Hospitals Cope With Growing Competition : New Business Methods Used to Meet Challenge

The signs that work crews installed on the sides of Mercy Hospital’s 12-story building in Hillcrest last month are a sign of the times.

They are a first for the private, not-for-profit hospital, which this year is celebrating its 95th year in San Diego. The Sisters of Mercy, a religious order that founded the hospital, never thought it necessary to install signs to advertise the hospital’s existence.

Prior to last month, first-time visitors had to rely on a CalTrans highway sign and a sign on the side of a planter on the hospital grounds.

“You knew you were at a hospital, but the question was, which hospital,” observed Mercy Public Relations Director Norman Greene.

Mercy is playing the name game because “public awareness of the hospital wasn’t what we thought it should be,” Greene explained, quickly adding that “the signs don’t (include) blinking lights or neon because that just isn’t the Mercy way.”

Marketing Efforts

Marketing, public relations, advertising and salesmanship are gaining in importance as San Diego County’s 30 health care facilities fight for an increased market share.

Hospital administrators who previously passed cost increases along to patients and third-party payers are now paying attention to unit costs, patient volume and loss leaders.

“Everyone was geared toward passing the cost increases along, so they could get away with lax business practices,” said Cal Knight, administrator of San Diego Physicians and Surgeons Hospital in the Barrio Logan area.

Consequently, determining a hospital’s cost structure is as much art as science, suggested Michael Stringer, director of the UCSD Medical Center in Hillcrest. “There is probably as much activity going on in that arena as there is in marketing. But we still, in actual fact, do not have real precise knowledge of what one service costs and therefore what the monetary benefit is, except in the grossest way.”

That makes “picking the financial winners from the financial losers a tough business because we in the industry don’t have a good handle on what our real costs are by unit of service,” Stringer said.

“If we had crystal ball and were reasonably successful with it, I’d feel a lot more comfortable” about allocating limited resources, acknowledged Steve Lash, director of finances and business development at Sharp Memorial Hospital.

“When it comes to a new program, we have to ask ourselves at the outset if we’re willing to underwrite it,” said Robin Brown, Mercy’s administrative manager. “Regardless of whether it’s a winner or a loss, we’re going in with our eyes open. That’s what competition has fostered.”

That kind of cost-consciousness applies to existing programs, too. Mercy, for example, recently dropped a dietary teaching program that cost $86,000 a year to run because the benefits were not in line with the expense involved.

Sharp Hospital is developing an advanced, computerized cost accounting system to help planners determine “by product lines, if you will, how much it costs to deliver a procedure.”

That emphasis on understanding costs will help hospitals expand their fledgling marketing programs, administrators agreed.

“In a competitive market like San Diego you have to continue to grow by taking risks,” Lash said. “If you’re the obstetrics/gynecology or cardiac leader, numbers two through eight are shooting for you. You can’t be complacent because that’s the hobgoblin of simple minds.”

“Being in the right place at the right time is what marketing is all about,” observed Francis Toto, who three years ago founded Healthcare Marketing Management, a marketing consulting firm. “Health care is a very complex latticework that is getting more complicated every day. That’s what hospitals have to come to grips with.”

Although larger hospitals have established marketing departments to cope with the health care industry’s rapidly changing environment, smaller institutions are being overwhelmed, observed Robert Samsel, president of Independent Community Hospitals, a San Diego-based preferred provider organization that serves 27 local hospitals in Southern California.

“We believe that independent community hospitals are and will remain a very viable force in the health care industry,” said Samsel, who is also president of the Southern California Health Care Marketing Assn.

Physicians and Surgeons is one example of a local hospital that, after a rocky beginning, used business management techniques to remain viable.

When National Medical Enterprises, a Los Angeles-based for-profit company took over the ill-starred Community Hospital in 1981, the facility was burdened with a dismal financial and medical image. Administrator Knight has spent most of his working days refurbishing that image.

Capital Improvements

Three years and $9 million in capital improvements later, Physicians and Surgeons is “for all practical purposes, operating on a break-even basis,” Knight said. Part of the plan for avoiding red ink is a 10%, across-the-board price cut.

Knight predicted that lower prices will boost utilization of the hospital’s 188 beds. In a mixed analogy, chief financial officer Dennis Suyeyasu predicted that “we will make a few cents off of more widgets rather than getting one patient a day and charging a million dollars,” he explained.

Widgets as part of the health care lexicon? “This is a definite ‘widget’ situation,” Suyeyasu explained. “We’ve reached the point where our fixed costs are being absorbed by a given number of patients, and if we can add five patients, the difference falls to the bottom line.

That bottom line turns from red to black when the hospital, which attracts a heavy percentage of patients covered by state and federal programs, has 55 patients in its beds. “With a more normal mix of private insurance and cash payments we’d break even with 30 to 35 patients,” Knight said.

Although Physicians and Surgeons is combing the county for additional patients, it will remain a local, community-based facility, Knight said. When it lacks a service, Physicians and Surgeons subcontracts with a competitor, as it did with Paradise Valley Hospital for obstetrics and gynecology services.

“Every health care entity in the county now has a dozen or 15 incestuous relationships with other health care facilities in town,” Knight acknowledged. “With 30% more beds than are needed it’s foolish to reinvent the wheel.”