Blog Post

The 5 questions you must ask before investing in a high-end service

February 14, 2019

    Hospitals and health systems have long considered high-end services an investment with strong potential to drive growth. But in a world of slimming margins, you need a principled approach to evaluating the true potential of these expensive investments before allocating your limited dollars to a new offering.

    What’s the future of cardiac surgery?

    How to assess a high-end service investment

    For instance, when one of our members asked us if investing in an open heart program would draw significant revenue and offer inroads to more advanced interventional procedures, we ultimately advised against the investment. To arrive at that conclusion, we outlined five key factors that planners should consider when deciding whether to invest in an advanced service offering:

    1. Market demand: Is there market demand for the service?
    2. Market supply: Is there a provider undersupply in the market?
    3. Competitive advantage: Can we gain market share from competitors?
    4. Organizational capability: Does the service complement services that we offer well?
    5. Financial viability: Will revenues cover costs in five years?

    In this particular case, we only needed to focus on the first four factors before confidently arriving at our conclusion.

    Market demand

    We found that the demand for cardiac surgery resulted in $135 million worth of revenue in the member's total service area. However, we also found that local demand for cardiac surgery was expected to decline by 9% over five years—which meant that the member would need to rely on shifting share from existing providers.

    Market supply

    We found that the top five providers in member's service area captured nearly 80% of the total market for cardiac surgery. Additionally, we noticed that there was minimal outmigration; in other words, patients did not need to leave their local area to receive services. These two market dynamics indicated that there was not a provider undersupply: patients could already receive the care they needed from five providers in the local area.

    Competitive advantage

    Physician referrals are a significant driver for the cardiac surgery business, and we found that it would be difficult for a new cardiac surgery program to upend the existing referral networks. Moreover, efforts to do so could potentially backfire by disrupting the member's existing partnerships. As one member stakeholder noted, "Should we partner and collaborate, or do we draw a line in the sand and compete?"

    Organizational capability

    This member expressed interest in cardiac surgery as an inroad toward offering an advanced interventional procedure, transcatheter aortic valve replacement (TAVR). However, to begin a TAVR program, an institution must perform at least 1,000 cardiac catheterizations and 200 percutaneous coronary interventions per year. In both cases, the member's existing volumes did not come close to meeting even half of the required thresholds. Strategically, a cardiac surgery program would not necessarily complement the services the member already offered.

    Thus, we advised the member against the investment. Our methodical approach helped them understand that, even though they were excited to launch an open heart program, pursuing new partnerships with institutions offered more potential to grow their existing cardiovascular business.

    Consider using this same approach when it comes time to make a tough investment decision.

     

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