“Network Service-Line and

1. “Network Service-Line and Business Planning” 2005 NCHH Spring Conference April 17-19, 2005David C. Hoffman, Ph.D., Partner

2. Objectives To: • Understand the value proposition for networks – What are we doing and for whom? • Cover the basic concepts in business planning • Relate these concepts to network service-line development • Translating the value proposition into services • Discuss the importance of strategic alignment between business objectives and services • Use some examples for the feasibility for new services.

3. Defining the Network’s Value Proposition • What is the purpose of the network? • How does it deliver value to its members? • Does it serve all members equally? • What are its primary business objectives -- Forum for administrators -- Shared services to reduce costs -- Create competitive edge -- Advocacy -- Education -- Keep members independent -- Spread financial risk -- Link to a regional provider -- All of the above

4. Major Challenges to Business Planning • Members have different operating and market circumstances. • Members have different agendas. • Members have different pocketbooks. • Members have other relationships. Network is not necessarily the primary one. • Members may not share a core set of values or business objectives around which to build new services.

5. Guiding Assumptions • The network has reached a “maturation” point where the need for services is evident and can be supported by a critical mass of the members. • The network is organizationally capable of providing or arranging for the services. • Value for the services can be demonstrated either operationally or strategically. • The members will make a commitment to the services being offered.

6. Critical First Steps • Clear mission, vision, and values statements. • A 2-3 year strategic plan or set of “strategic imperatives” driven by the former statements. • Consensus on priorities. • What is this business and where is it going? • How will we get there? • What are the most important things we need to do?

7. Critical Success Factors… • A strong market imperative for the network’s existence. • Understanding the sometimes subtle differences in the circumstances of individual members. • A unifying set of business objectives. • Identifiable core users. • Policies in place to discourage cherry picking: must buy core services package then options on add ins. • Services that are constantly fresh and revitalized. • Services that meet the changing needs of members and the changes in the market place.

8. Resist the urge to shoot from the hip. Service design based on random thoughts and good intentions do not a successful network make.

9. Start with a basic business plan outline • Description of the service or program • Why is it needed? Rationale? • Market Analysis – Who will buy it • Risk Factors • Ownership – All or Some? • Operations and Management • Marketing Plan • Financial Projections and Capital Requirements • Start-up and Implementation Plan

10. Is this enough? • Probably not! • The most important consideration is that service offerings be linked to the network’s “high-level” strategies. • Ideas that do not align with strategies are somewhat like random shooting stars. They come out of nowhere and shortly fizzle out. • In doing so, they use up valuable energy and money…sometimes turn members into critics and cynics.

11. Network Strategy Map • What will grow our business and make us more successful? • Sustainable reinvestment • Increased value • Maximized efficiencies and economies of scale Financial Perspective Customers And Partners Perspective Expand Network membership &/or sales base • How will we do that? • Attract more members • Increase value to members and non-members Process and Operations Perspective • What must be the internal focus? • Efficient operations and documented value • Flexible partnering with physicians Document & communicate value Foundational Investments Diversify and develop core services • How will we do that? • Diversify our services, attract grant funds, consider physicians as our partners. Vision Strategically aligned providers with high-quality services that promote health and well-being, manage resources effectively and achieve competitive edge Maximized operational efficiencies Increased value proposition Provide for sustainable reinvestment in mission Continue Peer Panels expand educational services to other levels of member orgs. Pursue centralization of common operational svcs. Develop joint contracting vehicles for physicians Develop physician-friendly partnerships Access to Grants and Research Funding Provide Recruitment Assistance Access to Clinical Technologies

12. Why Business Plans Fail or Bog Down • Conflicting or unclear objectives • Poor assumptions and data; especially revenue and volumes • Major risk factors not considered or ignored • Inadequate knowledge of the service • The right people aren’t involved • Inadequate understanding of the market • Inability to make a timely decision • Paralysis of analysis.

13. Things to keep in mind… • Good data is critical. • The data will never be as good as you’d like. • You’ll never have all the information you need. • Final decisions will part science and part art. • Knowing the market is critical. • Be realistic about competition & brand loyalty. • Market timing is as important as analysis. • The market will change while you are planning. • Risk can never be reduced to zero. • Make sure that the right people are involved.

14. Although good data and analysis … …is critical to success of any business venture; at some point, when all is said and done, you just have to trust your gut and experience. Corollary: There is not substitute for experience.

15. 1. Description of the Service • What is it designed to do? • Create a shared staffing pool? • Create a managed care contracting vehicle? • Develop shared systems and infrastructure? • Expand the continuum of care for a provider? • Improve health status of the community? • Offer a specific set of services not currently available? • Save money? • If successful, the owners will be able to….

