Integral Healthcare System (IHS), a not-for-profit organization with a strong, service-oriented mission, is one of the largest care systems in its region. Although highly profitable, it has seen its market share in certain specialties slip. The decline has been most prominent in oncology and cardiology because of the establishment of specialty hospitals and care centers by competitors. IHS’s executives have attempted to differentiate the system and recoup its market share by setting up centers of excellence, recruiting physician specialists in these areas, and using extensive media advertising, but to date none of these strategies has reversed the market decline.

Recently IHS was approached by National For-profit Company (NFC) proposing a joint venture proton therapy center. In 2010, proton therapy became eligible for reimbursement by most insurance companies and Medicare. This service involves sending a beam of protons to irradiate diseased tissue, mostly cancers. The protons appear to effectively kill cancer cells and cause less collateral damage to normal tissue. However, medical professionals question whether it is any more effective than traditional radiation therapy. For this reason, only six proton therapy units exist in the United States, none of which are located in IHS’s greater service area. The joint venture would be the first proton therapy unit in the region.

The problem with proton therapy is the facility cost; construction of a proton therapy unit could exceed $200 million. As a result, the cost per treatment often exceeds $100,000 per patient—two to three times the cost of traditional radiation therapy. Although state-of-the-art, the facility’s massive cyclotron could be supplanted in the future by superconducting synchrocyclotrons, a newer technology that might cost less than half the proposed construction cost. Local insurance companies have also expressed concerns about paying for this service.

IHS has to decide whether it wants to pursue the partnership. By adding proton therapy, it may achieve the differentiation it desires. It might be able to distinguish itself in oncology and regain much of the market volume it has lost to competitors. Nevertheless, there are risks. The large capital cost would need to be financed or taken from IHS’s limited capital reserves. NFC also has hinted that it may take its offer to one of IHS’s competitors if IHS does not agree to the partnership. Moreover, the local university hospital has established oncology as one of its key competencies and has been seeking tax support to establish a proton therapy research and treatment center.

Questions

1. For IHS, what are the advantages and disadvantages of being the first mover into the proton therapy market?

2. How might IHS minimize the risk posed by the joint venture?

3. What additional actions would you propose IHS take to improve its chances for a successful partnership with NFC?

4. Would you recommend that IHS accept or decline the offer?