Please read the Case study bellow and answer the questions. Please use extra references if possible, and list them bellow.

Questions:

• Market Analysis
  1. Is there a description of the target population to be served in the case study?
  2. Does the project complement other activities in the community?
• Competition

1. What are the comparative advantages?

Riviera Medical Center

Michael J. King

Tenet Healthcare Corporation, Dallas, TX

Robert C. Myrtle

University of Southern California, Los Angeles, CA

CASE HISTORY/BACKGROUND

Alex Harrington joined Riviera Medical Center as CEO 18 months ago. Riviera Medical Center is a 350-bed acute care hospital located in Northern California. It is part of a nonprofit chain of hospitals that has had financial challenges over the past several years that have redirected some of Riviera Medical Center's earnings to support capital investment at other locations. As a result, Riviera Medical Center has not had adequate funds available to reinvest in facilities and equipment.

In addition, approximately 5 years ago Riviera Medical Center entered into a contract with the county to provide services to medically indigent adult patients who are the responsibility of the county. The county contract and inadequate reinvestment have damaged Riviera Medical Center's image in the region.

Harrington is aggressively looking for ways to improve the hospital's image in the community without making significant capital investment. He believes the opportunity to partner with employers to help control the cost increases associated with employee health benefits is a way to align more closely with employers and improve the hospital's image with that constituency. He knows that when employers select the health plans for their companies, cost is a central component in their decision making.

During recent months, Harrington has led efforts to develop a workplace wellness program, which he calls Riviera Wellness Services. He is considering whether it is time to present the concept to the Riviera Medical Center board of directors and seek their approval of the new program. His consideration includes one more review of the business plan developed for Riviera Wellness Services and another opportunity to think about how Riviera Medical Center came to develop the plan for Riviera Wellness Services. He settles into his office on a Saturday morning and begins his review, starting with some of the history of Riviera Medical Center.

RIVIERA MEDICAL CENTER HISTORY

Through the 1980s and much of the 1990s, Riviera Medical Center grew to become the hospital of choice and technological leader in its region. It developed itself as a cardiac specialty center and was the dominant women and children's hospital in the region. The facilities were the best in the area, the equipment was state of the art, the nursing staff was highly trained, and the medical staff was on the cutting edge. The hospital was also financially very successful.

There was only one primary competitor in Riviera Medical Center's regionNorthern Valley Medical Center. That competitor had started a strategy focused on developing a foundation model medical group practice as a way to develop a referral base. Northern Valley Medical Center reinvested its hospital earnings into the development of its medical group practice rather than its facilities. In contrast, Riviera Medical Center focused on the independent physicians who were entrepreneurial and were attracted to the high-quality technology leadership offered by Riviera Medical Center.

When Riviera Medical Center negotiated the contract with Riviera County to purchase and close the old County Hospital, the action prevented the county from selling the hospital to another party and increased Riviera Medical Center's census, which used some of its excess capacity. The addition of the uninsured or underinsured population, however, made a risk of changing the hospital's demographics. The administration had determined that the benefits of adding the volume outweighed the risk associated with patient demographics; however, the changes that took place over the next several years proved that management grossly underestimated the impact of the changing patient demographics. The contract with Riviera County remains in place through 2018.

One of the most immediate impacts of the county contract was the growth in emergency department activity. The emergency department was built in the early 1990s for a capacity of around 40,000 visits annually. By 1998, the department added about 15,000 visits and was seeing a total of about 55,000 visits annually. Most of the growth was in uninsured patients or patients covered by the Medicaid program. The emergency department was quickly overloaded, and many insured patients felt uncomfortable around the newly added clientele.

The medical staff was extremely upset with the change, and many doctors looked to shifting some or all of their practices to Northern Valley Medical Center. That hospital had established a strong foundation medical group and was in fact attracting private physicians who had been loyal to Riviera Medical Center, resulting in a shift of insured business to Northern Valley Medical Center. This shift permitted Northern Valley Medical Center to begin a construction campaign to modernize its facilities and expand capacity.

In addition, during the decade of the 1990s, Western Health System aggressively marketed in the Riviera service area and expanded its membership to cover approximately 20% of the population. Western is a fully integrated health system that ensures its members and provides physician services and hospital services to its population of enrollees. In 2005, Western commenced construction of a new 200-bed hospital, which opened in late 2008.

