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Chapter 15Quantitative Analysis in Strategic Planning
Healthcare organizations must evolve to thrive, and this evolution is more likely to succeed if guided by a strategic plan. Quantitative analysis is essential for strategic planning. In this chapter, examples of the application of quantitative tools will be discussed in the context of creating a strategic plan for a healthcare organization.
LEARNING OBJECTIVES
1.To differentiate and define various types of planning.
2.To define the service area for an organization.
3.To identify key elements of a strategic plan, and to use quantitative analytic techniques to develop a useful strategic planning database.
REAL WORLD SCENARIO
Groveland Clinic is an independent group practice comprised of 27 physicians in several specialties, including internal medicine, pediatrics, obstetrics/gynecology, cardiology, endocrinology, neurology, and sports medicine, as well as three physician assistants, and numerous ancillary health services. The clinic was incorporated approximately 15 years ago and is currently the largest independent practice association in the state. Facing substantial changes in the community as well as increased competition from other providers locally, Brent Callcraft, the administrator of the clinic, has been charged by the board of directors to develop a strategy for the organization to enhance its competitive position for the next 5 to 10 years. Callcraft knows that he must consider many factors to devise such a strategy, and that it will be a significant undertaking. Meeting with Dr. Wanda Wells, the clinics medical director, Callcraft is asked to assemble a small working group to identify critical data elements that must be compiled, and to undertake the analysis.
LEARNING OBJECTIVE 1: TO DIFFERENTIATE AND DEFINE VARIOUS TYPES OF PLANNING
Planning is a systematic approach to achieving predetermined targeted future results or outcomes by making resource allocation decisions and identifying activities or actions to be completed. There are different types of planning, including community, operational, business, master or facility/space, and strategic, which differ in terms of their objective, unit of analysis, and time horizon.
Community planningis oriented toward identifying strategies and programs for communities or population groups. Generally speaking, this type of planning has a relatively long time horizon (10 years), because a lot of community programs take many years to evolve and become sustainable.
Operational planningis oriented toward the organizational or even suborganizational level (e.g., a department within a hospital). This type of planning has a short time frame, usually less than 1 year, and is focused on the day-to-day activities that must be completed to implement strategy.
Business planningcan be thought of as a blueprint designed to guide a program, initiative, or business through a period of about 5 years. Typically, business plans are developed to frame a startup activity, outlining its purpose and objective, as well as marketing and financial strategies. Business plans include statements, known as pro forma statements, which project the expected financial results for the activity over the plans time horizon. Business plans should be developed for all startup activities and are typically required when seeking capital investment from outside the organization (e.g., obtaining a business loan).
Planning that focuses on the physical space, such as buildings, is known asmaster,facility, orspace planning. This type of planning takes into account the amount and type of space required for particular activities, and also deals with issues related to proximity among physical spaces. For example, a master plan would consider how much space is needed for an emergency department within a hospital, what special equipment or physical capabilities might be required in that space, and where that space should be located in the hospital (e.g., first floor, relatively proximate to the radiology department, with easy access to the surgical suite, etc.). The time horizon for this type of planning is governed by the length of time the space is likely to be useful; in many cases this can be quite long (e.g., 1020 years), although updated master plans will certainly be required.
Strategic planningis used to articulate an organizations mission, goals, and objectives, and to define a set of activities to achieve these goals and objectives, over a time horizon of approximately 5 to 10 years. The activities are based on a reasoned, evidence-based approach to allocating resources. If an organization is fortunate enough to have unlimited resources, strategic planning decisionswould not need to be made. Obviously, such an organization does not exist. A simple way of defining strategic planning is to think of it as answering three questions:
1.Where do we want to be?
2.Where are we now?
3.Whats the best way of getting from where we are to where we want to be?
Table 15-1Major Types of Planning
Type of Planning
Major Focus
Time Horizon
Community
Community or population group
10 years
Operational
Organization or sub-organizationday-to-day
1 year
Business
Organization or sub-organizationassess sustainability and use to acquire external funding
5 years
Master
Space issues, including proximity among units in facility
1020 years
Strategic
Organization or sub-organization resource allocation decisions to achieve goals, objectives
5 years
This chapter deals primarily with strategic planning, although aspects of the other types of planning are also touched upon.
Table 15-1
differentiates among the essential types of planning.
LEARNING OBJECTIVE 2: TO DEFINE THE SERVICE AREA FOR AN ORGANIZATION
It is particularly important for a healthcare organization to identify who uses or might potentially use the organizations services in the future. This process is known as defining the service area. Many attributes can be used to define a service area for a healthcare organization. For example, a pediatric practice typically serves patientsunder the age of 18, obstetrics/gynecology specialists provide care for women, cardiologists focus on conditions pertaining to the heart, etc. In each of these instances the principal population served by the clinician is defined by the patients age (pediatrics), gender (obstetrics/gynecology), or body system (cardiology).
