Study of major developments in markets,
operations and fi nances of Dutch hospitals
2003-2004
‘The Pied Piper of Hamelin’
Which tunes are Dutch hospitals playing?
Gupta Strategists
Gupta Strategists
Study of major developments in markets,
operations and fi nances of Dutch hospitals
2003-2004
‘The Pied Piper of Hamelin’
Which tunes are Dutch hospitals playing?
Copyright 2005 Gupta Strategists. No part of this work may be reproduced, quoted
or used for any other purpose without the explicit consent of Gupta Strategists
2 3
The Pied Piper of HamelinInto the street the Piper stept, Smiling fi rst a little smile, As if he knew what magic slept In his quiet pipe the while; Then, like a musical adept, To blow the pipe his lips he wrinkled, And green and blue his sharp eyes twinkled, Like a candle-fl ame where salt is sprinkled; And ere three shrill notes the pipe uttered, You heard as if an army muttered; And the muttering grew to a grumbling; And the grumbling grew to a mighty rumbling; And out of the houses the rats came tumbling. Great rats, small rats, lean rats, brawny rats, Brown rats, black rats, grey rats, tawny rats, Grave old plodders, gay young friskers, Fathers, mothers, uncles, cousins, Cocking tails and pricking whiskers, Families by tens and dozens, Brothers, sisters, husbands, wives – Followed the Piper for their lives. From street to street he piped advancing, And step for step they followed dancing, Until they came to the river Weser Wherein all plunged and perished
THE PIED PIPER OF HAMELIN (Browning, Robert, 1812-1889)
The story of the Pied Piper of Hamelin may seem somewhat far-fetched for a study of Dutch hospitals, but we propose there is a beautiful analogy here. Transposing the old German fable to Dutch healthcare:
Hamelin = The NetherlandsThe council = Ministry of HealthThe rats =UnproductivityThe Pied Piper = HospitalsThe children = Patients
The city of Hamelin was plagued by rats, like the Dutch cure sector was with declining productivity. The council of Hamelin, read Ministry of Health, tried really hard to exterminate this vermin but all in vain. Till the pied piper, read the Dutch hospitals, played their magic tunes. Under spell of their tunes the cure sector gained in productivity and improved fi nancial health. If the results for 2004 are set forth, Dutch hospitals, or the pied piper are well on their way to get rid of the unproductivity vermin. But now the council of Hamelin, Ministry of Health, needs to come through on their part of the promise, to further liberalize healthcare markets. The hospitals have magic in their fl ute to sway the patients, like the pied piper did for the children. And we all do know how the tragic story of the pied piper ended.
Table of Contents
Executive Summary ...........................................................................................5
Chapter 1: Introduction ........................................................................................................ 19
Chapter 2: Market Performance ....................................................................................... 29
Chapter 3: Operational Performance ............................................................................. 53
Chapter 4: Financial Performance ................................................................................... 61
Chapter 5: Ranking ................................................................................................................. 67
The Pied Piper of Hamelin ...........................................................................71
4 5
+4.4%
Patiententities
More healthcare...Production change 2003-2004
... and shorter staysProduction change 2003-2004
Daytreatment
In patients
First outpatientconsultations
Nursingdays
-0.8%
+4.1%
+5.1%
+10.2%
Exhibit 1. Demand for
care remains
strong and..
Fighting fi t,
fi tting right
.. future fi nancing
is key issue
Executive Summary
Dutch hospitals recorded a remarkable recovery in 2003-2004. They improved
their operational productivity and strengthened their fi nancial base. And according
to our study, they did so under normal pressures of competitive markets in
which most of them operate. This indicates that already in 2004 hospitals were
competitively engaged well before the opening of the healthcare markets from
1st February 2005, when price-volume negotiations were initiated. We fi nd there
was already a shift of patients in 2003-2004 driven by competition between
hospitals. And factors such as cost of operation as well as fi nancial reward are
already somewhat correlated to market performance. Especially in more competitive
markets, the correlation is signifi cant. Dutch hospitals have become fi ghting fi t,
and it is fi tting right that they have done so.
The developments in the Dutch cure sector during the period 2003-2004 are
analyzed and presented in this study. The study addresses two major queries:
1) How did the Dutch hospitals rise to their key challenges: growth,
productivity improvement and fi nancial robustness?
2) Is it possible to evaluate which instruments are truly successful in
improving their performance? Specifi cally, do market mechanisms help
redress the productivity gap challenge?
We conclude that the demand for cure services again grew strongly in 2004. In
terms of patient entities the Dutch hospitals grew by 4.4%. In terms of revenues it
grew by 5% with an additional amount of above EUR 600 million spent in 2004. In
real terms this growth is in line with the projection that the cure sector will grow
by 4% per year, doubling to nearly EUR 30 billion by 2020 (Exhibit 1).
The fi nancing of this growth is one of the key policy challenges for the Dutch
society. We believe that boundaries for the actual need for healthcare have yet to
be reached. So far the consumed healthcare is dictated primarily by the available
budget. We postulate that introduction of “free” market mechanisms shall most
6 7
Totalproductivity
gain 2003-2004
Additional profitretained by
hospitals in 2004
Productivitygain returned
to society
102220
118
Finders keepers?Destination productivity increase 2003-2004 (EUR m)
Exhibit 2.
Dutch hospitals
became more
productive, cost
effective ..
.. and fi nancially
more robust
Can healthcare be
market driven?
likely further drive growth of the sector, as the potential demand is greater. The
introduction of a uniform basic insurance for all Dutch citizens is the fi rst step in
developing fi nancing instruments for the future. But we are of the view that both
more urgency and rigor are required in addressing the fi nancing challenge.
On the second key issue of effi cient delivery of care, Gupta Strategists conclude that
the Dutch hospitals have risen remarkably to the productivity gap challenge. Under
tremendous and sometimes unwelcome pressure, with strong winds of change
blowing from many directions, the Dutch hospitals have posted an unprecedented
improvement in their operational performance. Dutch hospitals saved above EUR
200 million on real basis, primarily by improving labor productivity. Given that this is
a huge upswing, and a breakthrough compared to the declining productivity of the
last years, this performance deserves special attention, analysis and recognition.
The productivity gain was utilized by the hospitals to improve their fi nancial
position. For example, the profi t margin of Dutch hospitals increased by nearly 1%
to 1.3%. However, had Dutch hospitals been fully compensated on a real basis for
the delivered services in 2004, they would have managed to retain another EUR
118 million as additional profi t. Or in other words, half of the productivity gain,
EUR 118 million was “returned” to the Dutch society by the hospitals as a “gift”, or,
depending on your perspective, debt incurred from previous years (Exhibit 2).
We were intrigued to what extent this productivity gain is a fruit of the various
policy initiatives undertaken to coax hospitals into performance improvement.
Specifi cally we have sought to seek whether this improvement is a result of market
mechanisms or of macro budget reductions.
The debate on the suitability of market mechanisms for healthcare has been
vociferous and sometimes even cantankerous, with both pro-market and anti-
market camps having valid arguments. The pro-market camp believes that the
“invisible hand” shall reshuffl e the playing fi eld to drive performance improvements.
While the anti-market camp believes that such improvements can only be driven by
regulatory insights and dictates, for example through “effi ciency frontier” analysis.
8 9
Exhibit 3.
High
Relativemarket
position2004
Low
475 275 200
Cost-to-serve [EUR/PE]
Strong
Financialposition
Weak
Low High
Relative Market position 2004
Cost efficiency yields market strength ..Strategic positions within Rotterdam region
4%
GrowthEPB[%]
-2%
475 214
Cost-to-serve [EUR/PE]
.. and drives growthgrowth 2003-2004 within Rotterdam region
... creating better financial positionFinancial positions within Rotterdam region
High
Relativemarket
position2004
Low
475 275 200
Cost-to-serve [EUR/PE]
Strong
Financialposition
Weak
Low High
Relative Market position 2004
Cost efficiency yields market strength ..Strategic positions within Rotterdam region
4%
GrowthEPB[%]
-2%
475 214
Cost-to-serve [EUR/PE]
.. and drives growthgrowth 2003-2004 within Rotterdam region
... creating better financial positionFinancial positions within Rotterdam region
High
Relativemarket
position2004
Low
475 275 200
Cost-to-serve [EUR/PE]
Strong
Financialposition
Weak
Low High
Relative Market position 2004
Cost efficiency yields market strength ..Strategic positions within Rotterdam region
4%
GrowthEPB[%]
-2%
475 214
Cost-to-serve [EUR/PE]
.. and drives growthgrowth 2003-2004 within Rotterdam region
... creating better financial positionFinancial positions within Rotterdam region
Yes, cure was
already a
competitive
market in 2004
It pays to be
competitive
Market defi nition
proposed
Irrespective of the outcome of the debate, we fi nd that Dutch hospitals already
operate in competitive markets and are sensitive to market pressures. It is important
to emphasize that such pressures and sensitivities already existed in 2004, even
before price-volume negotiations in the B-segment were possible. We estimate
that at least EUR 100-200 million worth of revenues were competitively at stake in
2004, and hospitals actively strode for patient custom. This supports our conviction
that hospitals themselves are capable of undertaking the necessary performance
improvements, even in the absence of further explicit market or regulatory
pressure. Already the existing market mechanisms forced them to do so in 2004.
We conclude that on average Dutch hospitals are aware of their challenges, and
have risen remarkably up to them in 2004.
In this report, Gupta Strategists present a consistent and logical framework of the
Dutch markets. A framework of markets is essential to evaluate the effects of market
mechanisms. The market framework requires fi rst and foremost a consistent and
logical defi nition of “markets” for each hospital. Since providing care is mostly a
regional business, we have used postcodes and travel time1 as the relevant variables
to assign each hospital a market based on the same defi nition. Then, based on
relative growth, operational and fi nancial performance in a hospital’s own relevant
market, we have distilled the extent to which local market mechanisms prod
hospitals to improve their performance.
