The CEO of St. Sebastian Health System, a moderate-sized

hospital system in a mid-sized, Midwest city has hired you to help turn things

around. The CFO is projecting an $8.9 million operating loss this year, which

will be more than offset by non-operating income. However, the board has made

it clear that the situation must improve. If the system cannot produce a

positive operating margin in 2022, someone else is going to be the CEO. The CEO

and CFO have asked you to recommend strategic approaches to selling their

services in the community that will help turn the financial ship around.Your

Health SystemSt. Sebastian is a community-based health system. The senior

management team has an average tenure of 17 years. The exception is the Chief

Medical Officer (CMO). She has been in her position for two years and is the

fourth CMO in that role in the past ten years. The CEO and COO have each been

in their current roles for ten years. The system is comprised of the

following:1. Two large, acute care hospitals2. Two long term care facilities3.

Two skilled nursing facilities4. One long-term acute-care hospital (LTAC)5.

Four geographically distributed outpatient centers6. Four Urgent Care Centers7.

Two free-standing ambulatory surgery centers (ASCs)8. A 400 member employed

physician group that includes 180 Primary Care Providers (PCPs). All 28 PCP

practices are certified Level III Patient Centered Medical Homes by NCQA.The

remainder of the 1,000 member medical staff is generally comprised of large,

independent groups who have varying degrees of 'loyalty' to the system. The

Radiology and Emergency groups, for example do 100% of their work at St.

Sebastian and have no ownership of any outside facilities. The Gastroenterology

group, on the other hand, does work at the hospital, but also owns their own,

freestanding endoscopy center. The orthopedic group does 75% of their work at

St. Sebastian, but maintains privileges at other facilities. They do not own

their own ASC.In the current year, St. Sebastian is projecting 221,700 patient

visits (combined IP and OP) with an average cost per visit of $1,775. They have

an average charge per visit of $4,600. Over the past ten years, St. Sebastian

has been active in pursuing a number of different strategic projects

including:1. They have established 'clinical institutes' in cardiovascular,

orthopedic, oncology, maternity and neurologic care. Each of these has been

built through a co-management agreement between the system and the internal or

external physician group who would be most logical. Each institute is led by a

dyad of an administrator and medical director. 2. Five years ago, they

consolidated maternity programs to one facility, a move that justified

investing in a Level III Neonatal Intensive Care Unit (NICU)3. They have

established a research division in the hopes of working with national

pharmaceutical companies and/or tertiary care hospitals in the Midwest.4. They

have established a Physician Hospital Organization (PHO) and intend to become

an Accountable Care Organization (ACO) that can participate in the Medicare

Shared Savings

Case Study - Background Reading - Strategic Management - The CEO

of St. Sebastian Health System, a moderate-sized hospital system in a

mid-sized, Midwest city has hired you to help turn things around. The CFO is

projecting an $8.9 million operating loss this year, which will be more than

offset by non-operating income. However, the board has made it clear that the

situation must improve. If the system cannot produce a positive operating

margin in 2022, someone else is going to be the CEO. The CEO and CFO have asked

you to recommend strategic approaches to selling their services in the

community that will help turn the financial ship around.Your Health SystemSt.

Sebastian is a community-based health system. The senior management team has an

average tenure of 17 years. The exception is the Chief Medical Officer (CMO).