However, in a more general sense the service area of a healthcare organization, program, or service may be defined geographically. For most organizations or services, the majority of clients or patients come from a definable area. This area includes those communities that are important to the healthcare organization in that they account for a substantial portion of the organizations business, as well as those communities that are especially dependent upon the healthcare organization for services. Identifying this service area is important for an organization, because it must make sure that the needs and interests of the population comprising the service area are met. In the next several paragraphs an approach for defining a service area is presented.
Determine the Relative Importance of Each Community to Your Organization
Healthcare organizations must determine where their patients or clients are coming from, a process known as patient origin analysis. For example, suppose you are completing a patient origin analysis for a physician group, Gladwell Medicine. In this case, you would analyze where the patients who utilize the group reside, for example, by zip code.
Table 15-2
displays the number and percentage of total patient visits using Gladwell Medicine, arrayed by zip code in descending order.
According to these data, more than 22% of Gladwells patients come from XXXX1, nearly 19% from XXXX2, etc. Using the setting of a physician practice, the formula for computing patient origin is:
Patient Origin for Community A=Patient Visits to Your Organization from Community ATotal Patient Visits to Your Practice
Obviously, it is critical for Gladwell to know where its patients are coming from and to identify and serve the needs of this group.
There is no percentage that is used strictly to define an organizations service area. However, generally the service area is considered to account for 60% to 75% of the total patient activity. For Gladwell, four zip codes account for more than 70% of patient visits. In addition, notice that there is a relatively large dropoff in percentage between zip codes XXXX4 and XXXX5. This dropoff, or natural breakpoint, frequently occurs in patient origin analyses. This suggests that there is a notable difference between these two zip codes in terms of the percentage ofpatients contributed. By convention, we would include the zip codes above the breakpoint in the service area. Taken as a whole, the patient origin analysis suggests that the first four zip codes represent a substantially more important area to Gladwell than the others.
Table 15-2Patient Origin Analysis for Gladwell Medicine, by Zip Code (FY 20072008)
Zip Code
Number of Patient Visits
Percentage of Total Patient Visits
Cumulative Percent of Total Patient Visits
XXXX1
234
22.4%
22.4%
XXXX2
196
18.7
41.1
XXXX3
174
16.6
57.7
XXXX4
129
12.3
70.0
XXXX5
80
7.6
77.6
XXXX6
74
7.1
84.7
XXXX7
41
3.9
88.6
XXXX8
19
1.8
90.4
XXXX9
14
1.3
91.7
OTHER
85
8.1
99.8
TOTAL
1046
100
Determine the Relative Importance of Your Organization to Each Community
Not only is it essential to assess how important each community is to your organization, but it is also important to assess your organizations relative importance to the communities. For example, a zip code with a relatively low population may contribute a small percentage of your business; however, the majority of the population may look to you for care. This analysis is known as market share analysis. Again using the example of the Gladwell practice, the formula for computing market share for community A is:
Market Share of Community A=Patient Visits to Your Organization from Community APatient Visits to All Organizations of Your Type from Community A
Table 15-3
displays the utilization data of the main zip codes from which Gladwell patients are drawn.
Note: the XXX in columns for providers A, B, and C indicate that these providers treat patients from other zip codes beyond the nine being analyzed. However, these data are not pertinent to completing a market share analysis for Gladwell.
Evaluating
Table 15-3
, we see that residents of zip code XXXX1 made 528 visits to physician offices in the last fiscal year. Of this total, 234 or 44.3% were to Gladwell. We say that Gladwells market share of zip code XXXX1 is 44.3%.
Table 15-4
displays the market share for Gladwell in each of the zip codes of interest.
Based on these data it is apparent that Gladwell Medical is a very important healthcare resource for residents of zip code XXXX7, where it holds a market share of 44.6%.
