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Rethinking the hospital

The value of business models for hospitals

Master thesis Maarten den Braber (m@mdbraber.com) October, 2008 – Enschede, The Netherlands

models for hospitals Master thesis Maarten den Braber (m@mdbraber.com) October, 2008 – Enschede, The Netherlands
models for hospitals Master thesis Maarten den Braber (m@mdbraber.com) October, 2008 – Enschede, The Netherlands
models for hospitals Master thesis Maarten den Braber (m@mdbraber.com) October, 2008 – Enschede, The Netherlands

Rethinking the hospital

The value of business models for hospitals

the hospital The value of business models for hospitals Master thesis University of Twente School of

Master thesis University of Twente School of Management and Governance master Industrial Engineering and Management track Health Care Technology and Management

Student M.M. den Braber BSc. (s0010863) m@mdbraber.com

Supervisor Prof. Dr. H.E. Roosendaal h.e.roosendaal@utwente.nl

Co-supervisor Prof. Dr. W. van Rossum w.vanrossum@.utwente.nl

Prof. Dr. W. van Rossum w.vanrossum@.utwente.nl Company supervisor The Decision Group Ir. M. Koomans

Company supervisor The Decision Group Ir. M. Koomans m.koomans@thedecisiongroup.nl

Front page: The photo depicts “Maggie’s Centre” at Dundee, United Kingdom. The building is designed by the architect Frank Gehry and located at Ninewells Hospital in Dundee. It was opened in 2003 and fulfills the purpose of helping people with cancer, their carers, family and friends to learn how to manage the physical and emotional impact of living with cancer.

Photo courtesy of “Royal Arch”

http://flickr.com/photos/46235637@N00/526055454/

Table of contents

ACKNOWLEDGEMENTS

1

EXECUTIVE SUMMARY

3

1 INTRODUCTION: MAKING THE RIGHT CHOICES

9

2 RESEARCH BACKGROUND

11

2.1

POSITION OF THIS RESEARCH

11

2.2

FOCUSING ON THE BUSINESS MODEL

12

2.3

RESEARCH QUESTIONS

13

2.4

RESEARCH METHOD

14

2.5

EXPLORATORY RESEARCH

14

2.6

RESEARCH CONTEXT

15

2.7

CONCLUSION

16

3 STRATEGIC ENVIRONMENT OF DUTCH HOSPITALS

17

3.1

EVOLUTION OF THE HOSPITAL

17

3.2

POSITION OF THE HOSPITAL IN THE HEALTHCARE DELIVERY SYSTEM

19

3.3

HOSPITAL LANDSCAPE

20

3.4

HOSPITAL FUNCTIONS AND ACTIVITIES

22

3.5

DUTCH HOSPITAL REFORM: A SHORT HISTORY

24

3.6

CONCLUSION

25

4 BUSINESS MODEL THEORY

26

4.1

CONCEPT OF THE BUSINESS MODEL

26

4.2

THE BUSINESS MODEL OF CHESBROUGH & ROSENBLOOM

28

4.3

BUSINESS MODEL AND VALUE

30

4.4

A MODEL APPROACH TO STRATEGY

32

4.5

BALANCING VALUE IN STRATEGY: INSIDE-OUT VERSUS OUTSIDE-IN

33

4.6

CONCLUSION

34

5 STRATEGIC ISSUES FOR THE HOSPITAL

36

5.1

FIELD RESEARCH

37

5.2

INTERVIEWS

38

5.3

DISCUSSION SESSIONS

39

5.4

OUTCOMES

46

5.5

CONCLUSION

52

6 BUSINESS MODEL THEORY AND HOSPITAL POLICIES

53

6.1

LITERATURE REVIEW

54

6.2

MCKEE AND HEALY (2002)

55

6.3

NVZ VERENIGING VAN ZIEKENHUIZEN (2000)

56

6.4

MACKINNON (2002)

57

6.5

DARZI (2007)

58

7

VALUE OF BUSINESS MODEL THEORY FOR HOSPITALS

60

 

7.1

VALUE PROPOSITION

60

7.2

MARKET SEGMENT

62

7.3

STRATEGIC POSITION

64

7.4

VALUE CHAIN

66

7.5

COMPETITIVE STRATEGY

68

7.6

COST STRUCTURE / REVENUE POTENTIAL

70

7.7

BENEFITS AND LIMITATIONS OF THE BUSINESS MODEL APPROACH

72

7.8

CONCLUSION

74

8

CONCLUSIONS, DISCUSSION AND FURTHER RESEARCH

76

 

8.1

CONCLUSIONS

76

8.2

DISCUSSION

80

8.3

FURTHER RESEARCH

83

RE

FEREN

CES

85

AP

PEN

DI

X

A

INTERVIEWEES

89

AP

PEN

DI

X

B

ATTENDEES DISCUSSION SESSION

90

AP

PEN

DI

X C

STRATEGY CANVAS SCORING QUESTIONS

91

List of figures, tables and boxes

FIGURE 3.1

FIGURE 3.2

FIGURE 3.3

FIGURE 4.1

FIGURE 5.1

FIGURE 5.2

FIGURE 7.1

FIGURE 7.2

HOSPITAL LOCATIONS IN THE NETHERLANDS (RIVM, 2007)

20

DIFFERENT DUTCH HOSPITALS

21

OVERVIEW OF INTERNAL HOSPITAL (SERVICE LINE) ACTIVITIES

23

APPLICATION OF THE BUSINESS MODEL IN 6 SEQUENTIAL STEPS

30

PRESSURE FOR CHANGE IN HOSPITALS (MCKEE & HEALY, 2002, P. 37)

37

STEPS FOLLOWED TO BUILD STRATEGY CANVASES AND FIND DIFFERENTIATING FACTORS

40

HEALTHCARE DELIVERY VALUE CHAIN (PORTER & TEISBERG, 2006)

67

PORTERS FIVE FORCES MODEL

69

FIG

URE

7.3

BCG MATRIX (JOHNSON ET AL., 1997)

 

71

FIGURE

8.2

APPLICATION OF THE BUSINESS MODEL IN 6 SEQUENTIAL STEPS

77

TA

BLE 3.1

HISTORICAL EVOLUTION OF HOSPITALS ADAPTED FROM MCKEE & HEALY (2002)

18

TA

BLE 4.1

PROPOSED ROLES OF THE BUSINESS MODEL

27

TABLE 6.1 ANALYSIS OF CURRENT IMPLICIT DUTCH HOSPITAL BUSINESS MODELS (ESTABLISHED POLICIES)

54

TABLE 6.2

POSS

IBL

E ROLES OF A DISTRICT GENERAL HOSPITAL (MCKEE & HEALY, 2002, P. 69)

55

TABLE 6.3

STRATEGIC PATHS TO FUTURE CHANGE IN THE ORGANIZATION OF HOSPITAL HEALTHCARE

 

(NVZ

VERENIGING VAN ZIEKENHUIZEN

, 2000)

56

TABLE 6.4 NEW

HOS

PITAL ENTERPRISES ONTARIO HOSPITAL ASSOCATION (MACKINNON, 2002)

57

T

ABLE 6.5

DELIVERY MODELS NHS LONDON (DARZI, 2007)

58

BOX 2.1

BOX 2.2

BOX 3.1

BOX 3.2

BOX 3.3

BOX 4.1

BOX 4.2

BOX 4.3

BOX 4.4

BOX 4.5

BOX 4.6

BOX 5.1

BOX 5.2

BOX 5.3

BOX 5.4

BOX 5.5

BOX 5.6

BOX 5.7

BOX 5.8

BOX 5.9

BOX 5.10

BOX 5.11

BOX 7.1

BOX 7.2

THE NEED FOR INCLUSIVE WAYS OF FRAMING PROBLEMS

12

RESEARCH QUESTIONS

13

VALETUDINARIUM

17

DUTCH HOSPITAL TYPES

21

FUNCTIONS OF AN ACUTE CARE HOSPITAL

23

ABOUT XEROX CORPORATION AND ITS SPIN-OFFS

29

ATTRIBUTES OF THE BUSINESS MODEL (CHESBROUGH & ROSENBLOOM, 2002)

29

ZERO-SUM COMPETITION

31

ATTRIBUTES OF VALUE CREATION IN HEALTHCARE

32

STRATEGY AS A MODEL

32

COMPLEXITY AND DELIVERING VALUE

33

INTERVIEW GOALS

38

INTERVIEW STARTER QUESTIONS

39

OUTCOMES OF THE FIRST DISCUSSION SESSION

41

GUIDING QUESTIONS DEFINING THE VALUE PROPOSITION

43

GUIDING QUESTIONS DEFINING THE MARKET SEGMENT

43

GUIDING QUESTIONS DEFINING THE STRATEGIC POSITION

43

GUIDING QUESTIONS DEFINING THE ORGANIZATIONAL ASPECTS (VALUE CHAIN)

44

GUIDING QUESTIONS DEFINING THE COST STRUCTURE AND REVENUE POTENTIAL

44

HOSPITAL CONFIGURATION IDEAS FOR THE SECOND DISCUSSION SESSION WORKSHOP

45

OUTCOMES OF THE SECOND DISCUSSION SESSION

46

MOST IMPORTANT OUTCOMES OF FIELD RESEARCH (INTERVIEWS, DISCUSSIONS)

47

BENEFITS OF THE BUSINESS MODEL APPROACH FOR HOSPITAL

72

LIMITATIONS OF THE BUSINESS MODEL APPROACH FOR HOSPITAL

73

Rethinking the hospital

Maarten den Braber

Acknowledgements

After organizing Orientation Week 2005 I made a very distinct choice to pursue a career

path involving people and healthcare, and have not regretted it since. During these past few years I have been able to meet, discuss and work with the most interesting and

skillful people I can imagine.

I would like to thank my friends and roommates, Joost and Maarten. Thank for your passionate discussions, honest critiques and always being there when I most needed you g uys. Don’t know where this would have ended without you!

To my other friends Lumine, Koen, Peter, Marieke, Mirte, and Annet: thank you for your

h umo

concepts about my thesis. I look forward to being able to discuss, talk and laugh with you for a long time to come.

r and kind remarks. You never ceased listening to my ever-changing ideas and

Professor Hans Roosendaal I would like thank for his inspiration and showing me insights into strategic management, also for not letting me walk the easy route. And Professor Wouter van Rossum I thank for his comments and shared insights on this thesis.

To everyone at The Decision Group, Maarten, Merijn, Roald, Fred, Lydia, Karin and Wendie, thank you for all the expertise, taking ideas to the next level and never holding

back on your feedback. Thank you for letting me experience consulting and giving me a

seat at the table. I still do not know of any other place that would have done the same!

And all the inspiration from the Nexthealth crowd: Martijn, Jen, Jacqueline, Niels and Jeroen. We have already accomplished some mind-blowing things and I am confident it will not end here. A special thanks to Jen, my English-speaking partner in crime and things even beyond Nexthealth. Never forget that the ones that talk about changing the world are often the ones that do!

Also a big thank you to all of you who have taken the huge effort in reading, spell-

checking and logic testing this document!

And last but not least a great thank you to all my family: mom, dad, Marieke and

Gerhard. You may have not always got all the details of what I was working on, but you have never ceased to show your interest in what I was doing. Thanks for your everlasting support and love!

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am looking ahead to the future, and it is bright. I

know of no better words than those of two friends who also made me smile every day writing this thesis. So in the words of Calvin and Hobbes, created by Bill Waterson, I’d like to close by saying: “It’s a magical world…

To end this acknowledgement…: I

M aarten den Braber Amsterdam, October 2008

by saying: “It’s a magical world… To end this acknowledgement…: I M aarten den Braber Amsterdam,

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Executive summary

Running a hospital is a balancing act. Hospital decision makers must balance pressures from the demand-side (demographics, pattern s of disease, public expectations), the s upply-side (technology and clinical knowledge, health care workforce) and the wider s ocietal level (financial pressures, internationalization, global R&D market). This leaves m any of them questioning how to react. We analyze the strategic background and issues o f hospitals to better understand what causes this anxiety. As a case example we focus on th e situation of the Dutch hospital.

Hospitals emerged i n the 1 st century when they were mainly focused on providing curative, stationary therapy to soldiers of the Roman Empire. Later they evolved into “places where people could die” (by isolating them from the rest of society). Well after that – from the 19 th century onwards – hospitals evolved more and more into places where symptom-based, treatment-oriented care was administered. Important in the last two centuries (19 th and 20 th century) was the development of aseptic and anti-septic techniques, better understanding of infections and the development of effective anesthesia. Overall, the development of the hospital in these two centuries was driven largely by technology. But unfortunately, other roles and service line strategies on the other hand developed with little conscious thought.

Where is the hospital today? The link with the environment of the (Dutch) hospital is mostly determined by its “neighboring medical institutions”, such as GPs or other hospitals. There is a structure that determines the position of the hospital based on the complexity of care and level of specialization. We discern 5 types: general hospital, top- clinical hospital, academic hospital, specialty hospital and focus clinic. With each of these hospitals there is a different mix of six main functions that the organization provides:

patient care, teaching, research, health system support (e.g. management of primary care), employment role and societal role (e.g. provider of social care). Analysis shows relatively large similarities between current hospital configurations.

What about strategic change? Hospitals have a long history of reactive behavior towards change (coinciding with their overall organic, rather than proactive change). Hospital reform in The Netherlands has been, especially from the 1980s, a struggle between government, hospital management and medical specialists. Attempts to implement new fee structures and fee cuts therefore never proved effective.

