2. PRESSURE CAUSING THINKING
ABOUT DIVERSIFYING
 Increased Competition
 Lower Reimbursement
 Greater Regulatory Scrutiny
 Technology and Automation Implementation
 Capital Funds Needed
IS DIVERSIFICATION A PANACEA?

3. DIVERSIFICATION HAS RISK
 Study of 1935 food product introductions showed a
11.6% success rate for smaller companies versus 76%
rate for large firms.
 Researchers concluded that smaller businesses lacked
strategic marketing skills and resources.
 Study by McKinsey & Co. showed that 65-70% of all
mergers fail to increase shareholder value.

4. DIVERSIFICATION MODEL
• Model is designed to guide hospice management is
assessing the viability of diversifying into a new
business or geographically versus continuing to focus
on its current market—”Stick to Its Knitting”
• Model is based on assessing the market maturity an
competitiveness of the current service area
• The greater the maturity and the more competitive a
market is the more attractive diversification becomes

5. MARKET MATURITY
 Market maturity is based on the percentage of
Medicare enrollees, who access the Medicare hospice
benefit annually.
 Research indicates a 80-95% correlation between this
measure and the traditional utilization metric of
“percentage of deaths”.
 Can be calculated at the state, regional/multi-county
or county level

6. RULE OF THREE
 Professors Sheth & Sisodia studied over the evolution of 200
industries and saw the development of 2 types of firms
 Full Line Generalists
 Product/Market Specialists
 Hospital based or local VNA – market specialist
 Ortho agency – product specialist
 Over time, 3 full line generalists grow to 70%-90& of the share
 Increased share results in better performance for the full line
generalists, but weaker results for the specialists
 UNDERLYING ASSUMPTION: The more concentrated a
market is, the more difficult it is to gain market share

7. MARKET COMPETITIVENESS
• Metric based on “Rule of Three”—Level of market
concentration
• It infers prospects for future success.
• Once referral source has “locked in” a preference, it
requires a greater degree of differentiation to get their
attention and gain trial.
• Referrals to captive agencies by parent organization
employees are not a “free market” situation and should be
excluded.
• Combined freestanding market share of 65% or more
indicates a “locked” market

8. FACTOR CALCULATION
 Market Maturity
 Medicare Hospice Patients Served
Medicare Eligible
 Market Competitiveness
 Combined Market Share of 3 Largest Hospices

9. WHAT RESULTS MEAN
• Quadrant 1
– Your area has low/moderate utilization in an unconcentrated
market.
– Therefore, focus on gaining market share through
differentiation or finding new sources of patients or types of
patients.
• Quadrant 2
– Your area has low/moderate utilization in a concentrated
market.
– Therefore, focus on finding new sources of patients or types
of patients.

10. WHAT RESULTS MEAN
 Quadrant 3
 Your area has high utilization in an unconcentrated
market.
 Therefore, focus on gaining market share through
differentiation.
 Quadrant 4
 Your area has high utilization in a concentrated market.
 Therefore, explore diversification.

11. DIVERSIFICATION ALTERNATIVES
 Expand into new geography
 Able to utilize existing skills, systems and resources.
 Lessons learned elsewhere can easily applied to new
territory.
 Company’s infrastructure can be leveraged
 Senior managers may have to learn the “rules of the
game’ in the new market.
THIS IS THE PATH TAKEN BY MOST FOR-PROFITS

12. DIVERSIFICATION ALTERNATIVES
• Enter new line of business
– Senior managers may not be as familiar with the
subtleties of this new endeavor
– Risk of a misstep is greater
– Culture required for new venture may be incompatible
with organization’s current culture
– New systems, skills and infrastructure may have to be
built
– Considerable management time and cash flow may be
invested before first dollar is realized

13. OBSERVATIONS
• Consider uneven record of home health agencies
entering the hospice field in recent years.
• With for-profits, geographic expansion appears to be
the diversification method of choice.
• Non-profits appear to be constricted by the
community focus of their mission or their board’s
geographic bias.

14. CONCLUSIONS
• Three out of the four quadrants call for hospices to
focus on their core business—This is what is called
“sticking to your knitting.”
• Tom Peters & Bob Waterman’s In Search of Excellence
advocates that one of the eight key to business success
is to stay with the business you know—”Stick to Your
Knitting.”
• Geographic expansion may be the least risky and most
financially rewarding diversification alternative.

15. CONTACT INFORMATION
Rich Chesney
President, Healthcare Market Resources
rchesney@healthmr.com
215.657.7373
215.657.0395(f)
www.healthmr.com