She has been in her position for two years and is the fourth CMO in that role

in the past ten years. The CEO and COO have each been in their current roles

for ten years. The system is comprised of the following:1. Two large, acute

care hospitals2. Two long term care facilities3. Two skilled nursing

facilities4. One long-term acute-care hospital (LTAC)5. Four geographically

distributed outpatient centers6. Four Urgent Care Centers7. Two free-standing

ambulatory surgery centers (ASCs)8. A 400 member employed physician group that

includes 180 Primary Care Providers (PCPs). All 28 PCP practices are certified

Level III Patient Centered Medical Homes by NCQA.The remainder of the 1,000

member medical staff is generally comprised of large, independent groups who

have varying degrees of 'loyalty' to the system. The Radiology and Emergency

groups, for example do 100% of their work at St. Sebastian and have no

ownership of any outside facilities. The Gastroenterology group, on the other

hand, does work at the hospital, but also owns their own, freestanding

endoscopy center. The orthopedic group does 75% of their work at St. Sebastian,

but maintains privileges at other facilities. They do not own their own ASC.In

the current year, St. Sebastian is projecting 221,700 patient visits (combined

IP and OP) with an average cost per visit of $1,775. They have an average

charge per visit of $4,600. Over the past ten years, St. Sebastian has been

active in pursuing a number of different strategic projects including:1. They

have established 'clinical institutes' in cardiovascular, orthopedic, oncology,

maternity and neurologic care. Each of these has been built through a co-management

agreement between the system and the internal or external physician group who

would be most logical. Each institute is led by a dyad of an administrator and

medical director. 2. Five years ago, they consolidated maternity programs to

one facility, a move that justified investing in a Level III Neonatal Intensive

Care Unit (NICU)3. They have established a research division in the hopes of

working with national pharmaceutical companies and/or tertiary care hospitals

in the Midwest.4. They have established a Physician Hospital Organization (PHO)

and intend to become an Accountable Care Organization (ACO) that can

participate in the Medicare Shared Savings

Program (MSSP) and/or enter into global risk contracts with

third party payers. The PHO is currently evaluating whether or not they should

purchase an insurance license so that they could offer commercial, Medicare

Advantage and Managed Medicaid insurance products.5. They have established a

Business Health division to service the corporate health needs of the employers

in the region. This would include things like EAP programs, on-site wellness,

drug screening, on-site clinics, etc. This division also recently built two

large, full-service fitness centers.The competition - The community is currently

served by three other major health providers:1. Mercy is the competitor acute

care system in town and has two hospitals and various outpatient centers. They

have not been active in physician employment - they employ a group of 60 PCPs,

but no specialists. Similarly, they have not been engaged in 'branching out'

with different strategic initiatives, preferring instead to focus on cost

efficient care. They do not have clinical institutes, research divisions, a PHO

or a Business Health division. They have 228,500 visits per year, with an

average cost of $1,450 per visit and an average charge of $4,450.2. General

Pediatric is a pediatric teaching hospital. Five years ago, they signed an

affiliation agreement with Johns Hopkins to gain access to clinical and

research capabilities that would have been beyond their reach, given their

size. They employee essentially all of the pediatric subspecialists and have a

PHO, which includes 75% of the region's primary care pediatricians. They will

have 202,000 visits this year, with an average cost of $2,050 per visit and an

average charge of $4,950 per visit.3. General University is an adult teaching

hospital affiliated with the local university's medical school. They staff the

region's free-care clinics and historically, have been the region's hospital

for indigent/uninsured patients. They are the region's Level I trauma center

and are well regarded for intensive services like trauma, stroke and cancer

care. However, their location and reputation for taking indigent patients means

that they are not preferred for 'normal' medical care by commercially insured

or Medicare patients. Besides the community health centers, they own an

inpatient rehab hospital, but not other facilities. They have explored

affiliations with national leaders in academic medicine, but so far have not

signed any such agreements. They see 185,000 visits per year with an average

cost of $1,825 and an average charge of $5,600 per visit.There are no other

hospitals currently operating, though there are 23 skilled nursing facilities

(SNFs) and 3 inpatient rehab facilities throughout the region. They are

independent actors and for the most part are struggling to stay profitable.

There are several single-specialty physician groups who operate ambulatory surgery

centers and one chain of independent diagnostic treatment facilities (IDTFs).

Three years ago, there was a significant change in the state government, and

that resulted in the long-time Certificate of Need (CON) program being all but

scrapped (Skilled Nursing Facilities are still heavily regulated). Several

for-profit hospital companies have recently done some analysis around entering

your market, but have not done so yet.The Community - The community is a

Midwest city and surrounding suburbs in the midst of a transition from a

manufacturing employment base, which unfortunately accelerated with the 2008

economic downturn. The hospitals have seen this over the past several years in

a tightening of benefits offered by local employers. Benefits continue to be

offered, but increasingly are likely to have a significant deductible

associated with them. Unemployment has been above the national average and is

projected

to remain that way. This means that the average wage in the

region is actually below where it was in 2008, when the last recession hit. The

number of Medicare-age residents are projected to rise over the next 10-20

years, while working age patients are projected to stay flat or fall slightly.