In this research we establish what possibilities for change there are according to current decision-makers. We have conducted semi-structured interviews with 11 field experts

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(chairmen and members of hospital boards of directors). The main question of the interview was: “Will future hospitals b e different and where/how will they differ?”

The interviews were structured based on themes of the business model: what will be the (future) value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential. This structure provided us with a framework to categorize the different questions as well as the outcomes to later identify the applicability of the business model framework as a relevant theory to build current and future hospital strategy.

T he outcomes of the interviews are two-fold. On the one side it shows us that the themes of the business model structure give a comprehensive view of current and future hospital strategy and are relevant themes to hospital decision makers. On the other side the interviews express anxiety of hospital decision-makers how change could be structured and/or accomplished. Few of the interviewees expressed that they were confident about how they could structure change in their own organization. These concerns added to the fact that it is useful to focus on tools, such as business model theory, that hospitals can use to build strategy.

Tools can be considered the opposite of pre-defined solutions (which are proposed by

many consultants or advisory bodies). Pre-defined

th ought-provoking, but they give no pointers on how to realize and implement the proposed changes. Also pre-defined solutions are exclusive: they only address a fixed number of solutions. Decision-makers identified this as a major short-coming of such models, because such solutions therefore never align with organization characteristics. Another problem with pre-defined solutions is that they tend to focus on providing value for the organization rather than the customer (patient).

solutions often look interesting and

The solution to building sustainable future hospital configurations is not in focusing on a single. Sustainable future hospital strategy will have to balance views that provide value for the consumer with views that provide value for the organ ization. To do so they need to p rovide a coherent and sound logic. This is why we focus on the business model: a comprehensive strategy building tool using a model (template) approach with value at its core.

We have been able to identify four distinct uses of the business model as defined in literature: strategic choice, linking different strategic domai ns, focus on value creation a nd focus on value appropriation.

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The business model is an approach that balances the inside-out views of strategy (based on the resources an organizations has) with the outside-in views of strategy (wh at the c ompetition offers and customers demand). The uses “strategic choice” and “linking different strategic domains” shows the comprehensiveness of the business model. It does not focus on one specific strategic domain (e.g. the value chain), but on providing a sound business logic that connects different domains. Using the business model to focus on both value creation and value appropriation makes sure that what is asked for can be delivered, and what can be delivered is what is really for.

U sing a model approach to strategy, such as the business model, gives structure to be able to answer complex questions. This is useful to hospital decision makers that have since long had an organic approach to strategy. By using a structured approach it also enables decision makers to be better knowledgeable about sources of success and failure in the past, present and future – which is something that often lacks in organizations like hospitals that have little experience with explicit strategy making.

The business model used in this research is based on that of Chesbrough & Rosenbloom (2002). This theory i s operationalized well, compared to other definitions available in li terature. See the figure below for a graphical overview.

Business model Customer Value Market Value Strategic Value Competitive Cost / preferences proposition segment
Business model
Customer
Value
Market
Value
Strategic
Value
Competitive
Cost /
preferences
proposition
segment
position
chain
strategy
revenue
delivered
value
value
implementation
creation
appropriation

T he business model consists of six different elements linked i n sequential order: value proposition, market segment, strategic position, value chain, competitive strategy and cost structure / revenue potential. At the start of the model customer preferences drive the value proposition and the result is value delivered.

The notion of value is at the core of the business model: value as input and value as output. This is important to solve current problems in healthcare. The current problem in hea lthcare is aptly described by Porter & Teisberg (2006) as zero-sum competition: no value is created, competition is about shifting costs, increasing bargaining power and competition to capture patients. Escaping this zero-sum competition can be done through a value-based strategy. Value for hospitals is defined by three dimensions: it must be viewed from the custome r perspective, it must span the complete process and be delivered through a sustainable process.

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To research the value of the business model approach to strategy we asked hospital decision makers for their strategic issues. See the list below for the ten most apparent issues found. Using these issues we have tested the business model approach in how it can help solve these issues.

1. Providing specialized medical care is considered core business

2. Strategic decisions are often supply-driven

3. Scale and scope are considered most important ax es for change

4. Current governance structure complicates decision-making

5. Relationship with the patient is considered of growing importance

6. Financial structures difficult to match with strategic initiatives

7. Hospitals show large similarities in strategic structures/configuration

8. Patients are not always considered end-users

9. Regulated competition is not fully functioning yet

10. Strategy development is replacing established policies

In addition to the strategic issues found through field research, we have also analyzed four different sources in literature about hospital strategies (Darzi, 2007; MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van zieken huizen, 2000).

From the analysis of the literature we conclude that hospital strategy literature focuses on pre-defined solutions, rather than on techniques and tools to build strategy. The focus is often on value realization (through strategic positioning or value chain optimization), but less on questions about what value should be realized (value proposition) or how value is appropriated (cost structure / revenue potential). The reasoning with hospital strategy in literature is often inside-out: strategy is built based on the resources the hospital has, rather than the value it should provide. The value of the business model in this aspect is the fact that it balances an inside-out with an outside-in view on building strategy.

The elements of the business model (value proposition, market segment, strategic position, value chain, competitive strategy and cost stru cture/revenue potential) together b uild comprehensive, concise business logic of the organization. Each of the individual elements can provide (different) value for the hospital in tackling their strategic issues.

Defining a value proposition requires the hospital to think about its stakeholders and its end-customers. The value proposition is not only about products and services but about core functions: is the hospital focused on curing sick people or keeping people healthy? The market segment follows the value proposition and focuses on segmenting potential customers in quantifiable groups and specifying targets for what customers to reach when. Current hospitals are showing only lit tle segmentation in their customer focus.

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The link with the environment is the third element of the business model (strategic

position) and oriented towards how to create the relevant value. It puts the attention of

the hospital on issues

in /outsourcing, transaction/coordination costs and addressing issues of governance. The relevance of determining the strategic position is that is makes clear w hat the borders of

the organization are: where does it start and where d oes it end.

of organizational structure, such as (de)centralization,

value chain of the

These organizational borders are needed to further explicate the

hospital: what does the hospital do itself and where and how does it add value? In each step of the value chain the hospital takes, value is exchanged, which must be relevant to the value proposition. The following element, competitive strategy, is r elevant for hospitals to offer sustainability and not be overtaken by competitors. Competitors might not be limited to the “usual suspects” of other healthcare organizations, but might come

from other industries as well. Therefore also reconsiderin g the focus on medical- te chnical quality as a single competitive dimension is relevant.

The cost structure and revenue potential of the business model shift focus towards the fact that no organization is sustainable if no revenue is generated. The h ospital needs to b uild a comprehensive service portfolio balancing cost as well as revenue-generating activities. Considering what customers are willing to pay for (exchange value) can help in identifying new revenue streams that go beyond the current mechanism of paying for procedures.

Through field research, literature research and assessing the model elements we have reached the point to draw the conclusions about the value of the business model approach as a whole, our main question for this research. We do this by evaluating the business model based on three criteria to evaluate strategic options: suitability, fea sibility a nd acceptability.

Suitability is concerned with the questions whether an option fits the firm’s situation and if there is evidence to support it. The business model helps to answer seemingly complex issues by using a model approach to strategy, putting hospital decision makers in contr ol o f their own strategic decisions, rather than providing ill-aligned pre-defined solutions. The business model solves the issue of causal ambiguity by making decision-makers aware of the (needed) logic behind strategic scenarios. It enables decision makers to expand the scope of their strategy beyond medical care as their core business and focus on value as defined by customers. Strategic issues (scale/scope, governance, competition, financial incentives) all get a place within the elements of the business model to be adequately addressed as part of the comprehensive approach connecting all the doma ins.

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A nd not only can the business model be used to test current strategies, it is also usable to test new scenarios for hospitals looking at how to gain competitive advantage in the future.

Feasibility is concerned with the question whether there are resources to do it and likely competitor response. The business model is no easy solution to implement for hospitals that have long followed established policies, rather than expli cit strategy development. R igor and discipline is needed to determine what sound business logic is. But hospitals also do not have to (re)invent the wheel. We have shown with each step in the business model that there are methods, tools and techniques that help the hospital assessing and connecting the different strategic domains. When the hospital connects these tools and techniques through the comprehensive business model it can evaluate the business logic of the current strategy as well as test future scenarios. But building a business model needs also a strategic mindset throughout the organization. When not everyone inside of the organization is knowledgeable about what the ultimate value delivered should be, it will be hard the least to deliver this, even if there is a sound log ic in theory.

The acceptability of using the business model is closely linked to willingness of the hospital to rethink the organization. If there is no perceived need for change with the decision-makers, there will likely be little interest in any value-based strategy (building tool) at all. If the hospital is aware of the fact that delivering value in a sustainable way is of increasing importance they will be more likely to accept the business model. During our field rese arch we have found many examples of the fact that hospitals do perceive th e need for change as well as the need for inclusive ways of framing seemingly complex problems. The business model is a likely candidate for this as we have been able to proof in this research.

The business model contributes to the efforts of hospital decision makers interested in

their customers and their organization: it provides them with a tool

ra ther than a pre-defined solution. The model approach of the business model makes the hospital (decision maker) smarter and allows for a clear strategic fit with the organization. Using business models hospitals can focus on delivering value for the consumer as well as for the organization.

providing value to

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“Would you tell me, please, which way I ought to go from here?” “That depends a good deal on where you want to get to,said the Cat. “I d on’t much care where…” said Alice. “Then it doesn’t matter which way you go,” said the Cat. -- LEWIS CARROLL, Alice in Wonderland

1 Introduction: Making the right choices

Hospitals and other healthcare organizations are working their hardest to deliver optimal care in cost-efficient ways. Examples are many and include finding optimal planning algorithms, patient satisfaction surveys or building new clinical paths, such as mamma- care service lines for focused breast cancer screening and treatment. The tension between these two objectives is challenging for decision-makers to manage. Choices ultimately have to satisfy the preferences of the patient (optimal care, outstanding communication and collaboration or information transparency, just to name a few). At the same time organizational issues have to be addressed in order to deliver products in services in a sustainable way (cost-effective, evidence-based, state-of-the art, etcetera). How than can the hospital make the right choices to balance the interest of the patient/customer as well as the organization?

Process optimization, total quality management or medical-technical innovations are some of the efforts organizations in healthcare are making to deliver the best care possible to patient/cus tomers. Analyzing different parts of the hospital process and looking at the many new initiatives in healthcare, the question comes up: what value does the hospital provide? Is the current hospital the best way to deliver value to the patient/customer? In other words: do we still know why the hospital should actually exist?

Hospitals have a long history of responsive organic changes, rather than a history of predictive explicit chan ges (explored further elsewhere in this research). But current pressures demand organizations culti vate an awareness of the value they deliver: what, why, how and when. But answering these questions is not a challenge just for hospitals, it is a challenge for all that deal with balancing customer and organizational preference. Therefore we take a premise in this research that best practices from other domains such as business can be used to help hospitals address this issue.

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making choices. “What?”,

Busi ness strategy is the scientific domain focusing on

“when?”, “how?” and “who?” are four questions for any organization to answer about

their business. Hospitals can benefit from a comprehensive and structured approach to

e the right choices: balancing search is about what is available

for hospitals to use and focuses in-depth on the approach of the business model.

patient/custom

help

them answer these strategic questions and mak

er and organizational preferences. This re

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“Research is to see what everybody else has seen, and to think what nobody else has thought.” -- ALBERT SZENT-GYORGI, Nobel Price for Medicine 1937

2 Research background

Helping hospitals make the right choices can be as easy as trying to point out the direction to go. But who follows such a suggestion without knowing if it is the right one for his organization? And how would you know that it is the right solution? There is definitely value in visionary answers and possible routes to take: they are often thought-provoking, good start for a discussion and may be close to the actual best route possible. But there is additional value in asking good questions: it is 100% focused on the specifics of the organization, it calls for a sound logic to connect the dots and it can be repeated if situations change.

We show an overview of current approaches to new hospitals strategies and configurations in 2.1. Following that we will explain that we chose the business model as the research object of this master thesis and why the business model adds to the current research domain (2.2). To guide the research we pose a set of research questions (2.3) and list the research methods (2.4). The context of this research is exploratory (2.5 and

2.6).

2.1 Position of this research

What hospitals might look like in the (near) future is becoming an increasingly popular field of research. Not surprisingly maybe, consultants are amongst the most avid publishers of change in healthcare, issuing (trend) reports about future configurations of hospital and other healthcare organizations (PriceWaterhouseCoopers, 2005; Roland Berger, 2007; Vreeman & Laeven, 2008). Often these reports are trying to give insight into several exclusive paths that healthcare organizations within a certain field (e.g. hospitals, nursing homes, primary care) can possibly take. Not only consultancy firms are publishing about paths for the future, also policy makers, associations and other non- commercial parties are doing so (Darzi, 2007; MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van ziekenhuizen, 2000). How can hospitals go about incorporating these possibly innovative ideas into their own organizations?

When we look at the academic literature for references to “recipes” rather than pre- defined solutions we find some literature that point to different elements: blending

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custom

n analysis of

co nfigurations (Reeves, Duncan, & Ginter, 2003). Most of the publications found have two things in common: (1) most of them focus on an analysis of the present-day situation and (2) they often focus on one specific issue. Our goal is to look for ways or tools that can help hospitals find new inclusive ways of innovating strategies, rather than

(Burns & Pau

and standard care (Bohmer, 2005), analysis of integrated delivery network s

ly, 2002), transformation processes (Golden, 2006) or a

only giving pre-defined solutions (Box 2.1).