We fi nd that in competitive markets, hospitals with higher productivity gained
market share in 2004. This gain in share also translated in a further strengthened
fi nancial position of the market winners. This is the classic virtuous cycle of well
functioning markets – gain in market share as a means to strengthen hospital
performance.
1 Travel time is only one of the many market defi ning variables, though perhaps for the bulk of the care the
most important. See Market Performance, chapter 2, for further details.
10 11
Let there be
more “markets”
On the basis of our analysis of 2003-2004 it would appear that costs can indeed be
a market shaper, though the effect varies across the various regional markets, being
most pronounced in Rotterdam2. And market share is a hospital shaper in terms of
fi nancial strength (Exhibit 3). The rudiments of the virtuous cycle already existed in
2003-2004 and are likely to be reinforced in the coming years.
On basis of the analysis of Dutch hospitals in 2003-2004, Gupta Strategists endorse
further accelerated freeing of healthcare markets, and allowing more degrees
of entrepreneurial freedom to hospitals. We conclude that the sector is already
capable of leveraging the market sensitivities to meet the healthcare revolution
challenge of the coming decades3.
The key fi ndings of the study are:
1) The majority of the Dutch hospitals operate in competitive markets,
and within their markets actively stride for patient custom and
share.
(Chapter 2)
Based on competitive intensity analysis of all Dutch postcodes, we
conclude that citizens in most postcodes have ample choice in hospitals.
At least 12 million Dutch citizens can choose from 2 hospitals within 15
minutes reach while nearly 10 m can choose from 3 hospitals. Viewed
from a lack of choice perspective, less than 2 m Dutch citizens have only
one hospital within 30 min travel time.
2 We cannot rule out that quality of care may also be a relevant market shaper. It is possible that highly
productive hospitals also provide high quality care, and quality of care is the underlying reason for gain of
share.3 There is however one word of caution. The introduction of DBC’s as a means to further liberalize markets has
increased administrative burden, led to unnecessary complexity and from a specialist and patient perspective
even inaccurate registration of cure. There is a risk that such changes may cause undesirable distortions of
markets. Rather than achieve the desired aim of further liberalization, these may hinder openness, and ability
to make judged choices. It would appear to us, that even in the pre 1st February 2005 paradigm, the markets
were beginning to re-equilibrate to a more optimal position. It would be a shame if DBC’s should distort
this rather than accelerate it. In as much as not being fully addressed now, the authorities need to actively
monitor, and prevent DBC led distortions of an extremely welcome and good performance under competitive
markets in the Dutch cure sector.
12 13
Exhibit 4.Cure is becoming a real marketEPB churn (switches above market norm as% of hospital EPB size)
-8% 18%
Σ 120k EPB
0%
Cure is becoming
a real market
Lower costs leads
to higher share
leads to stronger
fi nancial position
And Dutch citizens do exercise their choice. On average about 1-2% of
the EPB seeking patients shifted their custom to a new hospital of choice
in 2004. The actual churn in terms of Dutch citizens is of course much
higher, as within the same amount of EPBs, the actual patient population
churn will be higher. A 1% shift in average share is huge for healthcare,
particularly in the context of the limited motive for mobility. In value
terms a 1-2% churn means that about EUR 100-200 million worth of
the healthcare market was at stake in 2004. Or there was already a “free
market” worth EUR 100-200 million in 2004. Enough motive for competitive
performance as an average hospital had EUR 1-2 million to win or lose,
based on relative competitive performance. Of all Dutch hospitals 10 had
positive churn rate above 5%, reinforcing the conclusion that already in
2004, signifi cant competitive gains were realized by the market winners.
(Exhibit 4)
Translated to hospitals4, more than 80 Dutch hospitals operate in
competitive markets. The effects of competitive arena are also clearly
measurable. We see that hospitals in more competitive areas have a much
larger spread in performance, and thus have both clear out-performers
and under-performers. And it pays to be competitive. (Exhibit 3).
The “invisible hand” already affected hospitals in 2004. We fi nd that in
a competitive area like Rotterdam, hospitals with lower cost-to-serve
compared to their market peers, had higher share. It appears that cost
is a market shaper. Moreover, with insurers actively negotiating on price
since 2005, one expects performance will become more cost sensitive.
Importantly we also conclude that it pays to gain share. The hospitals
that gained share in 2003-2004 in their markets also showed a stronger
fi nancial performance. Indeed, in other sectors growth and market share
are long enshrined measures of a successful business.
4 Given our model of patient choice based on geography and demographics
14 15
Exhibit 5.
Exhibit 6.
-1.4%
+4.4%
EUR/patiententity
Patiententities
+4.2%EUR
Inflation1.2%
1) inflation adjusted
More cost efficient care ...Real Cost-to-Serve change 1)
2003-2004
... at lower increase in costsHospital costs change2003-2004
... by delivering more care ...Production change2003-2004
-1.4%EUR/patiententity
-1.6%2003
2004
222
229
3.2%improvement
Labour costs/patient entity
-1%Procurement costs/patient entity
1) Inflation adjusted
Total real1) cost-to-serve declined2003-2004
Both labor and procurement cost-to-serve declined2003-2004
Labor productivity improvedpatient entity/FTE
-1.4%EUR/patiententity
-1.6%2003
2004
222
229
3.2%improvement
Labour costs/patient entity
-1%Procurement costs/patient entity
1) Inflation adjusted
Total real1) cost-to-serve declined2003-2004
Both labor and procurement cost-to-serve declined2003-2004
Labor productivity improvedpatient entity/FTE
-1.4%EUR/patiententity
-1.6%2003
2004
222
229
3.2%improvement
Labour costs/patient entity
-1%Procurement costs/patient entity
1) Inflation adjusted
Total real1) cost-to-serve declined2003-2004
Both labor and procurement cost-to-serve declined2003-2004
Labor productivity improvedpatient entity/FTE
Exhibit 7.-1.4%
-5 +4.4%
1.6
35.8
37.4
3565352
571
179 750 530
220
20032003 2004
Inflationaryunit priceincrease
2004real1)
Productivitygain
2004normal
1) Inflation adjusted
More caredelivered
Inflationaryunit priceincrease
Justified costincrease
Actual costincrease
Productivitygain
351
Unit price for care decreasedCost-to-serve (EUR/PE)
resulting in substantial absolute savingsAbsolute increase healthcare costs 2003-2004 (EUR m)
While total care delivered increasedPatient entities served (million)
-1.4%
+4.4%
EUR/patiententity
Patiententities
+4.2%EUR
Inflation1.2%
1) inflation adjusted
More cost efficient care ...Real Cost-to-Serve change 1)
2003-2004
... at lower increase in costsHospital costs change2003-2004
... by delivering more care ...Production change2003-2004
-1.4%
+4.4%
EUR/patiententity
Patiententities
+4.2%EUR
Inflation1.2%
1) inflation adjusted
More cost efficient care ...Real Cost-to-Serve change 1)
2003-2004
... at lower increase in costsHospital costs change2003-2004
... by delivering more care ...Production change2003-2004
Cost-to-serve
declined
Financial position
improved
2) Dutch hospitals posted a strong productivity gain, both in labor and
in total cost-to-serve.
(Chapter 3)
After years of declining productivity, Dutch hospitals posted a major gain
in productivity in 2004. In cost-to-serve terms5 Dutch hospitals gained in
both nominal and real (i.e. infl ation corrected) productivity. The real gain
was 1.4%. This gain came along with a continued increase in production
of 4.4% in patient entities (Exhibit 5).
The productivity gain was both in cost of labor (1.6%) and in cost of
procurement (1%). The labor productivity (patient entities served per FTE)
increased by a remarkable 3.2% (Exhibit 6).
In value terms Dutch hospitals gained above EUR 200 m through
productivity improvement. (Exhibit 7)
While impressive, hospitals have still signifi cant potential for further
improvement. Improvement within the existing operational models
is possible given the large variation in performance. But there is also
signifi cant potential through next generation, innovative strategies,
for example, out-sourcing of procurement, or facility management. We
fi nd that Dutch hospitals have yet to employ competitively distinct out-
sourcing models and we conclude there is signifi cant untapped potential
here.
3) The fi nancial position of Dutch hospitals strengthened further, mainly
as a result of self-achieved productivity gain.
(Chapter 4)
The Dutch hospitals further improved their fi nancial position (Exhibit
8). The margins (net results as percentage of revenue) increased from
0.5% to 1.3%, a total profi t pool of EUR 169 m across all hospitals. An
average Dutch hospital increased its absolute net results from less than
EUR 0.8 m to EUR 2 m.
5 cost in euros required to serve one patient entity
16 17
Exhibit 8.
+5%
12,663
2003 2004 2003 2004
2003 2004 2003 2004
2003 2004
632
+152%
102
+14.1%
357 2,892
2,535
67
169
13,295
+2.3%
3.55 0.08
+7%
0.7 10.8
10.1
3.63
Higher top lineTotal revenues (EUR m)
Higher bottom lineTotal earnings (EUR m)
Less receivablesRevenues/working assets
More free cash flowOperational cash flow/totaldebt [%]
Stronger balance sheetTotal equity (EUR m)
Averages
improved but
performance gap
widening
Next to the profi t gains, the balance sheet of the hospitals also improved.
The total balance minus the total debt as percentage of revenue increased
from 20% to 22%, and absolute gain of EUR 357 m on the balance sheet.
On top of these improvements, fi nancial management of the hospitals
was also further strengthened. The operational cash fl ow as a ratio to debt
increased from 10% to 11%. At the same time turnover of current assets
also improved. Revenue as ratio of current assets improved to 3.63 from
3.58 in 2003. Thus hospitals required lower working capital in 2004 than
in 2003 and they have more room available to improve their solvability.
However, given the huge DBC billing problem in 2005, this measure is
clearly going to suffer in 2005.
4) While the average of all Dutch hospitals improved in operational
and fi nancial performance, the performance bandwidths continued
to diverge. Further entrenchment of winners and losers is ongoing.
