by Nancy Vessell

The vehicle caution, “Objects in mirror are closer than they appear,” might apply as a warning to hospitals tempted to jettison small, niche services that seem to have little positive impact on the bottom line.

Some services are worth a second, closer, more analytical look because they may be bringing in more revenue than reflected at first glance.

That’s the advice of Arthur C. Sturm, president and CEO of SRK Solutions, a Chicago-based health care marketing firm. It is unwise to automatically reject services “that on the surface appear to be not worth it,” he says. “Our belief is that you have to look at the value of the customer over time. A lot of people who come in for low-revenue procedures may come in with high frequency, or those low-revenue procedures may lead to larger-revenue procedures downstream.”

The one-time transactional revenue produced by a service doesn’t always reflect the true value of the service over time. Sturm illustrates the point using the experience of a client, a community hospital outside a major metropolitan area. The client had asked SRK to identify opportunities for revenue growth within its cardiovascular business.

Preliminary review showed that the hospital’s hypertension business yielded $151 in revenue per visit, a sum that suggested it might not be worthwhile. But a more in-depth analysis showed that the hypertensive patient yielded $2,105 during the following two years – 14 times the value of the transaction. Likewise, the hospital’s chest pain center produced $968 in revenue per visit, but over two years, a chest pain patient returned $4,021 in revenue for the hospital.

Unfortunately, that long-term value is often not captured in financial reports. “We’ve been surprised that people don’t think like this,” Sturm adds. “They’re used to the traditional approach – what’s the contribution margin, what’s the transaction? The traditional view is very narrow for reasons that are unclear to me. We find very few who look at things like churn rate [ratio of new to existing patients] and downstream value.”

Tough calculations
Understanding the full revenue potential of a service is especially important in the current economy, notes Susan Dubuque, president of Neathawk Dubuque & Packett, a health care marketing firm in Richmond, VA. “Right now, with revenue tanking along with everything else in the economy and uncompensated care being at levels higher than ever, health care organizations are looking for every new revenue possible,” she says.

However, calculating the full potential of a single service is not always easy. She adds: “Hospitals historically have not been able to figure the cost of providing services and where revenue comes from. Often, they don’t know what services truly cost. Definitely, there’s a tendency to look in the short term and not look six months down the road.”

St. Luke’s Hospital in Bethlehem, PA, opened a melanoma center nearly three years ago with the recruitment of a melanoma specialist. Tom Bacza, cancer services administrator, says he tries to identify the center’s financial impact. The center’s cost of treating melanoma can be very high and not fully reimbursed, but the use of other ancillary services at the hospital helps balance the impact.

“We try to include as much downstream revenue as we can get our arms around,” Bacza says. But when a service is housed in another department, that link is sometimes hard to make. “True cost accounting is very difficult, but we’re working on it,” he adds.

The melanoma center’s ability to attract patients from a broader region than St. Luke’s traditional service area has value that’s difficult to quantify, Bacza notes. “I don’t think there’s any way to put a dollar to it, but we know intuitively there are significant dollars associated [with] the marketing appeal,” he says. “When you have trials and studies and a reputation to be able to treat patients in all diseases, including melanoma, it can attract patients from a larger market area.”

Star attraction
Developing a niche business, according to Bacza, is a matter of taking advantage of opportunity. Sanjiv S. Agarwala, MD, a melanoma specialist, was recruited to St. Luke’s to establish a melanoma center of excellence – one of few such centers in the United States. “Being able to attract someone of Dr. Agarwala’s caliber is an opportunity you can’t pass up,” Bacza states. “I think it really is driven off the physician’s expertise.”

Agarwala points out that the center has a large research and clinical base with a broad reputation. “That brings patients to your place,” he says, “and they stay within the system. All their testing and care get done in that system. I get patients referred from all over the eastern United States and other states, and we would not get that [result] without the reputation.”

According to Dubuque, establishing a niche specialty business with a physician expert is both critical and risky. She points to the example of a hospital that built a hand center around a superb hand surgeon. The hospital renovated space and developed a promotional campaign. After the hospital launched the program, the doctor left.

“If the opportunity is there, you take advantage of it. But you have to very, very quickly deepen your bench, or you’re vulnerable with only one physician,” she says. “That can be a challenge, because with niche services there’s a limited market, so how do you sustain more than one provider?”

Extend services
To deal with that challenge, Dubuque recommends broadening the market with natural extensions of services. She gives the example of a wound care center, where a big user is the diabetic patient. “Ask yourself,” she says, “Who am I serving with this niche service? What other services can I render to that same population – dietary education or other things related to endocrinology or vascular services? Take that next natural step.”

Dubuque notes that a niche service can be successfully developed to target a select demographic group. She cites the example of a small Pittsburgh hospital that lacked obstetric services to attract young families at a time when obstetrics was the heart of hospital marketing efforts nationally. Bucking the trend, the hospital created a center for geriatric care with special programs in preventing falls and treating arthritis.

“Identify what you do well, and then go to your strength,” Dubuque advises. “Health care is an episodic thing. It’s a matter of planting that seed and when the need arises, you want the consumer to re-member where [for example] that great arthritis program is.”

A small-revenue service can serve as an effective point of entry for hospitals and can help improve the payer mix. Dubuque points to a major academic medical center in an urban area that had a high percentage of uncompensated care. The medical center opened vein clinics and mammography services in the suburbs to expand its base. “It’s a wonderful way to develop a relationship with well-insured consumers,” she says. “Once the patient has had a good experience, hopefully [the service] will serve as a point of entry for other services. Bring people into the service delivery system and, hopefully, they will come back for more.”

Sturm says providing a gateway service is just one step. Ensuring patient satisfaction for the long term is what makes the strategy viable. “Understand the value of the customer over time and the importance of the customer having a good experience over time,” he says. “When I go to Home Depot and buy a hammer for $20, does Home Depot see my value as just that hammer? No.”

Cultivating the long-term customer
Applying a retail philosophy and thinking of a patient as a long-term customer were concepts new to Richard Lipton, MD, medical director of the Montefiore Headache Center in the Bronx, NY. “When I first moved to Montefiore, one administrator walked into my office and said, ‘Who are your customers?’ I said, ‘I don’t have customers. I’m a doctor; I have patients.’ He said, ‘Your patients are customers.’ At the time, it seemed like a very, very foreign notion to me,” Lipton recalls.

But thinking of patients as customers – people who would put up with a five-month waiting list and a long drive to the Bronx to seek relief – helped Lipton better understand their needs and expectations. “The generic lesson is to understand why patients seek your services and what they’re looking for,” he says. Doing so involves managing expectations.

Lipton elaborates: “Someone once said to me that satisfaction is reality divided by expectation. One of the useful things a subspecialty center can do is deliver the best available therapy, but be very honest about what patients can expect.”

He routinely asks new patients to explain their expectations. When patients say they never want to have another headache, he suggests to them, “What if we cut your headache frequency by 80 percent and give you treatment to restore your functioning in two hours? Would that be good enough for you?” They typically agree that would be good enough. “It’s just a matter of framing the expectations to bring them in line with therapeutic realities,” Lipton says.

No matter how the revenues of the headache center are calculated, he notes, “they are a tiny part of the revenue package for Montefiore.”

But the value of the center, which opened in 1946 as the world’s first headache specialty center, is in its reputation for treatment and research, a value more difficult to measure. Says Lipton: “It’s a subspecialty niche where we’ve had a reputation for excellence for decades. That would be missed more than the dollars we generate.”

Nancy Vessell is a freelance writer and editor specializing in the health care field. She can be contacted at nvessell@mchsi.com.