Box 2.1

The need for inclusive ways of framing problems

“We live an extremely complex, pluralistic society where it is increasingly difficult to achieve consensus. In the effort to deal with the complexity, we often oversimplify by posing "solutions" in either-or terms. We need more inclusive ways of framing problems and challenges that permit us to consider the inherent complexity of the issues in a meaningful way.”

(Shortell et al., 2000)

2.2 Focusing on the business model

This research focuses on a comprehensive method for innovating hospital strategy: the business model. A business model explains how different elements of a business are tied together to embody coherent and comprehensive business logic. It does so by combining a perspective from both the organization (e.g. how can we sustain?) and customer (e.g. do I get what I want?).

The business model may differ from the focus of strategy in at least three important ways: (1) it focuses on creating value for the customer, (2) it focuses more on creation of value for the business than for the shareholder and (3) it assumes knowledge is cognitively limited and biased by earlier success of the firm (Henry Chesbrough & Richard S. Rosenbloom, 2002, p. 535). The attributes of the business model mentioned in the previous paragraph can be beneficial for hospitals: combining customer value creation with creating value for the business. Non-profit businesses, as viewed from a strategic standpoint, can benefit from the same tools and discipline as used by for-profit businesses (Collins, 2005).

The question of what the value of the business model is for (non-profit) healthcare organizations will be at the center of this research. We focus on one s pecific type of healthcare o rganization: the hospital. Using the hospital makes it possible to relate to real-world examples and test validity through example. Further research may extend this research to healthcare organizations other than the hospital.

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Rethinking the hospital

Maarten den Braber

We analyze the use of business models as a way to rethink the hospital. We acknowledge therefore that this approach might mean changing our ideas about what defines a “hospital”. We assume that the strategic definition of a hospital is not written in stone, instead can be a myriad of different things. Today’s healthcare organizations, particularly ‘one stop shops’ like hospitals, must hav e a fluid, adaptable approach to strategy d evelopment. We test this one approach, the business model, to be able to judge at the end of this research the potential value for reexam ining non-profit hospitals strategic p ositioning using traditional business models.

2.3 R esearch questions

What is the value of

research. We follow this by breaking down this research in six diffe rent sub-questions in Box 2.2.

tion for this

business model theory for hospitals?” is the main research ques

Box 2.2

Research questions

What is the value of the business model theory for hospitals?

1. What is the strategic environment of hospitals?

2. What defines a business model?

3. What is value?

4. What indicates a need for the approach of business model theory for hospitals?

5. What value does business model theory add for hospitals, compared to existing literature and methods already available?

6. What are the benefits and limitations of the business model elements and approach for hospitals?

To be able to asses the value of the business model we need to understand in what realm we are testing value. We choose hospitals as the one type of healthcare organization to be the case example for using the business model in the wider realm of healthcare organizations. The Dutch hospital situation is known to the author and useful to show the relevance of the business model by example.

The second research theme is the subject of our research question: value. Starting to define value immediately raises a plethora of additional questions: value for whom, which type of value, when is value delivered? We define value in the second part of this research to know what we link to the business model in the third part of this research .

The strategic environment of hospitals and the definition of value are linked to the business model in the subsequent part. The three sub questions concerning the business model are:

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Rethinking the hospital

Maarten den Braber

1. What are the theoretic elements of the business model?

2. What value do business model elements deliver in building hospital strategy?

3. What are the uses of the business model for current hospital makers?

2.4 Research method

For this research we use both literature and field research. Literature offers us many views and theories of what business models can offer. We test how these different views of the business model might apply to hospitals. We gain information about the current and futu re strategic issues of hospitals and healthcare in The Netherlands from in terviews and two discussions sessions with relevant decision makers.

Directors chairmen and

members (general hospital 2, top-clinical hospital 4, academic hospital centers 3, specialist hospitals 2) and 1 healthcare entrepreneu r. A complete list with names and functions of the interviewees is found i n Appendix A.

E leven interviews were conducted, mainly with Board of

The discussion sessions were attended by a total of 33 people, representatives of h ospital

or healthcare delivery organizations, (specialist) associations, hospital-related gover nment

organizations and facilitating organizations. A can be found in Appendix B.

complete list with names and functions

T he interviews and groups discussions were held in private settings. This allowed the interviewees and attendees to speak freely and allowed for more room to express strategic issues or concerns. The outcomes of these interviews and discussions are summarized in chapter 5, where the strategic issues for the hospital in building strategy are discussed. In the tables below (2.1 – 2.3) we listed the attendees for the interviews and the first and second

2.5 Exploratory research

This research offers an explorative view on a combination of two otherwise often disjunctive concepts: business (models) and healthcare. Because of the exploratory nature of this research we have chosen a qualitative approach. When searching for available li terature on conducting sound academic research in a non-quantitative ways, we utilize the theories of Popper (1935), later adapted by Kuhn (1962) and Lakatos (1970). They can guide us through this explorative research.

Popper introduced the theory of falsification: while there is n o one definitive way to prove a single statement or theory, we can falsify it if we find a proper counter-exam ple

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Rethinking the hospital

Maarten den Braber

(all swans are white – until we find a black one). Kuhn identified that in practi ce this isn’t the case with most scholars. Many hang on to their theory, dismissing any counter- evidence, stating it is u nsound or not true, rather than admitting their theory may be wrong. Explorative research such as this might lead others to state that the business model theory is not applicable to hospitals and other healthcare organizations. We take the stand in this research that this is not the case, until we have found a counterexample (evidence which shows that business model theory does not apply to hospitals)

L akatos, another scholar of research philosophy, offered an alteration to the theories of Kuhn and Popper. He didn’t view a theory as a single statement, but rather as a

collection of statement, he called a research program. The research program is made up of a hard core and different auxiliary hypothesis. With business models we can mirror this:

in a model, while the auxiliary

the hard core is the fact that strategy can captured

h ypotheses can be seen as the different themes and elements residing under that model, which might need to be changed at a later stage. This is than without dismissing the fact that strategy can be viewed as a model (see for a more detailed explanation section 4.4).

Changing these auxiliary hypo theses can explain apparent refutations and possibly also p roduce new facts. Lakatos named such a rule a positive heuristic. If changing the auxiliary hypotheses does not yield the prediction of new facts then it would be labeled degenerative. A progressive research program, with a positive heuristic, is interesting for scholars to research further, because it produces new facts and can explain apparent refutations. We look into if the theory of business model to research if it provides such a positive heuristic.

2.6 Research context

This research is the master thesis project of the author, enrolled in the master track Health Care Technology and Management (HCTM). HCTM is a specialization track of the master Industrial Engineering and Management (IEM), taught at the School of Management and Governance at the University of Twente (Enschede, The Netherlands). This research was supervised by Prof. Dr. Hans Roosendaal (Professor of Strategic Management at the Dutch Institute for Knowledge Intensive Entrepreneurship - NIKOS) and co-supervised by Prof. Dr. Wout er van Rossum (Professor of Innovation M anagement and director of the Institute of Governance Studies - IGS). Both NIKOS and IGS are directly linked to the University of Twente.

The day-to-day research has taken place at The Decision Group (Breukelen, The Netherlands), where the author has been employed full-time from October 2007 to June 2008 as a business analyst. The Decision Group is a strategy consulting firm with more

15

Rethinking the hospital

Maarten den Braber

than half of its client base in the health care and life-sciences sectors. Supervision at the Decision Group was performed by Drs. Merijn Stouten (consultant) from October 2007 to April 2008 and by Ir. Maarten Koomans (partner) from May 2008 to June 2008.

D ata for this research was gathered from the study “Changing Roles and Configurations of Hospitals,” executed as a joint-venture by Nyenrode Business Universiteit (Breukelen, The Netherlands), The Decision Group and Assist BV. Supervision of the study is by Prof. Dr. Fred van Eenennaam (Professor of Dynamics of Strategy at Nyenrode Business University and partner at The Decision Group). The author has been a member of the research project group for the full duration of the project.

2.7 Conclusion

This research focuses on devising whether the business model approach applies to h ealthcare and is able to ask the right questions instead of giving pre-determined routes of change. The main reasons why this research is different from currently available research is that focus on inclusiveness (“asking questions”) rather than exclusiveness (“giving answers”). The goal is to provide decision-makers with tools which can be tailored to our specific situation and repeated to strengthen our own decision-making.

The research object is the theory of the business model and the according research question i s: “What is the value of the business model?” The themes of this research are three: the hospital, the business model and value. There are six guiding questions used throughout this researc h:

1. What is the strategic environment of Dutch hospitals?

2. What defines a business model?

3. What is value?

4. What indicates a need for the approach of business model theory for hospitals?

5. What value does business model theory add for hospitals, compared to existing literature and methods already available?

6. What are the benefits and limitations of the business model elements and approach for hospitals?

Our research is exploratory in nature and we use qualitative research methods (interviews, discussions sessions) which give more insight in the relevance of the business model theory we are researching. We state that the business model can be used as a model to build strategy for hospitals. The contents of this business model we will have to test in this research.

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Maarten den Braber

“A hospital is no place to be sick.” -- SAMUEL GOLDWIN, Hollywood producer

3 Strategic environment of Dutch hospitals

The business model is part of the domain of tools at our disposal to build strategy. Strategy as we will discuss in more detail in the next chapter evolves around questions of what, where, how and when products and services are delivered 1 . If we want to be able to analyze further the value of the business model, we need to know more about in what context it is applied. This context is the strategic environment of the hospital: its positions in the landscape of healthcare organizations and its functions and activities.

T o be able to place this research in a broader context that also shows why any approach to building strategy is relevant, we show the evolutionary stages of the hospital.

3.1 Evolution of the hospital

T here is no single definition of “the” hospital. The first notions of what may be considered the emerging of a hospit al can be traced back to the Asclepiu s temple, 300 B.C. (NAi, 2006; Wikipedia contributors, 2008a) and the Rom an valetudinarium, see Box

3.1.

Box 3.1

Valetudinarium

“The hospital as institution was invented about 2 000 years ago, in the era of emperor Augustus (63 B.C. to 14 A.D.). It emerged in the context of the transformation of the Roman army from mobile troops to an army of occupation. Roman officers created a new type of building, the valetudinarium (military hospital) which was integrated within large permanent headquarters. Hence any service a patient might have required – from an operating theatre to a sickroom – was available under one roof […] As opposed to medieval hospitals which devotedly supplied health care for the poor, the weak and the sick, Roman hospitals were exclusively organized with the aim of providing curative, stationary therapy and simultaneously furthering the education of physicians and nursing staff”

(Wilmanns, 2003)

1 The questions of what, where, how and when are not defined as one distinct strategic theory but are apparent in many strategic theories and related literature. We use them in this research as guiding questions that help us easily identify what strategy is about in its core (Mintzberg, Ahlstrand, & Lampel, 1998; H.E. Roosendaal, 2006)

17

Rethinking the hospital

Maarten den Braber

Table 3.1 gives an overview of the changing role in current society.

historical evolution of hospitals as well as their

Table 3.1

Historical evolution of hospitals adapted from McKee & Healy (2002)

Role of hospital

Time

Characteristics

Curative, stationary therapy

1

st

to 5

th

century

Focused on soldiers

Practicing medicine as science

7 th century

Byzantine Empire, Greek and Arab theories of disease

Nursing, spiritual care

10 th to 17 th centuries

Hospitals attached to religious foundations

Isolation of infectious patients

11 th century

Nursing of infectious diseases such as leprosy

Health care for poor people

17 th century

Philanthropic and state institutions

Medical care

Late 19 th century

Medical care and surgery; high mor tality

Surgical centers

Early 20 th century

Technological transformation of hospitals; entry of middle-class patients; expansion of outpatient departments

Hospital-centered health systems

1950s

Large hospitals; temples of technology

District general hospital

1970s

Rise of district general hospital; local, secondary and tertiary hospitals

Acute care hospital

1990s

Active short-stay care

A mbulatory surgery centers

1990s

Expansion of day admissions; expansion of minimally invasive surgery

C linical pathways

2000s

Focusing not only on medical treatment, but on control of the complete path of care given.

O nline and offline personalized h ealth related services

Next

Providing information, advice and treatment in personalized service concepts both online and offline

(McCabe Gorma n & den Braber,

2008)

Starting out as military institutions, the first hospitals grew out of care made available th rough those realizing the Christian ideal of providing relief for the sick and poor. Together with this function came also the ‘added benefit’ of isolating those with infectious diseases from the rest of society. With the rise of industrialization, urbanization expanded (19 th century) and the state stepped in, alongside religious and

18

Rethinking the hospital

Maarten den Braber

philanthropic institutions, forming public hospitals. Admission was no lo nger based so

much on social s tatus, but rather

The 19 th century also saw

the r

d medical care:

infection was better understood, aseptic and anti-septic techn iques developed, effective

Together with greater surgical knowledge and an

increase in medical technology, these developments gave rise to the model of health care

delivery we now see i n most Western countries.

anesthesia became available etcetera.

on me dical criteria.

ise of symptom-

base

d, treatment-oriente

In the 20 th century military

advances including: safe blood transfusion, penicillin, and surgeons trained in trauma

techniques. Chemical engin eerin g meant an i

This broaden

ury medical technology increased even

further, especially the field of medical imaging an d diagnostics. All these improved

technologies also mean an increased burden on the health care system - people that

would otherwise have died can now be

common use of life support technol ogies in in dustrialized nations such as the United States.

d impact on hospitals, introducing

sur

gery had a

profoun

ncrease i

ed

n the diseases that could be treate

d.

ical technology got more expensive

ed the scope of ho

spitals, but also m

f of the 20 th cent

and complex. I n the second hal

kept alive m

uch longer, especially with the now

volution of h was driven la

and service line strategies developed with little cons

McKee, 2004).

centuries the configuration

This quick 2 overvi

ew shows th of ho

at the e spitals

n the last two

rgely by technology, and other roles

ospitals is organic. I

cious thought (Edwards, W

yatt, &

3.2 Position of the hospital in the healthcare delivery system

consists of three separate modalities: public health

services, primary car e and secondary/tertiary care 3 .

by

family physicians, district nurses, home care givers, midwives, physiotherapists, social workers, dentists and pharmacists. Each patient is supposed to be on a GP patient list and must be referred to specialist physicians or the hospital by the family physician.

