Rethinking the hospital

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The value of business models for hospitals

Master thesis

Maarten den Braber (m@mdbraber.com)

October, 2008 – Enschede, The Netherlands

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The value of business models for hospitals

Master thesis

University of Twente School of Management and Governance master Industrial Engineering and Management track Health Care Technology and Management

Student

M.M. den Braber BSc. (s0010863) m@mdbraber.com

Supervisor

Prof. Dr. H.E. Roosendaal h.e.roosendaal@utwente.nl

Co-supervisor

Prof. Dr. W. van Rossum w.vanrossum@.utwente.nl

Company supervisor

The Decision Group Ir. M. Koomans m.koomans@thedecisiongroup.nl

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Front page: The photo depicts “Maggie’s Centre” at Dundee, United Kingdom. The

building is designed by the architect Frank Gehry and located at Ninewells Hospital in Dundee. It was opened in 2003 and fulfills the purpose of helping people with cancer, their carers, family and friends to learn how to manage the physical and emotional impact of living with cancer.

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HOSPITAL LOCATIONS IN THE NETHERLANDS (RIVM,2007) 20 DIFFERENT DUTCH HOSPITALS 21 OVERVIEW OF INTERNAL HOSPITAL (SERVICE LINE) ACTIVITIES 23 APPLICATION OF THE BUSINESS MODEL IN 6 SEQUENTIAL STEPS 30 PRESSURE FOR CHANGE IN HOSPITALS (MCKEE &HEALY,2002, P.37) 37 STEPS FOLLOWED TO BUILD STRATEGY CANVASES AND FIND DIFFERENTIATING FACTORS 40 HEALTHCARE DELIVERY VALUE CHAIN (PORTER &TEISBERG,2006) 67 PORTERS FIVE FORCES MODEL 69 FIG BCG MATRIX (JOHNSON ET AL.,1997) 71 FIGURE APPLICATION OF THE BUSINESS MODEL IN 6 SEQUENTIAL STEPS 77 BLE 3.1 HISTORICAL EVOLUTION OF HOSPITALS ADAPTED FROM MCKEE &HEALY (2002)...18

BLE 4.1 PROPOSED ROLES OF THE BUSINESS MODEL...27

TABLE 6.1 ANALYSIS OF CURRENT IMPLICIT DUTCH HOSPITAL BUSINESS MODELS (ESTABLISHED POLICIES) ...54

TABLE 6.2 POSS E ROLES OF A DISTRICT GENERAL HOSPITAL (MCKEE &HEALY,2002, P.69) ...55

TABLE 6.3 STRATEGIC PATHS TO FUTURE CHANGE IN THE ORGANIZATION OF HOSPITAL HEALTHCARE VERENIGING VAN ZIEKENHUIZEN TABLE 6.4 NEW PITAL ENTERPRISES ONTARIO HOSPITAL ASSOCATION (MACKINNON,2002) ...57

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uys. Don’t know where this would have ended without you!

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Acknowledgements

After organizing Orientation Week 2005 I made a very distinct choice to pursue a career path involving people and healthcare, and have not regretted it since. During these past few years I have been able to meet, discuss and work with the most interesting and skillful people I can imagine.

I would like to thank my friends and roommates, Joost and Maarten. Thank for your passionate discussions, honest critiques and always being there when I most needed you g

To my other friends Lumine, Koen, Peter, Marieke, Mirte, and Annet: thank you for your h r and kind remarks. You never ceased listening to my ever-changing ideas and concepts about my thesis. I look forward to being able to discuss, talk and laugh with you for a long time to come.

Professor Hans Roosendaal I would like thank for his inspiration and showing me insights into strategic management, also for not letting me walk the easy route. And Professor Wouter van Rossum I thank for his comments and shared insights on this thesis.

To everyone at The Decision Group, Maarten, Merijn, Roald, Fred, Lydia, Karin and Wendie, thank you for all the expertise, taking ideas to the next level and never holding back on your feedback. Thank you for letting me experience consulting and giving me a seat at the table. I still do not know of any other place that would have done the same! And all the inspiration from the Nexthealth crowd: Martijn, Jen, Jacqueline, Niels and Jeroen. We have already accomplished some mind-blowing things and I am confident it will not end here. A special thanks to Jen, my English-speaking partner in crime and things even beyond Nexthealth. Never forget that the ones that talk about changing the world are often the ones that do!

Also a big thank you to all of you who have taken the huge effort in reading, spell-checking and logic testing this document!

And last but not least a great thank you to all my family: mom, dad, Marieke and Gerhard. You may have not always got all the details of what I was working on, but you have never ceased to show your interest in what I was doing. Thanks for your everlasting support and love!

