HMOs Can Teach Hospitals the Marketing Game

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Although HMOs are newer to the health care scene than hospitals, they can teach hospitals a thing or two about marketing.

“HMOs are the one segment of the industry that really understands marketing. They are flexible, respond to the market faster, and have an overall greater understanding of marketing,” says Larry Selwitz, an analyst with Bateman Eichler, Hill Richards, Inc., the Los Angeles-based investment analysts.

HMOs’ entire existence has been based on “knocking on doors,” Selwitz explains. HMOs exist by setting up provider health care networks and creating business for them. HMOs are managed and operated as businesses. Hospitals, on the other hand, have existed merely by sitting back and being available for those who are sick or injured.


Soliciting patients. Knocking on doors is just what Share Health Plan of Illinois does. The HMO’s marketing department consists of sales forces that primarily sell to three markets–the commercial or employer market, the senior market, and the provider market. This force includes about 20 sales representatives.

How much money does it take to market Share? According to Tom Balacek, vice-president of sales and marketing for the HMO, Share is spending between 25 and 30 percent of its revenues on marketing.

One step ahead. Sound bleak? Maybe not. Hospitals do need to become more focused in their goals to compete effectively in this marketplace. But they also have the edge on HMOs. “Hospitals must remember that they are the market leader,” says Michael Meyer, president of the New York City-based MED SELL, Inc.

He explains it this way: When Apple entered the market with the personal computer (PC), IBM could have relied on its own prevalence in the market to keep the business already established. Instead, IBM began to manufacture PCs. Even though the PC would compete with its main product, IBM was getting the PC business and not giving it away to Apple.


The same can be seen in health care. Hospitals have been in business for 50 years or more. And, according to Meyer, “50 years in business is a lot of equity.”

Waning trust. More than that, HMOs are losing their credibility with the business sector. “HMOs are no longer at the forefront of delivery systems,” says Peter Boland, president of Boland Healthcare Consultants, Berkeley, CA.

Many flagship corporations are becoming dissatisfied with HMOs because “the HMOs are going to the bank with the corporations’ money,” he explains. According to Boland, many surveys are now finding that, more often than not, health benefits managers don’t think HMOs are saving them money.

But beware: This may push HMOs to market themselves even more strongly and with greater resources than ever before.

Interview with Healthcare Guru Tom O’Leary

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Hospitals: What will be the JCAH’s approach to its work in the future?

O’Leary: Traditionally, the Joint commission has focused on the procedural aspects of care. It is a process-oriented approach, rather than being outcome-oriented. But there is no meaningful experience in correlating good process with good outcomes. Other organizations are looking at outcomes by accumulating data that can be interpreted in different ways. But these organizations, most particularly the peer review organizations, do not necessarily have the ability to interpret the data correctly. And although the JCAH has neither the data base nor the immediate ability to do so, it has more resources and experience than anyone else, by orders of magnitude, to qualify it for this work.

Hospitals: Can the Joint Commission service as a more neutral guardian of quality than those who have sought to take on that role so far?

O’Leary: If the Joint Commission can’t, then I don’t think there is a neutral party out there. Everyone else has a vested interest. I think the JCAH can develop that capability if it decides to do so. But it is not going to be easy at all. We talk a lot about quality, but the tools we have in hand for objective, scientific review of quality are very modest.

Hospitals: The Joint Commission’s authority is enhanced by the fact that we all know there are less pleasant alternatives. Does that give the JCAH enough credibility to carry out its mission?

Healthcare issue

O’Leary: The credibility issue is an absolutely critical concern to me. I don’t think credibility can be maintained strictly on the thesis that if anything happens to the Joint Commission, its activities will be turned over to the government. I do think that if the JCAH disappeared, pressure on state and federal government to develop detailed review programs far beyond what they have now would be enormous. But I don’t think that’s enough to carry the Joint Commission into the future.

My personal feeling is that the JCAH, as the standard-bearer of high-quality health care, must not only set standards, but also must help providers meet those standards. The organizaton cannot write standards and walk away without having a remote idea of how a provider is supposed to meet them. There are several standards about which that perception exists, whether it’s true or not.

