In ancient times, “Know Thyself” was inscribed in Greek on the lintel of the entrance to the Temple of Apollo at Delphi. More recently, it appeared in Latin above the entrance to the Oracle's kitchen in the motion picture The Matrix. This aphorism has stood the test of time for good reason: It's an excellent beginning to most anything—including a hospital's planning process.

Historically, hospital development and expansion projects began with the most basic planning precepts. The guarantee of a steady stream of healthy revenues and the promise of increasing admissions and outpatient visits, satisfying user requirements, meeting square footage needs, and adopting desired technologies were all that mattered. Hospitals were assured payment on the basis of costs and, as a result, they planned simply and spent freely.

That has changed. In fact, today's healthcare marketplace scarcely resembles that of just 10 years ago. Most hospitals are lucky to receive 30 cents of each dollar charged. Medicare, often the largest primary payer, reimburses at or below cost. Medicaid, the states’ mandated system for the poor, pays almost nothing. The traditional indemnity insurers, once comprising the single largest payer group after Medicare, have evolved into a category of heavy discounters.

Yet, despite discouraging payment shifts and a long list of other potentially harmful market pressures, inpatient admissions have continued to steadily climb alongside dramatically expanding outpatient visits. What's more, hospital financial margins have been on the upswing. According to the American Hospital Association (AHA), net patient margins—the key barometer of hospitals’ financial health—have revealed year-to-year increases over the past several years, with 2004 revealing a 7% increase over the 2003 number.

Behind these numbers is a startling revelation. While the demand side of the equation continues to rise, it does so with a future of fixed or declining revenues per patient. Thus, most hospitals are achieving profitability only by cutting costs. Clearly, hospitals cannot continue with business as usual.

Back to the Drawing Board: The New Planning Challenge

To survive in this new era of dramatic change and intense focus on the bottom line, planners will be forced to play an even more crucial role than they have in the past. While hospitals will (and should) continue their vigilant day-to-day endeavors to cut costs, many have found that their planning processes have only circled around the broadest of interpretations, i.e., developing general initiatives and leaving the details to “work themselves out” in the future.

After writing a mission statement, some hospitals have defined their future by setting a handful of strategic imperatives based on national trends and/or “following the (market) leader”; i.e., the crosstown competitor builds a new orthopedic center, so they must, too. It doesn't seem to matter that the institution might need to “run really fast” (a euphemism for expensively) to even attempt to catch up with its competitive rival in that particular medical area. This “running” can lead to recruiting physicians with a national reputation, as well as funding a corporate image (awareness) campaign or constructing new buildings and acquiring the latest equipment, which still may lead to lackluster (or worse) results in the market.

Misunderstood foundations, poorly researched alternatives, and an overcommitment of precious capital on a misdirected initiative will definitely result in a less-than-successful venture. On the other hand, the future survivability of health systems may depend on how well and maybe how often they introspectively plan. As one health system senior executive said recently, “We bet the bank before on good ideas and the latest trends, and we had some good years. That's over and totally unrealistic today. Now, we must think and plan more.”

Planning Begins with the Hospital's Operational Foundation

First and foremost, let's emphasize that planning does not have to be a major event every five years. Planning can also be done intermittently or when the need arises, as well as for the longer view every few years in order to make sure the latest assumptions are still sound or to determine whether contingencies should be initiated. There are many examples of challenges that present opportunities for planning such as when evaluating expensive purchases of new technology or new ventures or when reinvigorating older departments.

Next, from a pure business standpoint, there is a planning approach that cannot be emphasized enough, where “know thy hospital” comes to the forefront. To support the distinctive and market-ready decisions for a hospital's future, the planning process must contain an investigative research foundation. It's not the grandiose initial thoughts that set the stage for a hospital's development. It's what follows these broad strokes that must determine the most strategically desirable choices—those with the least risk and the best opportunity to capitalize on an institution's best “face” and optimal competitive resources/advantages.

More specifically, an extensive data search followed by an inordinately attentive data analysis must be applied, particularly to the operational aspects of the hospital, to fully determine the best course of action. These backstage procedures and resources really tell both sides of a hospital's story. If day-to-day operational practices are not scrutinized and adjusted for efficiencies, the ultimate plan is jeopardized even before its inception. After this deep data dive, the hospital can then review the alternatives best suited to its situation, as well as within the context of the marketplace, to realistically and thoughtfully determine its near destiny.

The following examples illustrate the importance of “knowing thy hospital”:

1. Master planning will put you on the path to the right options. A large acute care hospital needed to evaluate the recent acquisition of a freestanding hospital located next to its main campus. The facility had been purchased from a for-profit corporation and required significant upgrades to achieve licensure and accreditation. Hospital leadership needed to determine what design, operational, and service changes were necessary.