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am looking ahead to the future, and it is bright. I know of no better words than those of two friends who also made me smile every day

aarten den Braber

To end this acknowledgement…: I

writing this thesis. So in the words of Calvin and Hobbes, created by Bill Waterson, I’d like to close by saying: “It’s a magical world…

M

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s of disease, public expectations), the upply-side (technology and clinical knowledge, health care workforce) and the wider ocietal level (financial pressures, internationalization, global R&D market). This leaves any of them questioning how to react. We analyze the strategic background and issues f hospitals to better understand what causes this anxiety. As a case example we focus on

e situation of the Dutch hospital.

n the 1st_{century when they were mainly focused on providing} to soldiers of the Roman Empire. Later they evolved into “places where people could die” (by isolating them from the rest of society). Well after that – from the 19th_{century onwards – hospitals evolved more and more into places} where symptom-based, treatment-oriented care was administered. Important in the last two centuries (19th_{and 20}th_{century) was the development of aseptic and anti-septic} techniques, better understanding of infections and the development of effective anesthesia. Overall, the development of the hospital in these two centuries was driven largely by technology. But unfortunately, other roles and service line strategies on the other hand developed with little conscious thought.

Where is the hospital today? The link with the environment of the (Dutch) hospital is mostly determined by its “neighboring medical institutions”, such as GPs or other hospitals. There is a structure that determines the position of the hospital based on the complexity of care and level of specialization. We discern 5 types: general hospital, top-clinical hospital, academic hospital, specialty hospital and focus clinic. With each of these hospitals there is a different mix of six main functions that the organization provides: patient care, teaching, research, health system support (e.g. management of primary care), employment role and societal role (e.g. provider of social care). Analysis shows relatively large similarities between current hospital configurations.

What about strategic change? Hospitals have a long history of reactive behavior towards change (coinciding with their overall organic, rather than proactive change). Hospital reform in The Netherlands has been, especially from the 1980s, a struggle between government, hospital management and medical specialists. Attempts to implement new fee structures and fee cuts therefore never proved effective.

In this research we establish what possibilities for change there are according to current decision-makers. We have conducted semi-structured interviews with 11 field experts

Executive summary

Running a hospital is a balancing act. Hospital decision makers must balance pressures from the demand-side (demographics, pattern

s s m o th Hospitals emerged i curative, stationary therapy

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(chairmen and members of hospital boards of directors). The main question of the e different and where/how will they differ?”

he outcomes of the interviews are two-fold. On the one side it shows us that the

solutions often look interesting and ought-provoking, but they give no pointers on how to realize and implement the

ization. To do so they need to rovide a coherent and sound logic. This is why we focus on the business model: a

ns, focus on value creation nd focus on value appropriation.

interview was: “Will future hospitals b

The interviews were structured based on themes of the business model: what will be the (future) value proposition, market segment, strategic position, value chain, competitive strategy and cost structure/revenue potential. This structure provided us with a framework to categorize the different questions as well as the outcomes to later identify the applicability of the business model framework as a relevant theory to build current and future hospital strategy.

T

themes of the business model structure give a comprehensive view of current and future hospital strategy and are relevant themes to hospital decision makers. On the other side the interviews express anxiety of hospital decision-makers how change could be structured and/or accomplished. Few of the interviewees expressed that they were confident about how they could structure change in their own organization. These concerns added to the fact that it is useful to focus on tools, such as business model theory, that hospitals can use to build strategy.

Tools can be considered the opposite of pre-defined solutions (which are proposed by many consultants or advisory bodies). Pre-defined

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proposed changes. Also pre-defined solutions are exclusive: they only address a fixed number of solutions. Decision-makers identified this as a major short-coming of such models, because such solutions therefore never align with organization characteristics. Another problem with pre-defined solutions is that they tend to focus on providing value for the organization rather than the customer (patient).

The solution to building sustainable future hospital configurations is not in focusing on a single. Sustainable future hospital strategy will have to balance views that provide value for the consumer with views that provide value for the organ

p

comprehensive strategy building tool using a model (template) approach with value at its core.

We have been able to identify four distinct uses of the business model as defined in literature: strategic choice, linking different strategic domai

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at the ompetition offers and customers demand). The uses “strategic choice” and “linking

sing a model approach to strategy, such as the business model, gives structure to be

s operationalized well, compared to other definitions available in terature. See the figure below for a graphical overview.

n sequential order: value

lthcare is aptly described by Porter & Teisberg (2006) as zero-sum competition: no

r perspective, it must span the complete process and The business model is an approach that balances the inside-out views of strategy (based on the resources an organizations has) with the outside-in views of strategy (wh c

different strategic domains” shows the comprehensiveness of the business model. It does not focus on one specific strategic domain (e.g. the value chain), but on providing a sound business logic that connects different domains. Using the business model to focus on both value creation and value appropriation makes sure that what is asked for can be delivered, and what can be delivered is what is really for.

U

able to answer complex questions. This is useful to hospital decision makers that have since long had an organic approach to strategy. By using a structured approach it also enables decision makers to be better knowledgeable about sources of success and failure in the past, present and future – which is something that often lacks in organizations like hospitals that have little experience with explicit strategy making.

The business model used in this research is based on that of Chesbrough & Rosenbloom (2002). This theory i

li

he business model consists of six different elements linked i

Value delivered Customer

preferences

Value

proposition Strategicposition

Value chain Competitive strategy Cost / revenue value creation implementation value appropriation Business model Market segment T

proposition, market segment, strategic position, value chain, competitive strategy and cost structure / revenue potential. At the start of the model customer preferences drive the value proposition and the result is value delivered.