I hope that the Joint Commission will move further in the direction of making itself an educational resource and seek to do so in a broad perspective, not just in a narrow, hospital-focused perspective. Hospitals are still very important, and certainly the most complex care we render is provided in hospitals, but an increasing amount of care is moving out of hospitals, and I don’t think the JCAH can ignore that and maintain relevance.

The question is, when you look at an organization, what is it you are accrediting? Is it the hospital alone, or its satellites, or its nursing home? And if you only accredit elements that are part of a vertical delivery system, and not parallel independent services, then it doesn’t make sense. If you draw the boundaries at the hospital wall and have nothing to say about the ambulatory surgery center or the diagnostic imaging center or the birthing center or the home care program or the nursing home, you are ignoring a critical element of quality of healthcare, which is continuity.

It is clear that these alternative sites of care are going to be subject to state regulatory scrutiny. I don’t think that’s the best approach, because with state regulation, there is a program for hospitals, and a separate one for ambulatory surgery centers, and a separate one for hospices, and those medical programs often have no relationship to each other. That’s where the Joint Commission approach differs significantly, because a key element of the JCAH program is to promote continuity of care as the patient moves among different sites.

Hospitals: Should the Joint Commission, then, be the center of health services accreditation?

Health care costs

O’Leary: I think if the JCAH does its job well, that will serve both the professional and public interests best. Fragmentaton of the accreditation process doesn’t serve anybody’s interest. I don’t think the Joint Commission needs to control all the elements of accreditation. I think we can assume that other groups and agencies will maintain or develop capabilities in accreditation. The JCAH might end up working with some and competing with others. That doesn’t bother me particularly. I think te Joint Commission, with its tradition, is well positioned to compete.

Hospitals: How deep will the JCAH’s involvement be in the cost-vs.-quality issue?

O’Leary: The Joint Commission cannot be immune to purchaser concerns about the cost of health care, the efficiency with which it is delivered, and whether it is appropriate or not. But I don’t think we can or should be co-opted into having that as the central concern. The JCAH’s central concern should be to ensure quality. But there is need for a dialogue with the people who are paying the tab, because to stand in splendid isolation simply won’t work.

Hospitals: What do you see as the Joint Commission’s future role in credentialing issues?

O’Leary: First, credentialing and delineation of privileges are properly performed on an individual basis. It depends on what education, training, and experience the individual has. This is the basis of the qualitative judgment, not whether the individual belongs to a practitioner category, such as a cardiologist or a podiatrist or a nurse practitioner.

My experience is that when credentials committees get down to reviewing individuals, they do it pretty well. But they also tend to get into bitter philosophical discussions, which get you nowhere reasonably quickly.

The second problem is that hospitals, in theory, at least, can only provide for so many practitioners of a given type. A hospital has a limited number of operating rooms, cardiac catherization facilities, procedure rooms, and dialysis stations, and it cannot absorb an infinite number of practitioners. So the hospital, with appropriate consultation from the medical staff, must make reasonable and defensible prospective judgments about its capacity and its perceived needs.

The peculiarity, of course, is that hospitals are experiencing low occupancy, and you could argue that if beds are empty, hospitals should be able to absorb an infinite number of physicians because they will never reach capacity. But there are other resources involved.

Hospitals: There have been antitrust threats to the JCAH. Is this a continuing shadow on its activities?

O’Leary: That shadow is there, but I’m not afraid of shadows. You never eliminate them. Anybody can sue you. If you go around worrying that you’re going to get sued, you become paralyzed.

The Joint Commission went through this thought process during revision of the medical staff standards, because there were antitrust suits on the table for many millions of dollars. The JCAH board does have a fiduciary responsibility to ensure that the organization does not expose itself to unnecessary risks, so there has to be some sensitivity. But you can moderate the risk and still create meaningful standards.

Hospitals: Another thorny issue is malpractice.

