a Wall Street powerhouse with seemingly unlimited access to capital (See cover story, p. 50). Capital, after all, was our primary weapon on the battlefield.
Wars are never gentlemanly, and economic conflicts are no exception. I grew tired of the perceived atrocities committed by Columbia, and felt ever more conflicted as I tried to preserve my sense of personal integrity while carrying out orders. Now, with some distance behind me, I can objectively look at the experience and be grateful for both the education received and the fact that I am no longer associated with Columbia. My intent in writing this article is not to bash the company but to help not-for-profits compete against it.
Exploiting weakness. Like any good predator, Columbia capitalized on vulnerability in the marketplace. The hospital industry was highly fragmented. Though integrated systems were emerging to improve efficiency and achieve leverage, there were countless stand-alone hospital targets. Many of these facilities were economically hemorrhaging from underutilization, overstaffing and poor payer mix. Administrators often had failed to make difficult decisions that would have resulted in downsized yet efficient organizations.
More progressive organizations had begun to integrate. But even these often stumbled when it came to integrating their medical staffs. Some systems scrambled to employ a substantial number of primary-care physicians. They learned that although this might be effective in the short run, it often led to decreased productivity from the physicians as well as disenchantment.
Other organizations sought to maintain the autonomy of the physicians while aligning their incentives through physician-hospital organizations and other structures. Unfortunately, many of these quasi-partnerships were unequally balanced in the direction of the health system.
Hence, when Columbia entered the market offering physicians equity ownership in an integrated system without requiring their abdication of autonomy, it found a receptive audience.
Columbia did not strike market by market but created a sprawling battlefield. While hospital administrators anxiously scanned the horizon for the 800-pound gorilla, dozens of Columbia market-based guerrillas were stealthily cultivating deals. Columbia could enter markets and execute transactions with remarkable speed, pre-empting a backlash from the public and other key constituencies. Often, the first sign of trouble was the announcement of a binding letter of intent between Columbia and a community hospital.
Fueling the machine. Columbia is taking no prisoners. Seventeen not-for-profit hospitals fell victim to Columbia in 1996. It has been estimated an additional 20 to 30 hospitals will fall this year. Yet it's not these acquisitions that may prove most damaging but the company's apparent adoption of an aggressive new strategy.
As managed-care penetration and maturation intensify, reimbursement will increasingly shift toward capitation, making it ever more difficult for Columbia to maintain its current levels of profitability through the purchase and management of bricks and mortar. Columbia must begin aggressive vertical integration, targeting managed-care organizations/insurers, pharmacy and other major segments of the healthcare industry that will enable it to control a larger segment of the risk dollar.
Evidence of Columbia's new strategy abounds, including its acquisition of Value Health, its unsuccessful attempt to acquire Blue Cross and Blue Shield of Ohio, and its establishment of a department focused on managed-care development and acquisition.
Defense. Can Columbia be stopped?
That depends on how rapidly health systems, managed-care organizations and others mobilize to fend off this invading force. The counteroffensive needs to be swift and well-conceived. You must determine where you are vulnerable to attack. Your management team can do so by answering the following questions:
What is required to create a competitive integrated delivery system within your market? What services must be offered? What type of geographic access is necessary? Are there facilities that must be included because of overwhelming consumer preference? Are there facilities ripe for acquisition, and what is their strategic importance to a potential competitor?
What would be required to cause major managed-care organizations within your community to reconfigure their network participants, potentially excluding your system in favor of Columbia? What can your organization do to pre-empt the inclusion of Columbia in select managed-care networks?
What type of relationship does your facility enjoy with its aligned physicians? Is this a point of strength or a point of vulnerability?
Does your healthcare system deliver value to payers and patients? How is this measured?
Is there an active business coalition, and if so, what is the relationship between your system and this group?
Are there legislative impediments to competitive entry such as certificate-of-need laws?
If you were an "invading" for-profit system, where would you strike first and why?
Armed with this data, you should establish well-articulated goals that clearly improve your competitive position. These goals include:
The ability to deliver value-driven healthcare to your community.
Sooner or later, healthcare will become a value-driven service. When this sentinel event finally occurs, payers and patients will scrutinize providers' abilities to deliver clinical quality and satisfactory cost and access. Survivors will include systems that have established aggressive clinical quality-improvement programs, maximized efficiency without compromising patient care, developed a systemwide service excellence program and established multiple access points to the system.
Columbia is moving forward on this front. Is your health system?
The ability to assume and profitably manage risk.
As the industry moves toward capitation, systems must understand that their main mission is patient care, but their operating margin is determined by the ability to manage risk. Efficiency is pivotal. So, too, is the ability to maintain patient wellness through education and illness prevention.
Health systems will need to determine what they are willing to do to get the capitated dollar. Do they, for instance, want to develop and market risk-bearing products?
The ability to launch an effective marketing/communications program.
The system's marketing plan should anticipate new and aggressive competition. Messages should be honed that properly position the hospital as a vital part of the community, focusing on such issues as:
A commitment to superlative quality.
A commitment to honor its not-for-profit mission by providing uncompensated care.
A realization that healthcare is not just another business, but that there is a sacred element to caring for others.
A commitment to continually refine processes, improve efficiency and lower costs without sacrificing quality.
Columbia has mastered the art of propaganda. The best way to counteract the impact of propaganda is to avoid rhetoric and refute claims based on evidence. Columbia may claim superlative patient care, but there is evidence to the contrary.
The ability to exert legislative influence.
Develop, individually or with affiliated institutions, a lobbying presence at your state capitol. Help legislators understand managed competition and when such competition becomes highly disadvantageous to their constituents.
Develop a relationship with the state attorney general's office. Act as an educational resource whenever needed. Concern over conversion-related issues by the California attorney general's office blocked a proposed transaction between Columbia and Sharp HealthCare. The Ohio attorney general helped stop the proposed merger between Columbia and the Ohio Blues. And the Michigan attorney general's office has been very active in examining Columbia's transactions.
Push to make public the details of proposed mergers or acquisitions between not-for-profits and for-profits, including the disposition of assets, funding of foundations and employment guarantees of key executives.
Rally the troops.
Foster the development of grass-roots efforts to block "big business" from entering the markets and extracting profits. A "no growth" contingent in Lawrence, Kan., has effectively stymied Columbia's efforts to build a competing hospital.
Educate your constituencies.
Begin with your board. Provide members with a thorough understanding of the dynamics of organizations such as Columbia. Then turn your attention to the business community. Educate, then explore innovative ways to partner with your area business coalition, positioning your organization as highly sensitive to the needs of the businesses.
Five hundred years before the birth of Christ, Sun Tzu, a Chinese general, reminded us of the importance of strategy in his book The Art of War: "That general is skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose opponent does not know what to attack." For those averse to doing battle, remember the words of George Orwell: "The quickest way of ending a war is to lose it."
Leifer is chief executive of the Leifer Group, an Overland Park, Kan., consulting firm.