The notion of value is at the core of the business model: value as input and value as output. This is important to solve current problems in healthcare. The current problem

hea in

value is created, competition is about shifting costs, increasing bargaining power and competition to capture patients. Escaping this zero-sum competition can be done through a value-based strategy. Value for hospitals is defined by three dimensions: it

ust be viewed from the custome m

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es for change 4. Current governance structure complicates decision-making

huizen, 2000).

From the analysis of the literature we conclude that hospital strategy literature focuses on pre-defined solutions, rather than on techniques and tools to build strategy. The focus is often on value realization (through strategic positioning or value chain optimization), but less on questions about what value should be realized (value proposition) or how value is appropriated (cost structure / revenue potential). The reasoning with hospital strategy in literature is often inside-out: strategy is built based on the resources the hospital has,

cture/revenue potential) together uild comprehensive, concise business logic of the organization. Each of the individual To research the value of the business model approach to strategy we asked hospital decision makers for their strategic issues. See the list below for the ten most apparent issues found. Using these issues we have tested the business model approach in how it can help solve these issues.

1. Providing specialized medical care is considered core business 2. Strategic decisions are often supply-driven

3. Scale and scope are considered most important ax

5. Relationship with the patient is considered of growing importance 6. Financial structures difficult to match with strategic initiatives 7. Hospitals show large similarities in strategic structures/configuration 8. Patients are not always considered end-users

9. Regulated competition is not fully functioning yet 10. Strategy development is replacing established policies

In addition to the strategic issues found through field research, we have also analyzed four different sources in literature about hospital strategies (Darzi, 2007; MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van zieken

rather than the value it should provide. The value of the business model in this aspect is the fact that it balances an inside-out with an outside-in view on building strategy.

The elements of the business model (value proposition, market segment, strategic position, value chain, competitive strategy and cost stru

b

elements can provide (different) value for the hospital in tackling their strategic issues. Defining a value proposition requires the hospital to think about its stakeholders and its end-customers. The value proposition is not only about products and services but about core functions: is the hospital focused on curing sick people or keeping people healthy? The market segment follows the value proposition and focuses on segmenting potential customers in quantifiable groups and specifying targets for what customers to reach

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of organizational structure, such as (de)centralization, /outsourcing, transaction/coordination costs and addressing issues of governance. The hat the borders of oes it end.

value chain of the value? In each elevant for by competitors. Competitors might organizations, but might come g the focus on medical-chnical quality as a single competitive dimension is relevant.

ospital needs to uild a comprehensive service portfolio balancing cost as well as revenue-generating

sibility nd acceptability.

ol f their own strategic decisions, rather than providing ill-aligned pre-defined solutions.

ins. The link with the environment is the third element of the business model (strategic position) and oriented towards how to create the relevant value. It puts the attention of the hospital on issues

in

relevance of determining the strategic position is that is makes clear w the organization are: where does it start and where d

These organizational borders are needed to further explicate the hospital: what does the hospital do itself and where and how does it add

step of the value chain the hospital takes, value is exchanged, which must be relevant to the value proposition. The following element, competitive strategy, is r

hospitals to offer sustainability and not be overtaken not be limited to the “usual suspects” of other healthcare from other industries as well. Therefore also reconsiderin te

The cost structure and revenue potential of the business model shift focus towards the fact that no organization is sustainable if no revenue is generated. The h

b

activities. Considering what customers are willing to pay for (exchange value) can help in identifying new revenue streams that go beyond the current mechanism of paying for procedures.

Through field research, literature research and assessing the model elements we have reached the point to draw the conclusions about the value of the business model approach as a whole, our main question for this research. We do this by evaluating the business model based on three criteria to evaluate strategic options: suitability, fea a

Suitability is concerned with the questions whether an option fits the firm’s situation and if there is evidence to support it. The business model helps to answer seemingly complex issues by using a model approach to strategy, putting hospital decision makers in contr o

The business model solves the issue of causal ambiguity by making decision-makers aware of the (needed) logic behind strategic scenarios. It enables decision makers to expand the scope of their strategy beyond medical care as their core business and focus on value as defined by customers. Strategic issues (scale/scope, governance, competition, financial incentives) all get a place within the elements of the business model to be adequately addressed as part of the comprehensive approach connecting all the doma

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nd not only can the business model be used to test current strategies, it is also usable to

cit strategy development. igor and discipline is needed to determine what sound business logic is. But hospitals

ic in theory.

arch we have found many examples of the fact that hospitals do perceive e need for change as well as the need for inclusive ways of framing seemingly complex

their customers and their organization: it provides them with a tool ther than a pre-defined solution. The model approach of the business model makes the A

test new scenarios for hospitals looking at how to gain competitive advantage in the future.

