Hospitals

Targeting Value in Health Care:

How Intensivists Can Use Business Principles to Make Strategic Decisions

By Corey Scurlock, MD, MBA, Jayashree Raikhelkar, MD, and David M. Nierman, MD, MMM

In this article
Examine the business threats that intensivits face and
consider ways to establish a competitive edge.

1. The threat of new entrants

2. The bargaining power of customers
3. The bargaining power of suppliers
4. The threat of substitute products or services
5. Jockeying for position among current competitors

In 1979 Michael E. Porter, PhD, published a seminal paper

on how five competitive forces shape strategy within an industry (Figure 1).1 Grasp of these forces is a cornerstone of any
business strategy course, and executives frequently perform a
five forces analysis when determining if a strategic decision is
correct or if an industry is worth future investment.
The forces that govern competition in business in general apply to medicine overall and to critical care as a specialty. Since intensivists work in high-cost areas of hospitals
taking care of critically ill patients who use disproportionate hospital resources, they are uniquely positioned to add
value in our current health care system.
To better position themselves in the coming economic
environment, intensivists must increasingly assume hospital leadership positions and apply sound business principles.
It is imperative that they understand the structure of the
industry and forces that govern it to properly formulate successful business strategies.
We present an argument for understanding and using a
Porters Five Forces analysis of critical care. We argue that
intensivist groups that target value in their analysis will have
a tactical advantage relative to intensivist groups that do not.
Value is a difficult term to define, particularly in health
care. Porter defines value as health outcome per dollar
spent. 2 This differs from past attempts at health reform
that focused on simple cost reduction. Improving outcomes
per unit of cost is inherently cheaper in the long run as better health is less expensive than poor health.3

Porters Five Forces

The five forces governing competition listed by Porter are:
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Threat of new entrants

As a market becomes more profitable it inevitably
draws new entrants, e.g., opposing intensivist groups, into
the marketplace. Therefore, hospitals that are successful
and growing become appealing to outside intensivist groups
seeking new business opportunities.
From the perspective of hospital leadership, intensivists do not refer patients to a hospital, and are at risk of
being viewed as interchangeable commodities with low
switching costs. This makes an established intensivist group
vulnerable to new entrants.
The best defense that an established group has against new
entrants is to provide high-value care. By targeting value, an
established group creates barriers against competition.
In his analysis, Porter described four major barriers to
entry:

1. Economies of scale
Economies of scale are cost advantages that are secondary to size, usually in the form of increased purchasing and
bargaining power when dealing with contracts or benefits
for employees.
For physician groups, a benefit of larger groups is an
enhanced reputation of stability. In critical care, this means
that larger intensivist groups may have an advantage in
negotiating contracts with managed care organizations,
leading to increased collections as well as increased purchasing power when obtaining benefits for their employees
and reduced overhead costs.

This favors the merger and

acquisition of smaller groups to
form larger intensivist groups that
cover multiple hospitals. In order to
displace a large group, a competing
group would need to possess similar
economies of scale or accept some
form of cost disadvantage when
engaging in financial competition.

2. Product differentiation
The concept of product differentiation requires an understanding
of the core foundations of marketing.
Intensivist groups must develop some
form of brand loyalty from their
customers.
To accomplish this, a group
needs to be unique or to offer a highly differentiated service. This could
mean having an outstanding record
on patient safety, 24-hour in-house
ICU coverage, providing an efficient
patient and doctor-friendly ICU environment or mastering the utilization
of high-cost hospital resources.
An intensivist group may also differentiate itself by employing intensivists with a variety of skill backgrounds,
which would provide them with a
broad degree of critical care services,

In critical care, this means that larger intensivist groups may have an advantage
in negotiating contracts with managed care organizations leading to increased
collections as well as increased purchasing power when obtaining benefits for their
employees and reduced overhead costs.

i.e., neuro and cardiothoracic critical

care as well as the more common
medical and surgical ICU coverage.

3. Advantages that are

independent of scale
In addition to economies of scale
there may be significant advantages
that an established group has developed over time that comes from
experience.
A well-established group that has
accomplished senior providers has
an advantage over a newer and less
experienced group that is attempting
to displace them. These experienced
clinicians bring with them greater
emotional intelligence, which can
lead to better customer relations.
Moreover, their years of practice
may lead to enhanced clinical abilities and the ability to recognize disease patterns and syndromes, making

them more efficient and lower-cost

providers.
Finally, they may be able to mentor junior members of the group and
accelerate their professional growth.
At the same time, groups should
not solely rely on senior physicians,
but should also regularly bring in
younger physicians who are trained
in the newest ICU techniques and
technologies.
Clinical examples of this include
expertise in new technologies such as
ultrasound and echocardiography.

