How pediatric providers should rethink their strategy

Whether the organization just finished a strategic plan or it has been a few years, now is the time to reevaluate. Market disruption in any industry should cause organizations to pause, examine potential risks and opportunities and reevaluate their strategic plan.

Ask questions such as:

• Do our strategic goals still make sense? 
• What opportunities might be available that weren’t a year ago? 
• Are we ready to make tough decisions that we weren’t ready for before? 
• Are the timeline, staging and prioritization still right? 
• Are we balancing the headwinds today with our future sustainability?

Take the time to reprioritize, establish new targets and timelines, and design a strategic plan that can be managed in a dynamic environment.

Whether the outcome is a new direction or confirmation of the current structure, pediatric providers should evaluate the benefits and drawbacks of joint ventures, affiliations, M&A, and private equity (PE) or PE-like partnerships. Conversations about a wider array of strategic options — which may not have been on the table previously — are likely to become more commonplace as the long-term viability of pediatric financial models is questioned.

Benefits of a partnership can be tempting, including access to capital, increased scale, shared risk and new capabilities. But drawbacks should also be carefully weighed, including loss of control, reduced ability to focus on the mission and mismatched priorities.

Over the next few years, the market will continue to see mergers, acquisitions, joint ventures and other innovative partnerships within the pediatric provider space to combat increasingly difficult market and regulatory conditions. A comprehensive assessment of options, due diligence and transaction guidance can support health systems in finding and executing the partnership that is right for them.

Over the last decade, many health systems have expanded to adjacent businesses to diversify, including purchasing or building assets such as home health, urgent care and commercial insurance, either alone or through partnerships. Some ventures have been successful, while many others have struggled to achieve profitability and meet the pro forma expectations.

The current environment provides a healthy prompt to re-evaluate those businesses and determine whether each is still a strategically important asset or an investment that did not materialize, making it time to exit the business.

Care for children has long relied on the generous support of donors to bridge the gap between services needed and reimbursement available, as well as to fund research, innovation and facilities. Given the significant changes outlined above, the requests for donors (individual and corporate) to fill the void of federal funding will be significant.

Verifying that the organization has a comprehensive, thoughtful and targeted philanthropic strategy for the current environment is essential.

For decades, value-based care has held the allure of better care for patients and healthier margins for providers. The reality has been mixed, with many providers discovering that the infrastructure and culture shift to achieve those results is significant, and trying to live in two systems — fee for service and fee for value — is exceedingly difficult.

Providers have also found commercial payers less interested in partnering than they might initially expect. For providers well positioned to succeed with a willing payer partner, risk models provide an avenue for vertical integration and new margin that should be explored.

Revenue diversification has been a successful strategy for some systems to spread risk and improve margin. These efforts commonly include drug development, commercialization of data and assets, selling back-office support as a service, and venture capital or incubation efforts.

Success is often linked to brand, research breakthroughs, investment capital and, sometimes, a bit of luck. If revenue diversification is a goal, confirm that efforts are directly supportive of the organization’s strategy and its unique competitive advantage — along with appropriate investment, a built-for-purpose operating model and leadership expertise.

These are the efficiencies that are no surprise to anyone. For a variety of reasons, the underlying causes of inefficiency haven’t been addressed, and the current environment is a catalyst to take action. Whether the lingering inefficiency is a clinic that is consistently running at 20% productivity or physicians who are allocated 80% clinical time but only working 40% clinical time, these are issues that are no secret and need to be resolved.

Common exploration areas include:

• Productivity expectations and reporting
• Compensation structures and incentives
• Dashboards to easily monitor efficiency metrics

Much of the revenue and margin of pediatric providers comes from a few assets and service lines. Taking the time to focus on their success is essential, including understanding opportunities, defining the cost and disruption required, and quantifying success.

Success in these areas is often tied to getting the basics right. Using ORs as an example, whether that is designing a productive block schedule, facilitating on-time starts or reducing turnover time in ORs, the basics go a long way toward opening capacity. If investment dollars are available, new software and analytics can optimize throughput and staffing to generate more productivity through the same footprint. The effort to achieve these results should not be minimized. It takes sustained focus, collaboration and analysis to understand the opportunities and achieve results.

Supply costs:

Usually managed through a group purchasing organization, providers should proactively work with their vendors to manage potential impacts of tariffs and explore additional avenues for reducing spending growth on supplies.

If the organization has not completed a medical device rationalization, that should be completed early to appropriately harmonize devices and reduce spending.

Organizational spans and layers:

An organizational assessment will evaluate when the organization appears “heavy” in the number of management layers, which can add costs and increase bureaucracy. It will also assess the span of control of managers to understand if any reductions could be achieved while maintaining performance.

Real estate:

Many systems are still adjusting to the postpandemic work environment, which can involve a hybrid work environment, collaborative space instead of individual offices and a reduced need for square footage for back-office services. 

For patient-facing real estate, an assessment of consolidation potential and revenue per square foot can be used to selectively reduce the footprint. Instead of having three clinics, a stand-alone imaging center and lab space within a square mile, consolidating into one multi-specialty space could add benefits for patients and finances.

Outsourcing/onshoring:

As margins are continually compressed, a new look at what functions need to be controlled within the organization and/or which functions need to be co-located with other operations provides an opportunity for cost reduction.

While it is a difficult exercise, an assessment of programs, services and locations is likely required. It is common to have programs that were once funded by a grant or philanthropic support that has since run out or a personal project that was easily funded when margins were higher, or an expansion location that just did not materialize as expected. The outcome of the assessment is to categorize programs, services and locations into the following categories: grow, keep, partner, sell, shutter. Evaluation criteria should balance mission and financial sustainability:

• How is the program funded (e.g., grants, philanthropy, operating margin, mix)? 
  • What is the cost of the program to the organization? 
  • What does success look like, and how is it measured? 
  • How successful has the program been to date? 
  • How does the investment and impact of this program compare with others?

Does the program create revenue for the organization?