Is your service in a market with surplus capacity or is there unmet need? The answer to this question is critical to organizational performance because you have more leverage on rates in a market where service capacity is limited – and very little in a market with an oversupply of the same service.
This is the age old principle of competitive markets, “supply and demand.” And yesterday, we looked at how to estimate the system capacity (or supply) for a particular service (see Answering The Capacity Question In Your Market all members). To make that data useful in strategy and tactical planning, you also need to know the demand side of the equation. Estimating demand for health and human service is just math – but math that takes both rigor and knowledge of the field. At a high level, my formula for demand estimates is:
Consumer population (#) * insured rate (%) * condition prevalence (%) * insurer service level appropriateness (%) * service units per consumer treated = annual demand in units of service
For example, let’s look at calculating the estimated demand for a residential alcoholism treatment program for a service area with a population of 1,000,000 adults (eliminating children under 16 from our population estimate).
If the proportion of the population that is uninsured is 15%, that means that there are 850,000 adults in the market with insurance that covers the program.
The prevalence of alcohol dependence or abuse in the population is 5.6%, which means our geographic area has a target market of 56,000.
And, based on a recent data set, 4.2% of consumers with substance abuse diagnosis seeking treatment are admitted to residential treatment facilities (the other 95.8% get outpatient treatment programs), which is 2,352 adults.
The average length of stay (number of bed days used) for residential alcoholism treatment is 26 days, which means that the demand for alcoholism rehabilitation days in the market is over 61,152 bed days per year.
Is that a good number or bad number from a market perspective? It depends on the current system capacity. If you pair your estimate of demand (above) with the system capacity estimate (in this case, how many alcoholism rehabilitation beds there are in the market), you can answer the question of the proportional supply and demand for services.
Obviously, this is a simple model – there are many advanced variants of this approach of estimating market demand. And, these are market metrics that every executive team should have to inform their tactical planning – strategy, contracting plans, and operations.