Similarly, birth rates are expected to fall slightly over the coming decade.

The community is 60 miles south, 45 miles east and 50 miles north of other,

similarly sized cities. Until 20 years ago, that made this city effectively an

island unto itself. Increasingly, however, the suburbs of each of these

communities have become very close to each other. As that has happened,

providers in each community have followed and established practice sites and

free-standing outpatient centers.The payers - The community has a normal

looking mix of Commercial, Medicare and Medicaid patients. Because the state's

governor was fiercely against the Affordable Care Act, the Medicaid expansion

that happened in other states hasn't happened here. Thus, the community also

has a sizable population without insurance today. As you'd expect, different

hospitals see a different mix of these patients. The local health council was

able to provide you with the most recent year's payer mix by hospital -

below:Patient visitsCommercialMedicareMedicaidUninsured/

Self-payMercy82,000104,00022,00020,500St.

Sebastian100,500100,20012,5008,500Gen. Pediatric71,0003,500112,50015,000Gen.

University65,00046,00047,50026,500Community

Total318,500253,700194,50070,500Reimbursement - the CFO was able to supply you

with their best estimate for what various payers are reimbursing for services.

In general, the commercial plans are paying 50% of charges, regardless of

location, except at General Pediatric. There, the monopoly on pediatric

services has allowed them to negotiate rates of 80% of charge, but only for the

commercial plans. Medicare currently pays 30% of charges at all hospitals, and

Medicaid pays 25% of charges everywhere. Uninsured patients are generally

paying 2% of charges.

Case #1 - A Market on the MoveYou've read everything you can

about the legislative environment (both regionally and nationally) and spoken

to several brokers who together advise most of the local employers in the

region. You believe the most important changes that are about to hit this

region are the following:1. As Medicare reduces DSH and other payments,

reimbursement from Medicare will drop from 30% of charges to 28% next year2.

The health exchanges established in the ACA have not been much of a factor in

the region so far, but that's about to change. The two largest payers in your

state both plan to really step up in the exchanges and market these plans

aggressively both to currently un-insured and those with current, but

unattractive employer-based coverage. They believe that by 2022, they'll have

25% of all commercially insured patients in exchange-based products.3. There

has been a change in both governor and the makeup of the state legislature,

which means your state will engage in Medicaid expansion next year. Thus, more

people will have coverage, and the uninsured population will diminish, but not

go away entirely. Your best estimate is that uninsured visits community-wide

will reduce from 70,500 to 6,300. You estimate that, of the patients who have

new coverage, half will be Medicaid recipients and half will enter the

commercial plans.The assignment - as you consider how to guide the CEO,

answering the following questions should help:Part A1. Using the information

provided, estimate total gross and net patient service revenue per hospital

currently (2021). What is each hospital's operating margin in terms of dollars

and percentage? Based on this, who is doing well, and who is not? Who has the

most to gain and lose as the current environment changes?2. Based on what you

know will happen with the next year, re-calculate the estimates from question

#1 for 2022. In your estimate, assume that commercial, Medicaid and uninsured

patients still pay the same % of charges. As you consider the population that

moves into commercial insurance and Medicaid, you can assume that each hospital

continues to take the same share of each payer category (in other words, if

hospital A had 20% of the commercial visits in 2021, they will have 20% in

2022). You can also assume that total community visits and charge and cost per

visit numbers will remain as they were in 2021.3. Based on everything you've

read, the payers putting products into the health exchanges want to market

these as true, lower cost options. To get there, they will not reimburse as

much as other commercial products. In fact, your best estimate is that they

will pay 120% of the Medicare reimbursement rate. If that is the case, how does

your estimate of 2022 performance change? Is this good or bad? You may want to

answer that question from the perspective of the region as a whole and then for

each hospital. Assuming it was optional, would you recommend that St. Sebastian

participate in the exchange-based products?