Inova Health System is a network of six hospitals and one affiliate in the Northern Virginia market. Although Inova bills itself as a non-profit, the group reported net operating income of $1.978 billion in 2007 (the last year for which voluntary disclosures are available) and operating income of $132 million. Given that Inova also reported capex of $171 million, investments in medical education, research and other community benefits top the amount of $71 million and $105 million allotted to charity care, it would appear that the group is doing much better than direct competitors tracked by Morning Star. To wit, only Metropolitan Health Networks showed positive 5-year return of 9.62%, while second-best Universal Health Services was flat at 0.52%, and 19 other health care stocks fared poorly (5-year performance range: -3.9% to -75.23%). On the basis of 1-year performance, however, tiny Signature Exploration and Production Corporation bested the field with 633% return, followed at a distant second by Lifespan Inc. (+350%); 23 other health care stocks showed negative returns at the 1-year performance benchmark.
The literature shows that competitive strategy in the hospital setting has mainly focused on the central core of the Five Forces framework: rivalry among existing competitors and forestalling possible inroads by new entrants. Accordingly, cases of sustainably superior financial performance seemed to correlate with a cost-efficiency strategy (Gilliard, 1993), implementing tele-medicine with a view to improving decision-making about admission in timely fashion and thereby capturing a greater share of market (Emery, 1996).
Secondly, one also discerns successful competitiveness based on responding to the bargaining power of buyers. Thus, there is premium pricing strategy hand-in-hand with narrowing product scope by cutting back on Medicare and outpatient services so that the health care institution need not devote resources to low-income patients or to surmounting the bureaucratic requirements of Medicare (Langabeer, 1996). Realizing the bargaining power of well-off patients and the litigation-conscious, on the other hand, a hospital a hospital can choose to succeed by forging better cross-services collaboration that brings about well-rounded patient care and presumably a higher rate of successful outcomes (Sheldon and Windham, 2002).
With respect to the bargaining power of suppliers, this can embrace pharmaceutical companies that also market generic drugs and therefore give patients an affordable alternative.
Home-based midwives are a prime example of substitute care that mothers about to go into labor resort to in the mistaken belief that hospitals do not provide such “progressive” practices as water delivery or a birthing position other than flat on one’s back in a delivery table.
As to industry life cycle, there are two contrasting trends. Inpatient revenues have been on the decline since 1983 while outpatient volume remains in the growth phase. This and the bargaining power of users affects product/service mix decisions such that one can expect status quo or harvesting strategy for inpatient services while diversification (into the outpatient and managed care businesses) or market development become mandatory for on the outpatient side.
References
Emery, S. L., Ph.D. (1996) The diffusion of telemedicine in the southeastern United States: An empirical study and its policy implications. (Ph. D. Dissertation: The University of North Carolina at Chapel Hill), 224 pages; AAT 9708195.
Gilliard, D. J., Ph.D. (1993). A structural equation approach to strategic groups, competitive strategies, and performance: A hospital analysis. (Ph. D. Dissertation: Arizona State University), 123 pages; AAT 9320598.
Langabeer, J. R. , II, Ed.D. (1996) Competitive strategy in turbulent markets: A multivariate analysis of strategic management in teaching hospitals. (Ph. D. Dissertation: University of Houston) 167 pages; AAT 9626747.
Sheldon, A. & Windham, S. (2002). Competitive strategy for health care organizations; techniques for strategic action. Portland: BeardBooks.