abstract number – 020-0312

"Capacity increase in private hospital market"

Walter Cintra Ferreira Jr – FGV-EAESP, Av 9 de Julho 2029 11o, 01313-902 – SP – Brazil

– 5511-37997717

Ana Maria Malik - FGV-EAESP, Av 9 de Julho 2029 11o, 01313-902 – SP – Brazil

– 5511-37997717

POMS 22nd Annual Conference

Reno, Nevada, U.S.A.-

April 29 to May 2, 2011

"Capacity increase in private hospital market"

Abstract

There isn´t a common view on need for hospital beds per population, but there is a general perception that overall number of beds is falling, in different countries. Brazilian data from 2010 show this in national terms, presenting a reduction in the private hospital market, even though figures related to the public sector show an increase. Nevertheless, newspapers have articles about hospital groups in São PauloState that are building new beds, designing new projects that require a greater infrasctruture. Data bases, homepages and interviews conducted with managers from these hospitals show the reality these hospitais present. This paper shows strategic management regarding the size of these health organizations, decision making processes and the disregarding of operational formal indicators.

Introduction

In 2011 the need for hospital beds per population is smaller than it was in 1950. Indincators such as length of stay have shifted down, because of new drugs (for anesthesia and for therapeutics) and“new” surgical procedures, that allow for faster discharges.Occupancy rates have changed their trends, because of some activities being presently performed in outpatient facilities (for example, surgeries, chemotherapy) andof home care. Hospices or nursing homes are still not common in the Brazil, leading to the need for some backgroud support, eventually given through governmental policies.

The private hospital market in São PauloCity has been busy in the XXI century. Since early 1990s the discussion about a universal trend leading to decrease in the number of beds, observed is countries with universal health systems. In some of them, such as Australia and Canada, mergers (fusions) between public hospitals or hospital units to avoid service duplication. In others, a reduction in number of specialized beds, such as psychiatric ones, as can be easily noticed in the UK and Italy. For these specialties, both countries have strong mental health policies, so this phenomenon is at least as important as a political issue than as a technical one. Some other facilities have changed their main infrastructure profile, following epidemiological trends, to fulfill the needs of two growing populations: the geriatric one and the one who needs basically palliative care. (AmericanAcademy of Hospice and Palliative Medicine – AAHPM -

In the US, since the years 1970sthe Certificate of Need was instituted, as an instrument to rationalize the creation fo health facilities and the acquisition of new equipments.This regulatory instrument (NCSL – aimed todecrease health care costs, at least where insfrastructure is concerned, and to allow coordinated planning of resources and buildings. (1974 Health planning resources development Act, still valid in some north american states). Healthcare costs have been increasing and are supposed to keep growing, due to lots of different factors, such as multidisciplinary team work, population aging, emerging of diseases that did not exist or were not diagnosed some years ago because of earlier death of population or lack of diagnostic technology, so the idea is cost containment, not necessarily reduction.Healthcare costs have been increasing and are expected to continue to increase.

In the UK, fornational (NHS) financing of health services or equipments there is a mandatory cost-effectiveness/cost benefit analysis.Maybe this is one of the determinants that made this country the home of some of the internationally most important centers in health economics as a discipline.Since in this country there is a clear tendency to increase patient empowermente related to is health and healthcare – and thus increase the possibility of cost containment - the NHS developed a site to help them take care of their own health and to use health services in a more efficient way ( This helps patients make informed choices about their habits and care alternatives.

In other countries or in different circumstances there is a push towards consumption of health goods or services, considering drugs or equipments, for treatments or procedures for which the need is at least arguable. The study of needs, demand and supply have a very important role in this field.Uninformed users tend to mistake health inputs or products for health itself and this makes it difficult to rationalize (not ration or restrict supply) resources, offering the population a good ratio between supply and needs (rather than demand).

In Brazil the population desires/demands a healthcare delivery model that is considered as absolutely outdated (Christensen; Grossman; Hwang 2009; Porter 2010): healthcare delivery centered in specialist MDs, privilege to hospital care, ancillary tests used without hard evidence of need, excessive drug consumption (these two last ones defined – or ordered - either by the care providers or by the patients themselves, even though ANVISA [ – brazilian equivalent to FDA [ – tries to regulate this utilization). It also has to be acknowledged that most patients do not have access to the desired or needed goods and services. It happens that they use automedication or auto test prescription, even though brazilian government has been enforcing some control over this possibility, at least regarding tests and drugs considered more hazardous.