Feasibility is concerned with the question whether there are resources to do it and likely competitor response. The business model is no easy solution to implement for hospitals that have long followed established policies, rather than expli

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also do not have to (re)invent the wheel. We have shown with each step in the business model that there are methods, tools and techniques that help the hospital assessing and connecting the different strategic domains. When the hospital connects these tools and techniques through the comprehensive business model it can evaluate the business logic of the current strategy as well as test future scenarios. But building a business model needs also a strategic mindset throughout the organization. When not everyone inside of the organization is knowledgeable about what the ultimate value delivered should be, it will be hard the least to deliver this, even if there is a sound log

The acceptability of using the business model is closely linked to willingness of the hospital to rethink the organization. If there is no perceived need for change with the decision-makers, there will likely be little interest in any value-based strategy (building tool) at all. If the hospital is aware of the fact that delivering value in a sustainable way is of increasing importance they will be more likely to accept the business model. During our field rese

th

problems. The business model is a likely candidate for this as we have been able to proof in this research.

The business model contributes to the efforts of hospital decision makers interested in providing value to

ra

hospital (decision maker) smarter and allows for a clear strategic fit with the organization. Using business models hospitals can focus on delivering value for the consumer as well as for the organization.

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on’t much care where…” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

1

tomers. Analyzing different parts of the hospital process and

ges (explored further elsewhere in this research). But current vate an awareness of the value they deliver: what, why, how and when. But answering these questions is not a challenge just for hospitals, it is a challenge for all that deal with balancing customer and organizational preference. Therefore we take a premise in this research that best practices from other domains such as business can be used to help hospitals address this issue.

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to,” said the Cat. “I d

-- LEWIS CARROLL, Alice in Wonderland

Introduction: Making the right choices

Hospitals and other healthcare organizations are working their hardest to deliver optimal care in cost-efficient ways. Examples are many and include finding optimal planning algorithms, patient satisfaction surveys or building new clinical paths, such as mamma-care service lines for focused breast cancer screening and treatment. The tension between

bjectives is challenging for decision-makers to manage. Choices ultimately these two o

have to satisfy the preferences of the patient (optimal care, outstanding communication and collaboration or information transparency, just to name a few). At the same time organizational issues have to be addressed in order to deliver products in services in a sustainable way (cost-effective, evidence-based, state-of-the art, etcetera). How than can the hospital make the right choices to balance the interest of the patient/customer as well as the organization?

Process optimization, total quality management or medical-technical innovations are some of the efforts organizations in healthcare are making to deliver the best care possible to patient/cus

looking at the many new initiatives in healthcare, the question comes up: what value does the hospital provide? Is the current hospital the best way to deliver value to the patient/customer? In other words: do we still know why the hospital should actually exist?

Hospitals have a long history of responsive organic changes, rather than a history of predictive explicit chan

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Busi making choices. “What?”, “when?”, “how?” and “who?” are four questions for any organization to answer about their business. Hospitals can benefit from a comprehensive and structured approach to

help e the right choices: balancing

patient/custom search is about what is available

for hospitals to use and focuses in-depth on the approach of the business model. ness strategy is the scientific domain focusing on

them answer these strategic questions and mak er and organizational preferences. This re

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2

Research background

Helping hospitals make the right choices can be as easy as trying to point out the direction to go. But who follows such a suggestion without knowing if it is the right one for his organization? And how would you know that it is the right solution? There is definitely value in visionary answers and possible routes to take: they are often thought-provoking, good start for a discussion and may be close to the actual best route possible. But there is additional value in asking good questions: it is 100% focused on the specifics of the organization, it calls for a sound logic to connect the dots and it can be repeated if situations change.

We show an overview of current approaches to new hospitals strategies and configurations in 2.1. Following that we will explain that we chose the business model as the research object of this master thesis and why the business model adds to the current research domain (2.2). To guide the research we pose a set of research questions (2.3) and list the research methods (2.4). The context of this research is exploratory (2.5 and 2.6).

2.1 Position of this research

“Research is to see what everybody else has seen, and to think what nobody else has thought.” -- ALBERT SZENT-GYORGI, Nobel Price for Medicine 1937

What hospitals might look like in the (near) future is becoming an increasingly popular field of research. Not surprisingly maybe, consultants are amongst the most avid publishers of change in healthcare, issuing (trend) reports about future configurations of hospital and other healthcare organizations (PriceWaterhouseCoopers, 2005; Roland Berger, 2007; Vreeman & Laeven, 2008). Often these reports are trying to give insight into several exclusive paths that healthcare organizations within a certain field (e.g. hospitals, nursing homes, primary care) can possibly take. Not only consultancy firms are publishing about paths for the future, also policy makers, associations and other non-commercial parties are doing so (Darzi, 2007; MacKinnon, 2002; McKee & Healy, 2002; NVZ vereniging van ziekenhuizen, 2000). How can hospitals go about incorporating these possibly innovative ideas into their own organizations?

When we look at the academic literature for references to “recipes” rather than pre-defined solutions we find some literature that point to different elements: blending

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custom s

(Burns & Pau n analysis of

nfigurations (Reeves, Duncan, & Ginter, 2003). Most of the publications found have two things in common: (1) most of them focus on an analysis of the present-day specific issue. Our goal is to look for ways or tools that can help hospitals find new inclusive ways of innovating strategies, rather than and standard care (Bohmer, 2005), analysis of integrated delivery network

ly, 2002), transformation processes (Golden, 2006) or a co

situation and (2) they often focus on one only giving pre-defined solutions (Box 2.1).

