STRATEGY CHALLENGE Alan M. Zuckerman What Would You Do? ' are freestanding emergency centers an idea whose time has come? The Problem The relatively fragmented, underserved, sparsely populated but now rapidly growir\g market to the east of Small City General Hospital has been "discovered" by providers further east at the periphery of a large metropolitan area. To secure its position in this newly emerging battleground, Small City General Hospital is considering a bold move—developing two freestanding emergency centers. Does this make sense strategically and financially? The Situation Small City General Hospital is one of the two large hospitals located in an old. declining, small industrial city ahout 60 miles from a large Midwestern city (see map). As the hig city has grown and expanded, its suhurhan areas have gradually crept closer to Small City General Hospital's service area. Right now, a "no-man's land" huffer of ahout 10 miles exists hetween the edge of the small city and the big city's suhurhs. This hucolic. rural area is heginning to he developed and the projections for the foreseeable future are for rapid growth (see tahle helow). Some of the hospitals and health systems on the eastern end of the emerging hattleground are contemplating initiatives in this area. Although nothing is definite yet, rumors ahound. The potential exists for expansion west into the area of one or more of the large system-affiliated medical groups, development of major amhula- toiy care centers, and possihly, despite certifi- cate-of-need barriers, a satellite hospital. Small City General Hospital is concerned ahout this march west and southwest by formidable com- petitors. What, if anything, shotdditdo? Alternative Considerations Small City General Hospital reviewed a full range of possible alternative pre-emptive strikes and responses, including many of the initiatives its competitors appear to be contemplating. Given the nature of the competition and the high stakes SMALL CITY GENERAL HOSPITAL PROPOSED PRIMARY SERVICE AREA POPULATION 2005 TO 2010 Ages 0-17 18-44 45-64 65+ Total 2005 38,200 53,970 43,690 19,490 155,350 SKal 2010 39,930 57,370 51,100 23,660 172,060 % Change 4.5 6.3 17.0 21.4 10.8 Site 2 2005 58,650 78,470 56.950 19,060 213,130 2010 62,840 84.000 71,410 25,220 243,470 % Change 7.1 70 25.4 32.3 142 > Both site 1 and site 2 primary service area populations are projected to increase 11 percent to 14 percent by 2010. > Largest increases are projected for the 45-64 and 65+ age cohorts. > The site 2 primary service area is more populous than the site 1 primary service area and is projected to increase at a faster rate across all age cohorts. Source: Claritas, 2006. 114 AUGUST 2007 healthcare financial management PROPOSED SITE 1 A N D SITE 2 SERVICE AREAS Legend H Site 1 Primary Service Area Site 2 Primary Service Area Competitor Centers D Medical Center A B Medicai Center B O Medical Center.

1. STRATEGY CHALLENGE
Alan M. Zuckerman
What Would You Do? '
are freestanding emergency centers
an idea whose time has come?
The Problem
The relatively fragmented, underserved, sparsely
populated but now rapidly growirg market to the east
of Small City General Hospital has been "discovered"
by providers further east at the periphery of a large
metropolitan area. To secure its position in this newly
emerging battleground, Small City General Hospital
is considering a bold move—developing two freestanding
emergency centers. Does this make sense strategically
and financially?
The Situation
Small City General Hospital is one of the two

2. large hospitals located in an old. declining,
small industrial city ahout 60 miles from a large
Midwestern city (see map). As the hig city has
grown and expanded, its suhurhan areas have
gradually crept closer to Small City General
Hospital's service area. Right now, a "no-man's
land" huffer of ahout 10 miles exists hetween the
edge of the small city and the big city's suhurhs.
This hucolic. rural area is heginning to he
developed and the projections for the foreseeable
future are for rapid growth (see tahle helow).
Some of the hospitals and health systems on the
eastern end of the emerging hattleground are
contemplating initiatives in this area. Although
nothing is definite yet, rumors ahound. The
potential exists for expansion west into the area
of one or more of the large system-affiliated
medical groups, development of major amhula-
toiy care centers, and possihly, despite certifi-
cate-of-need barriers, a satellite hospital. Small
City General Hospital is concerned ahout this
march west and southwest by formidable com-
petitors. What, if anything, shotdditdo?
Alternative Considerations
Small City General Hospital reviewed a full range
of possible alternative pre-emptive strikes and
responses, including many of the initiatives its
competitors appear to be contemplating. Given
the nature of the competition and the high stakes
SMALL CITY GENERAL HOSPITAL PROPOSED PRIMARY

