Due Saturday $50
oIntroduction (250 – 350 words)
A statement of the strategic marketing issue being addressed in the case.
Your answer or response to the issue.
A brief explanation of how you provide proof to substantiate your answer or response.
Case: PeaceMemorialHospital: Downtown Health Clinic*
*This case was prepared by Professor Roger A. Kerin, of the Edwin L. Cox School of Business, Southern Methodist University, as a basis for class discussion and is not designed to illustrate effective or ineffective handling of an administrative situation. Certain names and data have been disguised. Copyright © 2000 by Roger A. Kerin. No part of this case may be reproduced without written consent of the copyright holder.
In mid-April 2000, Sherri Worth, Assistant Administrator at Peace Memorial Hospital (PMH) in charge of the hospital’s Downtown Health Clinic (DHC), uncovered an unsettling parcel of news. During a call on the employee benefits director at a downtown department store, she was told that a firm was conducting a study to determine whether sufficient demand existed to establish a clinic five blocks north of PMH’s Downtown Health Clinic. The description of the clinic’s services sounded similar to those offered by the DHC, and the planned opening date was May 2001.
As Worth walked back to her office, she could not help but think about the possible competition. Upon arriving at her office, Worth called Dr. Roger Mahon, PMH’s administrator, to tell him what she had learned. He asked her to contact other employee benefits directors and query patients to see whether they had been surveyed. He expressed concern for two reasons. First, a competitive clinic would attract existing and potential patients of the Downtown Health Clinic. Second, a clinic that provided similar services could hamper the DHC’s progress toward achieving its service and profitability objectives.Mahon requested that Worth summarize the DHC’s performance to date so that he could speak to members of the board of trustees’ executive committee on what action, if any, the DHC should take to compete for patients.
The Hospital Industry and Ambulatory Health Care Services
Health care, and specifically the hospital industry, has undergone a dramatic transformation in the past four decades. Until the 1960s, hospitals were largely charitable institutions that prided themselves on their not-for-profit orientation. Hospitals functioned primarily as workshops for physicians and were guided by civic-minded boards of trustees.
Federal legislation introduced in the 1960s created boom times for the hospital industry. The Hill-Burton Act provided billions of dollars for hospital construction, to be repaid by fulfilling quotas for charity care. Additional funds were poured into expansion and construction of medical schools. Medicare and Medicaid subsidized health care for the indigent, disabled, and elderly. These programs reimbursed hospitals for their incurred costs plus an additional return on investment. This period also saw dramatic increases in commercial insurance coverage, offered as employee fringe benefits and purchased in additional quantities by a more affluent public. Accordingly, health care became accessible to an overwhelming majority of U.S. citizens, regardless of where they lived or their ability to pay. Federal intervention had changed the concept of health care services from privilege to entitlement.
By the 1980s, however, skyrocketing health care costs had forced the federal government to reassess its role in health care. Stringent controls were placed on hospital construction and expansion, and utilization and physician-review programs were implemented to ensure against too-lengthy inpatient stays. By the end of the decade, hospitals were initiating voluntary cost-cutting programs to stave off additional government intervention. Despite all efforts, however, health care expenditures continued to outpace the Consumer Price Index into the 1990s.
The late 1980s and early 1990s ushered in a very different health care environment, and hospitals particularly were hard hit by the changes. On the one hand, the federal government sought to reduce health care costs through cutbacks in subsidy programs and cost-control regulations, such as the Balanced Budget Act of 1997. On the other hand, innovations in health care delivery severely reduced the number of patients serviced by hospitals.
One innovation was preventive health care programs. These fall into two categories: health maintenance organizations (HMOs) and preferred provider organizations (PPOs). An HMO encourages preventive health care by providing medical services as needed for a fixed monthly fee. HMOs typically enter into contractual relationships with designated physicians and hospitals and have been successful in reducing hospital inpatient days and health care expenditures. PPOs establish contractual arrangements between health care providers (physicians and/or hospitals) and large employer groups. Unlike HMOs, PPOs generally offer incentives for using preferred providers rather than restricting individuals to specific hospitals or physicians. PPOs have the same effect on inpatient days and health care expenditures that HMOs have, and Mahon planned to expand the PPO for PeaceMemorialHospital using the Downtown Health Clinic as a link to large employers in the downtown area.
A second innovation has been ambulatory health care services and facilities. Ambulatory health care services consist of treatments and practices that consumers use on an episodic or emergency basis. Examples include physical examinations, treatment of minor emergencies (such as cuts, bruises, and minor surgery), and treatment of common illnesses (such as colds and flu).
