At the Helm

Big enough for what? A strategist's approach to determining system size.

by Thomas Cassels and Ben Umansky

When we ask health care leaders about their growth strategy, more often than not their initial response is to turn the question back on us: "You tell me, how big is big enough?" That’s when the conversation gets interesting.

Our response is always the same. Big enough for what?

Size and strength don’t always go hand-in-hand

The last two business cycles in the health insurance and health services delivery industries created a simple scale advantage. We had the "managed care rebellion," which ended with a rapid growth in coverage for implantable devices in the early 2000s, and the "price-driven growth bubble," which is now coming to an end. As a result, health care leaders have been operating with an understanding that bigger has always been safer for your balance sheet (give or take an AHERF or two).

Today, however, many health care leaders starting down the same path are questioning the much touted economies of scale, whether a health system, health plan, medical group, or other.

The real strength of any health system comes not from pure size but from more fundamental characteristics like the ability to attract top talent, finance strategic initiatives, and support a reliable experience for patients and staff (the primary drivers of quality outcomes in health care delivery). Size can support these ambitions, but it’s no guarantee. We see all too frequently that size can hinder these ambitions in organizations that lack "systemness."

Moreover, the difference between success and failure for large provider and payer organizations—think Trinity Health, Tenet, and HCA as well as the Vivity Health, Aetna, and Anthem—will be determined not by the size and structure of new transactions, but by the product advantages and cost advantages that matter to price-sensitive customers. That will be the test of our new business cycle, the retail revolution.

Keeping these things in mind, the more important growth questions health system leaders should ask themselves are: "How do we capture strategic market position, and at what scope and reach?" and "What will make us more efficient and effective at serving current patients, retaining these existing patients for future care needs, and attracting new ones?"

Identifying the means to generate the right size should only enter the picture after clearly defined goals are set for strategic positioning and consumer acquisition. Remember, you can’t answer "How big is big enough?" until you ask, "Big enough for what?"

Are we large enough to attract purchasers?

One common ambition—and justification for getting bigger—is a desire to be more attractive to employers and insurers seeking comprehensive solutions.

It’s absolutely right to be thinking about how to appeal to these wholesale purchasers. But being larger is not necessarily the magic bullet for getting their attention. Purchasers are more interested in diverse and accessible clinical services for its beneficiaries or employees. The right questions here are: "What purchasers do we want to attract? Who are the consumers they represent? What is important to those consumers in terms of services and accessibility?"

Meeting these consumer demands may require growing the system—perhaps by expanding the geographic footprint to cover an employer’s entire workforce, or by bringing together enough patients and capital to support a new specialty service line. But sometimes the right answer for consumers involves divesting and restructuring in order to maintain lean cost structures and pricing flexibility. And in many cases, the best way to meet the market’s demands is through strategic partnerships where the network expands but the health system, as defined by balance sheet assets, remains the same.

Whether we talk about dollars, beds, square miles, or patients, there are no magic numbers. The right size for your organization is the size—and shape—that allows you to pursue your strategic aims as competitively and efficiently as possible.

When size impacts corporate structure

The shape of a system is just as important as its size. We find that leaders of expanding health systems often express uncertainty about whether their corporate structure is the right one to support the system’s growth strategy. Sometimes we’ll hear maxims like "hospital chains should be an operating company, but delivery networks can’t be an operating company." Just like there are no magic numbers to define size, approaching corporate structure from a this-or-that standpoint is dangerous.

Organizational models succeed when form follows function. That means the model needs to vary based on the corporate entity’s strategy, clear objectives for making the strategy a success, and capacity to support individuals and business units in reaching the objectives. Moreover, with ever-changing market demands and innovative care and business models, the corporate structure needs to be agile enough to respond to shifting ends.

The better approach to defining corporate structure is to ask, "What are the most efficient and effective ways to support the system’s business units?" Here are four different structures expanding systems can consider:

  • A holding company, which places strategic and operational authority at the business unit level. The corporate office has a narrow role, and incentives are aimed at maximizing the performance of the individual business units.

  • Enterprise standardization, which establishes common operating procedures in lieu of centralized management. Management authority is maintained at the local level, but incentives are in place for meeting system standards as well as individual goals.

  • Horizontal management, a matrix model that mixes centralized services with shared accountability. This model centralizes transactional functions virtually, and maintains a close proximity of staff to frontline operations. There is also increased accountability for enterprise standardization through a single reporting line.

  • Operating companies, which have a light presence of centralized management at the site level. This structure centralizes staff at one location, maintains strong corporate control over shared services decisions, and offloads transactional duties from local staff.

Regardless of your answers to these diagnostic questions, it’s worth explicitly revisiting them with your leadership team on a recurring basis. With the pace of change in today’s health care provider market, the answers to "How big is big enough?" and all the subsidiary questions underneath may be different next year than they are today.

Get more insights from Tom and our Strategy Consulting team

Our strategy practice helps clients tackle the volume-to-value transition, consumer marketing, and set health system strategy in the United States and beyond. Check out some of their recent work.

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