Problem: Hospital Strategy Development

A hospital management company recently acquired a 150-bed general hospital in a medium-sized city in the southeastern United States. Although the company had little knowledge of the local market when it acquired the facility, its first thought was to continue to run the facility as a general hospital. However, given that the hospital had not been profitable in offering general care and that it faced competition from three large facilities that had access to almost unlimited resources, the new managers chose to perform a situational analysis to determine the most appropriate strategy.

The managers commissioned a study of the immediate market area-the five-mile radius surrounding the hospital. This market area was examined in the context of overall trends for the metropolitan area. The analysts reviewed demographic trends to determine the future size and composition of the population as well as trends in service utilization, and then developed projections of the future demand for health services in the urban area and the immediate market area. Particular attention was paid to the competitive situation to determine the services offered by other facilities, existing market shares for those services, and the nature of existing managed care contracts and other negotiated relationships. The analysis determined that the immediate service rea was not likely to support a general hospital. The payer mix was not favorable, and other facilities controlled significant portions of the local market.

Further, most area employers were tied to the provider networks of the two dominant systems in the community. The hospital did not have a large or strong medical staff, and given the existing provider networks involving competing hospitals, attracting additional physicians to the facility would have been difficult.

Having conceded that it could not operate effectively as a general community hospital and that confronting large, established competitors
head-on was not practical, the managers considered other strategies. After analyzing the data, the managers decided that, under the circumstances, a niche strategy was appropriate for the hospital. It would identify niche services, and corporate efforts would focus on
exploiting those niches.

The hospital had previously developed an occupational health program that catered to the numerous employers in the area. Facilities were available, a basic program was in place, and adequate personnel were available to expand the program. Because no other entity was offering this service in the community, expansion of this program seemed like a logical next step. In addition, the hospital had a longstanding
behavioral health program that had experienced some success in attracting patients, and some of the area's leading substance abuse experts were affiliated with the hospital. Thus, because a fledging program was already in place, key personnel were available, and the market was underserved, the hospital also identified behavioral health (including substance abuse treatment) as a promising niche. Finally, in view of the large Medicare population in the general area and the lack of geropsychiatric services in the community, the hospital decided to add psychiatric services for seniors to the behavioral health component. This niche strategy focused on services that were not being adequately provided to the community.

One other niche was considered but eventually rejected. Market research indicated that minority group members, primarily African American, made up a large proportion of the community. The Hispanic population in the area was also growing rapidly. Further, mainstream providers historically had neglected these populations. A niche strategy focusing on these target populations was considered that would convert the hospital into a facility specializing in minority care. Because of the many unknowns surrounding this concept and the potential controversy such a strategy might generate, this idea was rejected. After carefully assessing the situation, the managers conceded that the facility could not successfully operate as a general hospital and therefore chose to pursue a niche strategy. The approach has, in the short run at least, been relatively successful. The hospital has maintained a significant share of the occupational health and behavioral health markets in the city and has earned a reputation as a facility that does not offer a lot of services but that does a good job with the services it does provide.

Question: What factors raised concerns among the hospital's managers about the viability of the facility as a general community hospital, and how did the market analysis validate those concerns?