Two questions still have to be answered: what is the real need in terms of health infrastructure, so that the population can receive adequate and sufficient healthcare; who makes decisions about what is supposed to be used and how. Herzlinger (1997; 2002; 2006; 2007) has been working with patient responsability facing the market and the consumption of healthcare, but this is still not a consensus.

The research question orienting this paper was how (or based on what evidences) hospital decision makers decide to increase the infrastructura capabilites of the facilities under their responsabilities.

Aims

To identify what are the reasons that are pushing private hospitals with good reputation in São PauloCity to invest in the increase of their service delivery infrastructure.

To identify what strategies are used by these hospitals and how they arise in the organization.

Justification

In the XXI century healthcare expenditure continues to grow. Alleged causes are increase in new technology complexity (including the concept of green buildings that are said to be more sustainable in the long range but are more complex and more expensive in the short one), in the increase in population need (since the age average is increasing in the whole world except in Africa) and, in short, in the increase of availability in health services anda products. Even in Africa, the access is still a challenge, and an expensive one, for a population that wasn´t used to have services to go to.

This paper is looking for the motives to the increase in the supply. Its aim is not to tryto find the boundaries for this phenomenon. There is a general assumption that investment decisions follow detailed economic, financial and marketing feasibility sudies. There is a clear increase in number of consulting firms specializing in the health field, advertising for this kind of analyses.

Brazil has presently public (DATASUS – AMS - www.ibge.gov.br/home/.../ams/default.shtmand ANS - and private (ANAHP – databases, among others, not considering specific public and private health services sites. The amount of available data is increasing, but their quality – which is increasing - is not yet equivalent to the quantity.Access is improving, since they are available to any internet user.

Some countries have a general health policy, that includes the private and the public healthcare delivery sector. In those, there are in general some logic alternatives: for instance, the integrated care for which Porter advocates, with the assumption of more value or at least more efficiency vs the concept of one stop shop, to make the consumer´s life easier, even though this may stimulate increase (either necessary or not) in consumption; the general incentives to have general hospitals vs specialized ones, and so forth.

Brazil is not one of those countries. National policies are – at least until early 2011 – clearly different for the public and for the private sectors. They can be even considered parallel, in the sense that they hardly meet, even though the financial resources used in health are in any situation mostly coming from the citizens, either in the “out of pocket” manner or from taxes or else, in Brazil at least, from tax exemptions, since tax payers that buy their private health plans have deductions from their IRS and so do the organizations that provide health plans for their employees.

Methodology

This papers focus was the increase of infrastructure capacity in private hospitals in São Paulo City. The sample was selected after the publishing of a newspaper article (Folha de São Paulo ) in 2010 second semester. This article was about the increase in capacity of private hospitals in the City. All hospitals mentioned in the article were approached and data were collected from those that agreed in participating in the research.The research was built as a case study regarding private hospitals in São Paulo, in the second semester 2010/early 2011, containing several individual cases.

Bibliographic search included textbooks, academic journals, dissertation and theses related to strategy and health strategy. Databases of national health statistics, as well as international references regarding international variation in number of beds, were also considered.

Litterature and experts´ opinions were used to build a semi-structured guide for the interviews made with hospital strategic decision makers or managers they appointed as suited substitutes. All of them signed an informed consent, where data confidentiality was stated unless asked and authorized by the managers interviewed. All interviews were scheduled and they were performed by one of the researchers and recorded whenever authorized. Recordings were only done in order to help understanding the answers, not for citation purposes. Interviewees were offered to receive the general research instrument in advance. Interviews were made during the same month, to make sure the environmental situation was objectively the same for all services considered.

Before every visit, the interviewer went to the website of the hospital to be studied that time. The purposes of this activity were to allow the researcher to specify some questions considering the hospital´ characteristics, to avoid spending the CEOs time with unnecessary questions and eventually to show the decision maker that serious work has been made previous to the visit.

Results

Twelve hospitals accepted the contact and 10 actually received the researcher during 3 weeks in January 2011. One of the missing cases showed interest in the research but did not answered further contacts and for the other one it was not possible to schedule the interview for the specified period. In average, each interview took 77 minutes.