O’Leary: It remains to be seen what the Joint Commission chooses to do, but it certainly wouldn’t surprise me to see it become a resource in the area of risk management. Risk management is so closely tied to quality assurance that the difference is possibly only semantic.

Hospitals: What do you see as the major health care quality issues facing us right now?

O’Leary: People are very worried about quality of care, but are unable to measure it in terms that would be acceptable to a spectrum of parties. Insurers are concerned, because although they compete on the basis of price, they are also competing on the basis of quality. They are nervous about the quality issue; some will want to talk to the JCAH about what kind of meaningful measures they ought to be looking at to ensure quality services and patient satisfaction.

Undercare is potentially the most significant problem we face, but we have limited ability to measure undercare. Continuity of care between different service sites is a complex and difficult problem, and an important one. And as new types of services are developed, how do we ensure that they meet service standards? Home care is probably the classic example of that.

Hospitals: What will the JCAH be accrediting in the future?

why is healthcare expensive

O’Leary: In other words, the Joint Commission on Accreditation of What? I don’t know whether the organization should or will change its name. I don’t think that will be an issue until the JCAH decides upon its future directions. But I know for a fact that for some people, the name “Joint Commission on Accreditation of Hospitals” suggests that all the Joint commission does is accredit hospitals or, more importantly, that all the Joint Commission should be doing is accrediting hospitals. I think that becomes a problem for the organization, if it is accrediting more than hospitals–which it is.

Another issue is the composition of the JCAH board. That’s enormously sensitive, but it is highly germane to the credibility of the organization. In the District of Columbia, I was a member of a private-sector task force trying to draft District regulations relative to nonphysician practitioner membership on hospital medical staffs.

The task force also included a nurse, an antitrust lawyer, a psychologist, and a social worker, among others. The physician and hospital members took enormous heat for suggesting the Joint Commission standards as a starting point, because of the composition of the JCAH board. I’m not saying that the Joint Commission could or even should change its board composition, but eventually the board will have to confront this issue.

Illinois Healthcare: Bleeding Under Pressure

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After four and a half years of struggle, Chicago this month will implement an ordinance that’s expected to create an exemplary trauma care system. The ordinance, which incorporates a trauma-classification system designed by the American College of Surgeons, was backed by the local hospital council and other health care groups. Yet a similar trauma care proposal languishes in the Illinois legislature, opposed by even the state hospital association.

In 1971, Illinois’ trauma system was a model for other states, but it quickly eroded because of loss of funding, interest, and effort, says Ted Matson, program manager for the American Hospital Association’s Division of Ambulatory Care, Chicago. After 1973, the state never reinspected or recertified the few trauma centers it designated, he says.

Those hospitals originally deemed trauma centers want a guarantee that they’ll be redesignated –or, at least, that their local competitors won’t get the designation either, says Anthony Marquez, chief of emergency medical service operations for the Illinois Department of Public Health, Springfield, IL. “It’s unbelievable how fierce the competition is.”

The myths. The reason for Illinois’ situation has as much to do with myth as with competition, says Matson, who sees Illinois as a microcosm of the national status of trauma care: a few bright spots amid general disorganization.


“There are three perceptions that hospitals have about trauma centers that just aren’t true,” he says. “The first is that if your hospital isn’t one of those designated as a trauma center, then your emergency department visits will significantly decrease. The second is that a hospital without trauma-center designation will lose substantial revenue to a hospital that is designated a trauma center, because trauma care is high-cost treatment. The third is that if your hospital isn’t designated a trauma center, you lose prestige to the hospital that is designated and thereby also lose potential non-trauma patients.’

To debunk these myths, Matson cites a study of the trauma system in Orange County, CA. The study compared emergency department (ED) visits at the county’s five designated trauma centers to those at the 30 undesignated hospitals in the area. The study showed no significant change in ED visits after implementation of the trauma system–no change for either the trauma centers or for the other hospitals.