Box 2.1 The need for inclusive ways of framing problems

“We live an extremely complex, pluralistic society where it is increasingly difficult to achieve consensus. In the effort to deal with the complexity, we often oversimplify by posing "solutions" in either-or terms. We need more inclusive ways of framing problems and challenges that permit us to consider the inherent complexity of the issues in a meaningful way.”

(Shortell et al., 2000)

2.2 Focusing on the business model

This research focuses on a comprehensive method for innovating hospital strategy: the business model. A business model explains how different elements of a business are tied together to embody coherent and comprehensive business logic. It does so by combining a perspective from both the organization (e.g. how can we sustain?) and customer (e.g. do I get what I want?).

The business model may differ from the focus of strategy in at least three important

pecific type of healthcare rganization: the hospital. Using the hospital makes it possible to relate to real-world ways: (1) it focuses on creating value for the customer, (2) it focuses more on creation of value for the business than for the shareholder and (3) it assumes knowledge is cognitively limited and biased by earlier success of the firm (Henry Chesbrough & Richard S. Rosenbloom, 2002, p. 535). The attributes of the business model mentioned in the previous paragraph can be beneficial for hospitals: combining customer value creation with creating value for the business. Non-profit businesses, as viewed from a strategic standpoint, can benefit from the same tools and discipline as used by for-profit businesses (Collins, 2005).

The question of what the value of the business model is for (non-profit) healthcare organizations will be at the center of this research. We focus on one s

o

examples and test validity through example. Further research may extend this research to healthcare organizations other than the hospital.

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e a fluid, adaptable approach to strategy evelopment. We test this one approach, the business model, to be able to judge at the ining non-profit hospitals strategic p

2.3 R

We analyze the use of business models as a way to rethink the hospital. We acknowledge therefore that this approach might mean changing our ideas about what defines a “hospital”. We assume that the strategic definition of a hospital is not written in stone, instead can be a myriad of different things. Today’s healthcare organizations, particularly ‘one stop shops’ like hospitals, must hav

d

end of this research the potential value for reexam ositioning using traditional business models.

esearch questions

“ business model theory for hospitals?” is the main research ques

research. We follow this by breaking down this research in six diffe Box 2.2.

What is the value of tion for this

rent sub-questions in

Box 2.2 Research questions

What is the value of the business model theory for hospitals?

1. What is the strategic environment of hospitals? 2. What defines a business model?

3. What is value?

4. What indicates a need for the approach of business model theory for hospitals? 5. What value does business model theory add for hospitals, compared to existing

literature and methods already available?

6. What are the benefits and limitations of the business model elements and approach for

hospitals?

To be able to asses the value of the business model we need to understand in what realm we are testing value. We choose hospitals as the one type of healthcare organization to be the case example for using the business model in the wider realm of healthcare organizations. The Dutch hospital situation is known to the author and useful to show

. the relevance of the business model by example.

The second research theme is the subject of our research question: value. Starting to define value immediately raises a plethora of additional questions: value for whom, which type of value, when is value delivered? We define value in the second part of this research

t we link to the business model in the third part of this research to know wha

The strategic environment of hospitals and the definition of value are linked to the business model in the subsequent part. The three sub questions concerning the business model are:

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2.4

1. What are the theoretic elements of the business model?

2. What value do business model elements deliver in building hospital strategy? 3. What are the uses of the business model for current hospital makers?

Research method

For this research we use both literature and field research. Literature offers us many

re strategic issues of hospitals and healthcare in The Netherlands from terviews and two discussions sessions with relevant decision makers.

E Directors chairmen and

members (general hospital 2, top-clinical hospital 4, academic hospital centers 3, r. A complete list with names and n Appendix A.

ospital nment complete list with names and functions

he interviews and groups discussions were held in private settings. This allowed the

2.5

views and theories of what business models can offer. We test how these different views of the business model might apply to hospitals. We gain information about the current and futu

in

leven interviews were conducted, mainly with Board of specialist hospitals 2) and 1 healthcare entrepreneu

functions of the interviewees is found i

The discussion sessions were attended by a total of 33 people, representatives of h or healthcare delivery organizations, (specialist) associations, hospital-related gover organizations and facilitating organizations. A

can be found in Appendix B. T

interviewees and attendees to speak freely and allowed for more room to express strategic issues or concerns. The outcomes of these interviews and discussions are summarized in chapter 5, where the strategic issues for the hospital in building strategy are discussed. In the tables below (2.1 – 2.3) we listed the attendees for the interviews and the first and second

Exploratory research

This research offers an explorative view on a combination of two otherwise often disjunctive concepts: business (models) and healthcare. Because of the exploratory nature of this research we have chosen a qualitative approach. When searching for available terature on conducting sound academic research in a non-quantitative ways, we utilize

o one definitive way to ple li

the theories of Popper (1935), later adapted by Kuhn (1962) and Lakatos (1970). They can guide us through this explorative research.

