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Before You Make That Cut

Karen Minich-Pourshadi, for HealthLeaders Media, June 9, 2010
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Strategic halo models can reveal vital fiscal connections among service lines.

The butterfly effect is the notion that an action as seemingly insignificant as the flutter of a butterfly's wings might create a disturbance that, sufficiently amplified, could change large-scale atmospheric motion, leading to a huge storm in a distant place. Meteorological theory isn't often something associated with finance, but the butterfly effect is similar to a theory dubbed the "strategic halo"—an idea that could potentially prevent finance leaders from making the wrong service line changes and costing a hospital more money than it saves.

Arthur Sturm, president and CEO of SRK, Inc., a Chicago-based healthcare consulting firm, presented the idea of strategic halo at a recent American College of Healthcare Executives Congress. The idea encourages healthcare leaders to look at their services as part of a patient's larger, ongoing pattern for care and develop a baseline that accurately measures the interdependence of services in different service areas.

Traditionally, hospital accounting looks at interactions with patients on a per-transaction basis; however, most other industries, for example, retail, take a broader approach to their customer interactions, explains Sturm. Based on that observation, Sturm built downstream and upstream models that help hospitals assess their data to discern what service lines are influencing each other. The data—all based on customer interactions with the hospital—helps facilities determine with greater accuracy which service lines are most profitable and which are "feeder" lines for the profitable lines, which in turn can be used to help target marketing efforts.

This seemingly simple theory of tracking and categorizing customer interactions caught the attention of the Healthcare Financial Management Association, which asked Sturm to write and speak about the topic for its members, as well as to gather statistics on the success of the data analysis to share with members.

"You can't look at each product line in a silo, because some business exists because your patients matriculate through the system before and after," he says.

Analyzing downstream by going upstream
Many hospitals are seeking ways to reduce costs, and often that may mean reducing or eliminating a less profitable service line. Sturm says the downstream model looks at the data that most hospitals are already collecting; however, more data is needed to take the analysis a step further and discern the interdependence of the profitable service line beyond the individual statistics on patient transactions.

For example, consider a hospital's cardiovascular service line. If 40% of the business originates from four other service lines, which Sturm refers to as upstream feeders, then the strategic halo shows the dependence of the hospital's cardiovascular line on those other lines of business. Thus a hospital that analyzes one of the upstream feeders and decides to downsize or eliminate one of them could drastically impact the profitability of the cardiovascular service line—the downstream area—and end up costing the hospital more money than it saves in making the cuts.

Every service line has a strategic halo, Sturm explains. "You need to know what the strategic halos are in order to maximize the revenue of your patients in both directions," he says.

To determine the downstream effect, hospitals need to use their database to collect information about where the patient is coming from—something few of them do. "When you connect the dots and look at the value of the customer, you can begin to ask, 'What do they really need, what path did they go down, and was the experience easy enough that they'd want to come back." Then you can determine the approach that will make those numbers bigger," Sturm explains.

For some facilities, Sturm says, if a service line doesn't make money as a standalone, then it may not be worth keeping. He uses diabetes treatment as an example. If the facility's diabetes clinic isn't particularly profitable on its own but is feeding 15% of the cardiology business, then maybe a facility can cross-promote other services to these patients, such as gastroenterology or endocrinology.

"You have to look at the total value of a customer, and whatever your number says, that's your baseline. If you're not looking at these connections, then you're going to be whacked in the side of the head if you cut the wrong thing," he says.

Looking beyond service line
"Once you learn the method to track the service lines, it applies to a lot of other areas like marketing," notes William Englert, vice president of operations and business development for Alle-Kiski Medical Center in Natrona Heights, PA. Part of the six-hospital West Penn Allegheny Health System, the 258-licensed-bed Alle-Kiski Medical Center began applying strategic halo principles at the hospital more than a year ago, after Englert heard Sturm speak at a seminar.

Alle-Kiski Medical Center wanted to find out whether its cardiovascular disease patients had been visiting the system for other services. What Alle-Kiski found was a significant number of patients had transactions with its endocrinology service line and its diabetes clinic.

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