4. Access to distribution channels

This is related to name recognition and familiarity of the group with
customers and suppliers. An example
of this is insurance company contracts.
Having in-network status makes the
group more desirable to an in-network
facility and in-network patients.

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Figure 1

Porter's Five Forces

Threat of
New Entrants

Bargaining
Power of
Suppliers

Jockeying
for position
among current
competitors

Bargaining
Power of
Customers

Threat of
Substitute Services

Hospitals can vertically integrate

by absorbing hospital-based but selfemployed physicians and demand
they become hospital employees.
With ever decreasing margins relative to general inflation, hospitals
will become even more price sensitive
in the future.
Providers who control ICUs
may be expected to accept lower
reimbursement from a disproportionate Medicaid/Medicare population
and to participate with lower reimbursement MCOs, in exchange for
a monopoly on a hospitals critical
care environment.
A group that targets value will
manipulate the power of customers to its advantage. Bringing value
throughout the care cycle differentiates the group and makes it an important and essential provider to their
customers, enhancing brand loyalty.
In the future, hospitals will also be
searching for value as reimbursement
becomes bundled or reduced.

Power of suppliers

A group with firmly established

contracts and a strong reputation can
more easily extend its critical care
services into a newly acquired hospital. Finally an established group will
benefit from its members having a
diverse social network with hospital
administration, referring physicians
and other groups.
Taken together an established
group has a comparative advantage
in overall access compared to a newer
group.
In the end, the threat of entry
is a considerable force for critical
care physician groups to counter.
Low brand loyalty and lack of economies of scale lower barriers to entry.

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PEJ MarchApril/2011

Intensivists must be cognizant of and

enhance the barriers in their local
environment to defend their position.

Power of customers
Who are the customers for a
critical care group? Is it the patients?
The referring physicians? The hospital within which they work?
For this discussion, we will consider the hospital to be the customer.
In Porters analysis customers are
powerful if they purchase in large
volumes, they are price sensitive or if
there is threat of vertical integration
toward the providers. Hospitals fit all
three of these criteria and are therefore powerful customers.

In his analysis Porter describes

a powerful supplier as one who has
a unique product that the industry
is dependent upon or that has little
threat of vertical integration.
In critical care, the suppliers
are the training programs that train
new intensivists. This will become
more important as residents increasingly move away from critical care as
a career choice, with lack of leisure
time and stress being the most commonly cited reasons. 4
As demand for critical care
physicians increases and supply continues to dwindle, the power of the
training programs to steer trainees
will become more important. This
will necessitate affiliations of critical
care groups with training programs
to have greater access for future
staffing.

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Threat of substitute services

The threat of a substitute service
can severely impair profitability and
lower the power of a group regardless
of economic climate. These substitutes often come rapidly into play
and are difficult to prepare for. The
ones that demand the most attention
are those that affect price sensitivity.
In critical care the most common
threat is the use of hospitalists or
other non-critical-trained physicians
to fill the growing supply-demand
mismatch between the need for
intensivist care and the number of
board certified intensivists.5, 6, 7
To protect against substitutes,
critical care providers must focus on
delivering and highlighting the value
they provide so their customers realize the distinction between their care
and that of others.
In addition, as changes in the
health care system cause customers to become more price sensitive,
it will be imperative to demonstrate
this to justify the higher salaries that
intensivists command. A group that is
attuned to this dynamic will be that
much more difficult to dislodge

Jockeying for position

This last force of competition
refers to rivalries within the field. In
critical care this refers to turf battles
between different groups over control
of certain hospitals in a geographic
area or ICUs within a single hospital.
According to Porter, rivalry is
greatest when there are numerous
competitors that are relatively equal
in size and power, low switching costs,
and poor differentiation between competing services. All of these currently
apply to the specialty of critical care
and make competition between existing groups particularly fierce.
For community hospitals the
switching costs for private practice
groups are relatively low. In academic
hospitals, however, groups are more
entrenched, which gives them some22

PEJ MarchApril/2011

what more protection as they benefit

from longstanding relationships and
traditions.
Any group must differentiate itself
by tracking its performance using
metrics such as central line associated
blood stream infections (CLABs), ventilator associated pneumonias (VAPs),
etc, which leads to decreased hospital
costs. This will increase brand loyalty
to the group, increase its power over
its customers and protect it from the
threat of substitute products.

