Strategic positioning. Part 2: Positioning challenges in an evolving health care marketplace.

Why is strategic positioning so important to health care organizations struggling in a managed care environment and what are the sources of value? In Part 1 of this article, entitled "The Sources of Value under Managed Care," the authors presented four sources of value relative to the evolution of the market from fee-for-service to managed care. These value sources are: (1) assets, (2) price/performance, (3) distribution, and, ultimately, (4) capabilities and brand equity. In this article, the authors further elaborate on the sources of value as the market moves beyond the historical fee-for-service position to a managed care marketplace. Part 2 presents the marketing and financial challenges to organizational positioning and performance across the four stages of managed care.

Strategic positioning. Part 1: The sources of value under managed care.

Part 1 of this series organizes and discusses the sources of value against a background of an evolving managed care market. Part 2 will present, in more detail, the marketing and financial challenges to organizational positioning and performance across the four stages of managed care. What are the basic principles or tenets of value and how do they apply to the health care industry? Why is strategic positioning so important to health care organizations struggling in a managed care environment and what are the sources of value? Service motivated employees and the systems that educate them represent a stronger competitive advantage than having assets and technology that are available to anyone. As the health care marketplace evolves, organizations must develop a strategic position that will provide such value and for which the customer will be willing to pay.

The effect of fixed payment on hospital costs.

New Medicare regulations have replaced the cost-based system of reimbursement of capital expenditures by hospitals with a fixed payment per case based on assigned diagnostic-related groups. For the first time, hospitals must pay the governmental share of their capital costs. At the same time, overall reform points toward more capitation or fixed payments from all payers. This article discusses possible responses to legislative and competitive reforms by hospital management and the resulting effectiveness of the changes. To identify the potential effect of capital payment reform, we highlight some of the key provisions and assumptions of the new regulations, discuss the management implications of a changed capital payment system, and explore alternative models of hospital investment behavior in a world where one price for services for all buyers is a probable scenario.

Hospital free cash flow.

Hospital managers may find it difficult to admit their investments have been suboptimal, but such investments often lead to poor returns and less future cash. Inappropriate use of free cash flow produces large transaction costs of exit. The relative efficiency of investor-owned and tax-exempt hospitals in the product market for hospital services is examined as the free cash flow theory is used to explore capital-market conditions of hospitals. Hypotheses concerning the current competitive conditions in the industry are set forth, and the implications of free cash flow for risk, capital-market efficiency, and the cost of capital to tax-exempt institution is compared to capital-market norms.

Hospital finance and marketing.

Objection is taken to descriptions of finance and marketing in health care institutions as being in conflict. The author explains the financial contributions of marketing in areas such as pricing and investment. He also notes the marketing concerns of finance that make these two disciplines inseparable in well-functioning, competitive organizations.