ANH Company Profile

 

LifeSpan, Inc., a Minneapolis based, not-for-profit corporation, was

the parent holding company of a diversified health services corporation

consisting of three hospitals including Abbott Northwestern Hospital (ANH),

a nursing home, a major rehabilitation center, two product and equipment

corporations, a home heath services corporation, and a foundation. The

operating revenues for LifeSpan and its combined affiliate organizations

were $211 million in 1985. LifeSpan’s net income has increased by over

25% to 9.8 million in 1985 from $7.8 million in 1984.

 

Abbott Northwestern, an 800-bed hospital in South Minneapolis, was

the largest private hospital in Minneapolis/St. Paul, with a high market

share in many key medical services. ANH had seven “Centers of Excellence”

– cardiovascular, neurosciences, rehabilitation, cancer, perinatal, low back,

and behavioral medicine. Its cardiovascular program provided truly

comprehensive services, from diagnostic through heart replacement. In

1985, ANH performed nearly 1,000 open heart surgeries – more than any

hospital in the area. The cardiovascular program at ANH was viewed as the

premier hospital in the upper Midwest and served portions of the five-state

area.

 

ANH’s patients could be classified into inpatient and outpatient

categories. Inpatients were admitted to the hospital by a physician and

were resident in one of the hospital’s beds. Outpatients used the services of

the hospital without being admitted. The latter include both former

inpatients who required follow-up treatment and patients referred by their

private physicians to have day surgery or laboratory or diagnostic tests

performed.

 

 

HealthCare Industry in the US             

 

The health care industry was among the largest in the US and in 1985

National health expenditure had grown to $425 billion. Health care

expenses as a percentage of Gross National Product accounted for as much

as 10.7%.

 

National health expenditures were divided into the following

categories: personal health care, program administration, government

public health activities, noncommercial research, and construction of

medical facilities. Personal healthcare is the biggest category of health care

expenditure accounting for approximately 88% of total industry

expenditures. In 1985, $371.4 billion was spent on personal healthcare and

of which $166.7 billion went to hospital care.

 

 

The Government which was the main third party payer had spent

$174.8 billion in 1985 and the amount was 44% of all healthcare

expenditures. The Medicare program had spent $70.5 billion in 1985.

Together the Medicare are Medicaid financed 29% of the healthcare

expenditures in 1985 and was expected to pay $110 billion in benefits to 48

million people. The other major third-party payer: the private health

insurance industry paid $113.5 billion in medical benefits in 1985.

 

Third party payments accounted for 71.6% of the U.S. health care

expenditures, and balance 28.4% was borne by consumers paying directly

for health services. However the share of direct payments accounted for

26.3% of physician’s service expenditures, but for only 9.3% of hospital care

expenditures.

 

Expenditure on hospital care had increased from $52.4 billion in 1975

to $166.7 billion in 1985 a growth rate of 13% a year. In 1985 there were

6,148 hospitals with about 1.3 million beds. Industry observers generally

agreed that the supply of beds exceeded the demand by as much as 20%.

The 67% bed-occupancy rate of hospitals in 1984 supported this contention.

 

The expanding role of Health maintenance organizations (HMOs)

represented one of the significant changes occurring in health care. HMOs

were priced competitively. They provided no iincentive to a physician for

doing extra procedures to argument his or her fee. The number of HMOs in

the U.S. grew from 39 in 1971 to 431 in 1985, with 16.7 million people

enrolled in those 431 HMO plans.

 

By 1980s the supply of physicians had increased substantially, and

there was no dearth of specialists.

 

 

The Minneapolis/St. Paul Heath Care Market

 

The twin cities had one of the most fiercely competitive health care

marketplaces in the U.S. with as many as 26 hospitals and 6 HMOs. During

1980-85, HMOs in the area had experienced an annual growth of 80%,

reaching a level of 865,000 members. In 1985 HMOs controlled 41% of the

Twin Cities marketplace, compared with just 11% on a national basis. This

dominance by HMOs had caused the inpatient market to shrink. During the

five-year period 1980-84 hospital utilization had declined by approximately

29%.

 

As inpatient days declined, many hospitals had lower occupancy rates.

To survive with HMOs, hospitals were undertaking cost containment

measures and changing practice patterns-shifting more care to an

outpatient basis. During 1981-85 ANH’s outpatient surgery volume

increased from 13% to 44% of all surgical procedures performed at the

hospital.

 

Despite the fact that total admissions and inpatient days were

declining, the number of physicians was increasing. The result was decline

in the admissions per physician. Consequently, the Twin cities began

witnessing intense rivalry between doctors. Competitive pressures were

transferring the industry and pushing hospitals, HMOs, and doctors into a

struggle.

