A Strong Dose of Entrepreneurship From the Health Care Industry

Tom Peters

Where do you find the ultimate entrepreneurial madness? In semiconductor industry? In biotechnology?

I cast my vote for health care. Hospital consolidations get most of the attention, but the real story is fragmentation, with new ventures uniting partners from all backgrounds.

Pure entrepreneurial plays abound. Affordable Health Care Concepts (AHCC) is a pure and simple broker, which rapidly has grown to include 1.2 million members. The firm is a Preferred Provider Organization. A PPO links health-care “providers,” such as hospitals, to would-be customers, such as companies whose employees are members. It negotiates low rates with a few hospitals from which members must then choose for their care. The no-frills outfit doesn’t even provide billing service to its employer/member or hospital clients.

Blue Cross is typical of a traditional insurer which failed to keep some of this business. In a time of ambiguity, newer entrants shun tradition and tend to be more flexible. For instance, AHCC custom-tailors programs to various employer needs and tastes. One employer might want to offer its employees 100 percent coverage on prescription drugs, while another might prefer only 80 percent.

Virtually all the new, substantial employee health care incentives are driving in a single direction: out of the hospital. Chief Executive Officer Tom Frist of giant Hospital Corporation of America recently commented, “Hospitals are now looked on as the provider of last resort.”

So ambulatory care centers now number 2,600 and will grow to 3,100 by year’s end. Outpatient visits soar while hospital stays decline. The occupancy rate, a frightening 63.6 percent, fell by 4.5 percent in 1985, causing a loss of 70,000 hospital jobs and a reduction of 18,000 beds. Surgical centers, free-standing specialty-care service operations, and outpatient clinics of all sorts dot the landscape. New entrepreneurs, venture capitalists and teams of doctors are racing to take advantage of the opportunity brought on by changing government, insurer, and employer incentives.

Entrepreneurship has become contagious. To fight back, hospitals are trying to reduce costs—not just by “downsizing,” but also by subcontracting everything imaginable. Activities such as housekeeping, food provision and running rehabilitation departments are being farmed out to outfits like wildly profitable ServiceMaster. Other third-party subcontractors such as Emergency Management Services Associated of Plantation, Florida, are profitably taking on the entire emergency room operation, from doctors to equipment to billings.

Nuclear Medicine Associates runs what Modern Health Care magazine calls the “ultimate shared service.” It provides local hospitals with diagnostic equipment which is tied to a remote central computer, so that medical specialists can conduct same-day cardiac analysis, thalamic studies, and bone and liver scans.

The emerging “medical mall” represents the ultimate effort by traditional hospitals to compete with their former selves by getting directly into every outpatient service imaginable. The 349-bed Providence Hospital in Mobile, Alabama, is pushing what it calls “one-stop shopping” to fend off the multitude who have “set up their own pill boxes.” Its medical mall will include ambulatory services for radiation oncology, outpatient chemotherapy, diagnostic imaging, outpatient surgical suites, physicians’ offices, pharmacies, rehabilitation centers, and optical shops. Beauty salons and maternity-clothes outlets may be in the works.

Nonprofit and public hospitals, still filling the vast majority of beds, are spinning off for-profit subsidiaries. For example, Carondelet Health Care Corp., a California Catholic hospital, just set up a for-profit rehabilitation center.

In the related world of insurance, Blue Cross/Blue Shield’s armlock (a peak of 80 million members) has been broken. For instance, the State of Illinois recently dropped Blue Cross/Blue Shield to form its own PPO, costing the giant insurer 100,000 workers and 57,000 dependents. Each PPO and Health Maintenance Organization is forming unique joint ventures to tailor needs to employers and twist hospitals’ arms. Doctor groups, via state medical associations, for instance, are getting into the act.

What are the big names in all of this—investor-owned conglomerates such as American Medical International (AMI) of Beverly Hills, HCA, and Humana of Nashville? All three have just reported tough quarters with losses or flat results. Frist of HCA recently noted, “The prevailing attitude used to be ‘more is better.'” That’s quickly changed, he added.

The attrition of beds and employees in the traditional acute-care, inpatient mode will continue as the potpourri of new alternatives surface. Hospitals can either join the new scene or be left behind. But hospital administrators, like most of America’s industrial managers, are unequipped to face the changing environment. In the prior non-competitive environment, they spent most of their energy overseeing construction budgets and readily passed the costs along.

To meet the challenge, most hospital executives now are giving lip service to the new god, “marketing,” without knowing exactly what it means. However, the real wave of the future for successful hospitals is not better advertising campaigns to promote heart surgery, but moving faster to create surprising new joint ventures and entrepreneurial activities.

The state of flux in the $400 billion health-care industry will create an elaborate entrepreneurial playground in America years to come.