Strategy and positioning

Modern medicine has made
extraordinary advances in technology
and science, with one result being the
specialty of critical care medicine and
the modern intensive care unit.
While these advances have led to outstanding clinical outcomes for many
patients, they come at a price. At this
point in time in the United States,
approximately one percent of the gross
domestic product (GDP) is spent on
providing critical care services.8
Given the resources devoted to
critical care, it is essential that we get
value. Without first achieving value,
any plan of universal coverage will
end in financial catastrophe, as debits
will quickly outweigh credits.
In almost in any business model
this would be unsuccessful and
health care is no exception.
How do intensivists add value?
Potential ways include:
Avoidance of VAP9
Lung protective modes of
ventilation10
Adherence to CLABs Protocols11
Timely resuscitation and attention to hemodynamics in septic
patients12
Identification of the chronically
critically ill and addressing goals
of care13
Interruption of daily sedation14

Some form of glycemic control15,

16, 17 As an example, glycemic control when applied properly has
been found to result in improved
outcomes and a cost savings of
2638 euros, largely as a result of
fewer ICU days and less mechanical ventilation.18
To contain costs Porter argues
that we must switch away from our
current volume-based system and
instead focus on maximizing value
throughout the health care cycle of a
patient.
This will result in outcomes
being widely measured and disseminated to the public for all health care
providers and for all medical conditions in the hope that a reimbursement system will align around the
central theme of maximizing value
for patients.
In addition to this the Affordable
Care Act (ACA), signed into law
on March 23, 2010, is designed to
improve quality and reduce unnecessary cost in the health care system.
Specific to critical care, the ACA
will create incentives for hospitals
to reduce rates of hospital-acquired
infections and complications that
lead to higher costs.
To understand the magnitude of
these costs, Fuller and others recently
found that post-operative infections
and deep wound disruptions added
$14,446 of incremental cost per patient
in Maryland.19 In addition patients
who experienced hospital-acquired
complications (HAC) were found to
have higher total costs and critical care
costs as compared to those who did not
experience a HAC.20
Moreover, intensivists decisions
have been found to play a large role in
discretionary costs in the care cycle
of a patient following only severity of
illness in magnitude. 21
The ACA will place an emphasis
on bundling of payments to bring
focus on the coordination of care for
chronic illness. This will mean that the

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acute care hospital, critical care physicians and the post-discharge skilled
nursing facilities will be sharing a single payment for care for both the acute
and chronic periods of illness. This
will force hospitals to search for value
as a means to sustained profitability
and survivability.
Once the group has assessed the
forces affecting competition within
their industry they can then identify
strengths and weaknesses. It is then
a choice of how best to position the
group to defend against these weaknesses to enable them to maximize
their competitive position.
Intensivist groups are wellpositioned to enhance value by their
proximity to high-cost resources, i.e.,
the ICU, end of life care. In this time
of change in our current health care
system, we recommend looking for
adding value in the health care cycle
as a target to harness the five forces
for the industry of critical care to
one's advantage.
The Porter Five Forces system
is easy to use and easily adapted to
allow critical care leaders to strategically position themselves.

David M. Nierman, MD,

MMM, is associate profes-

sor of medicine and surgery at Mount Sinai School

of Medicine in New York.

References
1.

Porter ME. How competitive forces shape

strategy. Harvard Business Review, March/
April 1979.

2. Porter ME. A strategy for health care

reform-toward a value-based system.
NEJM July 9, 2009; 361(2) 109-112
3.

Porter ME. Value based health care

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4. Lorin S, Heffner J, Carson S. Attitudes

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Committee on Manpower for Pulmonary

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6. Hyzy RC, Flanders SA Pronovost PJ,

Berenholtz SM, Watson S, George C,
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7.

Corey Scurlock, MD,

MBA, is assistant profes-

sor of anesthesiology &

cardiothoracic surgery
and director of the
Cardiothoracic Intensive
Care Unit at Mount Sinai
School of Medicine in New York.
corey.scurlock@mountsinai.org

Jayashree Raikhelkar, MD, is assistant

professor of anesthesiology & cardiothoracic
surgery at Mount Sinai School of Medicine in
New York.

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PEJ MarchApril/2011

Tenner PA, Dibrell H, Taylor RP.

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