 

 General Marketing at ANH

 

ANH has adopted three methods to increase the market share of

ANH. These methods were to:

a.    Give incentives to potential healthy customers to visit the

hospital. This would get future patients in touch with ANH. Since

most of the hospitalization decision was being by patients this was

critical.

 

b.    Find potential customers which had no designated primary

physicians and recommend one of the in-house physicians to the

customer.

 

c.    Made sure that the patients got satisfactory experience at ANH

with the human touch and the dignity patients rightfully deserved.

The positive feelings about ANH created in patients would make them

select ANH again. ANH’s image will be helped with positive word-of-

mouth, a powerful often neglected tool in marketing.

 

ANH’s employees exhibited a warm, tender and caring attitude when

they came in contact with patients. For example, ANH provided valet

parking for elderly and disabled patients and patients for one-day surgery

were welcomed by few members of senior management.

 

              ANH was running no-profit hotel-like facility for out of town

patients and their families. The hotel provided clean, comfortable, and

secure rooms adjacent to hospital at fair rates. This was one of the reasons

nonlocal patients picked ANH if they came to Minneapolis for treatment.

 

Product Management at ANH

 

ANH treated each of the medical service, such as cardiology,

radiology, neurology, cancer, chemical dependency and emergency

services, as product or department. To give more focus these as products

ANH started product management and hired product managers for the

following products: neurology, urology, orthopedics, low back and chemical

dependency.  The managers’ aim was to increase the market share of their

respective products. They interacted with specialty physicians, made sales

calls to HMOs and Medicare and talked to patients. They also ran special

programs to promote their products and set the pricing. The compensation

for these managers consisted of base salary and bonus if preset targets

were reached.

 

The ANH management felt that product management process was

successful since other departments without product managers were asking

for one. The emergency department was asking one and was telling the

management that if their department gets product manager then more

patients will use them with average contribution margin of $40 each

patient.

 

ANH also had seven “Centers of Excellence” –cardiovascular,

neurosciences, rehabilitation, cancer, prenatal, lock back, and behavioral

medicine. This level of expertise made ANH reputable in the five upper

Midwest states and showed ANH’s commitment in managing each of these

product lines.

 

Pricing

 

In general, ANH was facing pricing pressures from Medicare, HMOs

and lower prices offered by the competitors. Since most of the ANH prices

were higher than its competitors and still maintained a good market share,

it showed that ANH was somewhat successful in marketing. The impact of

ANH’s fee structure on its financial performance was directly affected by

the mix of payments methods used by patients. We felt ANH was able to

charge more for better quality offered at its centers of excellence.

 

The outpatients were more profitable compared to the inpatients. The

former offered average contribution of $85 on $200 revenue (42.5%)

compared to $700 contribution on $6000 from the latter (11.7%).

 

Distribution

 

At ANH, physicians were considered to be the most important part.

The physicians performed almost same function as retailers do for the

manufacturers. The physicians were responsible for 70% of health care

spending at ANH. One of the challenges ANH faced was that some of the

physicians considered ANH’s marketing tactics repugnant. ANH had around

400 active physicians who brought at least 30 patients a year to the

hospital, or in total at least 12,000 patients. 85% of ANH’s patients were

routed by these active physicians.

 

ANH also created policies in support of its physicians. One policy was

the physician-referral system where ANH referred those patients who did

not have any physicians to active physicians.  To control these referrals,

physicians were evaluated objectively. Another policy was ANH’s Medical

Staff Development Program. Under this program, ANH helped five groups of

physicians to establish full-service suburban clinics in underserved areas.

Basically ANH was increasing its presence and adding more channels to its

distribution. ANH linked primary physicians and hospitals in rural areas

with tertiary care support, teaching and consultation as needed.

 

 

Communications

 

Traditionally ANH relied on the physicians to relay its messages to

patients. But in recent years ANH was communicating directly to the end

consumers. ANH utilized its centennial celebration to advertise its name

and services to the public using radio, television, newspapers, and

billboards. It was verified that after the advertisement there was significant

increase in ANH’s names recognition. Riding on this success, ANH spent

$405,900 in 1984 in advertising since repeat messages were known to

impact consumer behavior. 

   

Medformation

 

              ANH instituted call to action communications program with the

launch of Medformation program. The Medformation was set up as

community telephone line providing health care information and referrals to

various programs, services, and physicians affiliated with ANH. The

telephone numbers differed for different categories of services. 

Medformation made easier for consumers to call ANH for their any health

needs.

 

              Medformation was advertised in two leading local newspapers;

90% of the insertions were quarter page ads on weekdays, and cost $700

per insertion. The rest were full page ads on weekdays and cost $7,000 per

insertion.  In 1985 a total of 28,667 calls were received with heaviest call

volume on the day of the ad insertion.