The Dutch healthcare delivery s

ystem

Primary healthcare is provided

S econdary and tertiary care in hospitals is largely provided in private not-for-profit institutions.

2 Much more can be said on the background and evolution of hospitals. The scope of this research does not provide sufficient space for an in-depth review of all developments. For those interested in such a review, we recommend reading the second chapter (The evolution of hospital systems) of ‘Hospitals in a changing Europe’ (McKee & Healy, 2002).

3 The division of care delivery in three separate modalities can be argued: the distinction between secondary and tertiary care is not always clear: e.g. psychiatric care is part of hospital care (secondary) as well as considered tertiary care (independent psychiatric hospitals). It is important to make a distinction between primary and ‘further’ care because of the referral system used in The Netherlands.

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Rethinking the hospital

Maarten den Braber

The family physician (GP) is the gatekeeper of the healthcare system in The Netherlands. The gate keeping principle is one of the main characteristics of the system. It denotes that patients do not have free access to spec ialists or hospital care, but must go “ through” the GP. Family physicians “specialize” in common and minor diseases, in care for patients with chronic illnesses and in addressing the psychosocial problems related to these complaints. Complicated non-comprehensive (and expensive) specialist care is reserved for patients who require special expertise and highly technical skills (European Observatory on Health Systems and Policies, 2004, p. 63).

“In the Dutch system, family physicians do not have hospital privileges: they cannot admit their

patients to, nor treat them in, the hospital. They may, however, use the hospital for diagnostic procedures, such as blood tests, X-rays, endoscopies and lung tests. Although some family physicians visit their hospital patients, this is not common in practice. This illustrates one of the disadvantages of the

existing

O bservatory on Health Systems and Policies, 2004, p. 69)

health care system: a gap between outpatient and hospital care.” (European

3.3 Hospital landscape

Currently there are 93 non-academic and 8 academic hospital organizations in the Netherlands providing specialized medical care combined with (overnight admissions) stay, comprising 141 hospital locations and 45 outpatient clinics (see Figure 3 .1).

Figure 3.1

Hospital locations in The Netherlands (RIVM, 2007)

3.1 Hospital locations in The Netherlands (RIVM, 2007) Current Dutch hospitals are defined as ‘institutes
3.1 Hospital locations in The Netherlands (RIVM, 2007) Current Dutch hospitals are defined as ‘institutes

Current Dutch hospitals are defined as ‘institutes delivering specialized

including stay’ (RIVM, 2007). In Dutch law all hospitals are known as institutes for

specialized medical care. This same name is given to independent/focus clinics. The

medical care

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Rethinking the hospital

Maarten den Braber

difference between those clinics and other institutes for specialized medical care is that only hospitals are allowed to offer stay, or overnight admissions.

The three main functions of Dutch hospitals are patient c are, education and research (M inisterie van Volksgezondheid, Welzijn en Sport, 2006; STZ, 2006). Through analysis of available publications and views expressed by different stakeholders of hospitals a categorization of hospitals in five distinct types emerges: general, top-clinical, academic, and specialty hospitals and the focus clinic, see Box 3.2.

Box 3.2

Dutch hospital types

! General hospital : regional focus, wide range of treatments

! Top-clinical hospital: regional focus, wide range of treatments, offering teaching facilities and some highly specialized medical treatments

! Academic hospital: national focus, focusing on complex treatments, offering teaching and research facilities

! Specialty hospital: national focus, focusing on a single treatment category (e.g. oncology or rehabilitation), may offer teaching and research facilities

! Focus clinic: national focus, specializing in a single type of treatment or medical condition, does not offer teaching and research facilities

The differences between the hospitals (as defined by the interviewees and discussion participants themselves) are based on diffe rences in complexity and specialization of patient care. Detailing the different types of hospitals based on these two axes yields the figure displayed in Figure 3.2.

Figure 3.2

Different Dutch hospitals

Academic hospital Specialty hospital Focus clinic Top- clinical General hospital hospital (STZ) Complexity of care
Academic hospital
Specialty hospital
Focus
clinic
Top- clinical
General hospital
hospital
(STZ)
Complexity of care

Specialization

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Rethinking the hospital

Maarten den Braber

Dutch hospitals and other institutions for specialized medical care are not permitted to be

organized around a for-profit classification.

including general practitioners, dental care or paramedic care providers are allowed to be fo r-profit organizations. An important distinction between for-profit and not for-profit organizations is the compon ent of overnight admission. When offered care is inpatient (including overnight admission), organizations are not allowe d to be for-profit.

Most other healthcare organizations,

Establishing a (new) health care institution in Th e Netherlands is regulated by means of the Health Care Establishments Licensing Act (Wet Toelating Zorginstellingen). An application has to be submitted to the Netherla nds Board for Health Care Institutions (Bouwcollege) who tests the application on the four different themes: transparency of management, continuity, quality and that accumulated eq uity is kept for health care purposes. This test is compulsory for institutions such as hospitals and care, but not for maternity care, dental care and GPs (Ministerie van Volksgezondheid, Welzijn en Sport,

2 007b).

Medical treatments in the Dutch system are reimbursed based on diagnosis treatment combinations (DBC), somewhat similar to the American system which uses Centers for Medicare and Medicaid Servic es (CMS) diagnosis related group (DRG) nomenclature. T his implies a ‘package of care activities’ with a single price for a complete diagnose and related treatment. Currently these a re divided into two segments. The B-segment entails 20% of all treatments, most of them low in terms complexity (such as cataract surgery or hip replacement). Prices may be negotiated between the hospital and the insurer. For the other 80% (A-segment) prices are not negotiable (set by the government).

3.4 Hospital functions and activities

The current hospital is a virtual organization: it often presents itself as a monolithic, singular, homogeneous entity to the outside world, but on the inside it is a network of different entities, working together in different ways at different stages of the process. An acute care hospital delivers six functions (McKee & Healy, 2002, p. 79) listed in Box 3.3.

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Rethinking the hospital

Box 3.3

Functions of an acute care hospital

Maarten den Braber

Patient care Inpatient, outpatient and day patient; emergency and elective; rehabilitation Teaching Vocational; undergraduate; postgraduate; continuing Research Basic research; clinical research; health services research; educational research Health system support Source for referrals; professional leadership; base for outreach activities; management of primary care Employment Inside: Health professionals; Other healthcare workers; Outside: suppliers; transport services Societal

State legitimacy; political symbol; provider of social care; base for medical power; civic pride

The first three functions in the previous box (patient care, teaching and research) directly translate to service line activities inside the hospital, see Figure 3.3. Service line activities inside the hospitals are often grouped around a specific medical field (e.g. surgery) rather than a specific condition. There is a shift towards organizing around clinical pathways and diseases (e.g. diabetes, COPD, heart failure). This shift is an important shift towards focusing more on the customer. See Figure 3.3 for an overview of internal hospital (service line) activities.

Figure 3.3

Overview of internal hospital (service line) activities

 

Research

 

Teaching

 

Patient care

Internal

Operating

Neuro-

Biomedical

Supporting

Integrated

- Internal medicine

- sensing

Cardiology

- Anatomy

-

Allergy/asthma/immunology

care

- Endocrinology

- Physiotherapy

- Biochemistry

-

Transplantation immunology

 

- Dermatology

- Diabetes care

- Hematology

- Surgery

- Cell biology

-

Hematology laboratory

 

- Pediatrics

- Heart failure clinic

- Gastroenterology

- Obstetrics / gynaecology

- Epidemics and statistics

-

Chemical endocrinology

 

- Geriatrics

- General Practitioner

- Oncology

- Orthopedics

- Pharmacology/ toxicology

-

Clinical chemistry

 

- Otolaryngology (ENT)

- IVF treatment

- Kidney diseases

- Plastic surgery

- Medical- and biophysics

-

Clinical pharmacy

 

- Ophthalmology (eye care)

- Prenatal diagnostics

- Pulmonology

- Emergency medicine

-

Medical microbiology

 

- Extramural

Oral / dental surgery

 

- Mamma-care

- Outpatient care

- Thorax surgery

-

Nuclear medicine

 

- Neurosurgery

- Neonatology

- Rheumatology

- Urology

- GP care

-

Pathology

 

- Neurology

- Psychiatric ward (PAAZ)

 

- Social medicine

-

Radiology

 

- Neurophysiology

- Nursing home care

-

Radiotherapy

- Emergency Care

- Psychiatrics

- Stroke Unit

 

Diagnostics

Medical facilities

 

Personal services

- MRI

- Anesthesiology

- Maternity ward

- Diabetes nurse

- CT

- Intensive care

- Pharmacy

- Dieticians

- Ultrasound

- Operating theatres

- Plaster room

- Medical social work

- Bucky

 

- Nursing ward

- Transport

 

- Mediator

- Blood sampling

- Sterilization

- Transfer point

- Religious support

- Endoscopy

 

- Admission desk

- Blood transfusion

 

- Speech therapy

Manag ement

Non-medical facilities

Commercial activities

- Board of Directors

- Personnel en organization

- Advisory services

-Travel agency

- Supervisory board

- Facility management

- Independent clinic

-Library

- Medical staff

- ICT

- Facility services

-Gift shop

- Working council

- Finance and control

- Lifestyle advice

-Swimming pool

-Postal office

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Rethinking the hospital

Maarten den Braber

3.5 Dutch hospital reform: a short history

We have looked at the current-day strategic environment of Dutch hospitals. Certain current-day practices, such as governance issues arise from the long and sometimes difficult path of health reform in The Netherlands. To provide context on that we

provide a short background on the Dutch hospital reform.

A chronology of main events in Dutch health policies 1941-2003 lists “many radical changes

that have been realized within a relatively short period of time” (European Observatory on

Health Systems and Policies, 2004, p. 120). In the last decades th ere has been an

increasing focus to increase competitiveness: regulated competition. This is not similar to

a free healthcare market. Although government does not directly control volume, prices and productive capacity, they create necessary conditions to prevent the undesired effect

of a free market (such as “cream sk imming” or “cherry picking”).

Besides certain negative

ef fects,

there most

certainly are also positive results to report.

“As a result of only discus sing

rovement

a more mar ket-orie

and qua

lity assuran

nted health care syst em, a huge increase in activities

ring the early 1990s. Probably the idea that quality of care will be a

n Health Systems

ce was observed du

concerning quality imp

main driving force for all of these quality-improving acti vities was the

major issue in a competitive he and Policies, 2004, p. 124)

alth care system.” (Europ

ea n Observatory

o

D

vernment of ten was und

cuts never proved effective: “

go

uring

the 1980s and 19

90s the

relat ionship

cialists, health insurers and

s to implement new fee structures and fee

betw

een spe

er pressure. Attempt

total budg et for specialist care in 1988 was

a disaster from a cost-control perspective. During the period 1980 to 1989, aggregate nominal expenditures for specialist care grew by an average of 2.6% per year. This average rose to 6.3% for the p eriod 1990 to 1992, when it should have been nil. Budget overruns set the stage for intense conflict, because the Minister of Health used retrospective fee cuts to compensa te for overruns of previous years.” (Maarse, Mur-Veenman, & Spreeuwenberg, 1997 ). Another example is the fact that until 1992 sickness funds had the legal obligation to enter into a uniform contract with each physician established in their working area, instead of having the option to selectively contract with physicians (European Observatory on Health Systems and Policies, 2004).

The introd uction of a fixed

T he Biesheuvel committee in 1994 stated that there was a need for fundamental reconsideration of the position of medical specialists. Their advice was to introduce management participation of specialists to also let them part of the responsibility for effective cost-control. The commission also recommended integration of the specialist’s revenues into the hospital budget to underscore the position of the hospital as an integrated healthcare delivery institution. Cautiously, to bypass opposition of the

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Rethinking the hospital

Maarten den Braber

National Association of Medical Specialist, the Minister of Health started with a small number of experiments in that direction. “Preliminary evaluation of the experiments suggests that th e financing of specialists within budgets is a complicated matter with direct repercussions on professional behavior” (Maarse et al., 1997).

One of the difficulties in the current healthcare system is the unique position of medical specialists: there are few substitutes or competitors. One of the reasons for this is the underinvestment in human resources (training and education of medical specialists) in The Netherlands (European Observatory on Health Systems and Policies, 2004, p. 134). F or a market oriented approach of healthcare there is a need for approximately 5% overcapacity, but the Dutch government has not committed itself to this task. As long as this is so, a demand-driven system in healthcare will remain illusive (Raad voor de Volksgezondheid & Zorg, 2003, p. 138)

3.6 Conclusion

Hospitals have a long history of reactive growth and development. Proactive strategy development and subsequent decisions about products and services to deliver have therefore not for long been part of hospital decision making. Rather hospitals would follow established polices by “doing what they had been doing for long time.”