Following the county contract, the demographics in the community got worse as far as Riviera Medical Center was concerned, with the uninsured population exceeding 25% by 2007. Riviera Medical Center required significant increases in managed care rates to offset the increased cost of care for uninsured or underinsured patients. Northern Valley Medical Center more aggressively increased rates to finance several hundred million dollars in new facilities, making employers in the region unhappy with the rate of increase in healthcare costs. Much of their dissatisfaction was directed toward the hospitals. The more sophisticated employers, however, saw that the costs associated with Northern Valley Medical Center were higher than with Riviera Medical Center.

Riviera Medical Center lost profitability, and the system it was a part of had other priorities for the funds it was generating. Capital reinvestment ran at approximately 50% of depreciation during the most recent decade. Competing hospitals made significant investments during the same period.

Riviera Medical Center has followed a strategy focused on quality of care and has achieved notably higher quality scores on publicly reported data than competitors in the region. Harrington thought that this was an important advantage for Riviera Medical Center. This accomplishment was recognized by others, as the hospital achieved numerous quality awards, including from the American Heart Association, health plans, and other organizations. Harrington was especially pleased that Riviera Medical Center had received trauma certification as a level II trauma center from the American College of Surgeons. He felt strongly that from a quality standpoint Riviera Medical Center occupied a leadership position. He also told himself that, although quality is important to health plans and employer groups, it is often not well understood or fully appreciated by the general consumer. Harrington concluded that, although Riviera Medical Center does not have the newest hospital, it does have a reputation with employers as being a good alternative for quality and cost.

His thoughts turned to a point of considerable concern. Over the past decade Riviera Medical Center has gone from the premier institution in the region to third in image with patients. Still, in Harrington's view Riviera Medical Center has the opportunity to be identified as the hospital of choice by working with employers. He reminded himself that Riviera Medical Center has plans for building replacement hospital beds to make modern facilities that can compete with the other two hospitals in the immediate area, but turned his thoughts to another potentially important strategic stepthe plan he is reviewing to introduce a worksite wellness program to help employers lower their healthcare costs while improving the overall health and well-being of their workforces.

PLANS FOR RIVIERA MEDICAL CENTER'S WORKSITE WELLNESS PROGRAM

Harrington thought about the importance of his vision for the hospital to be a partner with the community, and especially to develop relationships with local employers in the hospital's service area. As a part of this effort, Riviera Medical Center has worked with the California Health Collaborative, an organization representing mostly union health and welfare funds that are primarily self-funded for health insurance. California Health Collaborative's goal is to improve health and lower costs for its members and their employees. With approximately 3 million Californians represented by California Health Collaborative, Harrington had, in his view, wisely sought involvement with the organization.

An important accomplishment from working closely with California Health Collaborative was the development of a model direct contract between the hospital and those employer and payer groups represented by California Health Collaborative. The contract covers inpatient and outpatient services provided by the hospital, and there is an annual pay-for-quality component of the contract. Riviera Medical Center has significantly higher quality scores than other hospitals in the area, which California Health Collaborative members benefit from. California Health Collaborative and their members have recognized that improved quality translates into fewer complications and ultimately lower costs.

Harrington believes Riviera Wellness Services will build on and extend the past accomplishments made possible by working with California Health Collaborative. In his view, Riviera Wellness Services will allow increased direct interaction with employers and employees at their place of business, which is a powerful opportunity for Riviera Medical Center to establish itself as a partner in health for the community.

He concluded that the combination of high-quality healthcare services and a position as a partner for wellness for the community should translate into an improved image in the community and ultimately increased market share. Harrington believes these efforts are part of an overall value proposition that Riviera Medical Center brings to the community.

Harrington mentally reviewed how far his plans for Riviera Wellness Services had come, acknowledging that some aspects of the plans are still under way. Initial plans call for Riviera Wellness Services to send a team of healthcare professionals to an employer's worksite to conduct comprehensive screenings of employees. A personal wellness profile will be prepared for each employee who chooses to participate in the screening process. An aggregate wellness profile will be prepared for the employer to summarize the state of wellness for those employees who participate in the screenings.

