Greetings from the very hot city of Phoenix where I kicked off the mhca fall conference a couple of day ago. My opening remarks, Navigating The Behavioral Health Market Shifts in Finance, Tech, & Emerging Competition, focused on every executive’s top-of-mind concern—sustainability and the related questions: Will my organization still be here in a few years? Can we keep up with changing demand? Can we hold up against new competition?
For executives of most service provider organizations, addressing sustainability is a primary focus of strategy development. With the market shifts over the past five years, the status quo for most organizations is not longer possible due to eroding financial stability of traditional service lines. There are a few factors that are common to many organizations. First, fee-for-service (FFS) reimbursement for traditional services is on the decline for a number of services in selected markets. Even where FFS rates are remain stable, they are not keeping pace with inflation and increase operating costs. Second, health plans and consumers increasingly want to buy traditional services in new packaging—solution-focused, rate bundles, etc. And, last but not least, “better value” alternatives to traditional services are emerging from specialty regional/national provider organizations and from organizations offering tech-enabled access to service suites.
How do executive teams address these sustainability and margin issues? The simple answer is that current service lines need to be updated and new service lines need to be added. The complicated answer is that organizations need to embrace portfolio management as part of their strategic planning process to make the macro decisions about service lines. This means embarking on portfolio analysis and portfolio mapping—grouping individual services into service lines; tracking the revenue, market share, and margin of each; and projecting future changes in revenue and margin by service line. The decisions about what service lines to reconfigure, what service lines to develop, and what service lines to close are made via the portfolio management process.
The specific issues of whether, when, and how current service lines need to be reformulated is a matter of market research. Our team has found that traditional service lines are going through a market evolution of sorts—moving from a more competitive market; requiring linkages to an integrated service systems; adding value-based reimbursement models; and finally improving “value” through tech optimization. The rate of evolution is specific to each service line and dependent on the customers and competitors in each market.
My colleague and OPEN MINDS Senior Associate, Jim Gargiulo, who attended the conference with me added: “Once reformulation occurs, organizations need to tell their story through better marketing and ‘packaging.’ I am frequently amazed at what provider organizations serving complex consumers do every day and in ways that are important and cost-effective, but it is an untold story. Payers, consumers, and the community embrace (and fund) organizations that make a difference, but if executive teams fail to plan for a marketing spend, they may also fail to sustain their business models.”
For executives of mission-driven organizations, portfolio management brings a certain amount of discomfort. Not all services that are highly mission-aligned break even. That is to be expected. But executive teams need to make the hard decisions about which specific services will be subsidized and how to find the money for that subsidy. This may mean reformulating the service, limiting access to the service, using profitability from other service lines to cover the underperforming line, or targeting fundraising. These aren’t easy decisions to make and not easy plans to implement, but they are essential to future sustainability
Bringing strategy development to the level that supports agile decision making about service line investment is going to be increasingly important for assuring sustainability in a changing market. For more, check out these resources on portfolio management and mapping in the OPEN MINDS Industry Library:
- Diversifying Your Revenue Streams: How To Successfully Launch A New Service Line
- Planning For Long-Term Mission Sustainability
- Diversification & New Service Line Development
- Strategic Revenue Diversification: The HealthPath Commercial Health Home Case Study
- Innovation, Diversification & Scalability: How To Develop A Profitable New Service In A Competitive Market
- Four Elements In Your Sustainability Checklist
For even more on how to make portfolio management part of your strategic planning process, join Joseph Naughton-Travers, Senior Associate, OPEN MINDS on June 4, 2018 in New Orleans at The 2018 OPEN MINDS Strategy & Innovation Institute for his workshop, How To Develop A Strategic Plan: Best Practices In Market-Based Planning & Implementation.