As hospitals search for business models to adapt for their use, they should consider modeling themselves after airports, where a variety of independent enterprises cohabit, cooperate and compete. The breadth of activities, technologies and markets within an airport-where individual organizations occupy physical and market positions, risk capital and seek good returns-is too great for a single enterprise to administer. The same can be said for a hospital.
The airport model would allow a hospital to excel in many clinical and nonclinical activities, successfully compete in many different markets, understand and compete in many different labor pools, and master and wisely invest in many, vastly disparate technologies.
To succeed, airports depend on outsourcing-the use of third parties to help build or deliver a product or service-and orchestration (See related story, p. 42). Orchestrators provide a functional, economical infrastructure and rely on others to deliver services. Through these methods, hospitals can own the infrastructure and attract an array of specialists to provide the services.
A worthy strategy. The runway to orchestration in healthcare is strategic clinical outsourcing. SCO is the deliberate, managed delegation of entire clinical functions that can be performed better and more efficiently by others. It must be tailored to a facility's medical staff, market, comparative advantages, capital structure and long-term demands for capital and human resources. SCO converts healthcare's economic turbulence, unmanageable and unsustainable complexity, and vast technological change into an advantage, with better service to physicians, patients and the community. On a smaller scale, it mirrors a county commission's hiring professional hospital operators to manage the county hospital. It's not for everyone, but for hospitals struggling to secure a stable future, it is a flexible and worthy strategy.
Pulling SCO into healthcare is $1.1 trillion of economic activity. While many providers bemoan slim margins and economic jeopardy, upstart firms see in healthcare a market as large as the gross domestic product of the United Kingdom. Consider the parade of recently formed hospital management companies, as well as firms such as HealthSouth Corp., MedCath and US Oncology, which was created by the recent merger of American Oncology Resources and Physician Reliance Network. Although neither US Oncology nor its forebears existed until recently, 13% of new U.S. cancer patients, or about 170,000 people, are in its care.
Also pulling SCO into healthcare is a practical fact: Hospitals cannot manage the enormous bandwidth of technology, capital demands and markets that intersect them. Consider that MedCath operates about 40 catheterization labs and US Oncology operates 52 sites in 24 states. These specialty firms focus on the narrow demands of their categories. They are well positioned to accumulate marketing power and superior operating ability. Although large hospital chains may claim the same or higher numbers, they are stymied when it comes to creating product lines within a hospital, much less across a chain.
Economics will push specialty firms into arrangements with hospitals. The uneasy peace between the Franciscan Health Partnership hospital system and MedCath, in Dayton, Ohio, where both have joined to build a heart hospital, testifies to the pressures pushing hospitals and specialists together.
Some examples. Florida Health Park, Fort Myers, is an example of well-implemented orchestration. Different owners operate the hospice, the hospital, the Alzheimer's home and the continuing-care center on the partially developed 400-acre campus. Florida Health plans to add brands for a more-robust and comprehensive mix of services.
Elsewhere, Georgia Baptist Health Care System in Cumming is developing a 140-acre "Campus of Care" featuring a new acute-care hospital. Georgia Baptist leased a portion of its property to LifeTrust America, a Nashville-based builder of assisted-living facilities, which will begin construction in 2000. Georgia Baptist hopes others, such as the local YMCA, will establish services on its campus. The Georgia Baptist and LifeTrust partnership will build facilities throughout the state.
SCO has spawned the small industry of outsourced rehabilitation services. Brooks Rehabilitation System in Jacksonville, Fla., and investor-owned RehabCare Group in St. Louis are two firms to which hospitals have outsourced their inpatient or outpatient rehabilitation. Physician needs and the distance from core marketing and reimbursement expertise were among factors in the decision.
These organizations and others have outsourced because doing so liberates capital, manpower, space and management time. Where margins are slim or negative, outsourcing improves profitability and cash flow. SCO candidates include cardiology, dialysis, oncology, radiology and more.
The hospital considering SCO must also consider several broad issues: how well the SCO strategy and the third party fit its personality, the parties' respective needs for control, how performance will be monitored and measured, what the necessary and acceptable terms of a transaction are, and accreditation. Narrower issues include marketing, finance, legal, tax, human resource, technological and operational matters.
Many providers could improve service at lower costs by retaining specialists and using conserved resources to greater overall benefit. SCO and orchestration are practical solutions to enormously complex and unstanched financial, clinical and managerial challenges.