Table 15-3Visits, by Provider and Zip Code (FY 20072008)
Patient Visits
Zip Code
Gladwell
Provider A
Provider B
Provider C
Total
XXXX1
234
119
65
110
528
XXXX2
196
28
145
682
1051
XXXX3
174
109
35
72
390
XXXX4
129
59
131
7
326
XXXX5
80
541
129
74
824
XXXX6
74
59
365
291
789
XXXX7
41
15
7
29
92
XXXX8
19
55
198
704
976
XXXX9
14
29
577
308
928
OTHER
85
XXX
XXX
XXX
XXX
It is important for a healthcare organization to include in its service area those communities (or other population groupings) for which the organizations services are important, as well as the communities that are important to the organization, both of which may be measured by utilization patterns. Typically there is substantial overlap between these categorizations. That is, organizations in which we are important, as reflected by a high market share, typically also account for relatively high percentages of our business. As with patient origin analysis, there is no minimum market share level above which a zip code would be included inthe organizations service area; however, it is generally wise to take a conservative approach to defining the area (i.e., it is more prudent, strategically, to err on the side of including more communities, rather than excluding them). As a general guideline, if the organization has a market share of more than 15% in a community, the community should be included in the service area. It should be noted that in urban areas with dense populations and multiple providers, market shares will be substantially lower than the levels shown in this example; this fact must be taken into account.
Table 15-4Marketshare of Gladwell Medical, by Zip Code (FY 20072008)
Zip Code
Gladwell Patient Visits
Gladwell Marketshare
XXXX1
234
44.3%
XXXX2
196
18.6
XXXX3
174
44.6
XXXX4
129
39.6
XXXX5
80
9.7
XXXX6
74
9.4
XXXX7
41
44.6
XXXX8
19
1.9
XXXX9
14
1.5
For Gladwell Medical, based on the patient origin and market share analyses, the service area would be defined to include at least the following zip codes: XXXX1, XXXX2, XXXX3, XXXX4, XXXX7.
In addition to the quantitative approach used in patient origin and market share analyses, several qualitative or subjective analyses must be completed in defining service area. The first of these qualitative factors takes into account the relative location or proximity of zip codes. The preliminary service area for Gladwell, as defined by patient origin and market share, is shown in
Figure 15-1
.
Note that most of the preliminary service area zip codes, indicated by shading, are contiguous (i.e., they touch). Notice zip code XXXX5. It is surrounded by zip codes included in the preliminary service area for Gladwell, although it does not qualify to be included itself, based on insufficient patient origin and market share data. In effect, zip code XXXX5 is somewhat of an island in the middle of a sea of service area counties. There might be several reasons why this pattern has occurred. For example, perhaps the zip code has an extremely low population, has relatively poor access to Gladwell, or has a very specialized population(e.g., a military base or university), which has distinct healthcare needs and frequently dedicated healthcare resources. Whatever the reason, however, because of the proximity and contiguity of zip code XXXX5 relative to other service area zip codes, we would choose to include it in Gladwells service area.
LEARNING OBJECTIVE 3: TO IDENTIFY KEY ELEMENTS OF A STRATEGIC PLAN, AND TO USE QUANTITATIVE ANALYTIC TECHNIQUES TO DEVELOP A USEFUL STRATEGIC PLANNING DATABASE
Organizations do not exist in a vacuum; rather, they function as a part of a living, evolving environment. As such, they are affected (and can affect) several factors that exist both inside and outside the organization. In creating a strategic plan, both internal and external factors must be considered. This section identifies and describes several key external factors, many of them with quantitative components. A number of internal factors, such as governance and management team, organizational structure, provider capabilities, information system, financial health and stability, etc., but they are not discussed here. In differentiating between external and internal factors, generally the clearest distinction is that the organization has greater degrees of control over internal versus external factors. For example, the size and age distribution of the population, certainly important to a healthcare organizations strategy and activities, are not controllable by the organization (i.e., they are external factors).
In addition to the distinction between internal and external factors, both quantitative and qualitative factors must be taken into account, although the former aspects are discussed in greater detail in this section of the book. This focus is not to minimize the importance of qualitative factors, which can, on occasion, be the overriding strategic consideration. For example, political factors, both within and outside the organization, can be the final criteria by which a decision is made whether or not to pursue a particular strategy.
What are the key factors that must be considered in developing a strategic plan? The key is to identify those factors that influence the need for and utilization of healthcare services. There are several of these factors. First, identify the most important external elements, introduced by the acronym SHEEPED, each letter of which corresponds to an area that must be carefully evaluated. In each case, the data analyzed should include current as well as historic data for at least 5 to 10 years.
SHEEPED: A Framework for Analyzing External Factors in Healthcare Strategic Planning
Socioeconomic Factors
The relationship between the need for healthcare services and the level at which these services is utilized, and various socioeconomic factors is well established. For example, an individuals income level can have a substantial impact on the amount and type of healthcare services used. Individualswith a higher income utilize greater levels of most healthcare services. Some of this is tied to the fact that higher income levels are typically associated with employment status and availability of health insurance programs. Moreover, individuals with higher income levels have more discretionary income that can be used to obtain healthcare services not covered by insurance plans. An exception to this general rule is that individuals with lower income levels tend to use emergency department services at greater levels than those with higher income.