Popper introduced the theory of falsification: while there is n

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ce this isn’t the case with most scholars. Many hang on to their theory, dismissing any

counter-nsound or not true, rather than admitting their theory may be

akatos, another scholar of research philosophy, offered an alteration to the theories of

in a model, while the auxiliary ypotheses can be seen as the different themes and elements residing under that model,

theses can explain apparent refutations and possibly also roduce new facts. Lakatos named such a rule a positive heuristic. If changing the auxiliary

2.6

(all swans are white – until we find a black one). Kuhn identified that in practi evidence, stating it is u

wrong. Explorative research such as this might lead others to state that the business model theory is not applicable to hospitals and other healthcare organizations. We take the stand in this research that this is not the case, until we have found a counterexample (evidence which shows that business model theory does not apply to hospitals)

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Kuhn and Popper. He didn’t view a theory as a single statement, but rather as a collection of statement, he called a research program. The research program is made up of a hard core and different auxiliary hypothesis. With business models we can mirror this: the hard core is the fact that strategy can captured

h

which might need to be changed at a later stage. This is than without dismissing the fact that strategy can be viewed as a model (see for a more detailed explanation section 4.4). Changing these auxiliary hypo

p

hypotheses does not yield the prediction of new facts then it would be labeled degenerative. A progressive research program, with a positive heuristic, is interesting for scholars to research further, because it produces new facts and can explain apparent refutations. We look into if the theory of business model to research if it provides such a positive heuristic.

Research context

This research is the master thesis project of the author, enrolled in the master track

er van Rossum (Professor of Innovation anagement and director of the Institute of Governance Studies - IGS). Both NIKOS Health Care Technology and Management (HCTM). HCTM is a specialization track of the master Industrial Engineering and Management (IEM), taught at the School of Management and Governance at the University of Twente (Enschede, The Netherlands). This research was supervised by Prof. Dr. Hans Roosendaal (Professor of Strategic Management at the Dutch Institute for Knowledge Intensive Entrepreneurship - NIKOS) and co-supervised by Prof. Dr. Wout

M

and IGS are directly linked to the University of Twente.

The day-to-day research has taken place at The Decision Group (Breukelen, The Netherlands), where the author has been employed full-time from October 2007 to June 2008 as a business analyst. The Decision Group is a strategy consulting firm with more

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ata for this research was gathered from the study “Changing Roles and Configurations

2.7

than half of its client base in the health care and life-sciences sectors. Supervision at the Decision Group was performed by Drs. Merijn Stouten (consultant) from October 2007 to April 2008 and by Ir. Maarten Koomans (partner) from May 2008 to June 2008. D

of Hospitals,” executed as a joint-venture by Nyenrode Business Universiteit (Breukelen, The Netherlands), The Decision Group and Assist BV. Supervision of the study is by Prof. Dr. Fred van Eenennaam (Professor of Dynamics of Strategy at Nyenrode Business University and partner at The Decision Group). The author has been a member of the research project group for the full duration of the project.

Conclusion

This research focuses on devising whether the business model approach applies to ealthcare and is able to ask the right questions instead of giving pre-determined routes

s: “What is the value of the business model?” The themes of this research are value. There are six guiding questions used h:

h

of change. The main reasons why this research is different from currently available research is that focus on inclusiveness (“asking questions”) rather than exclusiveness (“giving answers”). The goal is to provide decision-makers with tools which can be tailored to our specific situation and repeated to strengthen our own decision-making.

The research object is the theory of the business model and the according research question i

three: the hospital, the business model and throughout this researc

1. What is the strategic environment of Dutch hospitals? 2. What defines a business model?

3. What is value?

4. What indicates a need for the approach of business model theory for hospitals? 5. What value does business model theory add for hospitals, compared to existing

literature and methods already available?

6. What are the benefits and limitations of the business model elements and approach for hospitals?

Our research is exploratory in nature and we use qualitative research methods (interviews, discussions sessions) which give more insight in the relevance of the business model theory we are researching. We state that the business model can be used as a model to build strategy for hospitals. The contents of this business model we will have to test in this research.

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“A hospital is no place to be sick.”

3

The business model is part of the domain of tools at our disposal to build strategy.

o be able to place this research in a broader context that also shows why any approach

3.1

-- SAMUEL GOLDWIN, Hollywood producer

Strategic environment of Dutch hospitals

Strategy as we will discuss in more detail in the next chapter evolves around questions of what, where, how and when products and services are delivered1_{. If we want to be able} to analyze further the value of the business model, we need to know more about in what context it is applied. This context is the strategic environment of the hospital: its positions in the landscape of healthcare organizations and its functions and activities. T

to building strategy is relevant, we show the evolutionary stages of the hospital.

Evolution of the hospital

T

considered the emerging of a hospit

here is no single definition of “the” hospital. The first notions of what may be s temple, 300 an valetudinarium, see Box al can be traced back to the Asclepiu

, 2008a) and the Rom B.C. (NAi, 2006; Wikipedia contributors

3.1.