(Chapter 5)
The 2004 analysis of hospitals shows that the sector is clearly segregating
further into winners and losers. We have ranked all hospitals on their market,
operational and fi nancial performance in three groups: out-performers,
on-par performers and under-performers. Based on the performance in
2003-2004 we conclude that the gap between out-performers and under-
performers is widening. Out-performers are leveraging their performance
premium to further gain ground on their competitors.
18 19
Shift from budget
driven to market
driven healthcare
But is healthcare
amendable to
market forces?
Chapter 1 - Introduction
Big C and small B characterize the business of healthcare. Thanks to economic
growth, technological advance, but foremost due to the fantastic return on every
euro invested in healthcare, a disproportionately large part of the economic growth
was channeled into healthcare.
But despite the continuously growing investments over half a century, the hunger
for further funding appears unlimited. The boundaries for healthcare have mainly
been dictated by the available budget rather than “normal” demand and supply
laws. And thus the role of “normal” business principles in healthcare so far has been
limited. A big C and a small B.
However, there is a clear realization that the state driven budgetary ways of the past
will not bring healthcare further in the future. The future needs, both in capital and
in labor, are huge6, and it is unlikely that these can be met through general, social
or labor taxation nor through available labor capacity. The reasoning goes that by
making healthcare more responsive to business principles, a more effi cient supply
will be realized for the exploding demand. A big B may perhaps help achieve an even
bigger C.
In this light the liberalization of the healthcare markets may be seen as a means
to achieve the goal of better healthcare for all in the future. The extent to which
healthcare is amenable to market forces has been subject of, ever since Adam Smith
himself, a raging debate. The two camps, the pro-market camp, and the anti-market
camp, both have valid arguments. The strongest argument from the pro-camp
is that pressure of “free” markets shall induce hospitals to provide better care at
lower price. The “invisible hand” will rearrange the healthcare markets to be more
effi cient.
6 Some projections suggest doubling for both in the next decade
20 21
Markets are
coming and ..
.. hospitals are the
market makers
However, as the anti-market camp clearly points out there are several market
deforming oddities in healthcare7. The information asymmetry and the “agent
problem” are often cited. An equally important argument is that in healthcare there
is also an extreme fi nancial asymmetry between the payers (the insured) and the
users (patients). Less than 15% of the patients are responsible for more than 40% of
total costs while more than 30% of the payers generate only 15% of the costs.
But while the debate continues to rage, the market forces, in as much as they
were not already present, have been unleashed on healthcare. It has thus become
necessary, as a pragmatic approach, to follow the consequences of “freer” markets
in healthcare.
It is pragmatic for hospitals to follow the market developments for the simple reason
that “if you cannot beat ‘em you better join ‘em”. All hospitals need to evaluate their
performance and strategies to respond to market forces. In free markets, the ability
to shape markets lies primarily in the hand of the market makers, in our view, in the
hand of the care providers, the hospitals. The mandate for change, the challenge to
change, but also the ability to change is clearly with the hospitals.
From a general societal perspective it is also necessary to follow the healthcare
markets because the consequences of this change are neither obvious nor reversible.
We need an objective and continuous evaluation of the developments in the
healthcare sector. Only by following the changes, and by understanding the results
of market forces on the sector, will we be in the position to evaluate the success of
the current policy.
This report presents a framework to analyze and evaluate the hospitals in their
market performance as well as in their operational and fi nancial performance.
To follow markets requires fi rst and foremost a defi nition of markets.
7 However it must be said despite honorable intentions it does not help the cause of the anti-market
camp that the track record of the “iron hand” in shaping effi cient markets everywhere has been rather dismal
so far.
22 23
Market defi nition
is required
A consistent
framework to
evaluate Dutch
healthcare
markets is
proposed
Currently each Dutch hospital uses its own defi nition of markets, the municipalities
lying around the hospital as the core care region. Experience shows that such a
defi nition cannot be used to analyze market performance across hospitals.
Rotterdam, Brielle and Midden-Delfl and could all be part of the market defi nition
of two Rotterdam hospitals. But in practice only few and different postcodes within
Rotterdam are actually relevant markets for each, and one hospital lying in the
south of Rotterdam has Brielle as nearly captive market while the other lying on
the west of the city has Midden-Delfl and as its nearly captive market. Further, only
a few postcodes within Rotterdam form the competitive zone for both hospitals.
Only by specifi cally assigning part of every postcode to each hospital, a logical and
consistent framework for market defi nition can be created.
In this report, Gupta Strategists present a logical and consistent framework of the
Dutch markets based on travel time. By defi ning the core care region identically for
all hospitals it is possible to measure the market performance of a hospital with
others in the same market, but also with other hospitals with comparable market
characteristics.
Having assigned markets, it becomes possible to follow the performance of each
hospital specifi c to its markets. It makes little sense in free markets for a hospital
in Delfzijl to compare its performance with one in Rotterdam. This might be a
valid approach in a centralistic regime or from benchmark principles. But the
improvement drivers for Delfzijl and Rotterdam hospital must emerge from the
pressures in their own respective markets.
To facilitate a relevant comparison across hospitals it is important to segment
hospitals based on comparable market characteristics. The obvious and in our view
relevant segmentation for most hospitals is based on regional markets. A competitor
peer basket consists of all hospitals with which a hospital shares common regional
markets. Or in case of hospitals with unique regional position, with other similarly
isolated Dutch hospitals. However, another relevant peer basket could be product
based, for example, all University Medical Centers (academic hospitals), or all STZ
hospitals.
24 25
Market,
operational
and fi nancial
performance of
each hospital in
own market
Market defi nition is also highly relevant from the perspective of the insurers. Most
large insurers utilize a portfolio of hospitals with a substantial regional position. By
comparing relevant hospitals within a mutually shared market, the opportunities to
guide hospital performance by a reward-punishment scheme become obvious.
The unique framework presented in this study allows us to measure how hospitals
operate in competitive markets. It also allows us to measure their performance in
their respective markets: both in absolute terms as well as in relative growth terms
on a year to year basis. Coupling this with their fi nancial and operational metrics
allows us to seek relationships between market and operational performance on
one hand, and fi nancial and market performance on the other hand.
Furthermore, this report presents a total sector view as well as analyses per hospital
on product mix, productivity, and fi nancial measures. In this report we have
clustered all hospital performance measures in three categories:
Market
✚ Market performance (Out-patient visits (EPB) - relative to market size, and
normalized for market competitive intensity)
✚ Gain or loss in market performance (hospital growth versus market growth)
Operational
✚ Cost-to-serve per patient entity
● Labor cost-to-serve per patient entity
● Procurement cost-to-serve per patient entity
✚ Labor productivity
✚ Average length of stay
✚ Absolute growth and ratio between
● Out-patients (EPB)
● Day treatment (Dagverpleging)
● In-patients (Opnames)
● Nursing days
26 27
Looking forward to
2005 performance
Financial
✚ Net results (as percentage of revenue)
✚ Equity8 (as percentage of revenue)
✚ Current assets (as times turned over in revenue)
✚ Operational cash fl ow (as percentage of debt)
In each of the subsequent chapters all the measures are further dovetailed. The
performance of all Dutch hospitals is evaluated across all of the above measures.
Both the performance in 2004, but also the change in period 2003-2004 is
analyzed. For each of the three performance categories, market, operational and
fi nancial performance a ranking of all hospitals is made based on a selection of
above metrics. Based on the three ranks, an overall performance rank is presented.
The available annual reports of all Dutch hospitals, demographic and time to travel
databases, and healthcare utilization databases were the primary sources used for
the study. These have been augmented by the expertise and knowledge developed
in assignments undertaken by Gupta Strategists for hospitals and insurers.
Gupta Strategists intends to repeat this study on an annual basis. By introducing
a logical and consistent market defi nition and thus allowing for a valid and
systematic comparison across all Dutch hospitals we hope to contribute to the
further strengthening of the healthcare industry. The challenge and ability to do so
is uniquely in the hands of the hospitals and the insurers. With this study we aim to
provide them with the relevant insights to evaluate their strategic options.
8 balance minus debt
28 29
Academic hospitalsProduct portfolio 2004
EPB: 42%Day treatment: 5%In patients: 7%Nursing days: 46%
EPB: 39%Day treatment: 5%In patients: 7%Nursing days: 48%
EPB: 39%Day treatment: 5%In patients: 7%Nursing days: 59%
General hospitalsProduct portfolio 2004
STZ hospitalsProduct portfolio 2004
Exhibit 9.
Large differences
exist in product
portfolios ..
.. and signifi cant
potential for shift
to shorter stay
Chapter 2 - Market Performance
Strategic analysis is about product-market combinations. Hospital products refer
to specialisms, and within specialisms to certain type of diagnostics or treatment,
for example Magnetic Resonance Imaging or open heart surgery. These products
are measured in four broad parameters: outpatient consultations, day treatments,
in-patients and total nursing days9. It was our intention to specify and follow these
for each specialism, but the publicly available data per specialism is limited to less
than half the hospital population. For this study we were practically limited to
follow the markets based on hospital wide data10.
We followed the developments in the four production parameters over the period
2003-2004. As in preceding years there is a considerable shift from in-patient to day
treatment (Exhibit 1). The total demand for healthcare continued to grow strongly
at above 4%. This is in line with our prognosis that the total sector would double
in volume and value by 2020. Also we note that by shifting to shorter stays, the
hospitals are managing demand better. There is no difference between hospitals in
total clinical admissions, whether for day treatment or in-patient longer stays. But
there is considerable difference amongst hospitals in the ratio between nursing
days to total care delivered (Exhibit 9). As expected, the general hospitals have
the lowest proportion of nursing days, and the academic hospitals the highest,
with STZ in the middle. But none the less within each hospital category there
are considerable differences. We conclude that several hospitals have signifi cant
potential to further shift to shorter stay.
For the rest of this section we focus on healthcare markets, the performance
of hospitals in their local markets, the characteristics of their local markets, the
market shapers, and the rewards of out-performing, and risks of under-performing
in individual local markets.