The current position of the Dutch hospital in the Dutch healthcare system is well established as an institution that “follows right behind” the gate keeping function of the GP: if the GP is not able to “solve the problem” a patient is referred to the hospital. Hospitals between them have a role division of general, top-clinical, academic and specialist roles with the addition of private clinics as highly specialized institutions but with another access pattern (direct instead of through gate-keepers). The functions and activities of the hospital can be divided in six different types: patient care, teaching, research, health system support, employment and societal.

All in all Dutch hospitals have a well established and rather clear position. There tends to be an increase in focusing on customer needs by providing specific services to specific patient/customer groups. How ever, this shift tends to mainly exist within the current b oundaries and structures and is not accompanied by any major change in how the hospital delivers its services and goods overall.

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Rethinking the hospital

“Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime”

-- CHINESE PROVERB

Maarten den Braber

4 Business model theory

Business model is a comprehensive approach to building strategy. It is a “conceptual tool that contains a set of elements and their relationships and allows expression of the business logic of a specific firm” (Osterwalder, Pigneur, & Tucci, 2005). We can use a business model as a tool to build strategy balancing both the internal, organizational views as well as the external, patient/consumer views. This sets the business model apart from other approaches at strategy which focus one side or the other.

We define the concept of the business model in the first s ection (4.1) and focus on the s pecifics of one the most operationalized versions of the business model, Chesbrough and Rosenbloom in the following section (4.2). An important part of this research is how the business model has a focus on value at its core which we highlight in 4.3. Section 4.4 and 4.5 detail the backgrounds of taking a model approach to strategy and balancing value (inside-out versus outside-in views).

4.1 Concept of the business model

The term ‘business model’ is often used these days but seldom defined explicitly (Henry Chesbrough & Richard S. Rosenbloom, 2002). A business model can be described as strategic model that explains how a company does business. If we analyze what such a description means we see that “how a company does business” draws on many different (strategic) aspects but is not limited to a specific focus on a single area. This sets the business model apart from other areas of strategic management, focusing on specific issues, such as marketing strategy or value chain analysis.

To research what is proposed in literature of the function of the business model we have analyzed different publications to compile a list of uses (Table 4.1)

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Rethinking the hospital

Table 4. 1

Proposed roles of the business model

Maarten den Braber

Proposed use

Source

Anal yz

strategic choices

Telling a good story

ing, implementing and communicating

Linking strategy and operations

Linking of strategic management and entrepreneurship theories of value creation

Focusing device that mediates between technology development and economic value creation

Conceptual tool that contains a set of elements and th eir relationships and allows expression of the business logic of a specific firm

Intermediate unit of analysis in managing technological ventures arising from R&D

Planning

Shafer, H. J. Smith, & Linder, 2005

Magretta (2002)

Mäkinen & Seppänen, 2007

Amit & Zott (2001)

Chesbrough & Rosenbloom (2002)

Osterwalder, Pigneur, & Tucci (2005)

Mäkinen & Seppänen (2007)

Magretta (2002)

Analyzing the available literature, four important dimensions are visible between the definitions of the different authors. The business can be used for:

1. Strategic choice (Shafer et al., 2005)

2. Link different strategic domains (H. Chesbrough & R. S. Rosenbloom, 2002; Mäkinen & Seppänen, 2007)

3. Focus on value creation (Henry Chesbrough & Richard S. Rosenbloom, 2002; Amit & Zott, 2001)

4. Focus on value appropriation (Amit & Zott, 2001; Henry Chesbrough & Richard S. Rosenbloom, 2002)

The use of the business model for strategic choice is not surprising. It is a technique that is located in the domain of strategic tools and techniques all aimed at supporting strategic choice in one way or another. What makes the business model stands out is its focus on comprehensiveness. Compared to other strategic techniques such as SWOT-analysis or the BCG-matrix - which only focus on specific strategic domains (competitive strategy and strategic position respectively) – the business model links different strategic domains focuses on a comprehensive view of the strategic option: ranging from value for the end-user to revenue generation for the organization as we will see in the next section.

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T he comprehensiveness of the business model is expressed through the range of strategic domains it links (we detail this in the follo wing section). On the one side there is the issue of what v alue must be delivered. This focuses on customer preferences: how do we provide what the customer wants? Who are our customers? We will detail these questions more in the follo wing section.

4.2

At the “other side of the spectrum” are questions of how to realize this: what resources

generate

do we need, how do we com

revenues from the activities we do, in order to provide a sustainable course of action?

pete/collaborate w

ith others and how do we

d,

and what can be delivered is what is re ally asked for. This is an exercise that must be

executed by the organization; it does not come as a pre-defined solution of what to do.

What the business model provides is a

template) of the elements ne eded to build a strategy that delivers value to both the consumer and the organization.

consistent and comprehensive model (or:

The balance between these two sides makes sur e t

hat what is asked for can be delivere

In the foll

5 and 6 we research what issues this model can help solve for the hospital. In chapter 7 w e detail further how each element of the business model delivers value in helping solve

these issues.

ess model. In chapter

owing section we operationalize the elem

ents of the busin

T he business model of Chesbrough & Rosenbloom

Strategic literature in the last few years has given rise to many different ideas and definitions of the business model (Mäkinen & Seppänen, 2007). To decide which definition of the business model best suits, we have analyzed strategic management literature to look for an operationalized definition of the business model that adequately defines three important elements: value creation, value realization and value appropriation. We identify one business model approach (that fits our first selection criteria) instead of reviewing and comparing all available definitions. We analyze the selected business model approach to test whether it has as positive heuristic: the ability to generate the discovery of new facts (Lakatos, 1970).

Our choice is the well operationalized model of Chesbrough & Rosenbloom (2002). In their article “The role of the business model in capturing value from innovation: evidence from Xerox Corporation’s technology spin-off companies”, they analyze how Xerox Corporation spin-offs became successful by taking technological offerings that were not valuable using the Xerox business model but did thrive by employing a different business model (see Box

4.1).

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Box 4.1

About Xerox Corporation and its spin-offs

Maarten den Braber

Xerox Corporation started out as the Haloid Corporation originally manufacturing photographic paper and equipment. The company grew substantially in the 1960s by focusing on copying (“xerography”). The Palo Alto Research Center (PARC) of the company developed many prototype technologies, resulting in commercial spin-offs such as 3Com (network infrastructure), Adobe (publishing software) and Documentum. (information management structures). All successful spin-offs employed business models that differed in important ways from the traditional Xerox business model (this notion is also important to hospitals, we get back to this in the next chapter).

Chesbrough & Rosenbloom (2002) derive their definition of the business model from different available definitions, focusing on detailing and operationalizing the definition. The also note that “many of the definitions of the current day business model are actually variations on Andrew’s 1971 classic definition of the strategy of a business unit (p. 533).

Box 4.2

Attributes of the business model (Chesbrough & Rosenbloom, 2002)

1. Articulate the value proposition, i.e. the value created for users by the offering based on the technology.

2. Identify a market segment, i.e. the users to whom the technology is useful and for what purpose, and specify the revenue generation mechanism(s) for the firm.

3. Describe the [strategic] position 4 of the firm within the value network linking suppliers and customers, including identification of potential complementors and competitors.

4. Define the structure of the value chain within the firm required to create and distribute the offering, and determine the complementary assets needed to support the firm’s position in this chain.

5. Formulate the competitive strategy by which the firm will gain and hold advantage over rivals.

6. Estimate the cost structure and revenue 5 potential of producing the offering, given the value proposition and value chain structure chain chosen.

The “six attributes collectively serve additional functions, namely to justify the financial capital needed to realize the model and define a path to scale up the business” (p. 534). The focus of the approach of Chesbrough & Rosenbloom is technology. Our approach is to adapt the model in

4 We prefer to identify this attribute as “strategic position”, rather than “value network” which is more descriptive and prevents discussions about the naming of value network, value constellations, value shops etcetera (Stabell & Fjeldstad,

1998).

5 Because of the non-profit nature of the (Dutch) hospital we have replaced profit potential from the model of Chesbrough & Rosenbloom with ‘revenue potential’ to express that the generation of revenue does not necessarily has to be profit oriented as an end-goal.

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s uch a way that we can also try using it for non-technological businesses, replacing notions of “technology” with the more generic definitions of ‘offering” where applicable.

A pplying the business model the authors do not follow a sequential structure, although t hey start with the value proposition. Through our field research and discussions with v arious experts we conclude that is it not strictly necessary to define such a structure. At t he same time giving a possible structure acts for many as a reference to align their t hinking process. We propose a structure to identify the three main subjects: value c reation, realization and value appropriation (Figure 4.1). Also we include the underlying notion of the business model approach that it starts with customer preferences and “ ends’ with value delivered.

Figure 4.1 Application of the business model in 6 sequential steps Business model Customer Value
Figure 4.1
Application of the business model in 6 sequential steps
Business model
Customer
Value
Market
Value
Strategic
Value
Competitive
Cost /
preferences
proposition
segment
position
chain
strategy
revenue
delivered
value
value
implementation
creation
appropriation

The six attributes of the business model and their application to form a comprehensive and coherent model is the study object for the final part of this research. To what extent do the sequence and combination of these elements and their combination deliver value for the hospital?

4.3 Business model and value

The key concepts of what a business model is all evolves around value: value creation, value realization and value appropriation. How do we define value creation for hospitals in a way that informs future strategic planning? This resear ch focuses on building a value- c reating strategy for hospitals in a comprehensive and coherent way. Using strategy as a model, gives heads and tails to the question of what to analyze. It enables us to deal with complexities - which may, in many cases, actually result from the absence of a strategy (Kiewik, 2007).

The concept of causal ambiguity, not being knowledgeable of sources of past success, and of impediments to future success states the need for a strategic model: “Because of causal ambiguity, it could be that the demise of firms is more to do with not knowing exactly what to change and what to change it to, than with any structural, or cultural rigidities.” (Bowman & Ambrosini, 2000, p. 7)

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Exclusive views on strategy such as RBV/CBV or the competence view (see section 4.5), highlight just one side the metal. Such approaches can result in an unbalance skewed e ither towards unsustainable value creation (too much customer focus) or towards value capture (too little customer focus). A model focused on value-creation helps hospitals escape zero-sum competition, which is the problem in the current healthcare systems (see Box 4.3).

Box 4.3

Zero-sum competition

“Health care competition is not focused on delivering value for patients. Instead, it has become zero sum: the system participants struggle to divide value when they could be increasing Zero-sum competition in health care is manifested in a number of ways, none of which creates value for patients: competition to shift costs, competition to increase bargaining power, competition to capture patients and restrict choice, competition to reduce costs by restricting services.”

(Porter & Teisberg, 2006)

Value, previously viewed as the price of things (Barbon, 1937, p. 2) is now often more market-oriented and must be viewed from the customer’s perspective (Coyle, Bardi, & Langley, 2003). The graphical representation of the business model expresses this by starting with customer preferences. Customer preferences are infin ite, which is why we cannot d efine the contents (exclusive) of value, but only its attributes (inclusive). The first attribute is value must be viewed from the customer perspective.

The second attribute is that value spans a complete process. “Value-based competition spans the full-cycle of care” (Porter & Teisberg, 2006). While the mention of a “cycle of care” applies well to a healthc are delivery organization (such as a current hospital), it might be too limited for the setting of the futu re hospital, which may extend its service portfolio to wellness (rather than sickness). That is wh y we define that value spans the complete process. This is different from much of the current day activities which are disparate interactions with an intermittent process. Interactions with the healthcare system are too often incident-based instead of focused on the complete process. Ultimately it depends on what is the described as the process, if it is keeping people healthy e.g. than incident- based interactions are not delivering value, as opposed to life-long coaching. If the process is simply to “get fixed” than they may. Thus this asks for a clear view on what the process and accompanying value proposition is.

Sustainability is the third attribute of value. Sustainability is the characteristic of a process, system or state that can be maintained at a commensurate level in perpetuity (H.E. Roosendaal, 2006; Wikipedia contributors, 2008b). Commensurate is defined as: comparable or compatible with other instances.

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Box 4.4

Attributes of value creation in healthcare

Maarten den Braber

1. Value must be viewed from the customer perspective

2. Value spans the complete process

3. Value must be delivered through a sustainable process

Box 4.4 summarized the attributes of value creation in healthcare. These are the a ttributes we will focus on when analyzing to what the business model delivers: is it viewed from the customer pe rspective, does it concern the complete process and is it d elivered trough a sustainable process?

4.4 A model approach to strategy

Strategy, originally a military term, is defined as “the science and art of military command exercised to meet the enemy in combat under advantageous conditions” (M erriam-Webster's Online Dictionary, 2008). Nowadays it is used in many disciplines, but the goal of the concept i s the same for every discipline: “The essence of strategy – whether military, diplomatic, business, sport, (or) political… - is to build a posture that is so strong (and potentially flexible) in selective ways that the organization can achieve its goals despite the unforeseeable ways external forces may actually interact” (Quinn, 1998). Strategy can be used as a model to analyze the environment and set direction (Box 4.5).

Box 4.5

Strategy as a model

“Ask someone sitting in a room to describe the environment around him and he will do either of two things. The first is that he will start naming all the different things he observes: chairs, tables, a flip-over, carpet, lights, a plant, persons etcetera. As long as no-one gives a sign when to stop the person will go on and on naming everything: dust particles, shadows, shirt buttons, shoelaces, window glass, a door knob, etcetera. Eventually he will ask how long this ‘naming process’ should continue?

That moment is what another person would have asked beforehand: ‘What should I observe?’ This question gives

a frame of reference and gives heads and tails to the description of the environment. This approach can look

limiting, but is not. It can be repeated for every level of detail needed. The use of a model acting as a frame of

reference makes a potentially unanswerable question answerable. That is what happens when we view strategy as

a model.”