Ambulatory health care facilities are split into two categories: (1) minor emergency centers, known by acronyms such as FEC (Free-Standing Emergency Clinic) and MEC (Medical Emergency Clinic) and (2) clinics that focus on primary or episodic care.1Although regulation is nominal, if a clinic positions itself as an emergency care center, expressing this focus in its name, it generally is required (or pressured by area physicians) to be staffed 24 hours a day by a licensed physician and to have certain basic life support equipment.
1Primary careis the point of entry into the health care system. It consists of a continuous relationship with a personal physician who takes care of a broad range of medical needs. Primary care physicians include general practitioners, internal medicine and family practice specialists, gynecologists, and pediatricians.
Three factors account for the growth of ambulatory health care services. First, advances in medical technology, miniaturization, and portable medical equipment have made more diagnostic and surgical procedures possible outside the traditional hospital setting. Second, consumers have adopted a more proactive stance on where they will receive their health and medical care. Consumers often choose the hospital at which they wish to be treated, and the incidence of “doctor shopping” is common. Third, the mystique of medical and health care has been altered with the growth of paramedical professionals and standardized treatment practices.
Most of the early centers emphasized quick, convenient, minor emergency care. Many new centers have positioned themselves as convenient, personalized alternatives to primary care physicians’ practices. These operations typically employ aggressive, sophisticated marketing techniques, including branding, consistent logos and atmospherics, promotional incentives, and mass-media advertising (giving rise to vernacular designations such as “Doc-in-the-Box” and “McMedical”). Although ambulatory care facilities vary considerably among communities and owners, the following characteristics appear to be universal: (1) branding, (2) extended hours, (3) lower fees than emergency rooms, (4) no appointments necessary, (5) minor emergencies treated, (6) easy access and parking, (7) short waiting times, and (8) credit cards accepted.
PeaceMemorialHospital
PeaceMemorialHospital is a 600-bed, independent, not-for-profit, general hospital located on the southern periphery of a major western city. It is one of six general hospitals in the city and twenty in the county. It is financially stronger than most of the metropolitan-based hospitals in the United States. It is debt-free and has the highest overall occupancy rate among the city’s six general hospitals. Nevertheless, the hospital’s administration and board of trustees have serious concerns about its patient mix, which reflects unfavorable demographic shifts. Most of the population growth in recent years occurred in the suburban areas to the north, east, and west. These suburban areas attracted young, upwardly mobile families from the city. They also attracted thousands of families from other states—families drawn to the area’s dynamic, robust business climate.
As hospitals sprang up to serve the high-growth suburban areas, PMH found itself becoming increasingly dependent on inner-city residents, who have a higher median age and higher incidence of Medicare coverage. Without a stronger stable inflow of short-stay, privately insured patients, the financial health of the hospital would be jeopardized. Accordingly, in the summer of 1998, the board of trustees authorized a study to determine whether to open an ambulatory facility in the downtown area about ten blocks north of the hospital.
Downtown Health Clinic
The charter for the Downtown Health Clinic contained four objectives:
- To expand the hospital’s referral base
- To increase referrals of privately insured patients
- To establish a liaison with the business community by addressing employers’ specific health needs
- To become self-supporting three years after opening
The specific services to be offered by the DHC would include (1) preventive health care (for example, physical examinations and immunizations), (2) minor-emergency care, (3) referral for acute and chronic health care problems, (4) specialized employer services (for example, preemployment examinations and treatment of worker’s compensation injuries), (5) primary health care services (for example, treatment of common illnesses), and (6) basic X-ray and laboratory tests. The DHC would be open 260 days a year (Monday–Friday) from 8:00 A.M. to 5:00 P.M.
The location for the DHC would be in the Greater West Office and Shopping Complex, situated on the corner of Main and West Streets (seeExhibit 1). This location was chosen because a member of the board of trustees owned the Greater West Complex and was willing to share construction, design, and equipment expenses with the hospital.
Exhibit 1 Present and Planned Locations of Downtown Health Clinics and Service Areas
Key:
- Original DHC and five-block service radius.
- Planned location of competitor and five-block service radius.