All websites were easy to access and information relevant to the interviews was available, unlike for some other researches, two years old, with different kinds of brazilian hospitals. Eventually, some of these sites had different data for the same question, depending on where in the site they were searched.

Access to national records for healthcare delivery facilities – CNES- intended to identify the business identity of the service to be studied, beyond data available to general public. Among research findings is the unaccuracy of these records, often outdated.

All interviewed managers were apparently very open regarding the information they offered, not trying to embellish the decision making process. Half of them were MDs, all of them with some degree of specialization in health care management or in health economics. In the other half (5), there were 3 engineers (one of them coming from na organization of medical equipment; another had a background as a hospital engineer and the third one came from a different economic sector) and 2 managers (one from the health sector and the other one a business administrator). All three engineers were management specialists, even though only one in the hospital field. Nine out of the 10 weremen.

Market studies were not considered a decisive factor for the increase in capacity. Only 3 decision makers (2 from “for profit” hospitals and one “non profit”) acknowledged this kind of study as a parameter to define what specialties to offer. Most of them stated that increase in demand for different services and high occupancy rates as the indicators they used to define the increase. Some mentioned identifying the movement of increase started by competiton as a great driver for decision making. Increase in technology (equipment) availability was considered a trigger for increasing scale, to male technology sustainable.

External consultants in planning were used either to justify or to refine decisions already made or to ensure implementation processes. Growth appears as an inevitable strategy. This can be due to characteristics of the health industry or to perceived demand or both. Beyond willing to serve the demand, hospitals wish to keep their market status or position. Corporate governance was mentioned in all 10 hospitals, as well as the utilization of BSC (balanced score card). BSC was not a popular management tool in hospitals in Brazil in 2005, as some research showed by then.

Only one of the managers mentioned budget planning as a sole process when asked about formal planning processes. All others talked about present or future adoption of a process for strategic planning, to go with BSC. External help was used at all hospitals at least for the implementation of both managerial tools. Corporate managerial models have been changing simultaneously with the increase in capacity. In one of the hospitals physicians halted the growth project considering that a reform of the corporate governance should precede structural changes. Several years later the project was restarted, but in a much smaller horizon.In 2011 this is perceived as a delay or as a strategic weakness as compared to competition.

One of the CEOs made it very clear that he knows “he has a dream” while investing in increasing the organization. Between the dream and the extreme professionalism there were several explanations, more or less structured, trying to justify the decisions made. Intuition as a driver for the decision making process appears sometimes quite explicit but in other answers it is present as a hidden text.

Communication was not perceived as a problem by any of the interviewed CEOs.All of them said they had competent communication skills either towards their Boards (and equivalent) or towards the hospital workers, no matter from what areas or professions. The interviewees considered information about strategic decisions readily available for internal or external public, especially regarding increase in infrastructure, as soon as they were made.

Many decision makers assume they had enough funding to support their expansion decisions, but only one did not take a loan from a public bank linked to development projects (BNDES – All of them justified this option because they considered interests from these loans to be quite low. All of them also stated that – either after complex studies or after discussions based on opinions – they were sure there would be a reasonable payback, in a way or in another, in an acceptable period.

Growth took different forms: centralized increase in number of beds; launching of new facilities with or without inpatient strucutres; implementation of new services; search for new clients in different (new) locations within or outside city limits. These alternatives show how different the strategies for capacity increase were, how this phenomenon was understood and tackled by decision makers.

In all cases it became clear that expansion based in only one specialty is not a solution beyond the short range. There is a clear perception among them that an older population, with more complex conditions, with more comorbidities, requiring multispecialty and multiprofessional teams will be a substantial part of the clientele. These patients will require competent hospitals to be referred to.Maternal and child care is losing its role as a relevant area, especially since maternity wards have diminished their size and quite often havebeen totally shut down.

Last question presented during the interview asked the strategic decision maker his definition of strategy. Each of them had a different definition, and almost all were not coincident with what theory presents.

Conclusions

The first conclusion that arises is thay most strategies were emergent, due much more from the sensitivity of the decision maker or to his will to achieve a dream than to elaborate studies.This is an evidence of the relevance of intuition in the decision makers role.

The second one, stemming from the first, deals with the non-utilization of indicators for planning, i.e. making decisions according to informations or to impressions that knock at the decision makers door. This can lead to some “wrong” decisions, as realized in at least one hospital, that had to be corrected afterwards, with more or less cost, causing a loss of a strategic opportunity.