 

              Medformation was managed by marketing manager with a staff of

two information specialists and one registered nurse. Two additional nurses

were available as need basis. The fixed cost of having phone lines and staff

was $175,000.

         

      

              Medformation received 2,338 physician referral calls out of which

70% or 1637 contacted the doctor. Of that 25% or 410 came to hospital.

These patients contributed $132,020 to bottom line. (See Exhibit 1.)

                          Exhibit 1: Medformation’s Known Contribution Margins

(Approximate)

Patient Types Patient

Counts

Contribution

Margin

Total CM per patient types

10% inpatient of

1637

164 $700 $114,800

10% outpatient of

1637

164 $85 $  13,940

5% Emergency of

1637

82 $40 $   3,280

25% of 1637 410 Total CM $ 132,020

 

              For quit-smoking Medformation telephone line, there were 655

calls. And 393 patients joined the quit-smoking program ANH offered. With

contribution margin ranging from $60 to $120, the net contribution from

these patients were in the range from $23,580 to $47,160. For discussion

sake, taking average, we find that quit smoking program contributed

$35,370.

 

              Physician referrals and quit-smoking each contributed $132,020

and $35,370 respectively. Their total contribution was $167,390. This

amount almost covered the fixed cost of the Medformation program. So the

contributions of four other remaining programs added to ANH bottom line

100%.

 

              The Medformation program was well liked at ANH as the overall

response to the program had far exceeded the management’s expectations.

There was a sharp improvement in consumer perception of ANH as per

surveys. Another proof that the program was something was given when

hospital from New York called buy the advertisement used by ANH for

$120,000. ANH director cleverly declined the offer and was contemplating

to professionally develop ANH’s marketing materials into package to be

sold to other hospitals.

 

 

WomenCare

 

              ANH created a WomenCare program to take care of women only

specific health care need that went beyond regular obstetrics/gynecology

services. The program provided a total range of services for women seeking

wellness, fitness, weight control, aging, and behavioral and reproductive

guidance.

             

              In the inaugural day, over 2,500 women attended the event paying

$100 each. And throughout the rest of the year, there were 12 timely

seminars on various subjects. On average 120 patients attended with fee

ranging from $100 to $200 each per woman.

  Exhibit 2: Women Care’s Approximate Min/Max Contribution

Margins

  Attendees Contribution

Margin

Total

Contribution

Min

Total

Contribution

Max

Inaugural

Day

2500 $60 $150,000 $150,000

Other

Seminars

1400

(average)

$60 to $120 $86400 $172,800

 

              Averaging other seminars contribution, we get $129,600

contribution and combining it with inaugural day’s contribution; we get

total of $279,600 contribution from WomenCare programs. (See Exhibit 2.)

 

Conclusions about Marketing Program

How can we say that the marketing programs at ANH were

successful? One key figure is the increase in revenues. The revenues in

1985 were $211 million compared to 150 million in 1984, a 40% increase.

The net profits jumped by 25.6% to $9.8 million from $7.8 for the same

period.

 

How this compares to prior period 1984 and 1983? From 1983 to

1984 the revenue increased from $135 million to $150 million, an 11%

increase and revenues were up from $4.8 to $7.8 million a 62% increase.

(See Exhibit 3.)

 

Exhibit 3: Increase in Sales and Profits from 1984 to 1985

Year Sales in

millions

% Increase in

Sales

Profit % Increase in Profit

1983 $ 135 - $ 4.8 -

1984 $ 150 11% $ 7.8 62%

1985 $ 211 40% $ 9.8 25.6%

 

It was in 1983 the centennial campaigned was launched. In 1984,

based on centennial’s success, $405,900 was spent in advertising. The sales

jump of 40% can be attributed to the advertising, where when advertising

was not done there was only 11% increase in revenues.

 

Another indication of ANH’s market success is that its bed occupancy

market share in Minneapolis was increasing for last two years and it had

become 18.8% with 71.2% bed occupancy, which was highest in all the

Minneapolis hospitals. ANH also performed 1000 open heart surgeries. That

going by ANH’s list price should have generated $5 million in contribution

margin. This fact has some contribution from the marketing of the excellent

surgery procedures and first rate physicians to surrounding area, as for a

patient heart surgery was one of the riskiest.

 

The consumers showed increase satisfaction with ANH services.

Consumer surveys showed that ANH was perceived highest in the hospitals

providing best medical care category. 

 

  The marketing aided by advertising had launched two successful

programs Medformation and Woman Care. The former was generating

$167,390 and latter $279,600. It was important to carry on this programs

and advertisement was necessary in this endeavor. These two programs

were also in accordance to the hospital’s marketing philosophy of reaching

out to as many patients as possible and treat them as humanly as possible

given the chance.