Another myth. The study was conducted by Richard Cales, M.D., chief of emergency medicine at Portland (OR) Adventist Medical Center. Cales, who is also chairman of the trauma committee of the American College of Emergency Physicians (ACEP), adds another item to Matson’s myth list–the myth that any hospital can handle trauma cases.

“Hospital administrators have been telling people for years that “our emergency room can handle anything.’ Don’t you believe it,’ Cales warns. “Trauma care is tertiary care. It meets all of the criteria regarding volume and special skills–and if you’re going to provide tertiary care to this kind of population, you have to have a system. When you start talking about trauma care as tertiary care, administrators get a whole different mind-set.’

The truths. It isn’t the trauma centers but the “doc-in-the-box’ walk-in centers that compete with hospital EDs, says AHA’s Matson. “We know . . . that hospitals that promote their EDs have increased their visits. We’ve seen that both for hospitals that have received trauma center designation and for those that have not.’

Based on October 1985 AHA data, ED visits were up by about 4 percent nationally from the previous year, Matson notes, partly because “there’s been a general reorganization of EDs toward a more consumer-oriented approach.’

rising healthcare costs

The revenue myth also is dispelled by the Orange County, CA, study. Although serious trauma cases require more effort and resources, they represent a tiny fraction of ED visits. For that matter, “less than 5 percent of all trauma patients require level I care,’ Cales adds.

The Illinois dilemma. The Human Services Committee of the Illinois House is trying to put together a revised bill that would be limited mostly to enabling legislation. Why? Because Illinois doesn’t have a structure in place to let it organize and review its 26 existing trauma systems–and because a comprehensive trauma-system bill wouldn’t pass at this point, says a Democratic legislative aide, who asked not to be identified. Many hospitals outside Chicago still believe the myths and oppose any law they think would take patients from them,” he explains.

“Lots of downstate hospitals are sole providers, who don’t want to spend the money to upgrade to a level II status,’ adds Patrick Finnegan of the Metropolitan Chicago Healthcare Council. “They’re afraid it’s going to cost too much.”

Political battles. Meanwhile, Finnegan notes, the Illinois Hospital Association (IHA) “is caught in the middle: It has to represent all the hospitals in the state.’ Scott Malan, an IHA lobbyist, concedes that the trauma bill has created considerable dissent among IHA members.

Malan points out that it’s difficult for hospitals to tell from the bill’s first draft whether they could qualify for trauma-center designation; the criteria weren’t included in the bill. However, the proposed legislation was being amended at Hospitals’ deadline.

The first draft also includes a certification requirement for trauma centers, which is opposed by IHA as duplicative and over-regulative, Malan says. IHA testimony before the legislative committee expressed concern that standards previously developed by the state’s emergency medical services council would be too rigid for downstate hospitals to be able to qualify for level II or level III status. Most level I centers are teaching hospitals.

types of healthcare

The rebuttal. “It’s totally ridiculous for most of them to try to upgrade to a level II. You only need a few level II trauma centers evenly distributed across the state,’ retorts ACEP’s Cales. “There are hospitals that could easily qualify as level II trauma centers, but they’re goint to be in cities of 100,000 or more.’

Then what’s the real issue? “The real problem in rural areas is that the local hospitals will literally fight to the death to keep these patients [rather than transferring them to the larger facilities]. Either the patients aren’t recognized as being seriously injured, or– even if they are–the local hospital overestimates its capability of caring for them,’ says Cales. “You’re going to lose a few patients during transfer, but that doesn’t justify not taking a hard look at the problem. We call it “high-sick, low-sick’ –you have to know which patients are high-sick and send them on, if necessary.’

The requirements. The key to a good trauma center, Cales says, is local physician commitment, “not going out and buying a lot of equipment. As long as you have people who are willing to stay on their toes, nobody has to sleep over at the hospital all the time.’

But the trauma center has to be part of a system, he adds. “You need statewide coordination. You can’t do it any other way. No place that has ever tried it on a piecemeal basis has succeeded’–and that’s something for Illinois legislators to keep in mind, he notes. The trauma-center bill is scheduled to advance out of committee early this month.