I was reading about a 13-bed micro-hospital proposed by health care system Mercyhealth in Illinois (see How big of a threat can a 13-bed hospital really be? in Crain’s Chicago Business) and started thinking about the challenges of strategy and strategic positioning in the current health and human service market.
In developing strategy for provider organizations in health and human services, there is an emerging dichotomy in market positioning. Provider organizations are increasingly positioning themselves as either a “system” or a “niche provider.” On the system end, there are full-service locally-focused (vertical) health systems (such as the Cleveland Clinic and Northwell Health) and national/regional (horizontal) systems of specialty providers (like Cancer Treatment Centers of America and The MENTOR Network). Then there are provider organizations that are specializing on serving the specific needs of a narrow group of consumers — the “niche.” (By definition, a niche is a focused, targetable portion of a market. It is a narrowly defined group of potential customers that have specific needs.)
The strategic challenge for executives of any provider organization is that what constitutes a financially sustainable health and human service system and what constitutes a financially sustainable niche provider is evolving — with changing payer contracting and reimbursement practices, as well as emergent competitive service offerings.
Both “system” positioning and “niche” positioning bring challenges. The current market is redefining the characteristics of a sustainable system. Size is an element, but size alone is not enough for long-term sustainability. In the current market, systems should be large enough to offer a broad service and/or geographic coverage (if vertical or horizontal, respectively); provide real economies of scale to health plan and consumer purchasers; accept financial risk in value-based reimbursement; and make big game-changing investments in service line and service delivery modernization (of technology, marketing, new treatments, etc.).
Successful systems have positioned themselves as the obvious choice for customers because of their dominance in a particular market. But being big can also mean being expensive, being unable to trim services that are financially unsustainable, being slow to modernize, and/or being unable to manage risk.
“Niche positioning” is when executive teams of provider organizations that have historically served complex consumers (addressing mental illness, addictions, cognitive disabilities, physical disabilities, corrections involvement, etc.) find it necessary to focus their positioning due to the market synergy of a few key factors:
- The increasing focus on the ‘superutilizer segment’
- The push for integrated care coordination
- The influence of managed care
- The value-based reimbursement environment
Unfortunately, I find this market positioning is often reluctantly accepted by executives and boards of directors. These organizations that were once local specialty systems are being displaced — the “big fish in a small pond” are now “little, specialized fish in a much larger ocean” of health and human service delivery.
Their reluctance is understandable as niche positioning does come with some significant downsides — there is a finite market and often limited growth potential, niche markets are susceptible to rapid change due to new options for “solutions,” and niche provider organizations are very directly and immediately affected by competitive entries in their market. What these executives and board members must remember, however, is the numerous advantages of niche positioning — reduced competition, lower capital costs, often improved outcomes, and more focused marketing spend.
“Quick to respond” is a key leadership characteristic of executives of niche organizations. Using my “marine life” analogy, the ocean’s small fish need to be quick to find cover when the big fish arrive. But, it is no picnic being the “big fish” — everyone is out to get them.
The micro-hospital issue is a classic example of the market tension between system providers and niche providers. The proposed micro-hospital is a specialty niche product extension of Mercyhealth, a $1.3 billion health system headquartered in Janesville, Wisconsin. Its justification? The new facility would target Medicaid consumers and an aging regional population that could be coming in from outside of the immediate area. Those opposed? The four large hospitals within 10 miles of the proposed location. Hadley Streng — a senior vice president at Centegra, which has three of those hospitals — was quoted in the Crain’s article as saying, “The application that [Mercyhealth has] truly is just another attempt at trying to get a larger facility in Crystal Lake [in Illinois] where we don’t believe one is needed.”
This market scenario is not limited to the battle between hospitals. Hospital systems and their accountable care organizations — and private equity-financed specialty organizations — are looking at market opportunities in the niches serving complex consumers. For the niche provider currently in this space, the emerging challenge is new competition for specific consumers — competition that will siphon off consumers and decrease sustainability.
For more, check out these resources from the OPEN MINDS Industry Library:
- Doing The Private Pay Math
- ‘Integrated Care’ & Strategy
- Positioning – & Managing – For Competitive Success
- The Alternative To Big – The Niche?
- Where Does ‘Big’ (& ‘Collaboration’) Fit In Planning?
And be sure to attend my closing keynote, “There Is No ‘Plan B’ Alternative To Value: Creating A Value-Focused Competitive Strategy In A Changing Market,” on June 7 at The 2017 OPEN MINDS Strategy & Innovation Institute in New Orleans. In my presentation I’ll be expanding on core elements for competing on “value” and finding sustainable positioning in an increasingly competitive and price-sensitive market.