Changes to ACA and reimbursement models make planning a challenge
If health care offered a stable environment in which stakeholders could clearly understand payment models, competition, and how rapidly change might occur, then the need for strategic planning might be superfluous," explained Michael J. Stahl, PhD, Professor Emeritus, who for 18 years served as the distinguished professor of management and director of the physician executive MBA program at the University of Tennessee, Knoxville.

Prof. Stahl has published more than 50 journal articles covering a variety of topics, including strategy and quality in health care, and has authored 13 books on those topics. He spoke recently on strategic planning for physicians at the annual meeting of the Clinical Orthopaedic Society.

"Many things are changing for physicians," he said, "including the reimbursement model and the risk-sharing model. Bundled payments tend to shift risk onto the provider. Hospitals enter bundled payments in a spreadsheet in which their cut is in the first column and reimbursement to physicians is in a subsequent column, so not only is the reimbursement amount going down, but who's bearing the risk is changing. The fee-for-service era is on its way out."

According to Prof. Stahl, all of these factors increase the importance of and need for physicians to engage in strategic planning—a process of balancing what an organization should do, what it wants to do, and what it can do, based on its mission, vision, values, objectives, and strategies.

Feasibility
Prof. Stahl explains that the strategic planning process consists of three phases:

• Strategy formulation
• Strategy implementation
• Evaluation and control

Input factors include customer needs and available resources, while output factors include value, products, and services.

"The environment is perhaps best understood through a SWOT (strengths, weaknesses, opportunities, and threats) analysis," said Prof. Stahl.

"For example, an organization may not want to take on any risk, and be willing to accept a reduction in volume as a consequence," he noted. "A practice consisting of five orthopaedic surgeons, four of whom are within 10 years of retirement, may not want to invest in an ambulatory surgery center (ASC) or sell to a hospital. If they like what they're doing, that may be a reasonable strategy.

"Similarly, the values of a practice must be taken into account," he continued. "Is an organization primarily private practice, or was it put in place to provide access to indigent people? A clinic in a large metropolitan area needs to think about things differently than a physician who's building an ASC for retired baby boomers in a suburb."

According to Prof. Stahl, there are at least two approaches to strategic planning. The first is through deliberate, thoughtful analysis and discussion. This may be most appropriate for smaller practices with less cultural inertia.

"It's not unusual for an organization to bring in process and content consultants to look at the market data and help develop a course of action," explained Prof. Stahl. "If a practice is based in a metropolitan area with a million people, can we estimate how many of them may need to undergo hip or knee replacement in the next 10 years?"

The second approach to strategic planning is more relevant for larger organizations that may find it difficult to change or to adopt new philosophies.

"Culture eats strategy for lunch every day," Prof. Stahl noted. "Large, stable organizations, such as hospitals or physician groups made up of 30 or 50 physicians, don't easily adopt new strategies. They may have been cursed with a certain level of success over the years and they're not about to change quickly. The key to strategic planning in an organization like that is to try to understand its culture and values, and then formulate capital budgeting plans that fit that set of values."

Evaluation
Prof. Stahl stated that strategic plans can be evaluated through the following five basic tools:

• Internal consistency
• External environmental fit  
• Competitive advantage
• Customer value
• Feasibility

He noted that it can be difficult to determine if a strategic plan will meet its objectives, but it is much simpler to identify plans that are unlikely to do so.

"I can point out a bad strategic plan," he said, "because it does not meet the five criteria. Using internal consistency as an example, if the personnel plan says we're not going to hire any new employees because we don't want to expand, but the marketing plan calls for an increase in total revenue of 18 percent per year for the next five years, that plan flunks the test of internal consistency.

"I know of a hospital that had developed a plan to grow top-line revenue 3 percent per year, compounded. Yet that institution was in a metropolitan area in which the population was shrinking by 2 percent per year. In addition, there were two other large competitors fighting for the same market share. So that plan failed the tests of external environmental fit and competitive advantage."

Prof. Stahl noted that the notion of customer value has shifted significantly in recent years. Not only have patients become more informed and potentially more demanding, but the advent of medical tourism has put specialists who perform elective surgery in the position of competing not only with the practice down the street, but potentially with practices on the other side of the world.

"There was a time in health care when the patient was viewed as somewhat passive," he explained. "They visited the doctor and followed what they were told. But the growth of the Internet has led many patients to read up on their condition before they even see their physician. In general, many physicians prefer their patients to be informed and educated, but that can also lead to a more exacting customer who walks in knowing what he or she wants, whether that be minimally invasive surgery, certain imaging exams, or opportunities for care elsewhere.

"Elsewhere might include India, Dubai, or simply across the border to Canada," he continued. "Once The Joint Commission began accrediting international hospitals, some of the fear people may have felt about getting low-quality care in another country has been mitigated. And the cost of care, even including travel, can be very competitive.

"In that case, physicians who are developing a strategic plan have to ask themselves, 'What is it that a hospital in Mumbai offers, and how are we going to respond?' Can we lower our costs if the patient is interested in medical tourism primarily for the sake of price? Or can we seek out a different group of patients who may be interested in minimum length of stay and a long-term relationship with the physician? The response might include doing more laparoscopic work and less totally invasive surgery, or building a short-stay hospital or an ASC. How do we offer something our competitors do not, and does that meet with the customer's expectations of value?"

ACA and shifting ground
The current political situation, in which the Affordable Care Act (ACA) may be repealed, replaced, or substantially altered, offers an additional challenge to physicians seeking to develop a strategic plan, said Prof. Stahl.

"Typically a strategic plan might be revisited every 5 years," he said. "It's now not unusual to revisit the strategic plan every 12 months. Another approach is to shorten the payback period of any plan. In the past, an organization may have considered a payback period of 3 or 5 years when ordering a new piece of equipment or constructing a new building. Now, you might hear of examples in which the payback period is down to 24 months. There's also the question of buying or leasing, with an organization choosing to lease an expensive item until it knows for sure where things are headed.

"As for changes to the ACA, I think we'll be able to get an idea of where things are headed during the first 100 days of the Trump administration," he said. "The politics are going to be strong, and there will be a lot of lobbying by industry stakeholders. Certain parts of the ACA will probably be retained and others heavily modified, but no one really knows what's going to happen."

Prof. Stahl predicted that new tax legislation that will affect healthcare providers—such as cuts to personal or corporate income tax rates, as well as changes to incentivize manufacturing and employment—could be on the horizon.

"Such legislation may affect decisions physicians make regarding purchasing, expanding, or hiring," he said.

Finally, Prof. Stahl noted that in the current market, the successful strategic plan must be agile enough to constantly update and adapt to changing conditions.

"The key is always to integrate what one should do with what one wants to do and what one can do," he said. "Due to ACA legislation, changing reimbursement methods, and revamped tax codes, developing a strategic plan is more of an art than a science."

Peter Pollack is the electronic content specialist for AAOS Now. He can be reached at ppollack@aaos.org

Bottom Line

• Changes to the ACA, reimbursement models, and technology make strategic planning imperative to the success of a practice.
• Strategic planning is a process of balancing what an organization should do, what it wants to do, and what it can do.
• Hallmarks of a quality strategic plan include internal consistency, external environmental fit, competitive advantage, customer value, and feasibility.
• Uncertain market forces argue for faster reevaluation, shorter payback periods, and reduced commitment to large expenditures.