During the fall of 1998, construction plans for erecting the DHC were well under way, and the expense budget was developed (seeExhibit 2). During the winter months, PCH commissioned a study to determine the service radius of the DHC, estimate the number of potential users of the DHC, assess responsiveness to the services to be offered by the DHC, and review the operations of suburban ambulatory care clinics. The results indicated that the service area would have a five-block radius, since this was the longest distance office workers would walk. Discussions with city planners indicated the service area contained 11,663 office workers during the 9:00–5:00 Monday–Friday work week. The population in the area was expected to grow 6 percent per year, given new building and renovation activity. Personal interviews with 400 office workers, selected randomly, indicated that 50 percent would use or try the DHC if necessary and that 40 percent of these prospective users would visit the DHC at least once per year (seeExhibit 3for additional findings). Finally, the study of suburban ambulatory care facilities revealed the data shown inExhibit 4on page202. Given their locations in suburban areas, these facilities were not considered direct competition, but their existence indicated that “the city’s populace was attuned to ambulatory health care facilities,” remarked Worth.
Exhibit 2 Downtown Health Clinic: Preliminary 12-Month Expense Budget
Item / ExpenditurePhysician coverage: 260 days times 8 hr/day at $66/hr / $137,280
Professional fees / 43,720
Lease / 76,500
Supplies / 46,894
Utilities / 6,630
Personnel, including fringe benefits (director, nurse, laboratory assistant, X-ray technician, receptionist) / 168,376
Amortization / 30,648
Annual expenditure / $510,048
Note: Expenditures were based on the assumption that the DHC would have 4 visits per hour, or 32 visits per day, when operating at full capacity.
Exhibit 3 Profile of DHC Service Area, Based on City and Survey Data
1999 Population Estimate (Source: City Planning Department)Total office worker population in five-block radius / 11,663 / Â
Expected annual growth, 1998–2003 / 6.0% yr / Â
Sex breakdown in five-block radius:
- Male
- Female
Results from Personal Interviews (January 1998)
Would use/try DHC if necessary for personal illness/exams / 50% / Â
Expected frequency of DHC use for personal illness/exams among those saying would use/try if necessary:a / Â / Â
- Once every other year
- Once per year
- Twice per year
- Three or more times per year
Selected Cross-Tabulations / Sex / Â / Â
 / Male / Female /  / Total
Would you use or try DHC if necessary? / Â / Â / Â / Â
Yes / 88b / 168 / Â / 256
No / 72 / 72 / Â / 144
- Total
 / Have Regular Physician (Excluding Gynecologist) /  / Â
 / Yes / No /  / Total
Would you use or try DHC if necessary? / Â / Â / Â / Â
Yes / 58 / 198 / Â / 256
No / 130 / 14 / Â / 144
- Total
aNo difference between males and females on frequency of use.
bOf the 160 males interviewed, 88 (55 percent) said they would use the DHC; 88 of the 256 interviewees (34 percent) who said they would use the DHC were male.
Exhibit 4 Suburban Ambulatory Care Clinics: Operations Profile
Operations / EmerCenter #1 / EmerCenter #2 / Adams Industrial Clinic / Health First / MedcenterOpening / March 1990 / November 1992 / June 1992 / May 1991 / June 1997
Patients/year / 9,030 / 6,000 / 8,400 / 5,700 / 8,661
Hours of operation / 10:00 A.M.–10:00 P.M. / 10:00 A.M.–10:00 P.M. / 8:00 A.M.–5:00 P.M. / 5:00 P.M.–11:00 P.M. / 8:00 A.M.–8:00 P.M.
 / Monday–Friday / Monday–Sunday / Monday–Friday / Monday–Friday / Monday–Sunday
 /  /  /  / 10:00 A.M.–10:00 P.M / Â
 /  /  /  / Saturday–Sunday / Â
Physicians/8-hr shift / 2 / 2 / 2 / 2 / 2
Estimated patient visits/hour / 3.8/hr / 3.4/hr / 5.0/hr / 3.0/hr / 3.0/hr
Estimated average charge per visit / $60.00 / $62.00 / $76.00 / $62.00 / $64.00
Services provided: / Â / Â / Â / Â / Â
- Preventive health care
- Minor emergencies
- Employer services
- X-ray/lab tests
- Miscellaneous
Use direct-mail advertising / / / Â / /
These results were viewed favorably by the board of trustees and “confirmed our belief that an ambulatory facility was needed downtown,” noted Worth. The DHC was formally opened May 1, 1999. Except for the publicity surrounding the opening, however, no advertising or other types of promotion were planned. “Several members of the hospital staff shied away from advertising or solicitation, since it hinted at crass commercialism,” said Worth.