3. SERVICE AREA POPULATION 2005 TO 2010
Ages
0-17
18-44
45-64
65+
Total
2005
38,200
53,970
43,690
19,490
155,350
SKal
2010
39,930
57,370
51,100
23,660
172,060
% Change
4.5
6.3
17.0
21.4

4. 10.8
Site 2
2005
58,650
78,470
56.950
19,060
213,130
2010
62,840
84.000
71,410
25,220
243,470
% Change
7.1
70
25.4
32.3
142
> Both site 1 and site 2 primary service area populations are
projected to increase 11 percent to 14 percent by 2010.
> Largest increases are projected for the 45-64 and 65+ age

5. cohorts.
> The site 2 primary service area is more populous than the site
1 primary service area and is projected to
increase at a faster rate across all age cohorts.
Source: Claritas, 2006.
114 AUGUST 2007 healthcare financial management
PROPOSED SITE 1 A N D SITE 2 SERVICE AREAS
Legend
H Site 1 Primary Service Area
Site 2 Primary Service Area
Competitor Centers
D Medical Center A
B Medicai Center B
O Medical Center C
D Hospital D
u Family Care Center of Hospital H
O Hospital E
B Hospital F

6. n Hospital G
jfj{ Family Care Center of Hospital H
^ 2-mile radius
^ B 5-mile radius
involved, it determined that a hold, but inher-
ently risky, move was prohably required to differ-
entiate Small City General Hospital from its
competitors and retain and grow its share in this
rapidly developing region. After some research
and brainstorming by the senior management
team, it settled on the freestanding emergency
concept as a priority alternative to consider.
> Serve as a referral source for affiliated physicians.
> Generate incremental utilization of hospital-hased
services.
> Mitigate competitive threats.
Freestanding emergency centers generally must
meet the same requirements as hospital-hased
emergency centers. Most operate 24 hours per
In a preemptive strike
against the contemplated
march west and south-
v/est by some formidable
competitors. Small City

7. General Hospital studied
two possible sites to
erect its freestanding
emergency centers.
The rationale for
developing a free-
standing emergency
center is similar to the
rationale that hospitals
rely on for developing
ambulatory care
centers:
> Enhance access to
care and meet increasing demand for emergency
and ancillary services.
> Develop sites and services that differentiate the
organization from competitors.
> Tap into new markets and increase market
share.
Although a relatively new concept, 15 states
have one or more freestanding
emergency centers, with many m.ore centers
currently under development.
day. seven days per week. Assuming the center is
underthe same provider license, payment is
typically the same at the freestanding center

8. as it is in the main hospital. Most freestanding
emergency centers are located within lo miles
of the main hospital campus, although in rural
h f m AUGUST 2007 115
STRATEGY CHALLENGE
CURRENT MEDICAL/SURGICAL INPATIENT MARKET
SHARE FOR PROPOSED FREESTANDING EMERGENCY
CENTER SERVICE AREAS
Site 1 Primary Service Area
29.4%
5.4%
Site 2 Primary Service Area
16.9%
10.7%
39.9%
Hospital D
Small City General Hospital
Medical Center C
14.5% • Medical Center A

9. • Another
15.3%
7.6%
12.1%
10.9%
Hospital F
Hospital D
Hospital E
Small City
General Hospital
Medical Center C
Hospital H
Hospital G
A n o t h e r
> Hospital D has the dominant m a r k e t share in the site 1
PSA.
> M a r k e t share in the proposed site 2 PSA is distributed
among a n u m b e r of hospitals.
C o m p e t i t i o n in b o t h
service areas is fairly

10. diverse, suggesting c o n -
siderable o p p o r t u n i t y
f o r Small C i t y G e n e r a l
Hospital's freestanding
e m e r g e n c y centers.
or underserved areas, tbey are sometimes
located as far as 3o miles away from the main
hospital campus. Existing freestanding emer-
gency centers report that tbey typically transfer
6 percent to lo percent of patients to the main
hospital for care.
Although a relatively new concept, 15 states have
one or more freestanding emergency centers,
witb many more centers currently under devel-
opment. Representatives of mature freestanding
emergency centers generally state that they have
met or exceeded volume projections and financial
performance targets.
Still, is this concept feasible in Small Gity
General Hospital's service area?
The Decision
Small City General Hospital's CFO led the charge
to explore the feasibility of development of two free-
standing emergency centers as depicted on the map