Roosendaal (2006) free after Popper (1963)

Most hospitals have become complicated and entangled entities in the eyes of many decision makers. This stirs interest in an approach to strategy that can help decision makers in hospitals (and other healthcare organizations) to make a “potentially unanswerable question answerable.

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The issue of having difficulty deciding what to do is also known as causal ambiguity. Causal ambiguity means not being knowledgeable abo ut sources of past success, and of impediments to future success - som ething that might be the case with many hospitals. “Because of causal ambiguity, it could be that the demise of firms is more to do with not knowing exactly w hat to change and what to change it to, than with any structural, or cultural rigidities.” (Bowman & Ambrosini, 2000, p. 7).

Causal ambiguity is of great relevance to hospital decision-making. The ways hospitals have done business has been subject t o little change for many years (see the previous chapter). Many hospital executive teams do not analytically examine potential sources of past success, much less future pos itioning, using a structured approach. In the introduction of this research and the first chapters we have clarified that current pressures (including consumerism, changing workforce, demographics) result in pressures on the current hospital organization. This can lead to anxiousness and uncertainty with decision makers (see also the outcomes from the field research in the next chapter). Results might include the unfortunate tendency to propose oversimplified solutions to complex problems, which results in poor decision-making. We highlight once more the quote from Shortell et al. (Box 4.6).

Box 4.6

Complexity and de livering value

“We live an extremely complex, pluralistic society where it is increasingly difficult to achieve consensus. In the effort to deal with the complexity, we often oversimplify by posing "solutions" in either-or terms. We need more inclusive ways of framing problems and challenges that permit us to consider the inherent complexity of the issues in a meaningful way.”

(Shortell et al., 2000)

Strategy as a model provides structure. Without structure trying to answer questions ( what, when, where, how) is without start and end: one could go on and on defining p ossible answers, just as in the example of Box 4.5. Situations where uncertainty is p revalent and over-simplification of answers lies looming, we can benefit from the s tructure of a model. A model allows us to explore decision-making within a specified, relatively objective, structured framework (McCabe Gorman & den Braber, 2008)

4.5

B alancing value in strategy: inside-out versus outside-in

Views on strategy traditionally often focus on a particular perspective. Two prevailing views on strategy are the inside-out and the outside-in views. We detail them here shortly because it shows how the business model is different by balancing those views, rather than focusing one of both.

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The inside-out view on strategy focuses on the internal strengths of the organization to define its strategy. Based on what the hospital itself is good at, strategy is defined. This can also be seen with hospitals: if a hospital has specific strengths, such as rare equipment, highly specialized surgeons or other specific assets, strategy is often based on those strong points. In literature the inside-out view is often associated with what is called the Resource Bas ed View (Barney, 1991) or the Competence Based View (Teece, P isano, & Shuen, 1997). These views focus on the notion that a sustained competitive advantage can be built through the potential of a firms resources.

The outside-in view on strategy opposes this view in that it focuses first on the external environment of the organization, rather than the internal environment (resources). A prime example of this view is the Porters Competitive Strategy which focuses on analyzing the external environment of the organization to determine strategy (Porter, 1980). If competitors are focusing on particular market segments, using specific resources or occupying certain strategic positions, strategy for the organization must focus on addressing those competitive issues in order to build its own competitive advantage.

T he business model does not favor one of these two approaches, rather it balances them. Strategic resources can be a starting po int for building a business model. But they have to b e logically connected to the other elements and provide value for the end-customer. T he movements of competitors can also be reason to build or change a business model b ut again, not without linking it back to the other elements such as a value chain that

log ical sense to the strategic position, market segment and value

c onnects in

proposition.

a

The business model does not provide a single answer to how these issues strategies should be built. But it continually stresses the need for logically connecting all the elements so that eventually value is delivered for the end-user in ways that adhere to the ideas about sustainability of the organization.

4.6 Conclusion

The business model provides a structured, comprehensive and sequential approach to building strategy. We base our definition of the business model on the version of Chesbrough & Rosenbloom (2002). The business model enables decision-maker such as hospital executives to take the lead in building their own strategies through an inclusive model, rather than following exclusive advices on predefined paths to take.

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The model approach to strategy building provides structure that makes it possible to give answers to increasingly complex problems in healthcare. It balances an inside-out and outside-view on strategy. Starting with the value preferences it uses six steps to reach the final stage of value creating. The three stages of the business model are value creation (value proposition, market segment), value realization (strategic position, value chain, competitive strategy) and value appropriation (cost structure / revenue potential).

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“Resting on your laurels is as dangerous as resting when you are walking in the You doze off and die in your sleep.” -- LUDWIG WITTGENSTEIN, philosopher

snow.

5 Strategic issues for the hospital

The previous chapter shows the strategic environment of Dutch hospitals. The Dutch healthcare system and its hospitals are rated amongst the best (Health Consumer Powerhouse, 2007) and followed by other countries, such as the United States., with close attention (Naik, 2007). As with any such system, ratings in healthcare are largely arbitrary. A prime example of the arbitrary nature of what is defined as good is the fact that only in the Netherlands we have at least three totally different hospitals ratings (Roland Berger, Elsevier/Lagendijk, Algemeen Dagblad), all three producing different end results about what is the best hospital.

Producing different results (by measuring different things) is not necessarily a bad thing. It highlights the fact that there are an infinite number of possible customers out there, all with different wishes and expectations. These preferences are related to areas of importance of your target market, and ‘expressed’ or value provided by service lines you choose to offer. Serving a specific type of service for every specific patient is something that not all hospitals are confident with yet.

Chapter 3 shows that hospital configurations have been formed in organic ways over long periods of time. While the technical and medical advantages have been enormous over the last 100+ years, the way hospitals treat their patients has stayed largely the same (large buildings, function-related departments, supply-driven). Discussion about how hospitals should treat patients has been limited. Patients have long expected hospitals to behave the way they currently do. And because of little actual differentiation and possibilities to compare hospitals, there was little incentive for a hospital to change the way it did business. That was until recent years.

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Rethinking the hospital

Figure 5 .1

Pressure for change in hospitals (McKee & Healy, 2002, p. 37)

Maarten den Braber

(McKee & Healy, 2002, p. 37) Maarten den Braber Current changes in healthcare are no longer

Current changes in healthcare are no longer mainly about technology and clinical knowledge (supply-side), as can be seen in Figure 5.1. They are also about demand-side (changing demographics, patterns of disease, public expectations) and wider societal changes (financial pressures, internationalization, global market) 6 .

These changes have a different impact than the changes in technology and clinical knowledge. They result in both patients and government (policy-makers) asking new types of questions and expecting concise answers: why does this treatment cost more than with another hospital?, how does the hospital address the needs of people with a large number of co- morbidities? what is the impact of international competitors? Such questions trigger the need for hospital to explicitly define and research their (strategic) position. This is change from the previous situation (as we found out in our field research), where hospitals could lean on their ‘established policies’ and do what they had done for years.

5.1 Field research

To identify what triggers the specific issues for hospitals that might lead them to rethink their current business(es) we have performed on-site field research as we explained in our research approach. We conducted non-structured interviews with 11 different hospital

6 For more in-depth analyses of current pressures in hospital and healthcare we refer to Innovatieplatform (2007); Ministerie van Volksgezondheid, Welzijn en Sport (2007a); PriceWaterhouseCoopers (2005); Putters & Frissen (2006); Roland Berger (2007)

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decision makers and organized two discussion meetings. See Table A – 1.3 for a list of

a ttendees.

The interviews and discussion meetings were organized as part of the Nyenrode research program ‘Changing Roles and Configurations of Dutch Hospitals’. The interviews were held at the location of the interviewee (most often the hospital) and carried out and summarized by Merijn Stouten, Paul van der Nat and the author in rotating order. As an introduction the background of the study was given and the fact that no remarks from the interviews would be directly quoted in a final report. This anonymity allowed all participants to speak more freely about their strategic issues.

5.2

Interviews

The interviewees were positioned as experts in the field of what a hospital is about (also meaning not as experts on strategic management). Goal of the interviews was defined as getting insight into the strategic issues for hospitals within the next 5-10 years, both on the content-side (what defines the future hospital?) as well as the process and difficulties le ading up to futuristic configurations. The five key questions of the interviews give insight into the current and near-future dimensions of the configuration of the hospital. These dimensions have been based on the business model theory of Chesbrough and Rosenbloom, which we have defined in the previous chapter.

W e have not asked hospitals for their competitive strategy. The current status of the Dutch healthcare system has just yet introduced the idea of regulated competition and competitiveness. We did not introduce the competitive strategy as a separate topic in the interviews for the reason of wanting to focus more on the elements that come “before” the competitive strategy, about what defines a new hospital configuration. What we have done is review relevant literature and coined the questions of competitive strategy on other occasions such as personal discussions and the discussion sessions to gain insight on a broader level (5.3).

Box 5.1

Interview goals

What is considered the current and near-future (5-10 years):

1. value proposition

2. market segment

3. strategic position

4. organizational structure (value chain)

5. cost structure and revenue model

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Because of the disjunction between terminology in the fields of business and healthcare we have ch osen to not directly use the definitions above in our interview, but use “starter q uestions” that give more practical answers that can be used to fill in the different goals. These starter questions have been defined in several brainstorm sessions with the project team and fine-tuned during the course of the project. Box 5.2 lists the questions (in no particular order).

Box 5.2

Interview starter questions

1. On what themes are future hospital organizations going to differentiate in the future?

2. Will patients ‘simply’ keep coming to the hospital?

3. Who will be the most important customers of future hospital organizations?

4. What will be important partners for the future hospital organization?

5. What is the relevance of ‘cooperation between competitors’ in health care?

6. What is the main incentive for changing hospital configurations?

7. Is it possible to create demand in health care?

8. What will be the influence of internationalization on the future hospital organization?

9. How are decisions about large investment taken?

10. What are the current strategic issues of the hospital?

5.3 Discussion sessions

The discussion sessions were also used to get more insight into to the current and near- future value proposition, market segment, strategic position, organizational structure (value chain), cost structure and revenue potential. We explained to the audience - just as we have done in this research - that this might very well mean going outside the “borders” of what is currently defined as a hospital.

5.3.1 Session 1 – Elements and strategy canvases

The preliminary outcomes of the interviews were that different strategic choices were made in hospitals, but the actual “width” of these decisions was supposedly small. As an example, look at the dim ension ‘coordination of care’. Some hospitals make an effort to coordinate a larger part of the care pro cess, rather than ‘just’ the surgical procedures. But considering the full potential of such an option, one could consider that the hospital would offer coordination of care for the patient from cradle to grave, always and everywhere. Unfortun ately it seems that options chosen by the hospitals are at the “same end” of the spectrum, such as offering coor dination only around a single treatment and only inside the organization.

Therefore to get more insight into the options we employ the strategy canvas tool. S trategy canvases allow a graphical representation of an organization’s strategic profile (Kim & Mauborgne, 2002, p. 78). Using the same dimensions for multiple organizations

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and scoring them from low to high makes it possible to quickly compare the strategic profile of similar organizations.

Figure 5.2

Steps followed to build strategy canvases and find differentiating factors

P1: Diversity in medical treatments P2: Complexity of medical condition P3: Treatment volume needed P4:
P1: Diversity in
medical
treatments
P2: Complexity
of medical
condition
P3: Treatment
volume needed P4: Service level
P5: Coordination
P6: Education
P8: Non-medical
of care
and training
P7: Research
services
Product offerings
High
P1: Diversity in
P2: Complexity
medical
of medical
P5:
Coordination
P6: Education
P8: Non-medical
treatments
condition
P3: Treatment
volume needed P4: Service level
of care
and training
P7: Research
services
Product offerings
High
P1: Diversity in
P2:
Complexity
medical
of medical
P3: Treatment
volume needed P4: Service level
P5: Coordination
P6: Education
P8: Non-medical
treatments
condition
of care
and training
P7: Research
services
Low
Product offerings
High
Low
Product offering
Market segm
Strategic position
Organization
Economic engine
P1: Diversity in medical treatments
P2:
Complexity of medical condition
P3: Treatment volume needed
P4:
Service level
High
Low
P5:
Coordination of care
P6: Education and training
P7:
Research
P8: Non-medical services
M1: Patient
M2:
Physician
M3: Healthy people
M4: Sick people
M5: Geographic
scope
S1: Cooperation: primary process
S2: Cooperation: support process
S3: Growth
S4:
Social-economic role
S5: Innovation
S6: Transparency
S7:
Supply chain integration
S8: Public-private partnerships
Low
O1: Process optimization
O2: Physician in the lead
O3: Management in the lead
O4: Capital intensive
O5: Standardization of care
O6: Outsourcing
E1: Focus on cost reduction
E2: Focus on profit
E3: Value-based payment
E4: Cost-based payment
E5: Insurer payments
E6: Income from private payments
E7: Income from non-core activities
E8: Income from (public) funding
E9: Income from private investments
E10: Negotiable prices
P1: Di versity in medi cal treatments
P2: Co mplexity of me dical
P3: Tr eatment volum e needed
P4: Ser vice level
P5: Coor dination of c are
P6: E ducation and tr aining
P7: Re search
P8: Non- medical serv ices
M1: Pa tient
M2: Phy sician
M3: Heal thy people
M4: Sick people
M5: Geo graphic sc ope
S1: Coop eration: pr imary process
S2: Coop eration: s upport process
S3: Gro wth
Market
OrEconomic
engine
positionganization
roduct offeringsStrategic
segments
P
S4: Soc ial-economi c role
S5: Innov ation
S6: Tran sparency
S7: Supp ly chain int egration
S8: Pub lic-private p artnerships
O1: Pro cess optimi zation
O2: Phy sician in the l ead
O3: Man agement in t he lead
O4: Cap ital intensiv e
O5: Stan dardization of care
O6: Ou tsourcing
E1: Focu s on cost re duction
E2: Focu s on profit
E3: Valu e-based pay ment
E4: Cos t-based payment
E5: Insu rer payments
E6: Inco me from private payments
E7: Inco me from non-core
E8: Inco me from (public) funding
E9: Inco me from private
E10: Neg otiable prices

Figure 5.2 shows the steps which were followed in the workshop to identify which elements were differentiating the organizations. The scoring questions used to build the strategy canvases can be found in Appendix C. As seen in the figure, there were 5 steps to draw the strategy canvases and determine the differen tiating factors:

1. Start with a blank strategy canvas per theme for each of the five business model themes (value proposition, market segment, strategic position, organizational structure and cost structure/revenue potential).

