“network service-line and

“Network Service-Line and Business Planning”

2005 NCHH Spring Conference

April 17-19, 2005

David C. Hoffman, Ph.D., Partner

Wipfli Health Care Practice 2

Objectives

To:

• Understand the value proposition for networks – What are we doing and for whom?

• Cover the basic concepts in business planning• Relate these concepts to network service-line

development• Translating the value proposition into services• Discuss the importance of strategic alignment

between business objectives and services• Use some examples for the feasibility for new

services.


Defining the Network’s Value Proposition

- What is the purpose of the network?- How does it deliver value to its members?- Does it serve all members equally?- What are its primary business objectives

-- Forum for administrators

-- Shared services to reduce costs

-- Create competitive edge

-- Advocacy

-- Education

-- Keep members independent

-- Spread financial risk

-- Link to a regional provider

-- All of the above


Major Challenges to Business Planning

• Members have different operating and market circumstances.

• Members have different agendas.

• Members have different pocketbooks.

• Members have other relationships. Network is not necessarily the primary one.

• Members may not share a core set of values or business objectives around which to build new services.


Guiding Assumptions

• The network has reached a “maturation” point where the need for services is evident and can be supported by a critical mass of the members.

• The network is organizationally capable of providing or arranging for the services.

• Value for the services can be demonstrated either operationally or strategically.

• The members will make a commitment to the services being offered.


Critical First Steps

Clear mission, vision,

and values statements.

A 2-3 year strategic

plan or set of “strategic

imperatives” driven by

the former statements.

Consensus on priorities.

What is this business

and where is it going?

What are the most

important things we

need to do?

How will we get there?


Critical Success Factors…

A strong market imperative for the network’s existence.

Understanding the sometimes subtle differences in the circumstances of individual members.

A unifying set of business objectives. Identifiable core users. Policies in place to discourage cherry picking:

must buy core services package then options on add ins.

Services that are constantly fresh and revitalized. Services that meet the changing needs of

members and the changes in the market place.


Resist the urge to shoot from the hip.

Service design based on random thoughts and good intentions do not a successful network make.


Start with a basic business plan outline

1. Description of the service or program

2. Why is it needed? Rationale?

3. Market Analysis – Who will buy it

4. Risk Factors

5. Ownership – All or Some?

6. Operations and Management

7. Marketing Plan

8. Financial Projections and Capital Requirements

9. Start-up and Implementation Plan


Is this enough?

• Probably not!

• The most important consideration is that service offerings be linked to the network’s “high-level” strategies.

• Ideas that do not align with strategies are somewhat like random shooting stars. They come out of nowhere and shortly fizzle out.

• In doing so, they use up valuable energy and money…sometimes turn members into critics and cynics.

CustomersAnd PartnersPerspective

Process and OperationsPerspective

Foundational Investments

Financial Perspective

What will grow our business and make us more successful?

–Sustainable reinvestment

–Increased value

–Maximized efficiencies and economies of scale

How will we do that?

– Attract more members

– Increase value to members and non-members

How will we do that?

– Diversify our services, attract grant funds, consider physicians as our partners.

What must be the internal focus?

– Efficient operations and documented value

– Flexible partnering with physicians

Diversify and develop core services

Document & communicate value

Expand Network membership &/or sales

base

Maximized operational efficiencies

Provide Recruitment Assistance

Access to Grants and Research Funding

Develop physician-friendly partnerships

Pursue centralization of common operational svcs.

Continue Peer Panels expand educational

services to other levels of member orgs.

Strategically aligned providers with high-quality services that promote health and well-being, manage resources

effectively and achieve competitive edge

Vision

Increased value proposition

Develop joint contracting vehicles for physicians

Network Strategy Map

Access to Clinical Technologies

Provide for sustainable reinvestment in mission


Why Business Plans Fail or Bog Down

• Conflicting or unclear objectives• Poor assumptions and data; especially revenue

and volumes• Major risk factors not considered or ignored• Inadequate knowledge of the service• The right people aren’t involved• Inadequate understanding of the market• Inability to make a timely decision• Paralysis of analysis.


Things to keep in mind…

Good data is critical. The data will never be as good as you’d like. You’ll never have all the information you need. Final decisions will part science and part art. Knowing the market is critical. Be realistic about competition & brand loyalty. Market timing is as important as analysis. The market will change while you are planning. Risk can never be reduced to zero. Make sure that the right people are involved.


Although good data and analysis …

…is critical to success of any business venture; at some point, when all is said and done, you just have to trust your gut and experience.

Corollary:

There is not substitute for experience.


• What is it designed to do?Create a shared staffing pool?Create a managed care contracting vehicle?Develop shared systems and infrastructure?Expand the continuum of care for a provider?Improve health status of the community?Offer a specific set of services not currently

available?Save money?

• If successful, the owners will be able to….

1. Description of the Service


2. Services and Programs

• What services or products will be offered? Physician practice management services Imaging Credentialing Insurance Products Staff Roundtables Managed care contracting Specific clinical service lines Rehabilitation Home Health/DME Laundry Quality indicators


3. Market Analysis and Strategy

• Identified need for the service or products• Geographic and demographic areas of focus

Utilization rates: actual or proxies• Competitor analysis• Current market share distribution• How the services or products will be positioned

for sale (e.g., locations, modes of distribution).• Will they be offered to non-members at a

different pricing structure?


4. Assessment of Risk Factors

Examples:• Established market with other competitors• Price competition• Regulatory and reimbursement impact• Competing strategies (for joint ventures)• Brand loyalty and “quality lead”• Limited capital.