The Riviera Wellness Services team will help employees and employers to establish individual and aggregate wellness improvement plans. Employees deemed at high risk of developing a chronic disease will be referred to their physician or to a participating Riviera Medical Center physician. To protect employee privacy rights, individual information will not be available to employers.

Riviera Medical Center's administration shares Harrington's view that the hospital needs to develop and implement strategies to help the hospital be seen as an attractive partner for the employers in Riviera County. They are convinced that Riviera Wellness Services will provide one such strategic advantage in the hospital's service area, especially because it will be the first program of its kind in the region.

As he reviewed the status of Riviera Wellness Services, Harrington's thoughts turned to some of the larger influences in the healthcare industry that have brought Riviera Medical Center to the point of presenting plans for Riviera Wellness Services to the governing board.

THE INDUSTRY

Riviera Medical Center's administration has identified the renewed awareness of healthy living and wellness as an opportunity to work with employers throughout California and to develop programs designed to improve the health of their workforces and reduce their insurance cost through health improvements. There is a significant increased awareness of how healthy behaviors can improve the quality of life through increased energy and reduced health complications.

Harrington remembered that he was especially influenced by release of an important study by the Partnership for Prevention, a nonprofit, nonpartisan organization that develops evidence-based solutions to major national health challenges. The study, Leading by Example, evaluates numerous CEOs' views on the business case for worksite health promotion. The study pointed out that the primary driver of soaring health costs is inadequate investment in health through primary prevention, health risk reduction, and disease management. It further noted, "Some forward-thinking organizations are integrating employee health as a business strategy that enables them to manage costs effectively, while investing in the potential of their human capital." Harrington concluded that this information is highly supportive of plans for Riviera Wellness Services.

THE SERVICE

In reviewing the business plan for Riviera Wellness Services, Harrington recalled that the essence of the service is to provide health assessments for employees with a focus on risks for chronic disease, and to establish programs to help employees minimize the risks associated with such chronic diseases. The initial phase of the program is planned to be a series of medical screenings conducted at various stations staffed by experts in the respective medical or clinical areas involved. Prior to conducting such screenings, the employees will be required to provide blood for laboratory tests that will be reviewed the following day as a part of the screening process. Separate stations will be set up for (1) cardiac care, (2) oncology, (3) orthopedics/bone density (4) exercise and conditioning, (5) nutrition and diet, (6) sleep and respiratory, (7) diabetes, and (8) women's health.

Based on the results of the screenings, a tailored healthy lifestyle program will be established for each employee. Chronic conditions, such as diabetes and obesity, will be addressed through education in group settings, such as weight management and diabetes classes or support groups. For employees who need more in-depth attention, Riviera Medical Center will use its certified diabetes clinic and Cardiac Center of Excellence. These specific resources can be used where appropriate to help prevent further deterioration of the chronic conditions identified in people who are screened. Other areas of concern will be addressed on an individual basis or by referral to a primary care physician.

Riviera Wellness Services' screening results will be accumulated, and a health rating determined for each employee at the beginning and the end of the year. The data will be aggregated for the participants in an employer's workforce and an aggregate average score established for its workforce. The employers will be able to present their aggregate data to managed care companies when negotiating annual health insurance rates; measured improvements should lower health insurance costs.

Recognizing that individual health is a highly confidential topic and subject to the privacy provisions of the Health Insurance Portability and Accountability Act, Harrington was satisfied that Riviera Medical Center's plans for individual health information to be maintained anonymously with access available only to those developing and implementing the individually tailored wellness programs as well as the physician overseeing the program were consistent with the Health Insurance Portability and Accountability Act. He had made certain that the intent of the program is to help employees of participating companies improve their health through lifestyle changes, and not to make a health record that is available to their employers.

Riviera Medical Center administrators are convinced that their worksite wellness program will be unique, with tailored health improvement plans for each employee and oversight by a uniquely qualified team of professionals headed by a primary care physician. They also plan for specially trained local primary care physicians to be available for consultation for employees who require special attention. In addition, the measures used to rate employee health are supported by evidence that they are primary indicators of individual health and wellness.

KEY ASPECTS OF RIVIERA WELLNESS SERVICES

Harrington reviewed several of the key aspects of Riviera Wellness Services that he and other Riviera Medical Center administrators had developed during their planning, including the following:

Organizational Mission: Coordinate efforts with employers to improve the wellness of their workforce. This will be accomplished through easily accessible health screenings and development of tailored health improvement plans for individual employees.