2. Score the elements per theme for the organization of choice on a 5-point scale (low, low/medium, medium, medium/high, high)

3. Merge all scores per theme; discuss differences in outcomes between organizations

4. Merge all themes (this figure becomes too complex to discuss)

5. Calculate the standard deviation per element to identify the themes to differentiate the most and the least; discuss lowest and highest scoring elements.

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We identify that answering questions with qualitative answers such as low, medium and high might be considered too su bjective. Also the sample of organizations having filled in the canvas can be considered arbitrary (although the mix of organizations attending was held as diverse as possible – spread between academic, specialist, gene ral hospitals and other relevant organizations). But the goal of this exercise was defined as getting more qualitative rather than quantitative insight in the “width” of the differences between the strategic profiles, for which this method was actually proving useful. Participants noted that strategy canvases gave them insights into their and other organizations they had not previously encountered. The outcome of calculating the standard deviations is shown in graphical form below in

Participants also noted that the scores within an organization about similar issues could be far apart. Meaning that if one participant from a certain hospital would score the dimension “diversity of medical treatments” as ‘2’ (low-medium), another participant from the same hospital might score it as ‘4’ (medium-high) depending on his/her views. This signals room for discussions about clearing up what defines the features of the organization. During the sessions it became apparent that the more focused an organization was (e.g. a specialist hospital), the more easy it was for participants to be able to fill in the strategy canvas.

The goal of the first session was to gain more insight into the differences between the current hospital configurations to identify dimensions that can be changed in future h ospital configurations. The most important outcomes are shown in Box 5.3.

Box 5.3

Outcomes of the first discussion session

1. Choices about what services and products delivered (and how) have a large correlation with the issue of scale.

2. Choices about services and products are largely made on similar themes resulting in limited distinctiveness of hospitals (small “width”).

3. Current cost structures are named as limiting the hospital in its room for innovation.

4. A strong focus on the nearby region is considered very important by many hospitals.

5. Current discussion has not yet progressed beyond defining healthcare as a win-loose game (reshuffling existing resources and activities) – no “straying from the path”.

6. One of the ‘big unknowns’ is what near-future patient behavior will be (willingness to choose, travel, pay).

Value for the patient can be defined beyond medical-technical issues, offering new possibilities for hospitals.

8. Disruptive configurations are suspected to have large impact by current decision makers.

7.

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Evaluating these outcomes there are two important conclusions that we can draw:

current configurations show large similarities and reasons for similarities are often defined in “outside factors” (location, cost structure, win-loose decisions). At the same time room is considered for disruptive configurations redefining what quality is (more reasoning outside-in, based on patient preferences). If such configurations would more prominently emerge, this is considered disruptive by most current decision makers. Examples of such configurations can be what is done now with retail clinics in the US, or the initiatives such as Hello Health or American Well (American Well, 2008; Hello Health, 2008; McCabe Gorman & den Braber, 2008).

I n short: current hospitals are limited in their uniqueness, but are aware that the moment truly disruptive configurations will pop up is only a matter of time (because there is ample room for). We take this as indication for the need of a structured approach to strategic (re)thinking the current hospitals if they want to sustain. This differs from the current approach of following established policies.

5.3.2 Session 2 – Using structure to put together configuration

The first session indicated in several ways that there is room for changing current configurations and possibly inv enting entirely new ones. We organized a second di scussion session to test the use of a structured approach towards building configurations in order to help hospitals (re)think their strategies. We distilled a list of elements that had been identified in the interviews and the previous discussion session as relevant guidance questions for hospitals to decide about the elements of th e business m odel (Box 5.4 - Box 5.9).

The guiding questions in the boxes mentioned are what they say: guiding questions. They should not be viewed as the complete list of relevant ques tions about the different business model elements. They can be viewed as a comprehensive list guiding structured thinking into building strategy.

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Box 5.4

Guiding questions defining the value proposition

Maarten den Braber

What business are we in? This hospital focuses on sickness / health / well-being / What is type of products/services delivered? The type of product / services is medical treatment / nursing care / research / education / What is the primary function of the organization? The primary function is delivering / facilitating / coordinating/ Is the organization focused on B2B or B2C? The most important customer are patients / specialists / other businesses / What is the complexity of the product offering? The products offered are complex / basic/ What is the diversity of the product offering? The medical treatments offered are diverse / specialized / What is the service level provided? The service level provided is below standard / standard / above standard /

Box 5.5

Guiding questions defining the market segment

What is the geographic scope? The geographic scope is regional / national / international / What are the target populations for what products? Target populations are elderly people / expats / diabetes patients / What defines the attractiveness of a market segment? Attractiveness is defined in volume / profitability / social need / challenge / What is the mobility of patients within our market segment? Patient mobility is low / average / high /

Box 5.6

Guiding questions defining the strategic position

What is the competitive strategy? To what extent is the organization collaborating / competing / collaborating and competing / Why is competitive strategy relevant? Competitive strategy is relevant because survival / sustainability / growth / Who are strategic partners? Strategic partners are other hospitals / suppliers / insurers / GPs / Where (to which activities) does what competitive strategy apply and why? Where: core processes / support processes / What: collaborate / compete / compete and collaborate / Why: revenue / scale / quality / reputation /

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Box 5.7

Guiding questions defining the organizational aspects (value chain)

What are the core activities? Core activities are orthopedics / urology / diagnostics / What are the support activities? Support activities are pharmacy / patient transport / counseling / Who has to execute the activity? Activities can be done ourselves / joint venture / outsourced / What is the scale of the organization? The scale is small / large / dynamic / What are the strategic assets? Strategic assets are personnel / infrastructure / data / What is the process focus of the activities? The process focus is customer intimacy / product leadership / process excellence / What is the governance structure (parties and responsibilities) ? The governance structure is RvB-RvT- medical staff / cooperative / single entrepreneur / Who are the strategic decision makers? The strategic decision makers are management / medical staff / investor / What is the position of the professional? The position of the professional is on the payroll / free-employed / partnership / What is the level of independence (of the separate business units)? Business units are completely independent / tightly coupled / (de)centralized / What is the preferred organizational culture? The preferred organizational culture hierarchic / informal / innovative /

Box 5.8

Guiding questions defining the cost structure and revenue potential

What is the cost structure of the product offering? The costs for the product offering are based on labor / medicine / overhead / Who pays for the services? Services are paid for by the insurer / patient / employer / What determines price? Price is determined by quality / volume / health outcome / How is economic sustainability reached? Economic sustainability is reached mixing profitability of treatments / additional services / What is the capital intensity of the organization? The capital intensity of the organization is low / high / dynamic /

The structure of the discussion session was that five different groups of 4-5 attendees w ith different backgrounds were given a certain direction of a possible future hospital configuration (see Box 5.9). Participants were asked to go through the different questions to further define the different elements of the configuration.

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Box 5.9

Hospital configuration ideas for the second discussion session workshop

1.

Large volume focus hospital: focusing on a specific type of medical condition and/or treatment on a very large scale.

2.

Small scale focus clinic: focusing on a specific type of medical condition and/or treatment on a small scale.

3.

Network hospital: hospital part of an alliance with other providers, dividing what care is delivered where.

4.

Wellness organization: organization responsible for the complete well-being of a person or population.

5.

GP hospital: hospital with a long-term relation with their customer, resulting in a low threshold for access.

6.

Virtual hospital: hospital not delivering care, but acting as a single point of entry to the health system.

7.

Personalized healthcare organization: organization providing healthcare services when and where the clients wants.

8.

Facility provider: only providing services and facilities professionals (business to business organization).

The ben

ipants as helpful

a nd stimulating their thought about the implications of the different choices. Room was

given to

. The process

o f going through the different questions was assessed by almost all partic

eficial outcomes of this exercise were twofold: process and content

the participants to suggest additional questions or subjects

that could enhance

the current list, but, interestingly, none were given.

Critique arose because of the method used (focusing on a limited number of ‘predefined’

i deas for future configurations). Most of the crit ique focused on the fact that participants

fe lt limited by the different configurations. One of the arguments used

more than once

as the fact th at configurations such as these were thought up by ‘system thinkers’ (mostly

“business scholars”) and that they fail to reflect the diversity that exists in reality. A parallel was drawn with the ideas about school reform in the Netherlands in the last d ecades.

Looking at this research (assessing the value of the business model for hospitals) it is

importan

fo r defining systems, but rather individual organizations (or businesses as you like) and (2) we claim there is value in explicitly defining strategy and that this does not limit the options individual organizations have.

to use in the first place

t to note two things: (1) the business model is no tool

The business model approach does not explicitly dictate an y of the choices hospitals must make to define their strategy. It is inclusive rather than exclusive, just as the list with guiding questions is only to be used as guidance. Employing the business model

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approach does even the opposite: it can be used to think about the man y options of

organizations in a structured and comprehensive way. But this has eventually to

followed by choosing between thes e options, something which the audience still seemed somewhat reluctant too, judging by their responses about feeling limited in their choices. This shows the fact that hos pitals have not yet completely adapted to both the ideas about choices itself as well as making decisions about the available choices, much les s

considering the impact th ese might have on future performance.

be

The outcomes about the configurations that were discussed and analyzed in the ses sion are listed in Box 5.10. Summarizing these outcomes we can see an interesting proble m emerge: while there maybe a string of different barriers, at the same time hospitals a re acknowledging the fact that others m ight be entering their domain, as well that there is a general need to rethink the configuration (see previous paragraphs). This strengthen s our idea that the business model might be one of the tools that, by structuring the process needed, might help hospitals find a comprehensive and conc ise way of modeling how to (re)define their strategy.

Box 5.10

Outcomes of the second discussion session

1. There are several factors seen as limiting to creating new configurations, most prominently the current cost/insurance structure and the need for solidarity.

2. There seems to be relative high reluctance of current players to allow access to other players (while new configurations often depend on cooperation)

3. It is very much thought to be likely that other players than the current hospital (e.g. insurer, patient organizations or industry) might develop new configurations competing with the hospital.

5.4

Outcomes

The outcomes of both the interviews and the meetings have been summarized in this paragraph, grouped as the 10 most important outcomes (Box 5.11). In the following section we will detail each issue and analyze its relevance and implications from a strategic viewpoint.

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Box 5.11

Most important outcomes of field research (interviews, discussions)

1. Providing specialized medical care is considered core business

2. Strategic decisions are often supply-driven

3. Scale and scope are considered most important axes for change

4. Current governance structure complicates decision-making

5. Relationship with the patient is considered of growing importance

6. Financial structures difficult to match with strategic initiatives

7. Hospitals show large similarities in strategic structures/configuration

8. Patients are always end-users, but not always end-customers

9. Regulated competition is not fully functioning yet

10. Strategy development is replacing established policies

5.4.1 Providing specialized medical care is considered core business

When asked to define the core business of the hospital many decision makers talk about providing specialized medical care: surgeries, stay, nursing, diagnostics etcetera.

Much of the core business is defined in product terms. While this may seem logical - the official definition of the hospital is after all institute for specialized medical care – many options are left unexplored. We argue that there is much to gain from widening the scope of what is considered core business of the hospital, by considering as its core not products delivered (e.g. surgeries), but value delivered (k eeping people healthy, patient satisfaction, increased patient autonomy). The product of the hospital does not exist in a vacuum, it is only relevant when it delivers value to the patient/customer.

5.4.2 Strategic decisions are often supply-driven

Hospital decisi on makers consider their service line portfolio one of their most important decision points. What types of surgeries or treatments should we offer and why? Often this analysis is based on the strengths and weaknesses of the hospitals, such as quality/availability of the respective surgeons, available equipment, amount of revenue generated etcetera. Decision options are considered: do-it-yourself, collaborate with other hospitals, outsource or abandon activities.

Service line portfolio is an important decision area for current hospitals. The previously wide scope of hospital service line portfolio is increasingly difficult to combine with the needed scale to provide a sustainable level of quality. Decisions about what is provided (service portfolio) are often deemed more important than how it is provided (service level). Service portfolio decisions are mainly driven by internal factors (supply-driven) while service level decisions are often driven by customer request (demand-driven). This

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can be considered ‘survival tactics’ of the hospital or a sign of difficulty to adapt to a new demand-driven structure.

5.4.3 Scale and scope are considered most important axes for change

axes: scale (increase or

decrease) and scope (increase or decrease). The most common cu rrent combination (large scale together with large scope) is expected to be non-main tainable in the future.

Ever increasing scale is needed according to current decision makers if h ospitals want to keep offering research and education and limit risk/provide qua lity. Also the sheer size of investments needed asks for a certain scale to justify tho se investments.