Among the service considerations were diagnostic and surgical service expansions—programs that were in place but needed quick upgrades. The hospital sorely needed to expand these services, although it was also developing a freestanding center that had been planned before the recent acquisition. Nevertheless, bringing the surgical services online immediately would provide a major boost to revenues until the new freestanding center became operational. This short-term strategy of quick fixes turned problematic in many ways and was one of many planning issues that created significant duplication of services and woefully inefficient operations for this hospital.

Correcting these problems required understanding the combined book of business for surgical services and the opportunities for a new, efficient business model, both surgical sites were assessed separately and collectively. Using sophisticated simulation-based modeling as a first step, a significant redesign of the entire institution's programs, functions, and operations was undertaken. As a result of the redesign, operating rooms were moved, expanded, and grouped for increased operational flows. Two major components within the entire patient care process were removed, reducing steps for staff and patients and dramatically improving performance times. While this was a very complex and challenging project to redesign and implement, it was worth the extensive, detailed time and thought it required.

2. Serve your patient market first. Never underestimate your main constituency. An acute care hospital along the Atlantic Coast wished to assess potential expansion options for its emergency department. Once the ED was assessed, it appeared that the hospital's previous planning assumptions of demand and resource usage were not consistent with its market. Significant and yet unrealized opportunities for increasing market share were possible. Nevertheless, as program planning progressed and budgets became known, senior hospital executives worried that they could not afford the costs of implementing such a program. A detailed analysis of future ED possibilities, given current knowledge, was in order.

A detailed financial pro forma audit of all business and revenues provided by ED patients was conducted. This included an in-depth examination of the ED's financial structure, performance, and policies for ED outpatients and inpatients. It was determined that, based on its current strengths and increasing market demand, the ED program would begin covering all costs of the new facility by year three. With these findings and downstream revenues associated with an expanding patient population, the project's scope expanded to include a state-of-the-art diagnostic imaging services addition which, when combined with future leverage of additional service expansion, will place this facility as a market leader within its community.

3. Begin lowest to reach the highest. A large health system in the South began to see that the losses from its air and ground emergency medical services (EMS) were resulting in an operating deficit for the entire organization. This program had been inherited from the local town government and had expanded over time, with management decisions that had resulted in costly duplication across all levels. This negative factor would seriously handicap the organization in meeting its near-term financial obligations and potentially place a hold or, at minimum, restrictions on future expansions.

After a thorough assessment of the EMS structure and personal interviews with the staff involved in the processes, the failures in the system became apparent. Improvement strategy recommendations included a right-sizing of the day-to-day management functions, consolidating overlapping service responsibilities, making changes to contractual arrangements, and improving billing. These solutions reversed a $7 million operating loss with no discernable decrease in the EMS provision. Additionally, by returning the organization to immediate profitability and a stronger financial base overall, the system can also plan for a large campus expansion.

4. Always return to the operational core of your business; when in doubt, it's your decision-making anchor. A Midwestern hospital developed a long-range facility master plan that recommended the expansion of inpatient beds, imaging services, and emergency services. It seemed that providing service to a rapidly growing elderly demographic would naturally lead to the construction of a new bed tower with all private rooms. However, after an in-depth analysis of inpatient admissions by DRG categorization, length of stay, and admission source, it was determined that inpatient beds, while important, were not the immediate priority everyone envisioned.

Research revealed that an unusually large percentage of patients were being admitted via the emergency department with one- to two-day lengths of stay. By comparing these data to national and regional norms, the facility determined that it could actually reduce the number of beds required for the new tower simply by employing more stringent criteria for admission. At a minimum of $1 million per newly constructed bed, this single factor alone dramatically changed the expansion strategy for this hospital.

Knowing that questionable data provide an unreliable basis for decision making, there are numerous examples of seemingly smooth operational (record keeping) practices that might, on focused audit, be found deficient. Hence, hospitals must ensure that there is “truth in their numbers” before analysis. Some of the problem areas to watch for might include missing or outdated codes in medical record systems, lapses in the transfer of data to information systems for patient records and billing, and a dearth of paper-based work arounds, e.g., Band-Aids, to overcome inefficient practices.


The challenge for all hospitals is determining the most appropriate set of business strategies and executing them. Today, there is no room to fail. A miscue in a single strategy can result in significant, possibly unrecoverable, financial losses. Unless the correct fundamentals are assessed, starting with a solid understanding of operations, a hospital's future development cannot meet the basic requirements to design the strategic imperatives most likely to be successful.

Hospitals are competitive organizations, and a great deal of innovation is occurring. They are busy installing computerized patient record systems, improving patient safety, streamlining supply acquisition and distribution, and evaluating technology applications based on clinical evidence. They are also beginning to understand that regularly sifting through the operational details of their day-to-day business can make a dramatic difference in their overall success. Any project will likely fall short of expectations unless the entire business and operational model is examined in tandem.

Hence, “know thy hospital,” and then “know thy fundamentals.” When these knowledge areas merge, hospitals will have the highest probability of moving into the future with the best results. HD

Ted Matson, MA, FACHE, is Director, Center for Ambulatory Care, for FreemanWhite, Inc.