Box 3.1 Valetudinarium

“The hospital as institution was invented about 2 000 years ago, in the era of emperor Augustus (63 B.C. to 14 A.D.). It emerged in the context of the transformation of the Roman army from mobile troops to an army of occupation. Roman officers created a new type of building, the valetudinarium (military hospital) which was integrated within large permanent headquarters. Hence any service a patient might have required – from an operating theatre to a sickroom – was available under one roof […] As opposed to medieval hospitals which devotedly supplied health care for the poor, the weak and the sick, Roman hospitals were exclusively organized with the aim of providing curative, stationary therapy and simultaneously furthering the education of physicians and nursing staff”

(Wilmanns, 2003)

1_{The questions of what, where, how and when are not defined as one distinct strategic theory but are apparent in many}

strategic theories and related literature. We use them in this research as guiding questions that help us easily identify what strategy is about in its core (Mintzberg, Ahlstrand, & Lampel, 1998; H.E. Roosendaal, 2006)

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historical evolution of hospitals as well as their

Table 3.1 Historical evolution of hospitals adapted from McKee & Healy (2002) Table 3.1 gives an overview of the

changing role in current society.

Role of hospital Time Characteristics

Curative, stationary therapy 1 to 5 century st th Focused on soldiers

Practicing medicine as science 7th_century _{Byzantine Empire, Greek and Arab} theories of disease

Nursing, spiritual care 10th_{to 17}th centuries

Hospitals attached to religious foundations

Isolation of infectious patients 11th_century _{Nursing of infectious diseases such as} leprosy

tality Early 20th_century _{Technological transformation of}

hospitals; entry of middle-class patients;

secondary and tertiary hospitals 1990s Active short-stay care

A C

O h

concepts both online and offline (McCabe Gorma

2008)

Health care for poor people 17th_century _{Philanthropic and state institutions} Medical care Late 19th_century _{Medical care and surgery; high mor} Surgical centers

expansion of outpatient departments Hospital-centered health systems 1950s Large hospitals; temples of technology District general hospital 1970s Rise of district general hospital; local, Acute care hospital

mbulatory surgery centers 1990s Expansion of day admissions; expansion of minimally invasive surgery

linical pathways 2000s Focusing not only on medical treatment, but on control of the complete path of care given.

nline and offline personalized ealth related services

Next Providing information, advice and

treatment in personalized service n & den Braber,

Starting out as military institutions, the first hospitals grew out of care made available rough those realizing the Christian ideal of providing relief for the sick and poor. Together with this function came also the ‘added benefit’ of isolating those with th

infectious diseases from the rest of society. With the rise of industrialization, urbanization expanded (19th_{century) and the state stepped in, alongside religious and}

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nger based so tatus, but rather dical criteria.

the r base d medical care:

anti-septic techn

with greater surgical knowledge and an increase in medical technology, these developments gave rise to the model of health care

n most Western countries.

sur profoun

advances including: safe blood transfusion, penicillin, and surgeons trained in trauma

eerin ncrease i d.

ed the scope of ho ed

n the second hal ury medical technology increased even further, especially the field of medical imaging an

technologies also mean an increased burden on the health care system - people that kept alive m

dustrialized nations such as the United

ew shows th volution of h n the last two

of ho was driven la

and service line strategies developed with little cons yatt, &

3.2 Position of the hospital in the healthcare delivery system

philanthropic institutions, forming public hospitals. Admission was no lo

much on social s on me

The 19th_{century also saw} _{ise of symptom-} _{d, treatment-oriente} infection was better understood, aseptic and

anesthesia became available etcetera.

iques developed, effective Together

delivery we now see i

In the 20th_{century military} _{gery had a} _{d impact on hospitals, introducing} techniques. Chemical engin g meant an i n the diseases that could be treate This broaden spitals, but also m ical technology got more expensive

and complex. I f of the 20th_cent

d diagnostics. All these improved would otherwise have died can now be uch longer, especially with the now common use of life support technol

States.

ogies in in

This quick2_overvi _{at the e} _{ospitals is organic. I}

centuries the configuration spitals rgely by technology, and other roles cious thought (Edwards, W

McKee, 2004).

The Dutch healthcare delivery services, primary car

s consists of three separate modalities: public health

e and secondary/tertiary care3_. _by

family physicians, district nurses, home care givers, midwives, physiotherapists, social workers, dentists and pharmacists. Each patient is supposed to be on a GP patient list and must be referred to specialist physicians or the hospital by the family physician.

econdary and tertiary care in hospitals is largely provided in private not-for-profit ystem

Primary healthcare is provided

S

institutions.

2_{Much more can be said on the background and evolution of hospitals. The scope of this research does not provide sufficient}

space for an in-depth review of all developments. For those interested in such a review, we recommend reading the second chapter (The evolution of hospital systems) of ‘Hospitals in a changing Europe’ (McKee & Healy, 2002).

3_{The division of care delivery in three separate modalities can be argued: the distinction between secondary and tertiary care is}

not always clear: e.g. psychiatric care is part of hospital care (secondary) as well as considered tertiary care (independent psychiatric hospitals). It is important to make a distinction between primary and ‘further’ care because of the referral system used in The Netherlands.