Hospital leaders often define their hospitals options on two

A nother option: decreasing scale and scope steers the current hospitals more in the direction of smaller focus clinics. Many hospitals do not like this direction because they view it as their obligation (and their income stream) to deliver a wide range of services to their geographic area. A difficult issue with changing scale and/or scope is what to do with the complex or chronic patients who often fall between different config urations. F igure 5.3 gives an indication of directions for hospital change on the axes of scale and scope. Important to acknowledge is that with many decisions about scale and scope issues of large investments done or needed play an important role.

.

Figure 5.3

Possible directions for hospital change - scale versus scope (diagram made by author)

scale

merger/ merger/ focus focus factory factory network network acquisition acquisition specialized specialized
merger/ merger/
focus focus factory factory
network network
acquisition acquisition
specialized
specialized
independent independent
current
current
hospital
hospital
growth
growth
small focus
small focus
limit access
limit access
broker
broker
clinic
clinic

scope

S cale and scope decisions are supply-driven, not demand driven. There are more options in changing the hospitals by looking at other axes next to scale and scope (which are definitively important). Such options may include more demand-driven axes such as service availability or service level. This is more about the value delivered than the structure used.

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5.4.4 Current governance structure complicates decision-making

The most significant choi ces in hospitals are not made on the ‘corporate’ level (whole hospital) but on the business-unit level (specialty). Because of the level of independence of professional partnerships in most hospitals, the ability of hospital boar ds to make decisions spanning the whole of the hospital is often limited. Often it is unclear who is in charge of the hospital: the board or the different professional partnerships of physicians. One of the effects is that when board and medical staff clash, the board of governors has to choose ‘sides’ often resulting in firing one or several members of the boards. A small number of hospitals (e.g. Bronovo or Ziekenhuis Groep Twente) try to tackle this issue by putting individual specialists on the hospital payroll.

Hospitals are virtual organizations that are viewed as a single organization by the customer. But this ‘image’ is changing. Individual professional partnerships are independently advertising their services directly to patients. Hospital ratings are changing towards specialty rating. The still complex internal structure of the hospitals is often viewed as an impediment to structural change.

5.4.5 Relationship with the patient is considered of growing importance

In all interviews and discussion it was acknowledged that the posit ion of the patient and th e relationship with the patient is of ever growing importance. Much has been done in the past decades to improve this relationship – and there is still much that can be done.

There are stratifying differences between hospitals in how to view their relationships with patients: some view patients still as people who have to adapt to the structures and processes of the hospitals, while others actively try to engage patients as responsible actors in their own healing process. There is a notion that the (combined) views of the patient, of the hospital and physician are increasingly important. E.g. reputation management is actively practiced by several hospitals.

5.4.6 Financial structures difficult to match with strategic initiatives

The single most heard complaint about realizing (new) strategic initiatives is the fact that fi nancial incentives and reimbursement structures do no match. The main problem for many hospitals is that better quality is not paid for. One example is that of academic hospitals: they try to position themselves as centers for last-resort care (including experimental treatment and other high-risk procedures). This last-resort care is more expensive than basic or top-clinical care, but the reimbursement for these types of treatments is d isproportional (reimbursement is less than the costs). Therefore all academic centers also deliver basic care to pay for the more expensive type of last-resort care.

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Hospitals are right in signaling the failure of the current reimbursement structures and financial incentives to align properly with the practice of healthcare. But this also means that hospitals cannot afford to “sit back and wait” until better systems will “pop up”. Other financial structures such as joint ventures with industry partners (e.g. as is practiced in the St. Maartenskliniek) or HMO-types of financing (as was tried by Rivas Zorggroep) may show new ways to finance healthcare. This can still complement strategies trying to align financial incentives and reimbursement structures with the real practice of healthcare.

5.4.7 Hospitals show large similarities in strategic structure c.q. configuration

T he choices hospital make for their products or service offerings show very large

similarities (look ahead to the introduction of chapter 6). The largest distinctive criteria are level of complexity/expertise needed, geographic location and size. Hospitals link their position in the value chain to the level of complexity of the disease pattern or expertise needed. General hospitals have more expertise than GPs, top-clinical hospitals more than general hospitals and academic ho spitals are used as “last resort”. Another defining factor of the hospital is its geographic location. One of the first arguments when

choosing a hospital is defined, by both decision-makers and patients alike, t o be its geographic location. This is therefore one of the more distinctive elements of the hospital. Also the size of the hospitals is an important differentiating factor: the number of hospital beds ranges from small (< 50) to large (1300+) (RIVM, 2007)

Hospitals decision makers mostly talk about current distinctive characteristics in terms of organizational features: expertise, location, size. Secondary product features that indicate how products are delivered (staff friendliness, communication possibilities etcetera) are not amongst the first elements that are considered important in discerning hospitals. But changes are visible e.g. because different Dutch hospitals are now adopting concepts such as the Plane-Tree concept that focuses on differ ent issues than technical/product qualities. Examples are integrating family, friends and social support, focusing on architectural and interior design (provide a healing environment) or offer complementary therapies (Planetree, 2008)

5.4.8 Patients are always end-users, but not always end-customers

The stakeholders in hospitals are many, including patients, physicians, nurses, management, insurers, neighbors, government, family and suppliers. And the list can be even longer. The question of who the consumer is for hospitals is therefore not always easy to answer. Who should the hospital consider the patient as its “consumer” to focus on when building value-based strategy? Should this be the patient (receiving care) or the insure r (paying bills) or maybe the physician (providing services)? There are many

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options to choose from, indicating that it important for the hospital to be clear about its customers in order to be able to know what value to deliver, where, to whom etcetera.

What we can say is that the ultimately the patient is always considered the end-user: take away the patient (person receiving care) and there is no reason for any of the other stakeholders to be involved. This makes the patient the end-user but not necessarily always the end-consumer. Hospitals currently express different views on who they consider the end-consumer. Som e hospitals state that the patient is their end consumer, other see themselves as facilitators of physicians who deliver the real services, while other still focus on the insurer as their final customer, because it defines the parameters about wh at should be delivered.

Hospitals agree that the patient is always considered the end-user, but that the end- consumer can be different depending on what/who is considered more important.

5.4.9 Regulated competition is not fully functioning yet

The system of regulated competition which was gradually introduced in The Netherlands since the 1980s does not yet serve up to its promise of more choice and better quality for patients. The different players of the game blame each other for slowing down or even obstructing the process. Different problems identified that hold off regulated competition include: lack of transparency of hospitals, no excess capacity in e.g. surgeons o r hospitals, lack of strategic entrepreneurship with physicians or perverse reimbursement systems.

Regulated competition is one of the possible approaches to ensure better quality of care. But after having taken this path, it has become an almost never-ending struggle between all stakeholders involved: government, hospital management, physicians, policy advisors etcetera (this is not only in The Netherlands, but also in other countries such as the United States). See section 3.5 for a short history of Dutch health reform. Most stakeholders agree on the fact that the current status of regulated competition in Dutch healthcare is still a far cry f rom what it should be. But the causes for this are many and different depending on your viewpoint. Two claims often made are that physicians and other professionals for a long time have tried to protect their own interest s (keeping the status quo) at the expense of improving the quality of the system. Another argument is that government has too much tried “easing in” the system instead making explicit decisions and making hospitals more responsible e.g. for their financial situation.

5.4.10 Strategy development is replacing established policies

One of the interviewees describes the hospital strategic process in earlier days as follows:

we used to add up all the individual wish list of the physicians, now we first define a focus and base our

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wish lists on that focus”. Hospitals, as we found out through field research, have only rather recently (last 5-10 years) focused on the value of an explicit strategy development proce ss. B ecause of their strategic environment (based on budgets, a steady flow of patients and little or no competitive incentives) hospitals were run by established policies: doing things the way they had been done for years – taking the internal drivers (supply-driven) of the hospitals as the guideline for changing policy, rather than external drivers (demand-driven).

If stakeholders always have been used to get what they wanted (just by yearly submitting “wish lists:) it is more difficult to change that strategic process. A growing number of hospitals are looking into new ways of facilitating the strategic process, e.g. by doing S WOT-analysis per specialty, putting a manager plus physician in charge of a department or providing education/training about strategic entrepreneurship to medical professionals.

5.5

Conclusion

What emerges from the field research above are signs of a struggle: healthcare organizations are actively trying to fight their old habits to increase future relevance to the customer (focusing only medical care, large similarities between organizations, focusing more on professionals than patients). There is large acknowledgement amongst the participants that there is a need for change in hospitals: whether it is driven by the need for a better financial position or more focus on the patient.

It is important to note that participants in all of these discussions have granted us permissions to discuss their strategic issues. This alone can already be seen as an issue of confidence or at least transparency that shows their interest in improving at least their own position, but also the position of others by supporting this research. We have not reached every hospital, and while this often is because of practical issues such as scheduling and time limitations, we can never be completely sure whether or not the current list of participants might be skewed to those more interested in realizing change than the general average of hospital decision makers.

Many hospitals identify (possible) problems on their road to change: health systems does not allow enough room for experiments, complex governance structures, financial incentives are mainly perverse. There is no single, clear-cut solution that solves all the problems, especially the scale/scope problem and the perverse financial incentive issues, which worries many of the participants.

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“Try not to become a man of success but rather to become a man of value.” -- ALBERT EINSTEIN, physicist

6 Business mo

del theory and hospital policies

The previous chapter focused on giving an overview (using qualitative field research) of current strategic issues for hospitals. The focus of this research is to assess the value of the business model theory for hospitals.

Let us take a look at what we define as the current “implicit business models” of the Dutch hospital. This ter m is very much a contradictio in terminis as business models are only business model s if they are explicitly defined, otherwise they are established policies (“how we have always done it”). To be able to link these to the business model theory we analyze the different elements of current hospital strategy as elements of the business model (Table 6.1): value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential.

The analysis in the table above shows relatively little differences in (implicit) business model between the current types of hospital. The previous ch apter specifies several re asons decision-makers give for this (scale/scope issues, difficulty to match financial structure, complex governance structures). The business model is no panacea to all of these issues. What it does help with is providing a comprehensive and concise approach to “asking the right” questions that eventually help tackling these problems. It is like the quote about quality at the beginning of this chapter: “Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution; it represents the wise choice of many alternatives.”

The fifth research question is: “What value does busin ess model theory add for hospitals, c ompared to existing literature and methods already available?” The previous section lists different reasons why there is a need for a structured comprehensive approach towards strategy building. We analyze different literature that focuses on the issue of strategic hospital configurations in relation to the proposed approach and elements of the business hospital (6.1). We focus on the relation of the existing literature with the business model elements and sequentia l structure: value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential.

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Tabl

e 6.1

Analysis of current implicit Dutch hospital business models (esta

Maarten den Braber

blished policies)

 

General

Top-clinic al

Academic

Specialty

Focus clinic

hospital

hospital

hospital

hospital

Value

all basic care; average service

all basic and top-clinical care; teaching; average service

all basic and top-referent care; teaching; research; average service

single specialty full range; above- average service

single specialty focused range; no stay; above- rvice

average se

proposition

 

Market segment

all patients

all pati ents supra-regional; low patient mobility

all patients

single patient

single treatment

regional; low

national; average

type

national; average

patient mobility

patient mobility

national; average

patient mobility

 

patient mobility

Strategic

between GP and STZ/academic; collaborate to compete

between

last resort;

stand-alone;

stand-alon e;

position

academic and

collaborate to

industry

competing;

general;

compete

partnering;

reputation

collaborate to

competing;

 

compete

reputation

Value chain

small scale;

medium scale;

large scale; product fo cus; physician on payroll;

medium scale;

small scale;

product focus;

product focus;

service focus;

process focus;

physician self-

physician self-

physician self-

physician self-

employed

employed

employed

employed

Competitive

travel distance,

treatment type

expensive

expert position,

speed, serv ice

strategy

patient relation

equipment; last

customer focus,

 

resort

speed

Cost structure / revenue potential

DBC A+B;

DBC A+B;

DBC A+B;

DBC A+B;

DBC B; medium ca pital intensity

medium capital

WBMV; high

research;

research

intensity

capital intensity

government; high

industry; high

 

capital intensity

capital intensity

Concluding from this literature review and our field research, we derive for the hospital th e benefits and limitations of the business model elements in the next chapter, in accordance with our last research question: “What are the benefits and limitations of the business model elements and approach for hospitals?

6.1 Literature review

A literature review into the possible different strategic configurations and models for a hospital returned only few results (MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van ziekenhuizen, 2000; Darzi, 2007). We take a look at the results found and assess their relevance compared to what the value of the business model can be. Beforehand we notice that none of the referenc es found in the literature offers a (basic) model to help decision-makers guide the strategy building process, but rather focus on concrete and practical delineations of what the possible development routes of the

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hospital strategies and structures can be. That differs from the business model appro ach, which is actually about building stra tegy. But it can also be used (when the relevant

ghlight

qu

the different authors and approaches below.

estions and elem

ents are

answere

d) to def ine those different ro

utes. We

will hi

6.2 McKee an

d Healy (2002)

n their

book about hospitals in a changing Europe. They define four different types of hospitals:

dominant, hub, comprehensiv

McKee & Healy (2002, p. 69) list the possible role

of a district

general hospital i

e and

separatist ho

sp ital (Table 6.2).

Table 6.2

Possible roles of a district ge neral ho

spital (McKee & Healy, 20 02, p. 69)

Name

Description

 

Dominant hospital

A dominant

h

ospital

mon

opo

lizes

skilled

sta

ff