9 And perhaps in the future as DBC10 We report all results based on EPB but if required other FB parameters can be similarly analyzed, both
hospital wide or per specialism.
30 31
Defi ning markets
is key...
...and possible
Markets are all about patients (or insurers), and thus success in markets is about
infl uencing patient (or insurer) choices. To follow markets requires fi rst and foremost
to defi ne markets. With the Netherlands as the market of each hospital, the market
share varies between 0.5% for the small hospitals and 5% for the biggest. With an
entire big city as the market, a typical hospital in Amsterdam or Rotterdam has 10-
20% share. But neither defi nition is relevant because both are too broad.
To defi ne markets there are two points of departure. A hospital can start from
the current patient population – which postcodes does the hospital serve. Most
of the hospital’s patients come from a small number of postcodes. Some of
these postcodes are fairly captive, a dominant share comes to the hospital. Other
postcodes are competitive, a signifi cant share comes to the hospital but also takes
its custom to other hospitals.
Beyond the current catchment area, the ambition of the hospital can also form a
point of departure for defi ning the hospital’s market. For example a hospital may
have a marginal service base, let’s say less than 5% share in certain postcodes, but
might wish to consider these as competitive or even future captive markets11.
Currently each Dutch hospital has its own specifi c, and often legacy based
defi nition of its market. In general these are the municipalities lying around the
hospital. However such a defi nition cannot be used to analyze market performance
across hospitals. In this report, Gupta Strategists present a logical and consistent
framework of the Dutch markets based on time to travel. By defi ning the catchment
area identically for all hospitals it is possible to measure the market performance of a
hospital with others in the same market, but also with other national hospitals with
comparable market characteristics. Time to travel is of course not the only criterion
used by patients. General physician’s recommendation, insurer’s recommendation,
religious persuasion, landmarks, natural inclination, or even perceived or actual
11 Different product types will have different markets. For basic care, a patient can refer to all hospitals, but for
certain care needs, for example kidney transplant, the choice is limited to few hospitals. “Top care” is typically
a very small volume, and for the purposes of this study, we have not differentiated markets on products.
32 33
Exhibit 10. Attractors and repellersRelative market performance - share (LOG scale)
Weighted average
10.4 2.8
Time to travel
defi nes markets
quality may all play a role. As markets become more open and sophisticated it shall
become possible and necessary to consider these and other decision infl uencing
factors in defi ning markets. Our model is general enough to include such measures,
as they become available in the future.
For the purposes of this study, we have used time to travel from a postcode to
a hospital as the sole criteria for defi ning markets. We have assigned parts of all
relevant postcodes to all relevant hospitals in the inverse ratio of the travel time
to the hospital (with less than 5 min as the lower cut-off and 10 hospitals per
postcode as the upper cut-off). Thus both the regional demographics, as well as the
position of other hospitals are considered in defi ning a hospital’s market12.
Geographical basis for defi ning markets needs to be supplemented by a hospital’s
ambition. One hospital may have the ambition to be the dominant care giver of
choice in a wide region, while another may consider only a sub-region within a
metropolis as its natural market. Based on our database it is possible for each
hospital to individually defi ne and monitor its own market performance, based on
a combination of current patient population and ambition.
For the purposes of comparing the performance of all Dutch hospitals it is
important to have a consistent market defi nition that is ambition-independent. And
the defi nition we propose in this study is based on assigning parts of all relevant
postcodes in the inverse ratio of time to travel to all hospitals.
Having defi ned the market for which each hospital has a theoretical “right of
service” or the catchment area (shortest travel time) it becomes possible to measure
each hospital’s performance. The actual produced EPB as a ratio of the allocated
catchment area EPB, is the market performance of a hospital. A hospital with market
performance greater than one attracts patients above what may be expected from
geography and demography alone.
12 It is not our claim that this is the only relevant criteria. But we do believe that this is by far the most relevant
criteria in defi ning markets. Other criteria are most likely to have only second or higher order effects.
34 35
Exhibit 11.
slatipsoh noitacol dna ytisnetnI evititepmoC
Competitive intensity per postcode based on time to travel to 10 nearest hospitals
1
High
Medium
Low
0,880,830,780,720,650,560
Hospitals’ market
performance
varies
But also
competitive
intensity of local
markets vary
On the other hand, a hospital with less than one as market performance will have
patients within its catchment area who prefer to travel longer rather than come to
it for their care needs. The market performance of all Dutch hospitals is illustrated
in Exhibit 10. There is a considerable spread across the Dutch hospital population.
The spread varies from a score nearly three for Flevoziekenhuis in Almere to 0.4 for
Havenziekenhuis in Rotterdam. Even after correcting for demographic growth of
Almere region, Flevoziekenhuis attracts patients well above those dependent on it
based on travel time alone.
Whether a high market performance score is a sign of excellent performance, or
simply indicates that patients do not have real choice, depends on the competitive
intensity in a region13. In a competitive environment, a market score above 1.0 is a
clear indication that the hospital offers services and/or quality of care that attracts
patients away from its competitors. While operating in a highly competitive market,
such a hospital performs well. Whereas a score of 1.0 in a competitively not intense
market is not a refl ection on the hospitals performance.
We have calculated the theoretical competitive intensity14 of each hospital as well as
for each postcode in the Netherlands. This is plotted on the map of the Netherlands
in Exhibit 11. The color shading confi rms that most Dutch hospitals operate in
competitive markets. But importantly even outside the Randstad large competitive
zones exist, as patients can choose from multiple hospitals with comparable travel
time.
13 Many hospitals within a short travel time implies high competitive intensity. Just one hospital in a region
means, low competitive intensity or concentrated markets.14 The competition intensity is based on the Herfi ndahl Hirschman index (HHI): the sum of the squares of
the market shares of all hospitals in the market. In our model, the market consists of all postcode areas that
contribute EPBs to a hospital, where patients choose from the ten nearest hospitals. The share is the ratio of
the expected to the total EPBs in each postcode. The HHI is a well established measure used by competition
authorities in judging mergers and acquisitions. Competition authorities generally consider markets with
HHI below 1,000 competitive, between 1,000 and 1,800 moderately concentrated, and above 1,800 highly
concentrated or low competitive intensity. Of course the key in calculating the HHI is modeling patient
behavior. Please contact Gupta Strategists for a more detailed analysis.
36 37
Exhibit 12.
Near monopolists Competitors
Low
10
1Relative marketperformance
0.1
Competitive intensity High
Monopolists and competitorsRelative market performance of hospitals versus competitive intensity in local markets 2004
On par performers
Outperformers
Underperformers
Most Dutch
hospitals operate
in competitive
markets
Based on regional competitive intensity three cases emerge:
✚ Border regions. At the borders with Germany and Belgium, hospitals
operate in markets with relatively low competitive intensity15. In The
Hague, the same effect arises because of the North Sea as a natural
border. It limits patient choice given the assumed travel time preferences.
This geographical characteristic seems to be well leveraged by Haga that
has a high market share of one third of its own market.
✚ Randstad. Amsterdam is competitively the most intense region in the
Netherlands, closely followed by Rotterdam.
✚ Rural areas. As expected, in the provinces the markets are less competitively
intense. Zeeland is the least competitive market. In fact, taking out one of
the hospitals in the region may lead to too little choice. In some rural
areas however, the markets have nonetheless high competitive intensity
as the hospitals are spread evenly across the area so that travel time
differences are not very big. This happens for instance in the area north of
Meppel where the hospitals in Heerenveen, Drachten, Assen, Hoogeveen
and Meppel compete with each other.
How good a hospital performs can be visualized by plotting the theoretical
competitive intensity against its market performance (Exhibit 12). All hospitals in
such a graph fall in a tennis racquet shaped curve. In the handle of the racquet are
hospitals that operate in competitively less intense markets. These hospitals all have
a market performance score close to 1 irrespective of the competitive intensity.
These hospitals primarily serve their captive patients and their performance is a
refl ection of their geographical position and not of their operations. The head of
the racquet is crowded with hospitals that operate in competitively more intense
markets. Most Dutch hospitals operate in these more competitive markets. We
conclude that most Dutch regions fulfi ll an important criterion for the success
of market mechanisms: there is ample choice for patients in local markets. In
comparison to other countries, for example Germany or the USA, there are plenty
of hospitals per unit area across the Netherlands and this renders most of them
sensitive to local competitive pressures.
15 the model does not include cross border competition
38 39
Exhibit 13.
15%
Front runners
Followers
8%
Hospital growth
Market growth-7%
Some win, some looseMarketshare development EPB 2003-2004
Some hospitals are
gaining share,
others are losing
– a zero sum game
There was a “free
market” of about
EUR 100-200
million in 2004
Not surprisingly, competitive markets force hospitals to perform. And the pressure
to perform separates the out-performers from the under-performers. We have
ranked all Dutch hospitals in three groups based on their market performance.
All those that score around 1 are the on-par performers. Part of these are in the
handle of the tennis racquet and a part are in the middle group in the competitive
zone16. The group of market out-performers is defi ned as hospitals that operate in
competitive markets and score well above 1 in their market performance. While
under-performers score well below 1. For those hospitals that have found the key
to good performance in more competitive markets, it appear that it pays to be
competitive. While the gains of a “monopolist” is a lazy life!
A performance ranking of all hospitals relative to their markets in 2004 sheds
important light on their local, static position. However, it is also relevant to ask
how these different performance groups are developing. In our project experience
we have often encountered that despite a strong growth (above 5%), the hospital
has actually underperformed in its markets. Growth needs to be measured against
markets. We plotted the market growth of all Dutch hospitals against their own
growth in EPB for 2003-2004 in Exhibit 13. We fi nd that the markets are competitive
and in a dynamic fl ux. There is a group of hospitals that grew well above market
growth and thus gained competitive ground while the other group lost competitive
ground.