5. Ownership

Factors to consider:• Identification of owners: Network? Sub-set?• Legal form ;e.g., FP, NFP, LLC, 501(c)(3),

partnership• Effects on network politics• Description of governing body and how

decisions are to be made• Key committees• Special voting issues


• How will daily operations be conducted? Network staff? Outsourced?

• Internal versus external management (i.e., outside management contract)

• Organizational chart: reporting structure

• Staffing pattern: FTEs by position

• Backgrounds and qualifications of key staff

• Are the core competencies there to be successful?

• Effect of one service on the delivery of other services.

6. Operations and Management


7. Marketing Plan

• Identification of marketing objectivesShort term: 3-6 monthsLong-term: 6 months and longer

• Identification of target markets: demographics, specific employer groups

• Segmentation of the market: demographics, specific products or services

• Sales through others: e.g., networks• Partnerships and alliance with others


8. Financial Plan and Capital Requirements

• Assumptions and narrative• Projections of revenues and expenses (at

least 3 years)• “What if” scenarios: multiple volume

projections• First year cash-flow budget

P/LBalance sheetWrite-offs, discounts, bad debt

• Project or Capital Budget


9. Start-Up and Implementation Plan

• First 90-120 days• 120 days to the end of the first year• Examples:

StaffingOperations


Gaining Commitment

• The most difficult task for most networks is to get a critical mass of members committed to using a service.

• Consider a “core service” menu as a matter of network policy.

• All members must commit to a minimum level of service for those services that demand the heaviest investment.

• Consider a la carte services as value-added add-ons.


Building Sustainable Services

• Constantly assess the value of services.

Value = Benefits + Customer Service

Dollars Spent

• Use surveys to evaluate value and satisfaction.

• Conduct competitive pricing analyses.

• Understand the unique circumstances of members.

• Continuous re-evaluate network mission and vision.


Mobile MRI Example

Scenario: 1,200 annual scans for a extremity MRI unit

Year 1 Year 2 Year 3 Year 4 Year 5

Estimated Scans Per Month 100 105 110 116 122 Estimated Annual Scans 1,200 1,260 1,323 1,389 1,459 Estimated net reimbursement per scan 451$ 451$ 451$ 451$ 451$

Estimated Net Revenues 541,200$ 568,260$ 596,673$ 626,507$ 657,832$

Estimated Operating ExpensesFixed Expenses Salaries 73,500$ 75,705$ 100,940$ 103,968$ 107,087$ Fringe benefits 18,375 18,926 25,235 25,992 26,772 Major equipment annual payment** 56,699 56,699 56,699 56,699 56,699 Annual Maint. Contract - 25,000 25,000 25,000 25,000 Mobile Unit Operating Costs 23,000 23,000 23,000 23,000 23,000 (including debt service, taxes & operating

expenses) Other Misc. Expenses* 2,500 2,575 2,652 2,732 2,814 Variable Expenses Supplies/exam 24,000 25,956 28,071 30,359 32,834 Bad Debt 10% 54,120 56,826 59,667 62,651 65,783

Total Estimated Operating Expenses 252,194$ 284,687$ 321,265$ 330,401$ 339,988$

Estimated Contribution Margin 289,006$ 283,573$ 275,408$ 296,106$ 317,844$

* Includes telephone, postage, miscellaneous operating expenses, marketing, etc.** Assumes major equipment expense of $370,000; 80% debt financing at 3.75%, and 7-year loan period. Includes the MRI unit and camera.


Mobile MRI Example Narrative

1. MRI procedure estimates are based on the best estimates of the number of procedures that physicians will order. Estimates range from 800-1,200 annual scans. Four scenarios:

a. Approx. B-E is 5-years assuming fixed reimbursement levelsb. 800 annual scansc. 900 annual scansd. 1,200 annual scans

2. All volumes are increased by 5% for years 2-5

3. Average net reimbursement is assumed at $451 per scan

4. 1.5 FTE technologists are assumed for years 1-2; 2.0 FTE thereafter; average salary $50,000.

5. Fringe benefits at 25% of salaries

6. Film and supply costs at $15.00 per scan; increased 3% annually and adjusted for annual increase of 5.0% for scan volumes.

7. Annual maintenance contract is assumed at $25,000 per year for years 2-5.

8. Miscellaneous expense assumed at $2,500; annually increase = 3.0%

9. Major equipment budgeted at $350,000; camera = $ 20,000; no cryogens (not a super-conducting magnet).

10. Financing of major equipment 80% debt at 3.75% for 7 years

11. Mobile truck operating costs at $23,000.


Mobile MRI Example

1. Can you obtain your volume and revenue estimates?

2. Is this a new product or service; or do you have to take business away from someone?

3. Can you compete effectively on price, access, and quality?

4. Is the venture adequately capitalized?

5. How long will it take to break-even?

6. What are the strategic consequences of being in this business?

7. How does this business complement your core business?

8. Is there measurable “spin-off” value?

9. Can you be successful by proceeding alone?

10. How vulnerable is the business to regulatory and reimbursement changes?


Final Thoughts

• Strategic alignment is critical any business service.

• Membership commitment to purchase is essential.

• Don’t overlook non-member purchasers.

• Scrupulously document your assumptions so that you have a basis for changing things later.

• Remember that you can never reduce risk to zero.

• Good luck!


Discussion and Questions

?


For more information about this topic, please contact:

David C. Hoffman, Ph.D., PartnerWipfli Health Care Practice/ Wipfli LLP2901 W. Beltline HighwayMadison, Wisconsin 53713

Tel. 608.437.7440Fax 608.274.8085E-mail [email protected]

“network service-line and

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new services

members independent

shared services

business planningmembers

business planningrelate

primary business objectives

core services package

changing needs of members