Vision Statement: Our vision is to establish the standard for employers and employees to make health improvement and wellness continuous priorities.

Objectives: Objectives of the worksite wellness program are (1) to limit the increase in health insurance cost to 5% or less by year 3 for self-funded employers that participate in the program; and (2) to reduce absenteeism due to illness by 3% during year 2 for employers that participate in the program.

Culture: The desired organizational culture for Riviera Wellness Services includes the following: (1) Riviera Wellness Services' employees will have an enthusiasm for wellness, (2) employees will present an image of a professional and well-coordinated healthcare team, (3) employers will have a service orientation and will go out of their way to make the service convenient and user-friendly, and (4) employees will be active participants in community events and organizations focused on health and wellness.

Entry and Growth Strategy: A team of specialists representing each of the eight focus areas will be available to begin screenings at client sites by January, year 1. The teams will consist of registered nurses and will be aided by a phlebotomist who will assist with blood drawing for laboratory work. As demand for the service grows, the number of teams available for the screenings will be increased. The initial targeted population is the self-funded preferred provider organization employer groups. To the extent that major health reform plans include incentives and possibly funding for wellness improvement among the lower-income populations in California, demand for services should substantially increase, perhaps far in excess of Riviera Medical Center's initial expectations.

Once the program is launched in Riviera County, it can quickly be expanded to surrounding counties. Riviera County has more than 450,000 residents. There are more than 1 million people in the Riviera Medical Center extended service area, which is within 30 miles of the hospital. Growth of the service will be more controlled by the desire to have manageable growth than by maximizing potential growth. In order to be successful in the long term, the service must be delivered with quality. Riviera Medical Center's administration believes that controlled growth of the service is the most certain way to ensure excellence.

Being first to market in the local service area is strategically important. Riviera Medical Center's administrators plan to market to key employers immediately and strive to bring wellness to the workplace in a more focused way than has previously been experienced in the community.

Once this initiative has been rolled out, it can be duplicated by Riviera Medical Center's competition within a period of about 6 months. By developing the foothold as the hospital bringing wellness to employers and employees, Riviera Medical Center's administrators believe that the hospital will be in a position to have a competitive advantage for delivering the service over the next several years. First to market can erect barriers to entry and may deter other hospitals from offering similar services.

MARKET RESEARCH AND ANALYSIS

Customers

Harrington recalled that initial target clients will be members of the California Health Collaborative. He remains convinced that, because they are determined to reduce health costs and improve quality without degrading benefits, Riviera Wellness Services is a close fit with California Health Collaborative's objectives.

Harrington also recalled that additional potential customers include employers or employer groups with self-funded health insurance plans. These groups typically see the direct correlation between the improved health of their members and lower health costs. Another group of potential customers is the health maintenance organization populations within employer groups. Well-documented health status of a workforce will be a selling point to health maintenance organizations.

Competition and Competitive Edge

Nationally, Comprehensive Health Services and Ceridian Corporation are the two largest players in the area of workforce health assessment and health management programs. Comprehensive Health Services is based in Vienna, Virginia, and Ceridian Corporation is based in Minnesota. Neither organization has an office in California. There are wellness plans developed by many larger employers. However, in Harrington's thinking, there is significant opportunity to provide these services to employers with fewer than 1,000 employees.

There appears to be minimum competition in communities throughout California with populations below 500,000 and for companies between 100 and 1,000 employees. This will give Riviera Wellness Services a competitive edge in those initial target markets.

Estimated Market Share and Sales

In Harrington's view, market share will start on a small scale and grow as the service gains a positive reputation, as evaluation teams are developed, and as marketing and sales efforts take hold. Riviera Medical Center's administrators believe that the initial target, California Health Collaborative, can generate approximately $300,000, $500,000, and $700,000 in revenue for years 1 through 3, respectively.

ECONOMICS AND BUSINESS

Harrington quickly reviewed some of the key business variables in the plans for Riviera Wellness Services, including the following:

Gross and Operating Margins: Employee health assessment and wellness program development are the primary initial markets to be pursued by Riviera Wellness Services. Contribution margin percent is expected to be more than 60% from the primary activities. Years 2 through 5 of operations are expected to generate progressively improving earnings before interest, taxes, depreciation, and amortization (EBITDA) margins ranging from 5% to 34%.