A relevant measure of the dynamics in a market is the churn rate of patients. We do
not have individual patient data and thus cannot report actual patient churn. But
we know the EPB a hospital gained or lost above the market norm17. We calculate
that at least 100,000 EPB churned, or shifted hospital in 2004. On a total of above
9 million EPB in 2004, this is a signifi cant number. Even a low churn rate like 1%
in EPB suggests a dynamic market. For example, a churn rate of 1% in EPB implies
EUR 100-200 million market at stake. Or up to EUR 1-2 million difference in the
16 Unlike the other hospitals in the low competitively intense markets, the on-par performers in the competitive
markets suffer the risk of degradation to under-performers in their markets, or have the upside of promotion
to the out-performers club.17 Based on available data we have calculated net churn. Gross churn is higher.
40 41
Exhibit 14.The winner takes it allMarket share development, % of hospitals 2003-2004
Followers Front runners
40%27%
37%
30%
23%
43%
Increase market share
Steady market share
Decrease market share
The
out-performers
are growing at
the expense of
under-performers
And that is
good news
bottom line of a single hospital. The largest EPB churn rate was above 10%, but 1%
gain or loss in share was not uncommon in the Netherlands (Exhibit 4).
In highly competitive and transparent markets like fast moving consumer goods,
where unlike healthcare consumer choice carries much less risk, the share battle
is also about no more that fractions of percentage points. And each percentage
point is also worth several hundred million EUR . Thus we conclude that the second
criterion for successful market operations is also present in the Dutch markets,
there is a shift of custom above and below the market norm. And importantly
such shift already took place in 2004, well before the regulation allowed for “free”
market for the B-segment. It appears it is already “normal” day to day business for
the majority of the Dutch hospitals to function competitively.
Having concluded that hospitals are in a state of fl ux, it is logical to investigate
which of the hospitals are gaining ground and which are losing it. Is it that the
under-performers have gained share, and the out-performers have shrunk and
thus the hospitals are falling back to the average? Or precisely the opposite that the
out-performers are further gaining share at the expense of the under-performers.
We fi nd evidence that on an average, the out-performers gained further ground in
2004. The gap between the out-performers and the under-performers is widening.
43% of all out-performing hospitals further gained share in 2004, while only 27%
lost share. The trend was precisely the opposite for under-performers, 40% of all
under-performing hospitals lost further share, while only 23% managed to gain
share. The markets seem to be self-reinforcing, rewarding the out-performers and
punishing the under-performers further (Exhibit 14).
From a public policy perspective the further delegation of the under-performers
may appear to be alarming. What happens to the under-performers if this trend
continues? The answer shall be specifi c to each local market, but in general we
conclude that there is not much reason for worry or interference in the current
Dutch competitive landscape. Most hospitals in the Netherlands operate in a
competitive market. And in competitive markets there are other hospitals that are
performing well. And these out-performing hospitals have patient preference.
42 43
Is it obvious what
under-performers
need to do?
Is cost-to-serve
the formula for
growth?
In some regions
under-performers
need to address
cost structure to
grow again
A more important question would be to ask what it is that enables an out-
performer to grow further. For if we can fi nd the formula for growth, we can help
the under-performing hospital narrow the performance gap in it’s own market. By
closing in on the heels of the front-runners, the under-performers can accelerate
the performance of the entire sector. It is to the formula for growth that we now
turn.
The formula to growth consists of both cost-to-serve and quality. Should quality
vary signifi cantly and the differences be transparent, quality would be the
dominant market shaper. However, measurements of healthcare quality in the
Netherlands are not yet suffi ciently objective and transparent and thus do not
allow for differentiation. Therefore in this report we focus on cost-to-serve as
the performance measure. Looking at cost-to-serve is also highly relevant as the
current policy is based on the premise that opening up the markets will result in
effi cient hospitals gaining more share, and thus enhancing the effi ciency of the
entire sector.
We asked ourselves: Is cost of operations, or effi ciency, the formula for growth?
To answer this question, we analyzed several local markets in detail, for relative
market performance as well as relative cost-to-serve. The advantage of our model
is that it allows us to defi ne local markets, both in terms of total healthcare, and
also the relative performance of each of the competing hospitals in a region.
We had expected to see no correlation at all in 2004. To our surprise we fi nd that in
some markets, cost-to-serve does already appear to be a market shaper, or driver for
change in 2004. The correlation or the lack of it has primarily to do with different
competitive intensities in different regions. But also other factors like the historical
budget lock-ins, the different type of competitor hospitals (STZ, UMC), and learning
curve effects may tend to distort the effect.
To illustrate the effect we show the correlation between cost-to-serve and its effect
on market performance for three regions, Rotterdam, Amsterdam and Eindhoven in
Exhibit 15. The local competitive markets and the position of the hospitals is also
44 45
Exhibit 15.
Albert Schweitzer
Ikazia
Erasmus MC
Havenziekenhuis
IJsselland
MCRZ
Reinier de Graaf
Ruwaard Van Putten
St. Franciscus Gasthuis
Vlietland
Vlietland
Cost efficiency yields market strength..Strategic positions within Rotterdam region
Relativemarketposition
2004
Cost-to-serve [EUR/PE]475
Low
High
200275
… and thus a better financial positionFinancial positions within Rotterdam region
Relative market position 2004HighLow
Financialposition
Weak
Strong
Cost efficiency yields market strength?Strategic positions within Amsterdam region
Relativemarketposition
2004
Cost-to-serve450
Low
High
200
… and thus a better financial position?Financial positions within Amsterdam region
Relative market position 2004HighLow
Financialposition
Weak
Strong
Cost efficiency yields market strength..Strategic positions within Eindhoven region
Relativemarketposition
2004
Cost-to-serve370
Low
High
190
… and thus a better financial position?Financial positions within Eindhoven region
Relative market position 2004HighLow
Financialposition
Weak
Strong
200
Rotterdam
shows the
best
correlation
between
cost-to-serve and
performanceHigh competitive intensityLow competitive intensity
Amsterdam is
still an issue
And a risk as no
reward mechanism
to reduce costs
seems to be in
place in Amsterdam
illustrated in Exhibit 15. All three regions are competitive, but to varying degree.
Theoretically Amsterdam is the most competitive, with Rotterdam following close
behind and than Eindhoven.
Of all the three regions, Rotterdam shows the best correlation. The hospitals in
Rotterdam that have a high market performance are also the ones with the lowest
cost-to-serve. A difference in cost-to-serve of EUR 50 makes a difference of several
percentage points market share. (The change in market performance was even
more strongly correlated to cost-to-serve in 2003-2004 – Exhibit 3, low cost-to-
serve means higher growth). It appears that despite historical budget lock-ins and
supposed lack of incentives, the insurers in Rotterdam have already been successful
in 2004 in rewarding more effi cient hospitals with more patients. Detailed analysis
on individual hospital performance reinforces this conclusion. Low cost hospitals
have gained share, while high cost hospitals have lost signifi cant share over the
last years. The ability of markets to react to hospital operations and costs is thus
confi rmed in Rotterdam and can serve as an example for other region.
However, the correlation between cost-to-serve and market share is not yet strong
in all competitive regions. Even though Amsterdam is the most competitive region
a correlation between cost-to-serve and market performance hardly exists. There
are of course several potential explanations for this. Part of the explanation is that
Amsterdam has several different types of hospitals with different funding. There
are two STZ and two UMC hospitals in Amsterdam, and these probably distort the
competitive fi eld. Furthermore, one hospital in Amsterdam did not have the annual
report available. But we also believe that, unlike Rotterdam, the local insurers in
Amsterdam have not yet suffi ciently and successfully guided the local hospitals’
performances.
Locked in regional ineffi ciency like Amsterdam forms a big risk. If effi ciency was
being rewarded, the local hospitals would have a motive to improve. However, if
there is no reward system in place, there is a risk of entrenched and long tolerated
ineffi ciency, forcing a single hospital to suddenly become redundant – a quantum
shock, that everybody saw coming, but did little to avert. Rotterdam can serve
46 47
Exhibit 15.
Academisch Medisch Centrum
BovenIJ Ziekenhuis
Onze Lieve Vrouwe GasthuisOnze Lieve Vrouwe Gasthuis
Slotervaartziekenhuis
St. Lucas Andreas Ziekenhuis
VU Medisch Centrum
Zaans Medisch Centrum
Ziekenhuis Amstelveen
Ziekenhuis Go
Cost efficiency yields market strength..Strategic positions within Rotterdam region
Relativemarketposition
2004
Cost-to-serve [EUR/PE]475
Low
High
200275
… and thus a better financial positionFinancial positions within Rotterdam region
Relative market position 2004HighLow
Financialposition
Weak
Strong
Cost efficiency yields market strength?Strategic positions within Amsterdam region
Relativemarketposition
2004
Cost-to-serve450
Low
High
200
… and thus a better financial position?Financial positions within Amsterdam region
Relative market position 2004HighLow
Financialposition
Weak
Strong
Cost efficiency yields market strength..Strategic positions within Eindhoven region
Relativemarketposition
2004
Cost-to-serve370
Low
High
190
… and thus a better financial position?Financial positions within Eindhoven region
Relative market position 2004HighLow
Financialposition
Weak
Strong
200
St. Jans Gasthuis
Catharina ZiekenhuisElkerliek Ziekenhu
Jeroen Bosch Ziekenhuis
Máxima Medisch Centrum
Máxima Medisch CentrumSt. Anna Zorggroep
Cost efficiency yields market strength..Strategic positions within Rotterdam region
Relativemarketposition
2004
Cost-to-serve [EUR/PE]475
Low
High
200275
… and thus a better financial positionFinancial positions within Rotterdam region
Relative market position 2004HighLow
Financialposition
Weak
Strong
Cost efficiency yields market strength?Strategic positions within Amsterdam region
Relativemarketposition
2004
Cost-to-serve450
Low
High
200
… and thus a better financial position?Financial positions within Amsterdam region
Relative market position 2004HighLow
Financialposition
Weak
Strong
Cost efficiency yields market strength..Strategic positions within Eindhoven region
Relativemarketposition
2004
Cost-to-serve370
Low
High
190
… and thus a better financial position?Financial positions within Eindhoven region
Relative market position 2004HighLow
Financialposition
Weak
Strong
200
Shall cost-to-serve
become an even
stronger market
shaper in post
2005 healthcare?
as a model for Amsterdam of how correlation of market performance to cost
effi cient operations can result in a total regional improvement. Since 2005 the
means available to insurers to guide hospital performance have been signifi cantly
expanded. And the Amsterdam hospitals and insurers should leverage these tools
to reshuffl e the Amsterdam competitive fi eld in favor of the effi cient operators.