Other socioeconomic factors that must be taken into account in strategic planning include race, gender, education level, marital status, size of household, and availability of health insurance coverage. Each of these factors needs to be analyzed in terms of past socioeconomic status of the community, as well as forecasts of such information in the future. For example, changes in the ethnic composition of the U.S. population are likely to have an impact on the delivery of healthcare services in the future, particularly in evolving urban areas, requiring healthcare providers to implement translation services and perhaps print healthcare information in multiple languages.
Healthcare Resources and Utilization
Existing health and social service organizations within the service area must be identified and evaluated in light of potential competitive and/or collaborative opportunities. At a minimum, an inventory of such programs and services should be developed, including descriptions of the programs offered, detailed information on available technology, with a particular focus on specialized or unique capabilities such as specialized imaging devices or cutting-edge clinical approaches. This resource inventory should be mapped geographically. In addition to the inventory, quantitative information should be gathered and analyzed regarding utilization of healthcare resources in the service area. For example, in terms of hospital resources, the analysis would include at least the following:
1.Availability statistics
a.Number and location of hospitals
b.Number of beds, by service
c.Outpatient capabilities and capacity
d.Educational programs or services
2.Utilization statistics
a.Number of admissions (These data can be combined with service area population data to determine service area utilization measures, such as admissions per 1000.)
b.Average length of stay
c.Program or service utilization statistics
By recognizing the interrelationship among the data elements cited in the preceding, several very additional useful measures can be computed. Examples of this were introduced in
Chapter 5
, including
Equation 5-3
, which is used to compute the number of patient days. Here, we also introduce a second
Equation 15-1
, which uses patient days to determine the percentage occupancy for a facility.
1.Patient days: By combining the number of admissions by the average length of stay, the number of patient days of care can be calculated. This statistic is particularly useful in analyzing hospital utilization, determining bed occupancy rates, likely demand for hospital inpatient ancillary and support services such as laboratory tests, imaging examinations, meals served, pounds of laundry handled, etc.
Patient Days =
(Hospital Admission Rate per 1000 people) (Number of People (in 1000s) in the Service Area) (Average Length of Stay)
Equation 5-3
2.Average annual percentage occupancy: Knowing what percentage of a healthcare organizations beds is occupied is important to plan for the emergency needs of a community, as well as staffing and other programmatic needs.
Average Annual Occupancy Rate=Patient Days UsedPatient Day Capacity=(Number of Admissions)(Average Length of Stay)(Number of Beds Available)(Days in Year)
Equation 15-1
The examples provided in the preceding refer only to institutional healthcare resources such as a hospital or a nursing home. It is important to evaluate individual healthcare provider resources as well. Physicians are a particularly important individual healthcare resource, and their availability and utilization must be monitored carefully. The physician assessment for a community should at least include the following:
Number of physicians, by specialty and age
Number of physicians by office location
Physician activity levels, e.g., admissions, revenue generated, referrals, etc.
Epidemiologic Factors
Epidemiology is the study of the distribution and determinants of disease, and there are several quantitative measures of great interest to health planners. In terms of planning, epidemiologic data break down into three major categories: natalitypertaining to birth; morbiditypertaining to disease; and mortalitypertaining to death. Each of these categories includes several indicators of interest as they reflect health status and need. Examples of pertinent indicators are introduced in
Chapter 5
, and they are repeated here to place them in the context of strategic planning.
Natal statistics:
Number of births.
Birth rate: Relates the number of births to the total population, usually expressed as the number of births per thousand.
Fertility rate: Takes into account the ages and gender distribution of the population, expressing the number of births per thousand women aged 15 to 44.
Low and very low birth weight births: Usually expressed as the percentage of total births considered low birth weight (less than 2500 g) or very low birth weight (less than 1500 g).
Premature births.
Percentage of Caesarian births.
Morbidity statistics:
Incidence rates of various diseases: Incidence refers to the occurrence of an event, in this case a new case of a disease. So populations are assessed relative to the number of new cases per 1000 or 100,000 population.
Prevalence rates of various diseases: Prevalence refers to existing cases of a disease, so populations can be assessed relative to the number of existing cases of a disease per 1000 or 100,000 population.
Mortality statistics:
Crude mortality rate: This is a measure of the total number of deaths in a particular geographical area, divided by the population of the area, so the rate is usually referred to in terms of the number of deaths per 100,000.
Age-adjusted mortality rate: This rate takes into account that populations differ in terms of their age distribution, and that difference will, of course, have an effect on the number of deaths that occur. This rate adjusts for different age distributions and is usually referred to as the number of deaths per 100,000.
