Beyond Band Aids

In what she characterizes as "a patchwork quilt" of a career, Rebecca Wells has been a director of development (for a civic nonprofit group, then for a private school), a financial analyst with a Wall Street firm, and a personnel officer and unit commander in the Army Reserves. In those diverse settings, she got a taste of administrative planning and "saw a lot of commonalities in how operational strategies develop and what their ultimate outcomes are."

people attending to woman in hospital bed
James Collins

Hospital CEOs face steeply rising health care and malpractice insurance costs.

Today an assistant professor of health policy and administration, Wells has turned her attention to the evolution of strategies in small hospitals. In this era of steeply rising health care and malpractice insurance costs, many such institutions walk a thin line between profitability and closure, between remaining able to provide quality medical care and becoming merely "band-aid stations" in the minds of local residents, who then take their health problems—in essence, their business—elsewhere.

Notes Wells, "According to 'learning theory,' a widely acknowledged social sciences concept, organizations develop strategies by integrating diverse ideas both from within and from the outside. The organizations then seek to change, based on the new information. We wanted to see if that process held true for small hospitals."

In a study funded by Verizon Corporation and Penn State's College of Health and Human Development, Wells, Larry Baronner from the Pennsylvania office of Rural Health, and graduate students Jennifer Lucore and Michelle Holt interviewed the chief executive officers of seven hospitals scattered around Pennsylvania. Interviews were conducted on-site at the hospitals; the researchers used specific prompts but offered them to the CEOs in open-ended ways: "Could you describe how you go about the process of strategy development?" and " What about the medical staff and their role in strategic planning?"

Most of the hospitals were in rural areas, and all had fewer than 150 licensed beds. Net patient revenues were between $12 million and $56 million annually; CEO tenures ranged from two to ten years. Rural hospitals, Wells points out, are important local institutions, not simply because they provide needed medical care and a quick response to health emergencies, but because they are major employers and keep federal and private insurance dollars in the community. Wells, Lucore, and three co-authors write that in recent years "small hospitals have closed at disproportionately high rates, a trend that is likely to continue as fixed costs rise due to expensive new technologies and increasing regulatory requirements."

Says Wells, "We found that CEOs, sometimes aided by a few key managers, were the source of most strategic planning. We had thought there might be more 'bottom-up' ideas and advice regarding new technologies and business opportunities—input from technicians, nurses, vendors who sell medical equipment, and payers such as Blue Cross and Medicare. However, it appeared that CEOs mainly developed their own ideas, then built alliances to implement them."

"We tried to probe for every relevant source of internal intelligence and external ideas. I particularly thought that doctors might prove to be a source of strategic concepts": whether a hospital should buy state-of-the-art magnetic resonance imaging equipment, establish a cancer treatment center or a skilled nursing facility, or offer advanced surgical techniques such as laparoscopy.

close-up of surgeons face
James Collins

Hospital CEOs look to doctors for assistance.

"Only one CEO named a member of his medical staff as an important source of ideas," Wells says. "Our interpretation was that, even though they made efforts to insure that physicians felt involved in the planning process, CEO's did not expect them to be active partners in decision-making. While physicians didn't seem to generate ideas that drove new strategies, they were important in building support for strategies the CEOs had themselves advanced."

Other strategies mentioned by CEOs involved retaining specialists who were important revenue-generators, such as obstetricians and orthopedic surgeons. Providing core services such as delivering babies and setting broken bones may also encourage families to bring their other health care needs to the hospital.

Often CEOs took such ideas to hospital boards, whose members tended to belong to the local business community and whose acumen the CEOs respected. "CEOs didn't go to the board and say: ' Okay, what strategies should we employ to remain competitive?' Instead, they came up with a general idea and left enough flex in it so it could be shaped and changed as more and more people became involved in implementing it."

According to Wells, although CEOs' "alliance-building" did not provide a source of new ideas, it did promote an ability to make changes quickly—something seen as essential by the administrators, most of whom reported working in a "hostile" economic environment. Four of seven CEOs specifically mentioned severe problems with medical malpractice premium increases. Three cited escalating pharmaceutical costs. Six of seven noted formidible difficulties with "payers," generally insurance providers. "If there was only one payer, they paid what they darn well wanted to," says Wells. "Some CEOs mentioned trying to recruit additional payers into their market—a rather inventive strategy, we thought."

What CEOs really wanted, said Wells, was "to find out what's working out there, how other CEOs are responding to similar problems." Many mentioned the Hospital and Health-system Association of Pennsylvania, an organization that provides advocacy and research services for its members.

Says Wells, "Researchers need to do a better job of working in productive collaboration with practitioners who are dealing with real problems. We need to provide better evidence about what works, so that administrators can reach for actual studies demonstrating the kinds of strategic processes that work in specific situations."

"I would not presume to advise CEOs on the basis of our study. I think they already know all of what we documented. However, I hope we've presented a more realistic picture of how strategies evolve in small hospitals. This study will lay the groundwork for more applied research in the future—research that can ask the right questions with the goal of informing both CEOs and government policymakers on how small hospitals really work."

Rebecca Wells, Ph.D., is assistant professor of health policy and administration in the College of Health and Human Development, 116 Henderson Bldg., University Park, PA 16802; 814-865-8893; rsw8@psu.edu. Jennifer Lucore and Michelle Holt are masters degree candidates in the College of Health and Human Development; the college and Verizon Corporation jointly funded the project. Collaborators included Shoou-Yih Daniel Lee, Ph.D., of the University of North Carolina at Chapel Hill; and Larry Baronner, M.Ed. and M.A., and Lisa Davis, M.H.A., of the Pennsylvania Office of Rural Health, 202 Beecher-Dock House, University Park, PA 16802.

Last Updated May 03, 2005