Another area of concern was that around 30% of ANH’s patients came

from outside the seven-county Metropolitan area. It meant that there was

lot of potential in targeting the area within the Metropolitan area. There

was some belief among consumers that the hospital was in bad

neighborhood. Evidently there was some work to be done in to clear the bad

perception.

 

In 1982 ANH did a survey of 1,800 consumers and 400 physicians.

There were some key findings from the survey. First thing was that it was

patients who were deciding on which hospital to choose from. Most of the

patients believed that all hospitals provided services which were equal in

terms of quality. University of Minnesota was in high esteem. 67% of

patients did not recognize the ANH. Less than 10% of consumers had very

clear perception of what ANH was. And those who used ANH were very

satisfied. In light these findings ANH had already embarked on the

advertisement path. There was evidence that it was successful. The current

situation was prodding ANH to keep continuing on same path with more

zeal. The need of the hour was that ANH’s exposure to the patients

increase, so that the patients choose ANH while making decisions about

which hospital to use. The fact that ANH provided top notch quality service

should also be told to patients so that the patients could choose hospitals

judiciously; at least they should know the hospital names where the quality

was the norm.

ANH had no TV exposure. And the budget required allotment of

budgeting dollars for TV advertisements. Since TV was increasing becoming

more powerful media and families were increasingly spending more time in

front of TV, it was important to reach these TV watching segment of the

population.

ANH was thinking about packaging its advertisements and selling

them to other hospitals for $100,000 or so. If the marketing budget is

expanded and approved, it will allow ANH to gain further experience in

medical advertisement which will later make such packages more attractive

and lucrative. ANH was member of VHA an association of 650 hospitals.

And if ANH’s advertisement success story was shared with VHA then more

hospitals were expected to come forward to buy the package. Even 5% or

33 hospitals buying the package would generate $3.3 in additional

revenues.

 

We looked at the Medformation call volume data and performed linear

regression analysis for all six types of calls. We found that for Weight Loss,

Quit Smoking and Physician Referral the call volume was in linear

relationship to the advertisements done in a particular month. (See

Appendix: Regression Analysis for Medformation Calls)

For Weight Loss the linear model was

y=12.6 + 36x (where y is predicted number of calls, x is

number of advertisements)

The linear equation for Quit Smoking Medformation program was:

y=1.55 + 28.9x (where y is predicted number of calls, x is

number of advertisements)

And the third linear equation for Physician Referral calls was

y=122.5 + 16.6x(where y is predicted number of calls, x is

number of advertisements)

This is in one way expected, since Weight loss and smoking

problems are pre- existing and so are patients without physicians are.

But calls response for Cancer, Medical Information and Others were

not linear. Further analysis needs to be done to model these calls. But

we have some evidence in hand that as we spend more advertisement

dollars, the call volumes for the first three categories are going to go

up. Since we also know the contribution margins for these kinds of

calls, the model can be extended to give dollar return in terms of

advertisement dollars spend. These models give us more

understanding and foresight on how the purposed budget of $1.25

million for fiscal year 1986, a jump of $533,000 compared to previous

year, was going to create consumer response the ANH was striving

for.

In conclusion, we have one hand evidence of success, then there

was need to continue the successful programs and there were

pending tasks to improve the hospital’s perception. This could only be

possible if the expanded advertisement budget was approved.

Ethics in Medical Profession

The ethics in medical profession walks on very thin line. First there is

conflict of interest among the key players in the industry. Hospitals want to

give good care. Patients want to receive good care. But who pays for it? The

parties who make payments Medicare and HMOs are always negotiating

with the hospitals about lowering the rates they pay. This creates pressure

in hospitals to cut costs and in that process patient is left not so well taken

care for. If after surgery, patient needs say four days of rest and supervision

in hospital, the HMOs will push for two day stay. The hospitals generally

accept the will of their paymasters and release the patient in just two days.

The other side of same argument is that if hospital keeps a patient

more than it is required then it is also unethical, here the aim of the hospital

becomes to generate more revenue.

Hospitals charge different rate to a patient who pays directly and to a

patient whose bills are paid by third party. The third party gets discount

rate for the volume of patients they get to the hospitals whereas the patient

coming alone does not. For the patient, he or she is taken advantage for, for

he or she has no recourse other than to get the treatment at whatever

prices hospital might charge. There are lots of patients who have gone

bankrupt because the direct billing is too high.

ANH was trying to help patients with Medformation. The patients

when looking at Medformation advertisement might get the impression that

the Medoformation is going to provide free information in regards to their

heath issues. But it was a marketing ploy. And it is kind of unethical, since it

was all marketing effort to get ANH in touch with its future potential

customers. That in itself was not bad because ANH was known to provide

good quality health care, but a caveat here, at higher prices. Once

mindshare is won among customers, one gets capability to charge little

higher prices. Some of the ANH’s physicians didn’t agree to this practice.