Profit Potential and Durability: Riviera Medical Center administrators project achieving EBITDA of $500,000 in year 5, while serving only 1% of the target market. This model will have highly sustainable profits so long as Riviera Wellness Services can demonstrate that the healthcare cost savings its clients are achieving are a result of healthier lifestyles and reduction of chronic diseases.

Fixed and Variable Costs: Variable costs primarily consist of the service delivery teams that provide the screening services to groups of employees. Each service delivery team consists of eight professionals. It is anticipated that this team screens 48 employees during an 8-hour day. The service teams cost $2,900 per day to conduct the screenings. Other variable costs relate to health risk-appraisal packages, which cost $12 per screening, and lab testing, which costs $11 per screening. Fixed costs relate primarily to administrative services and marketing costs.

Months to Breakeven: Riviera Medical Center's administrators project achieving breakeven status by month 16. The service teams will develop slowly and gain productivity as sales efforts start to take hold.

MARKETING PLAN

Harrington's thoughts next turned to marketing Riviera Wellness Services and to some of the critical components of the marketing plan being developed for the service.

Overall Marketing Strategy

Riviera Wellness Services' service is directly tailored to help employees change their lifestyles and achieve health cost savings and incentives for themselves and their employers. The sales and marketing focus will be directed to employers with self-funded health insurance plans. These employers will see immediate and direct savings and should be eager to hear how Riviera Wellness Services can help improve the health of their workforce.

Initial target employers will have between 100 and 1,000 employees and will be identified through coordination with California Health Collaborative or through local chambers of commerce. The program manager will identify key markets and prospective customers.

Pricing

In Harrington's view, there is little competition that is directly comparable to Riviera Wellness Services. The initial pricing is based on a full-day screening of 40 employees per day per team, and a margin of approximately 50% based on direct cost of services. A price of $200 per employee for the screening service achieves the margin objective, allows for support of the administrative functions, and provides for marketing costs. The cost considers the need to involve expensive medical professionals in the screening process. The pricing is expected to be at a level that Riviera Medical Center can ultimately demonstrate a return on investment of at least 500% through the combination of reduced healthcare costs and reduced absenteeism. It is possible the return to employers could be much higher than the initial estimate.

Advertising and Promotion

Riviera Medical Center's administrators plan for advertising and promotion to be designed to support the sales team's efforts. A professionally designed brochure will describe the service to be provided, the employee health scorecard, and the aggregate employee health report. This will also demonstrate anticipated savings in health costs attributable to the improved health of the workforce. As an example, Safeway Stores, a large grocery store chain with $45 billion in revenue and 197,000 employees, has implemented a wellness program to reward healthy choices and activities. The program was estimated to decrease total healthcare costs by 30% over a 2-year period. Results will also be tracked from Riviera Wellness Services' clients and will be used in ongoing sales brochures.

IMPLEMENTATION

In his review of how implementation of Riviera Wellness Services was to unfold, Harrington thought about several aspects of implementation that he and his administrative colleagues had focused on, beginning with the tools they planned to use in implementing Riviera Wellness Services.

Reporting Tools

Riviera Medical Center will purchase the software and services of Wellsource, Inc., to provide reporting to clients. Wellsource, a wellness company, offers software and Internet services that generate individual wellness profiles and aggregate wellness reports. Their Personal Wellness Profile Software will allow the Riviera Wellness Services team to present health risks, target risk groups, track progress, and evaluate cost-benefit performance. The software is a proactive tool to manage the wellness of individuals and groups. It considers lifestyle, health factors, and measurements of health risk, including personal and family medical history, nutrition, stress, and biometrics. Assessment scores and recommendations are based on optimal health factors rather than risk of death.

The Wellsource tools also include a weight and health profile, a coronary risk profile, a diabetes risk profile, and a HealthStyle Index, which is a comprehensive lifestyle and health assessment.

Service Delivery

Riviera Wellness Services will start with a single-service delivery team, which will include a few individuals formally trained in using the Wellsource tools. Once the sales team engages a customer for the screening and health-scoring services, a date or dates will be set for the screening services, and scheduling will be based on customer preference first and availability second. The individual wellness profile is a detailed report of health and wellness and will be made available to each employee who has a screening. Aggregate reports are prepared and presented to clients to identify health risks in their organization. Trend reports can also be prepared over time after follow-up visits to demonstrate progress within the organization.