The third region we followed is Eindhoven. Eindhoven has a medium to high
competitive intensity with eight hospitals. We fi nd that a very weak correlation
exists in Eindhoven between cost-to-serve and market performance. It is more
appropriate to think of a correlation zone, rather than a correlation line.
We conclude that cost-to-serve can indeed be a success factor in healthcare
markets and the effect shall become more pronounced in the coming years. This is
important news for the under-performing hospitals. By trimming their operations
and becoming effi cient they can narrow the performance gap with the out-
performers18. The risk of not doing so is further slipping in local markets. While the
formula for growth is redesigning one’s own operations to be effi cient.
We expect the increased freedom for price-volume negotiations from 2005 onwards
will further reinforce this effect. The success of current policy of “freer” markets,
can be measured by following the correlation between cost-to-serve and market
performance in the coming years. If through price-volume negotiations the insurers
are successful in shifting custom to more effi cient hospitals, than an increasing
correlation must emerge. We intend to follow this in our ensuing reports.
Having concluded that hospitals can gain market share, it is equally important
to ask: Why should a hospital bother to gain share if it comes with the pain of
realizing diffi cult productivity gains? In fact, one may even conclude that low cost
18 The urgency to do so would be even greater were there economies of scale affects. Then under-performers
would have inherent disadvantage. However in all our analysis we have yet to fi nd any signifi cant economies
of scale effects in Dutch hospital operations.
48 49
operations, may mean fi nancially poorer bottom line, and is thus not the preferred
option for a hospital. However just as in other sectors, we fi nd that in healthcare
effi cient operations, or low cost-to-serve, could translate in better bottom line.
By winning share the revenue increases, while a low cost-to-serve means higher
absolute net results. The classic virtuous business cycle of fi nancial gains through
share gains and effi cient operations also applies to hospitals. The overall current
correlation is however insuffi cient and must be strengthened if hospitals are to be
motivated to improve their operational performance.
The correlation between market performance and fi nancial success of the hospitals is
displayed in Exhibit15 for the three regions: Rotterdam, Amsterdam and Eindhoven.
We measured fi nancial success as the cumulative rank based on individual rank of
both the operational cash fl ow and current assets. In order to allow for comparison
we used the ratio of operational cash fl ow to debt, a measure of a hospital’s ability
to service its debt out of its own operations19. And we used revenue divided by
current assets as a measure of the working capital turnover19.
We fi nd that there is a weak and in our view insuffi cient correlation between
market performance and fi nancial success. As before, the degree of correlation
varies per market. Rotterdam appears to be the most sensitive to the market. In
Amsterdam there is no correlation, and like cost-to-serve, we are tempted to
conclude that the payers (insurers) have a clear task cut out for them. Rotterdam
shows that it is possible to improve the fi nancial performance of a hospital by
improving market performance. Eindhoven also shows no correlation. In fi nancial
correlation historical budget lock-ins, or legacy costs, play a strong role. We expect
that the effects of market success on fi nancial results will take longer to crystallize.
However, if hospitals are encouraged to improve their performance, it is important
that their market and operational success be highly correlated to their fi nancial
success soon.
19 These measures are used by analysts to rate the creditworthiness of hospitals, for instance in the more
liberalized hospital markets in the United States, France and Germany where some hospitals are quoted on
the stock exchanges.
50 51
Markets are
emerging and ..
.. more
entrepreneurial
freedom desired
Based on this, as well as other local market analyses, we conclude that across the
various competitive markets in the Netherlands, cost-to-serve can indeed be a
market shaper. And a low cost-to-serve was generally rewarded with a high market
performance, which in turn was rewarded by a stronger fi nancial position. We
cannot rule out that quality was also a relevant market shaper. In fact based on the
“Algemeen Dagblad” ranking, we fi nd a weak correlation with quality and fi nancial
performance. This may suggest that more effi cient hospitals tend to dominate in
their competitive markets, thus becoming fi nancially more robust giving room to
invest more in healthcare and thus deliver better healthcare. The virtues of market
forces, or the “invisible hand” are crystallizing in the Dutch curative sector.
On basis of the analysis of Dutch hospitals in 2003-2004, Gupta Strategists
endorse further accelerated freeing of healthcare markets by allowing for more
entrepreneurial degrees of freedom to hospitals. We conclude that the sector
is already capable of leveraging the market sensitivities to meet the healthcare
revolution challenge of the coming decades.
52 53
Exhibit 16.
+4.2%
Procurement
Labour
+4.6%
+3.9%
Salarycosts
FTEs
+2.8%
+1.1%
EUR
Inflation 1.2%
Cost increaseHospital cost change 2003-2004
Procurement outpaced labour costCost change 2003-2004
Higher wagesLabour cost change 2003-2004
+4.2%
Procurement
Labour
+4.6%
+3.9%
Salarycosts
FTEs
+2.8%
+1.1%
EUR
Inflation 1.2%
Cost increaseHospital cost change 2003-2004
Procurement outpaced labour costCost change 2003-2004
Higher wagesLabour cost change 2003-2004
+4.2%
Procurement
Labour
+4.6%
+3.9%
Salarycosts
FTEs
+2.8%
+1.1%
EUR
Inflation 1.2%
Cost increaseHospital cost change 2003-2004
Procurement outpaced labour costCost change 2003-2004
Higher wagesLabour cost change 2003-2004
Cost-to-serve
declined in both
real and nominal
terms
Chapter 3 – Operational Performance
Hospitals are extremely complex operations. On one side, there are on average
hundred different individual specialists working in twenty odd specialisms that
form the “front offi ce” for the patients. Nursing, diagnostics and surgery are the
continuation of the “front offi ce” for patients from nearly all specialisms. On the
other side, the “back offi ce” functions like fi nance, administration, procurement,
and human resources are getting even more complex, and under pressure to meet
the needs of the specialists and the patients.
The diffi culty in this complex environment is to defi ne simple metrics to follow the
operational performance of the hospital. Labor costs form the dominant portion
of the hospital costs, on average 60%. The majority of the additional costs are
procurement, including interest and depreciation. We fi nd it useful in most of our
analyses to look at operations of a hospital in terms of cost-to-serve. For individual
diagnostics and treatments it is possible to defi ne specifi c cost-to-serve, for
example a cost-to-serve for a cataract operation. On a macro level, hospital wide, it
is possible to follow hospital performance by defi ning cost-to-serve for all patient
entities served. Such cost to serve has a labor component and a procurement
component.
We fi nd that while total costs increased by 4.2% in 2003-2004, the delivered care
in terms of patient entities increased by 4.4%. Even before correcting for infl ation,
the hospitals cost-to-serve decreased in 2004. Accounting for infl ation (national
1.2%), the cost-to-serve declined by 1.4% (Exhibit 5). In absolute value terms, this
implies that Dutch hospitals saved EUR 220 million through productivity gains
(Exhibit 7). Dutch hospitals were compensated EUR 102 million extra in 2003-2004.
This implies that EUR 118 million of the gains made by Dutch hospitals in their
productivity were “returned” to Dutch society (Exhibit 2).
Most of the productivity gain can be attributed to labor productivity and not salary
or procurement costs (Exhibit 16). On a real basis, labor cost-to-serve improved by
54 55
Exhibit 17. Exh.18.Hospitals are increasing productivityLabour productivity change Dutch hospitals2003-2004 [Patient entity/FTE]
Average improvement:7.2
74 out of 90 analyzedhospitals have increasedlabor productivity 2003-2004
Increased labourproductivity
Decreased labourproductivity
110-22 0
Large differences in labour productivityLabour productivity 2004 [patients/FTE]
Average:
229
Higher labourproductivity
Lower labourproductivity
96068
Most hospitals
improved labor
productivity
But large
differences remain
1.6%. A single FTE served 229 patient entities in 2004, while it served 222 in 2003,
an improvement of above 3% (Exhibit 6). We believe there is signifi cant room for
more productivity gains in hospitals. The gains made in 2003-2004 show that it
is possible. Further gains are possible in nursing day reduction (see below), but
also in reducing the huge variation in care planned and delivered, more focus on
core activities and by reducing the often redundant, and sometimes self imposed,
administrative burdens.
We looked at the individual labor productivity improvement of all hospitals. We
fi nd that 74 of the 90 hospitals analyzed improved labor productivity in 2004
(Exhibit 17). The average increase was 7.2 patient entities extra per FTE on an
average labor productivity of 229 patient entities per FTE in 2004 (Exhibit 18). The
degree of change varied across hospitals. The largest gain made was 103 patient
entities extra per FTE, and thirtyfour hospitals improved by 10 patient entities or
more per FTE.
Is salary increase a driver to improve productivity? We did not fi nd evidence
that salary is an incentive to improve labor productivity. The average labor costs
increased by EUR 1,300 per FTE in 2004, a marginal increase compared to the average
costs of EUR 49,000 per FTE in 2004, but this is not correlated to labor productivity
(Exhibit 17).
We continue to be intrigued by the large difference amongst hospitals. The labor
productivity varies from 900 to 100 patient entities per FTE a factor of nearly 10
(Exhibit 18). The large differences are confi rmed by looking at the cost-to-serve
of Dutch hospitals which also varies, from EUR 100 for small basic hospitals to
EUR 1,500 for academic hospitals (Exhibit 19). A part of the difference should be
attributed to the product and patient mix, a large top clinical hospital versus a
small, basic care hospital. But nonetheless we believe, confi rmed by our project
experience, that there is suffi cient further room to improve productivity in the
sector. Only a fraction of the potential has been realized in 2004.