Performance: May 1999–March 2000
A financial summary of DHC performance through March 2000 is shown inExhibit 5on page203. According to Mahon:
We are pleased with the performance to date and hope the DHC will be self-supporting by April 2001. We are getting favorable word of mouth from satisfied patients that will generate both new and repeat patients. We expect 410 patient visits in April [2000]. In addition, we have taken steps to improve our financial standing. For example, our bad debts have been costing us 4 percent of gross revenue. With a better credit and collection procedure established just last month, we will reduce this figure to 2 percent. We plan to initiate an 8 percent across-the-board increase in charges on May 1 and will experience only a 5 percent increase in personnel and professional services expenses next year.
Exhibit 5 Downtown Health Clinic Financial Summary
 / 1999 / 2000 / May / June / July / Aug. / Sept. / Oct. / Nov. / Dec. / Jan. / Feb. / Mar. / Total Year to Date
Gross revenue / $8,150 / $16,774 / $17,688 / $19,394 / $22,412 / $22,812 / $23,344 / $23,516 / $25,692 / $27,758 / $29,430 / $236,970
Variable expenses: / Â / Â / Â / Â / Â / Â / Â / Â / Â / Â / Â / Â
- Bad debt
- Medical/surgical supplies
- Drugs
- Office supplies
- Total variable expense
Contribution / $(6,970) / $13,916 / $13,788 / $15,792 / $18,150 / $19,668 / $19,040 / $20,678 / $22,308 / $23,036 / $25,818 / $185,224
Fixed expenses: / Â / Â / Â / Â / Â / Â / Â / Â / Â / Â / Â / Â
- Personnel
- Professional servicesa
- Facilityb
- Miscellaneous
- Amortization
- Total fixed expense
Net gain (loss) / $(53,028) / $(22,734) / $(23,716) / $(18,968) / $(18,526) / $(24,866) / $(18,016) / $(14,652) / $(14,024) / $(17,144) / $(11,940) / $(237,614)
Number of patient visits / 109 / 231 / 275 / 277 / 322 / 320 / 321 / 366 / 383 / 463 / 423 / 3,490
Number of working days / 22 / 21 / 21 / 22 / 20 / 23 / 22 / 20 / 22 / 21 / 23 / 237
aIncludes professional fees paid (seeExhibit 2).
bIncludes lease payments, utilities, and maintenance.
Records kept by PMH revealed that the DHC was realizing its objectives. For example, the referral objective was being met, since the DHC had made 105 referrals to PMH and produced slightly over $378,000 in revenue and an estimated $30,000 in net profit. Almost all of these patients were privately insured. The service mix, though dominated by treatment of common illnesses and examinations, did indicate that the DHC was being used for a variety of purposes. A breakdown of the reasons for patient visits for the first 11 months of operations is as follows:
Personal illness exams / 53%Worker’s compensation exam/treatment / 25
Employment/insurance physical exams / 19
Emergency / 3
Total / 100%
Patient records indicated that 97 percent of all visits were by first-time users of the DHC and 113 visits were by repeat patients. Approximately 5 percent of the visits in each month from October 1999 through March 2000 were repeat visits. “We are pleased that we are already getting repeat business because it shows we are doing our job,” Worth commented. The average revenue per patient visit during the first 11 months was $67.90.2A breakdown of the average charge by type of visit follows. The average charge was to increase 8 percent on May 1, 2000.
2The average charge per patient visit excluded the charge for basic x-ray and laboratory tests.
Personal illness/exam / $50 per visitWorker’s compensation exam/treatment / $78 per visit
Employment/insurance physical examination / $94 per visit
Emergency / $134 per visit
In an effort to monitor the performance of the DHC, patients were asked to provide selected health care information as well as demographic information. This information was summarized monthly, andExhibit 6shows the profile of patients visiting the DHC for the first 11 months of operation. In addition to this information, patients were asked for suggestions on how the DHC could serve the downtown area. Suggestions typically fell into three categories: service hours, services offered, and waiting time. Thirty percent of the patients suggested expanded service hours, with an opening time of 7:00 A.M. and a closing time of 7:00 P.M. One-half of the female patients requested that gynecological services be added.3A majority of the patients expressed concern about the waiting time, particularly during the lunch hours (11:00 A.M.–2:00 P.M.).A check of DHC records indicated that 70 percent of patient visits occurred during the 11:00 A.M.–2:00 P.M. period and that one-half of the visits were for personal illnesses.