Intervention plans can be designed to establish one-to-one coaching for those who desire such structured interaction. Also, classroom instruction and self-study can be made available to those who prefer such intervention methods. Interventions can be tailored to the needs and desires of the individual and can also be coordinated with the employer in an effort to help address the needs of the workforce.

Screenings and interventions will be conducted at the employer's worksite whenever possible. If the employer does not have adequate facilities, screenings and interventions can be performed at the hospital. If space is a limiting factor to selling the service, Riviera Medical Center will invest in a mobile unit for future use.

There will also be tools available to help motivate individuals and employees, such as e-mail notices and reminders. There are also wellness challenges that can be issued to help keep target groups focused on their goals.

Tools can also be made available to track health activity. A personal health diary is available for participants to log health, exercise, and nutrition practices. These tools make it easy to track individual and organization progress. Rewards and recognition programs can be introduced to motivate individuals and organizations as they accomplish their goals.

The Wellsource software allows clients to track changes and improvements. Employers should also track trends and savings in productivity, work-loss time, and healthcare expenses.

All of these efforts should help employers to modify their corporate culture to promote a healthy work environment and healthy lifestyles.

Development Plan

A key component of the health assessment is the process for health screening and development of the health report card. The reporting will be a combination of the data from the Wellsource software and some proprietary reporting. The Riviera Wellness Services administration will work with patent and trademark counsel to ensure that proprietary processes and documents are adequately protected. The process for such assessment and patent and trademark filings must be completed before Riviera Wellness Services becomes operational.

The health assessment team qualifications have been identified and Riviera Medical Center's administrators are in the early phases of locating qualified candidates for such positions. It is anticipated that the first screenings will not take place until the first quarter of year 1.

A marketing brochure is a key component of the sales team's effort. The brochure is being developed with the assistance of a professional public relations and marketing firm. This brochure will be available at the beginning of year 1.

Organization

Riviera Wellness Services will be a division of Riviera Medical Center. The clinical staff will be recruited out of the Riviera Medical Center workforce, which currently stands at about 2,000 individuals. A program manager will be hired to oversee all aspects of operations of the program. This individual will likely have a background and training in wellness. Candidates include exercise physiologists with training in nutrition. This individual will also be supported by a program coordinator, a sales manager, and an administrative assistant.

Harrington is comfortable that Riviera Wellness Services will have joint reporting to Debbie Pike, Riviera Medical Center's director of public relations and marketing, and John Morse, chief operating officer. This joint reporting was decided on because of the emphasis on having Riviera Wellness Services benefit the community, which is part of Harrington's larger strategy for the hospital.

HARRINGTON'S CONCLUSIONS AND THOUGHTS

Following his review of the business plan for Riviera Wellness Services and his more general thinking about the environment facing Riviera Medical Center, Alex Harrington concluded that it is indeed time to share plans for Riviera Wellness Services with the board of directors and to ask for their approval of the plan. His rationale includes a conviction, based on the significant planning that has gone into development of Riviera Wellness Services, that this is a service opportunity that will be in strong demand in the current environment. He believes that the fact that there is little immediate competition helps make this an attractive business prospect for Riviera Medical Center. Riviera Wellness Services complements the Riviera Medical Center's hospital strategy and provides value to the community, employers, and their employees. The opportunity to provide a roadmap to improved health to numerous individuals will be widely valued. Along with Riviera Medical Center's leading quality of care, which is publicly reported by numerous sources, the Riviera Wellness Services initiative will help Riviera Medical Center achieve its objective of being the hospital of choice for employers in Riviera County.

Although Harrington feels the proposed program is ready to present to the board of directors, he wonders how the board will react. Specifically, he wonders if they will see the wellness service as merely viable or as a significant strategic advance for the hospital. He also wonders if the business community will be pleased by Riviera Wellness Services's availability.

ENDNOTE

This case is based on actual events. The organization, its location, and the names of people have been disguised.

CASE STUDY DISCUSSION

As the board of directors, what are your concerns, recommendations and assessment of this proposal.