56 57
Exhibit 19. Order of magnitude differences in cost-to-serve, but not in type of costsCost-to-serve Dutch hospitals 2004 compared to national average[EUR/Patient entity]
Average:EUR 351
Higher than average costto serve
Lower than average costto serve
EUR 78 1,267
Academic hospitals
Personnel costs
Material costs
Competitive
out-sourcing
advantages yet to
be realized
Procurement
needs to improve
Delivering care is a hospital’s core business. Yet most Dutch hospitals are self-
contained monoliths, where the gardening department potentially requires as
much management attention, as does the kitchen serving the patients, and the
operation theatres. A simple measure to see the extent to which hospitals have
focused on core activities and out-sourced the rest is to look at the ratio of labor
costs to procurement costs. Should for example a hospital have out-sourced its
entire facility management (a substantial cost for most hospitals), or its ICT, there
would be a signifi cant increase in procurement costs as a ratio of labor costs, while
the total may remain the same. We fi nd that while the total costs of Dutch hospitals
vary considerably the balance between labor and procurement costs is nearly the
same everywhere (Exhibit 20).
Having optimized within the existing operations, hospitals need to look further to
more innovative operational strategies. This includes outsourcing (or carving out
own departments) to achieve further productivity, cost and quality benefi ts. The
VAT is currently a potential hurdle that dissuades hospitals from out-sourcing. It
needs to be addressed soon by the government as currently out-sourced services
need to be at least 19% cheaper in order to compete with in-hospital operations.
But the gains made through labor relationships, economies of scale, professional
and specialized management, should yield a much better price-quality proposition.
Examples are facility management, including the hotel and the technical services,
but also ICT where the complexity and criticality of technology requires seriously
more resources and management focus.
We believe that procurement and goods logistics is one of the key improvement
drivers for hospitals and also suitable for outsourcing. A hospital procures, stores
and distributes an extremely large range of commodities, some critical and highly
specifi c to operations, others much more generic. The administrative costs alone
of managing thousands of vendors and hundreds and thousands of orders are
large for an average hospital. And most procurement departments in hospitals are
little more than administrative units, that work the orders and ensure they are
paid and delivered. Given the cost and quality impact, procurement departments
need to quickly evolve from a plain administrative unit to a more sophisticated
58 59
Exhibit 20.
Lower
Procurementcost-to-serve
Higher
Higher Laborcost-to-serve
Lower
Ratio of procurement to labor costs are same for all hospitalsRelative cost-to-serve Dutch hospitals
Exhibit 21.
3
38 5
44
6.7
5.2
Averagelength of stay
2004
Average 7.2
Average length of stay 2003
8.8 5.7
8.3
Most Dutch hospitals can further reduce the average length of stayAverage length of stay in Dutch hospitals 2003-2004 and number of hospitals in each quadrant
Average length
of stay declining
but still shorter
stays likely
strategic and professional procurement organization that is a valuable partner for
all care units and specialists. Such evolution can take place within the hospitals but
requires substantial management attention and investment. But it can also take
place in partnership with other hospitals.
Looking at the extremely large concentration of hospitals in the Randstad, a shared
procurement and distribution center for hospitals can yield substantial gains. Such
a Group Purchasing Organization (GPO) is yet to emerge in the Dutch market,
but the conditions to do so are increasingly favorable. Whether it is a jointly
owned enterprise or an independent vendor; a group purchasing and distribution
organization serving multiple hospitals in an area is a proposition worthy of
investigation.
Lastly we looked at the average length of stay and conclude that it continues to
decline, having come down from 7.2 to 6.7 days in 2004 (Exhibit 21). While the
rate of decline is slowing, we believe that there are still opportunities for further
improvement. Only a handful of hospitals have reached the current effi ciency frontier
in managing nursing days optimally. The differences within the current care model
(all care within one roof in a complex hospital) are large. Further, benchmarks across
all specialisms, normalized for patient and case mix, reveal suffi cient room for lower
length of stay when compared to the best practice hospital for that specialism.
But also new innovative hospital care models can yield substantial improvement.
Within the current single hospital model we estimate the average length of stay
can be reduced to 5-6 days. But by infrastructural separation between out-patient
and in-patient clinics, and between acute and elective patients, further gains can
be made, for example as it exists in the USA.
To conclude we fi nd that Dutch hospitals have made a remarkable gain in their
productivity in 2004. Continued room exists within the current care organizations
for further improvement given the large difference between the front-runners
and the followers. But even for the front-runners, innovative new models for out-
sourcing of non-core activities as well other infrastructural forms of delivering
care, imply further room for operational excellence.
60 61
Exhibit 22. Almost all hospitals are comfortablyin the black figuresNet result/revenues 2004 [%]
1.3%
Weighted average0.84%
Average increase
Large improvements predominantly athealthier hospitalsChange in Net result/revenues 2003-2004 [%]
Above averageincrease
Below averageincrease
-7.1% 7.5%
Average improved from0.5-1.3%
61 out of 90 hospitalsimproved performanceAbove average: 83%improved, below average59%
-7.7% 13%
Above averageBelow average
Only 5 out of 90hospitals postednegative results in2004
0%
Almost all
hospitals posted
positive results
Is it sense of
urgency enough
that the strong are
getting stronger?
Chapter 4 – Financial Performance
The fi nancial health of Dutch hospitals has been improving since 2000. On the basis
of analysis for 2003-2004 we confi rm substantial further improvement of fi nancial
health. For the fi rst time this improvement came not as a result of extra money made
available (“boter bij de vis”), but because hospitals improved their productivity. And
the partial extra funds made available to deliver care were channeled to improve
both the balance sheet and the bottom line.
The improvement is most heartening to see. However, on average the Dutch
hospitals are still not fi nancially robust. But continued improvement along these
lines should see them by 2012 as truly private organizations capable of steering
their own specifi c strategic course backed up by their own fi nancial resources.
The net results posted by the hospitals showed a huge improvement in 2004. An
extra EUR 102 m was added to the net results, improving it from 0.5% to 1.3%
(Exhibit 22, and 2) . Only 5 out of 90 hospitals posted a negative net result in 2004,
a considerable improvement for 2003, where there were 27 such hospitals. 61 of
the 90 hospitals analyzed improved their bottom lines, with some gains well above
10%.
The fi nancial performance gap between the hospitals is widening. 83% of the
hospitals that posted above average performance in net results, made further
improvements in 2004, while 59% of the weak performers posted even lower
net results. The fi nancially strong are getting stronger, while the weak are falling
further behind. In our discussion with hospital management and specialists they
often bemoan a lack of sense of urgency within the hospital walls. According to
some, insuffi cient sense of urgency results in unwillingness to change the culture
and performance. It may console those who understand the need for change
that the sense of urgency must surely be rising given the further deterioration in
performance of some of the already weak hospitals.
62 63
Exhibit 23. Stronger balance sheetsEquity/revenue 2004 [%]
21.7%
Weighted average
Higher financialstrength
Lower financialstrength
1.7%
Average increase
Especially for the fitter hospitalsChange 2003-2004 [%]
Above averageincrease
below averageincrease
0% 48%
Average improved from 20.0%-21.7% 73% of the above
average hospitals havegotten stronger, whilstonly 33% of the belowaverage
-14.7% 20.8%
Balance sheets
improved
Financial war
chest slowly being
fi lled
The trend of overall improvement and widening performance gap is confi rmed by
analyzing the balance sheets of all Dutch hospitals (Exhibit 23). The average of the
equity (balance minus debt) as a ratio of revenues, increased from 20.0% to 21.7%
in 2004. The differences in balance sheet strength have been large, from nearly
+50% to even nill. But these differences are growing; 73% of the hospitals with
above average balance sheet strength further improved their balance sheet.
Finally, we looked at two other fi nancial measures for hospitals to analyze their
performance: the ratio of the revenue to current assets and the ratio of operating
cash fl ow to debt. Both ratios are often used in analyzing the fi nancial soundness of
hospitals. Higher revenues as ratio of current assets implies that the hospitals ties
up less capital in its business. By improving this measure, hospitals can potentially
shore up their solvability, a key issue for future strategic course. High operating
cash fl ow as ratio of debt suggests the ability to repay debt from own operational
business.
We defi ne both parameters as partial measures of the hospital’s war chest. A high
ranking hospital on these parameters has more fi nancial degrees of freedom in
pursuing its strategic course. These could include gaining share at the expense
of competitors, acquiring competitors, or undertaking a national alliance. In any
case, fi nancial strength is important to successfully navigate the slowly opening
and diffi cult healthcare markets. For both parameters we fi nd overall improvement
but yet the differences among hospitals are still large. The revenues as a ratio of
current assets increased from 3.55 to 3.63 (Exhibit 24). The gap between the best
and the weakest hospital was more than six in 2004. The operational cash fl ow as a
function of debt20 improved from 10.1 to 10.8, nearly 7% improvement (Exhibit 25).
At the same time the gap between the best in class with 46% to the worst in class
at -10% is large (Exhibit 25).
20 both long and short term
64 65
Exhibit 24. Receivables are managed betterRevenues/current assets 2004
3.63
Weighted average
1.57 8.72
Average improvedfrom 3.55 to 3.63
Exh. 25.Debt ratios are improvingOperating cash flow/debt 2004
10.8%
Weighted average
-10% 46%
Average improved from 10.1-10.8%
Picket fences
changing to
staircases
Signalling room
to climb
In conclusion, we note that on average on all fi nancial parameters analyzed, the
Dutch hospital sector improved its performance. The fi nancial performance gap
between Dutch hospitals is large. And this gap is growing further. What for decades
was a performance fence - all pickets neatly lined up at same height, is increasingly
looking like a staircase.