11. on page 115.
From a strategic standpoint, the feasibility study
indicated that given population growth and the
resulting increased demand for emergency services,
if Small City General Hospital is first to market, the
hospital should be able to develop viable freestanding
emergency centers that will both enhance access to
healthcare services for residents and improve the
market position of the hospital.
Financial findings were as shown in the table below.
Clearly, site 2's financial projections are excellent,
and there was no question about whether to proceed.
After some discussion, the indirect benefits associated
with site 1, including synergies with collocated
ambulatory services and downstream referrals to
ancillary and other hospital-based services, were
sufficient to convince Small City General Hospital's
senior team to proceed with both freestanding

12. emergency center initiatives immediately, m
Alan M. Zuckerman, FACHE, FAAHC, is president, Health
Strate-
gies &
Solution
s, Inc., Philadelphia {azucl([email protected]<inc.com).
VOLUME ESTIMATES FOR TWO PROPOSED
FREESTANDING EMERGENCY CENTERS
Visits
Contribution
margin
Site 1: Moderate Volume Estimate
Year 1 , Year 3 Year 5
(2008) 1 ^ I
7,900 15,100 18.400
$(925,000) $545,000 $970,000

13. Site 2: Moderate Volume Estimate
Year 3 Year 5Yeari
(2008)
11,200 20,600 24,900
$60,000 $2,200,000 $3,000,000
116 AUGUST2O07 healthcare financial management
STRATEGY CHALLENGE
Alan M. Zuclcerman
What Would You Do?
is it too late to develop a comprehensive

14. community hospital cardiovascular program?
The Problem
Leadership at Southeast Community Hospital
believes that its basic cardiovascular services should
be expanded into a comprehensive cardiovascular
program. The new management team has made this
initiative its No. 1 priority for the next five years, but
medical staff and board opinions are divided about
whether the window of opportunity for broad cardio-
vascular development has closed. How should the
leadership at SCH proceed?
The Situation
Southeast Community Hospital (SCH) is a 175-bed

15. community hospital located in a rapidly growing
retirement community in the southeastern
United States. The hospital has stagnated for
most of the past decade, while growth in the
. region has heen dramatic, as has the increase in
the number and size of competitors. SCH's lead-
ership has heen extremely conservative and
inwardly focused during this period. The hospital
has muddled along, providing good, hasic, hut
unexceptional care and generating mediocre
financial results.
In mid-2oo6, the CEO for most ofthe past
decade was terminated. A national recruitment
for the next CEO led to the appointment of a
dynamic, growth-oriented new leader late in
2006. Among his early priorities was to develop a
strategic plan for SCH for the next five years.
A strategic planning committee of the hoard,
including medical staff leaders and management,
spent the first half of 2007 in an intensive review
ofthe hospital's strategic situation and needs.
Among the major findings of this effort were:

16. > The hospital serves a large, growing, relatively
elderly, and extremely affluent population that
is demanding ahout its healthcare needs.
> The hospital has failed to keep up with the
healthcare needs of this population.
> Despite its failings, SCH and its services are
viewedpositivelyhy residents ofthe area.
> To truly meet community needs, significant
programmatic and facilities development is
required.
> The hospital's competitors, although larger, are
not too formidable, and many have significant
issues of their own to deal with.
Additional findings on the hospital's situation
appear in the tahle on the next page.
To hetter determine programmatic needs for the
future, the strategic planning committee con-
vened four program-specific task forces: cardio-

17. vascular, cancer, women and children, and
orthopedics/neurology. These task forces were
charged with developing mini-plans in each of
the assigned clinical areas to address the commu-
nity's health needs and SCH's role in meeting
those needs. The strategic planning committee
believes that the overwhelming majority of com-
munity needs is in these four areas; by defining
and heginning to proactively address them, the
hospital would he on a track to reestablishing
itself as the region's provider of choice.
Unlike the other three clinical areas, SCH's car-
diovascular services are extremely hasic com-
pared with those ofthe competition. Although the
hospital offers only noninvasive cardiology, a
number of its competitors have long-estahlished
and relatively comprehensive programs.
116 APRIL 2008 healthcare financial management
SOUTHEAST COMMUNITY HOSPITAL SWOT ANALYSIS

18. Strengths
> Solid set of services for a community hospital
> Reasonably good book of business
> Favorable community demographic and
socioeconomic characteristics
> Excellent payer mix
> Large, diversified medical staff
Opportunities
> Leverage location and community's size, grov/th,
and socioeconomics
> Markedly improve financial performance
> Strengthen physician relationships and medical
center-physician synergies
> Develop distinctive position
> Cultivate strong community image
Weaknesses
> Poor financial performance