16. 2. Services and Programs • What services or products will be offered? • Physician practice management services • Imaging • Credentialing • Insurance Products • Staff Roundtables • Managed care contracting • Specific clinical service lines • Rehabilitation • Home Health/DME • Laundry • Quality indicators

17. 3. Market Analysis and Strategy • Identified need for the service or products • Geographic and demographic areas of focus Utilization rates: actual or proxies • Competitor analysis • Current market share distribution • How the services or products will be positioned for sale (e.g., locations, modes of distribution). • Will they be offered to non-members at a different pricing structure?

18. 4. Assessment of Risk Factors Examples: • Established market with other competitors • Price competition • Regulatory and reimbursement impact • Competing strategies (for joint ventures) • Brand loyalty and “quality lead” • Limited capital.

19. 5. Ownership Factors to consider: • Identification of owners: Network? Sub-set? • Legal form ;e.g., FP, NFP, LLC, 501(c)(3), partnership • Effects on network politics • Description of governing body and how decisions are to be made • Key committees • Special voting issues

20. 6. Operations and Management • How will daily operations be conducted? Network staff? Outsourced? • Internal versus external management (i.e., outside management contract) • Organizational chart: reporting structure • Staffing pattern: FTEs by position • Backgrounds and qualifications of key staff • Are the core competencies there to be successful? • Effect of one service on the delivery of other services.

21. 7. Marketing Plan • Identification of marketing objectives • Short term: 3-6 months • Long-term: 6 months and longer • Identification of target markets: demographics, specific employer groups • Segmentation of the market: demographics, specific products or services • Sales through others: e.g., networks • Partnerships and alliance with others

22. 8. Financial Plan and Capital Requirements • Assumptions and narrative • Projections of revenues and expenses (at least 3 years) • “What if” scenarios: multiple volume projections • First year cash-flow budget • P/L • Balance sheet • Write-offs, discounts, bad debt • Project or Capital Budget

23. 9. Start-Up and Implementation Plan • First 90-120 days • 120 days to the end of the first year • Examples: • Staffing • Operations

24. Gaining Commitment • The most difficult task for most networks is to get a critical mass of members committed to using a service. • Consider a “core service” menu as a matter of network policy. • All members must commit to a minimum level of service for those services that demand the heaviest investment. • Consider a la carte services as value-added add-ons.

25. Building Sustainable Services • Constantly assess the value of services. Value = Benefits + Customer Service Dollars Spent • Use surveys to evaluate value and satisfaction. • Conduct competitive pricing analyses. • Understand the unique circumstances of members. • Continuous re-evaluate network mission and vision.

26. Mobile MRI Example

27. Mobile MRI Example Narrative • 1. MRI procedure estimates are based on the best estimates of the number of procedures that physicians will order. Estimates range from 800-1,200 annual scans. Four scenarios: • a. Approx. B-E is 5-years assuming fixed reimbursement levels • b. 800 annual scans • c. 900 annual scans • d. 1,200 annual scans • All volumes are increased by 5% for years 2-5 • Average net reimbursement is assumed at $451 per scan • 1.5 FTE technologists are assumed for years 1-2; 2.0 FTE thereafter; average salary $50,000. • Fringe benefits at 25% of salaries • Film and supply costs at $15.00 per scan; increased 3% annually and adjusted for annual increase of 5.0% for scan volumes. • Annual maintenance contract is assumed at $25,000 per year for years 2-5. • Miscellaneous expense assumed at $2,500; annually increase = 3.0% • Major equipment budgeted at $350,000; camera = $ 20,000; no cryogens (not a super-conducting magnet). • Financing of major equipment 80% debt at 3.75% for 7 years • Mobile truck operating costs at $23,000.

28. Mobile MRI Example • Can you obtain your volume and revenue estimates? • Is this a new product or service; or do you have to take business away from someone? • Can you compete effectively on price, access, and quality? • Is the venture adequately capitalized? • How long will it take to break-even? • What are the strategic consequences of being in this business? • How does this business complement your core business? • Is there measurable “spin-off” value? • Can you be successful by proceeding alone? • How vulnerable is the business to regulatory and reimbursement changes?

29. Final Thoughts • Strategic alignment is critical any business service. • Membership commitment to purchase is essential. • Don’t overlook non-member purchasers. • Scrupulously document your assumptions so that you have a basis for changing things later. • Remember that you can never reduce risk to zero. • Good luck!

30. Discussion and Questions ?

32. For more information about this topic, please contact: David C. Hoffman, Ph.D., Partner Wipfli Health Care Practice/ Wipfli LLP 2901 W. Beltline Highway Madison, Wisconsin 53713 Tel. 608.437.7440 Fax 608.274.8085 E-mail DHoffman@Wipfli.com