Cause-specific mortality rate: This statistic measures the number of deaths from a particular cause, such as cardiovascular disease, in relation to the population. It is usually referred to as the number of deaths from a specific cause per 100,000.
Infant mortality rate: Many analysts use infant mortality rate as a particularly important proxy measure of the quality of a health system. The measure indicates the number of deaths of infants (under the age of 1 year) per number of live births. It is usually referred to as the number of deaths per 1000 births.
Economic Factors
The economic vitality of the country as well as the local community can have a considerable impact on healthcare need and use. Rising unemployment rates will lead to decreases in the number of people covered by employer-based health insurance, and probable increases in coverage by government programs, such as Medicaid. These patterns will undoubtedly have an impact on the type and level of health services used. Similarly, the rate of inflation has an influence on purchasing decisions, including healthcare services. It is instructive to evaluate the employers of the local community. Are they in industries which typically offer rich employee benefit packages, including health insurance or is the workforce provided with very limited benefits? Are local employers in growth industries, as categorized by standard industrial classification (SIC) categories? Are local industries high-risk employers, such as agriculture, lumbering, and fishing?
Political Factors
One area of external analysis, although primarily qualitative in nature, will be included here because of its particular importance to healthcare planning. The areas political environment (e.g., limited government intervention/free market orientation versus more regulation and increased levels of government involvement) can have a significant impact on a healthcare organizations future strategy and its ability to carry out this strategy. For example, requirements related to a certificate of need program, if relevant, will certainly have an impact on an organizations ability to enter a market, or modify its programmatic offerings. Some states have imposed temporary moratoria on development of particular healthcare services, such as nursing home or acute beds. Local issues, such as zoning regulations, can also have a substantial impact on strategic decisions.
Environmental Factors
Healthcare need is affected by environmental conditions in the service area. Aspects such as water and air quality must be monitored to identify existing and potential health risk factors. For example, areas in which the local air quality is demonstrably compromised, based on emissions data, would suggest the likelihood of increased levels of pulmonary-related morbidity. It is also important to monitor the location of toxic waste disposal sites, either suspected or documented.
Demographic Factors
Demography is the study of the population, and perhaps the most basic area of quantitative analysis pertaining to demographic characteristics. This area ofquantitative analysis relates quite closely with the socioeconomic characteristics described earlier. The two most important demographic factors to consider are:
Total population size: Healthcare resources are used by virtually everyone, so while the particular type of services used will vary depending on the characteristics of the population, all other things being equal, larger populations will require more healthcare services.
Population by age: Healthcare utilization varies by age, with the younger (less than 5 years old) and older (over 65 years old) using more healthcare services; the type of services used will also vary by age. Healthcare planners need an understanding of the age distribution of the population to identify future healthcare needs.
In addition to analyzing past and current demographic data, it is especially important to develop forecasts of future population levels. Approaches to complete such forecasts are presented in
Chapter 6
.
EXERCISES
15-1Using the following data set on hospital admissions, define the service area for Hospital A, based only on quantitative factors (
Table 15-5
).
15-2Compute the target bed capacity of Cheswick Community Hospital 10 years from now, based on the following information:
Assume current population of Cheswick Community Hospitals service area = 145,000
Assume projected population increase of 8% in service area over the next 10 years.
Table 15-5Hospital Admissions, by Community
Community
Hospital A
Hospital B
Hospital C
Other Hospitals
North
45
64
76
123
South
159
324
12
521
East
65
24
137
311
West
145
68
95
113
Central
32
56
78
159
Upper
29
84
45
814
Lower
37
14
8
57
Assume a future admission rate per 1000 of 102.
Assume average length of stay of 4.7 days in 10 years. Assume a target occupancy rate of 78% in 10 years.
15-3Newgroveton is a community of 445,000. In the most recent year, there were 750 new cases of disease A in the community. Assume the expected incidence rate for disease A is 245 per 100,000 people. Was the communitys experience better or worse than expected? Explain your answer.
15-4The population of South Winslet is 358,000. Assume the following physician distribution by specialty in the community (
Table 15-6
).
Assume that one half of physicians retire at the age of 65 and all physicians retire at age 70.
How many physicians, by specialty will we must recruit in 5 years? Ten years?
Table 15-6Exercise 15-4
Specialty
Number of Physicians
Number Currently Aged 6065
General Practice
90
18
Pediatrics
38
6
General Surgery
41
2
OB/GYN
50
6
Assume the following target ratio of physicians per 100,000 people.
Specialty
Target Physician Ratio per 100,000
General Practice
31
Pediatrics
18
General Surgery
13
OB/GYN
14