19. > Limited development of clinical programs
> Historically, strained relationships among board,
management, and medical staff
> Large, fragmented medical staff with divided
loyalties
> Capacity constraints
Threats
> Recruitment challenges due to high cost of living
> Increasing competition in profitable service lines
> Competition for fund-raising dollars
> Inability to address financial challenges
However, the market is fragmented, with no
particularly strong and distinguished programs,
and all the competitors have clear weaknesses in
their cardiovascular programs. Also, the regional
market, like others in the United States, has been
affected dramatically by the growth of angioplasty
and the decline in cardiac surgeiy. Finally, many
of the cardiologists and vascular physicians in the
region are on SCH's active medical staff. Their

20. practices have been limited historically at the
hospital, and they are quite vocal in stating their
desire to be more
active and establish the
> During this period, SCH should develop the
fullest scope of cardiovascular services possihle,
including prevention, ambulatory care, rehabil-
itation, and invasive services—possibly even
cardiac surgery as warranted by technological
developments.
> Vascular services should be organized into a
formal institute as rapidly as possible.
> The cardiovascular program should be distin-
guished for its excellent outcomes and high
level of patient service.
Finance staff estimated that debt capacity could
meet no more than half those capital needs.
The task force had a
number of long
meetings and animated discussions about what to

21. do in cardiovascular services. The three principal
alternatives and accompanying rationales are
shown in the table on page 118.
As a result of the task force's deliberations, the
following recommendations were made to the
hoard's strategic planning committee:
> By ?oi2 (the end ofthe strategic plans five-
year planning horizon), SCH should be the
first choice for cardiovascular services in the
region.
Along with these recommendations, the strategic
planning committee received an ambitious pro-
gram development agenda from the cancer task
force and moderate program development rec-
ommendations from the other task forces. A
facility master planning process, carried out con-
currently with the strategic planning, was also
nearing completion. Basic facility needs were
estimated to be at least $100 million (for heat-
ing/ventilation/air conditioning, parking, other
infrastructure), and minimal bed/ancillary
expansion and programmatic needs added at least

22. M m APRIL 2008 117
STRATEGY CHALLENGE
r PROPOSED SCH CARDIOVASCULAR PROGRAM:
ALTERNATIVES AND THEIR RATIONALES
Description
Pros
Cons
Status Quo
> Largely maintain
current scope of
services
> Conserve
resources, espe-
cially given needs in

23. other programs
> Many competitors;
overserved market
> Not responsive to
our primary service
area's greatest need
> Majority of medical
staff think status quo
is untenable
Focused CV Program
> Grow selectively,
principally in vascu-
lar care and possibly
diagnostic cardiac
cath
> Exploits least com-
petitive segments
> Demonstrates com-

24. mitment to meeting
primary service
area's greatest need
> May not be enough
to satisfy area
residents
Full CV Program
> Develop as compre-
hensive a program
as possible
> Most fully addresses
primary service
area's need
> Supported by
medical staff
> Resource-intensive;
would limit growth in
other areas

25. > Could create signifi-
cant and expensive
competitor battles
another $100 million. Finance staff estimated that
deht capacity could meet no more than half those
capital needs.
So the committee was facing some difficult
choices. What do you think the committee's
recommendation to the hoard should he?
The committee was deeply concerned
about the magnitude of the funding apparently
required for facility development.
Ultimately, the committee decided to affirm the cardio-
vascular task force's recommendations and supported
management's view that a comprehensive cardiovas-
cular service line is the top programmatic priority. In
the end, the opinions expressed about the primacy of

26. high-quality cardiovascular care as a core community
need, especially in a community as affluent and
demanding as this one, car-
ried the day and swayed the
committee (and then the
board) to support the task
force's recommendations.
The Decision
The strategic planning committee decided to review
and prioritize the task forces' recommendations in the
context of anticipated overall capital needs and fund-
ing sources. The pros and cons of the cardiovascular

27. recommendations essentially paralleled what the task Depending
on the outcome of the fund-raising feasibility
force had come up with earlier. Proponents argued study,
expansion plans may need to be trimmed, but given
vocally for their position, as did the opposition. Much the high
ranking for cardiovascular services, initial
speculation was offered on the impact of technological
expansion activities are already under way. m
changes and competitor responses to whatever course —•
The committee was deeply
concerned about the magni-
tude of the funding apparently
required for programmatic and facility development. It
consulted with the hospital's foundation about the like-
lihood of a major capital campaign. Based on these dis-

28. cussions, leadership believes a $100 million capital
campaign may be feasible, but further testing is needed.
SCH chose. Alan M. Zuckerman, FACHE, FAAHC, is president.
Health Strategies &