In some ways the growing gap is welcome news. It may create a sense of urgency
to improve performance of the hospitals. We show that in competitive markets
ingredients already exist to reward better performance with higher share and
stronger fi nancial results. By improving, the weak can begin the close the gap, thus
improving the health of the entire curative sector.
66 67
Exhibit 26.4002 sremrofreptuO
puorg3002 4002 sremrofrep rap-nO
puorg Under3002
puorg3002sremrofrep
3murtneC hcsideM hcsimedacA 3thcirtsaaM siuhnekeiZ hcsimedacA peorggroZ sisylA siuhnekeiZ suinotnA 1siuhnekeiZ reztiewhcS treblA siuhnekeiz aihpmA
2siuhnekeiZ adsehteB siuhnekeiZ JInevoB murtneC hcsideM muirtA2siuhnekeiZ animlehliW-suisinaC 1siuhnekeiZ anirahtaC snahcsregnojT eD 2siuhnessenokaiD thcizfleD siuhnekeiZ siuhnekeiZagaH
iDsiuhnekeizovelF iuhnessenoca dieL s siuhnekeiznevaHnelessJIsiuhnekeiZ keilreklEsiuhnekeiZ sucsicnarF neziuhnekeiZ reem
2siuhnekeiZ inimeG hcsideM sumsarE murtneC nekeinilK alasI3neziuhnekeiZ erleGsiuhnekeiZ aizakI siuhnekeiZ hcsoB neoreJ 1siuhnekeiZ traH eneorGsiuhnekeiZ suitneruaL siuhnekeiZ initraM
lessJIehgnillemS jiN siuhnekeiZ dnal murtneC hcsideM amixáMoZ ne hcsideM sibrO nrecnocgr rednaeMmurtneC hcsideM riatisrevinU sdieL murtneC hcsideM
nietnaP 3nednalgaaH murtneC hcsideM raamklA murtneC hcsideM 3siuhnekeiZ siurK edoR 1siuhnekeiZ ajafeR diuZ-dnomnjiR murtneC hcsideM 2siuhnekeiZ dnalegnilS 1siuhnekeiZ nettuP naV draawuR etnewT murtcepS hcsideM
peorggroZ annA .tS 1siuhnekeiZ htebasilE .tS 2murtneC hcsideM soseM siuhtsaG ewuorV eveiL eznOsiuhtsaG snaJ .tSsiuhnekeiZ suinotnA .tS
siuhtsaG sucsicnarF .tS 1obeN-ovonorB gnithcitS 2neziuhnekeizedlehcsretsoO ladsnaJ .tS 1grebsnoiS amlaT 2peorG faarG ed reinieR
gnithcitSsiuhnekeiZ adsehteB-leeW naV peorgsiuhnekeiZ retneveD siuhnekeiZ dnalnjiRsiuhnekeizdnalretaW xirtaeB nigninoK siuhnekeizkeertS peorG hgrubnexaS
t'nessA siuhnekeiZ animlehliW siuhnekeiZ enraapSsiuhnekeiZ dnaL egnaL1negninorG CMUmurtneC hcsideM snaaZ siuhnekeiZ saerdnA sacuL .tS 3duobdaR .tS CMUneevletsmA siuhnekeiZ 2grebsneveiL siuhnekeiZ
UVdrooN-iooG siuhnekeiZ murtneC hcsideM siuhnekeiz nedetSeewTmusrevliH siuhnekeiZ siuhtsaG seirftseW thcertU CMU
iZdnalnereiviR siuhnekeiZ nevohnreB siuhneke 2murtneC hcsideM iruCeiV 2nerehclaW siuhnekeiZ 2siuhnekeiZ-dnalteilViellaV esredleG eD siuhnekeiZ 2grobredrooN eitanibmocgroZ nerednaalV-swueeZ siuhnekeiZetnewT peorgsiuhnekeiZ
etdeerbredrooN peorggroZtlevedyuS peorggroZ2tseW thcertU peorggroZ
Chapter 5 – Ranking
On the basis of market, operational and fi nancial performance of all 90 hospitals
analyzed, Gupta Strategists have developed a rank index for the sector. The ranking
was done by fi rst developing a separate market, operational and fi nancial rank
in which each parameter within the three categories was given an equal weight.
All three categories: market, operational and operational were equally weighed to
end up with an overall rank. The metrics analyzed and scored for the ranking are:
Market Parameters
Market performance relative to competitive index (EPB)
Hospital growth relative to market growth (EPB)
Operational Parameters
Cost-to-serve (EUR/patient entity)
Day treatment as percentage of inpatients
Average length of stay
Financial Parameters
Net results as percentage of revenue
Equity (balance minus debt) as percentage of revenue
Revenue as a ratio of current assets
Operational cash fl ow as percentage of debt
A rank index for both 2004 and 2003 was developed. For 2003 growth was not
considered. The rank for 2004 as well as position in 2003, is displayed in Exhibit 26.
Exhibit 27 shows the shift in position between 2003-2004. We choose to present
the individual hospital performance in three groups rather than be persuaded by a
misplaced sense of accuracy and rank hospitals from 1 to 90. Of course, signifi cant
differences exist within the groups. But the performance measures used for the rank,
also imply that signifi cant differences exist across the three different categories. In
fact in the top 5 hospitals for market, operational and fi nancial performance there
is no overlap at all. Or in other words not one Dutch hospital scores in the top 5 of
all three rankings. This confi rms our contention that there is signifi cant room for
Dutch hospitals to improve.
68 69
Exhibit 27. Performance entrenchmentPerformance group dynamics 2003-2004
Out-performers
2004
On-parperformers
2004
2003 under-performers
2003 on-parperformers
2003 out-performers
Under-performers
2004
68%
26%
57%
6% 13%
30% 21%
79%
Room to improve Based on performance shifts in 2003-2004 we conclude that out-performers and
under-performers are increasingly getting entrenched as well as the performance
gap is widening. Two thirds of the out-performers in 2004, were also out-performers
in 2003. While more than three quarters of under-performers of 2003, continued
to under-perform in 2004. This is a strong indication of the diffi culty in changing
one’s performance. But by no means is change impossible. 6% of out-performers
in 2004, was under-performer in 2003. So 2 of the 29 under-performers found the
formula to the top.
70 71
The Pied Piper of Hamelin
Providing high quality, universal and affordable healthcare to all citizens is a
fundamental challenge for all countries. The expectations based on the quality of
healthcare from the last decades are high. But during the last decades, on top
of technological advances, economies were growing, and the labor participation
increased.
The picture for the future is much less rosy. Less robust economies and graying
population shall bring healthcare under enormous pressure. Most countries have
chosen to meet the challenge by relegating responsibility for healthcare to the
markets, or to the three players in healthcare markets: the payers, the providers and
the patients21. However, the interest of the three players are inherently confl icting.
The ability to align these interests would be the critical success factor of healthcare
markets.
In meeting the healthcare challenge all three players shall undergo quantum leaps
in roles and responsibilities. Based on our project experience, as well as on this
study, we believe that the tunes hospitals practice and play will be critical. Their
ability to provide best care to the patients at affordable cost to the payers will be
the key. Our conclusion that the hospitals’ ability to rise to the challenge is critical,
is based on two observations:
1) Healthcare is a critical service for patients. When in need costs are nearly
irrelevant. The patient tends to rely and trust the physician above all other
players. As and when cracks begin to appear in healthcare, patients shall
bear pressure on politics and insurers to enhance fi nancial support to the
hospitals. Or as supply capacities shrink it will gradually become a demand
driven business.
21 The fourth player, the suppliers already operate in free markets
72
2) Hospitals are extremely complex and therefore diffi cult to manage
operations. After having done detailed analysis for many hospitals, and
in many cases gone further than before, we are still befuddled by the
underlying complexity of operations and the inherent diffi culty in coming
to an optimal confi guration. It is not easy to arrange an effi cient supply.
This implies that the onus is clearly on the hospitals. Nobody has potentially better
insights, and the ability to change, and convince and bind patients than hospitals.
The tunes hospitals are playing are critical to follow.
In this light it is heartening to conclude that the hospitals are rising to the challenge.
After decades of being cocooned in a false security shell of fossilized regulations,
they are beginning to realize that they are the crucial player. Three conclusions
based on this study underpin our view:
1) Hospitals improved productivity in 2003-2004.
2) They used part of the productivity gain to become fi nancially stronger, a
critical need for the future.
3) In some regions rudimentary markets are beginning to emerge, where
effi cient operations were rewarded by higher share and stronger fi nancial
position.
The rats of an unproductive sector are being banished by the hospitals themselves.
Hospitals have the magic in their fl ute. In return it seems reasonable to provide
them with increased room to maneuver. By maneuvering in their local markets
for patients, by providing the required care at an optimal cost, the hospitals can
further rise to the challenge of providing high quality, universal and affordable
healthcare. The tunes they play to patients are going to be important. We hope it
is beautiful music.
The oncoming demand revolution in healthcare will fundamentally change the way
healthcare is managed. A paradigm shift is inevitable if we are to enjoy universal,
high quality, affordable healthcare. Managing the shift requires fresh, creative,
objective and rigorous strategic analysis and insights. Gupta Strategists strive to
provide the analysis and insights required to manage the shift.
Gupta Strategists is a new player with the ambition to reshape the strategic
consulting value proposition. Though young as a company, most strategists have
extensive experience both in strategic consulting, and in healthcare but also
importantly in other sectors. All strategists working in our company are driven
by one shared passion: success for our clients. This report is an example of our
thinking, our passion, and our investment in developing a rational knowledge base
for the sector.
Strategists in picture: Samuel Smits, Anshu M. Gupta, Jan-Peter Heida, Wouter
Klinkhamer and Jeroen van der Wolk
For further information please address:
Postbus 139, 3100 AC Schiedam
The Netherlands
www.gupta-strategists.nl
You can also reach
Dr. Anshu M. Gupta at
+31 6 512 19799
Gupta Strategists
Postbus 1393100 AC SchiedamThe Netherlands