The Declining Health of the Local Market: When and How Should Your Health Care Business Expand into New Markets

The Declining Health of the Local Market: When and How Should Your Health Care Business Expand into New Markets
March 21, 2013 - 7:52 pm, by

A large proportion of our nation’s health care infrastructure is located in urban markets with declining population. For example, according to the U.S. Census, cities with the largest population decline in recent years include New Orleans, Detroit, Cleveland, Pittsburgh, Toledo, and Buffalo. These very same cities, however, are home to some of the most reputable and innovative health care institutions in the country.

A very interesting business question facing these institutions is whether they can leverage their local reputation as a means of expanding into areas of high population growth. After all, to some extent the population growth in cities like Phoenix is comprised, at least in part, of transplants from the same shrinking urban centers. In this essay we explore some of the key parameters driving a “reputation leveraged” market expansion. Our insights are based on a series of projects that we conducted with a leading health care provider system a few years ago.

One of the most important variables to consider in market expansion is the overall demand for health care in the target market. In addition to overall population growth, it is important to understand the age distribution in the target market. Older folks are heavy health care users; thus, markets with a steady or growing older population are desirable. But older folks are also covered by Medicare, which is a comparatively tightfisted payer. Another important driver of health care demand is per capita income. Contrary to popular belief, health care is considered a “normal” good in that people with more money tend to buy more of it.

Another class of demand factors are “indirect” effects. Whereas population growth and per capita income will have a direct impact on your business in the target market, things like credit markets, mortgage rates, fuel prices, taxes, and housing prices can also impact the demand for health care. The unemployment rate is another important indirect factor, and one that at the extremes can quickly become a direct effect. Unemployment rates tend to serve as a crude barometer of the health of the local economy.

Another way to assess demand factors is to look more closely at health care utilization. Demand for professional services can be expressed as, for example, outpatient visits per capita. Similarly, demand for hospital services and treatment for acute conditions can be expressed as inpatient visits per capita. There a variety of datasets from which these measures can be calculated for a given geographic area.

Supply-side factors are less important than demand-side factors, in our opinion, but nevertheless cannot be ignored. The most expeditious way to assess the existing supply of health care services in the target market is to measure things like hospital beds per capita, specialists per capita, and the total number of physicians per capita. Other important measures are the number of ambulatory surgery centers, urgent care centers, clinics and fully-staffed emergency rooms. Also, is the market in close proximity to a medical school?

The third category of factors to consider is “environmental.” These include the number and concentration of third-party payers, the levels of fees paid by payers to providers, and the legal environment governing the construction of new health care facilities (i.e., state “certificate of need” programs). Payer concentration is typically measured by what economists refer to as a “four-firm concentration ratio,” which is the proportion of the market served by the four largest firms (for more information on this, refer to this Related Article). The levels of fees paid to providers can be assessed using fee benchmarking datasets (See related blog).

This essay briefly summarizes what we believe to be the key factors in assessing potential growth markets, but the list is far from comprehensive. In 2008, our Business Analytics team (then part of HECG LLC) conducted an extensive market expansion analysis for a U.S. health system with a worldwide reputation, many factors were taken into consideration, and data gathered during an extensive site visit were also crucial to the formulation of meaningful insights for our client. If you are looking to grow through expansion into new markets, Avalon Health Economics has the experience, knowledge and insights to assist.

–John Schneider, CEO & Founder, Avalon Health Economics

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