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ialists or hospital care, but must go through” the GP. Family physicians “specialize” in common and minor diseases, in care

health care system: a gap between outpatient and hospital care.” (European bservatory on Health Systems and Policies, 2004, p. 69)

3.3

The family physician (GP) is the gatekeeper of the healthcare system in The Netherlands. The gate keeping principle is one of the main characteristics of the system. It denotes that patients do not have free access to spec

“

for patients with chronic illnesses and in addressing the psychosocial problems related to these complaints. Complicated non-comprehensive (and expensive) specialist care is reserved for patients who require special expertise and highly technical skills (European Observatory on Health Systems and Policies, 2004, p. 63).

“In the Dutch system, family physicians do not have hospital privileges: they cannot admit their patients to, nor treat them in, the hospital. They may, however, use the hospital for diagnostic procedures, such as blood tests, X-rays, endoscopies and lung tests. Although some family physicians visit their hospital patients, this is not common in practice. This illustrates one of the disadvantages of the existing

O

Hospital landscape

Currently there are 93 non-academic and 8 academic hospital organizations in the Netherlands providing specialized medical care combined with (overnight admissions)

.1).

medical care stay, comprising 141 hospital locations and 45 outpatient clinics (see Figure 3

Figure 3.1 Hospital locations in The Netherlands (RIVM, 2007)

Current Dutch hospitals are defined as ‘institutes delivering specialized

including stay’ (RIVM, 2007). In Dutch law all hospitals are known as institutes for specialized medical care. This same name is given to independent/focus clinics. The

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are, education and research inisterie van Volksgezondheid, Welzijn en Sport, 2006; STZ, 2006). Through analysis difference between those clinics and other institutes for specialized medical care is that only hospitals are allowed to offer stay, or overnight admissions.

The three main functions of Dutch hospitals are patient c (M

of available publications and views expressed by different stakeholders of hospitals a categorization of hospitals in five distinct types emerges: general, top-clinical, academic, and specialty hospitals and the focus clinic, see

Box 3.2.

Box 3.2 Dutch hospital types

! General hospital : regional focus, wide range of treatments

! Top-clinical hospital: regional focus, wide range of treatments, offering teaching facilities and some highly specialized medical treatments

! Academic hospital: national focus, focusing on complex treatments, offering teaching and research facilities

! Specialty hospital: national focus, focusing on a single treatment category (e.g. oncology or rehabilitation), may offer teaching and research facilities

! Focus clinic: national focus, specializing in a single type of treatment or medical condition, does not offer teaching and research facilities

The differences between the hospitals (as defined by the interviewees and discussion rences in complexity and specialization of these two axes yields the participants themselves) are based on diffe

patient care. Detailing the different types of hospitals based on figure displayed in Figure 3.2.

Figure 3.2 Different Dutch hospitals

Specialization Co m p le x it y o f ca re

General hospital Top- clinical _hospital (STZ) Academic hospital

Focus clinic Specialty hospital

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Most other healthcare organizations, general practitioners, dental care or paramedic care providers are allowed to be r-profit organizations. An important distinction between for-profit and not for-profit ent of overnight admission. When offered care is inpatient

d to be for-profit.

e Netherlands is regulated by means of nds Board for Health Care Institutions uity is kept for health care van Volksgezondheid, Welzijn en Sport, 007b).

es (CMS) diagnosis related group (DRG) nomenclature. his implies a ‘package of care activities’ with a single price for a complete diagnose and re divided into two segments. The B-segment entails 20% of all treatments, most of them low in terms complexity (such as cataract surgery or hip replacement). Prices may be negotiated between the hospital and the insurer. For the other 80% (A-segment) prices are not negotiable (set by the government).

3.4 Hospital functions and activities

Dutch hospitals and other institutions for specialized medical care are not permitted to be organized around a for-profit classification.

including fo

organizations is the compon

(including overnight admission), organizations are not allowe Establishing a (new) health care institution in Th

the Health Care Establishments Licensing Act (Wet Toelating Zorginstellingen). An application has to be submitted to the Netherla

(Bouwcollege) who tests the application on the four different themes: transparency of management, continuity, quality and that accumulated eq

purposes. This test is compulsory for institutions such as hospitals and care, but not for maternity care, dental care and GPs (Ministerie

2

Medical treatments in the Dutch system are reimbursed based on diagnosis treatment combinations (DBC), somewhat similar to the American system which uses Centers for Medicare and Medicaid Servic

T

related treatment. Currently these a

The current hospital is a virtual organization: it often presents itself as a monolithic, singular, homogeneous entity to the outside world, but on the inside it is a network of different entities, working together in different ways at different stages of the process. An acute care hospital delivers six functions (McKee & Healy, 2002, p. 79) listed in Box 3.3.

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Box 3.3 Functions of an acute care hospital

Patient care

Inpatient, outpatient and day patient; emergency and elective; rehabilitation

Teaching

Vocational; undergraduate; postgraduate; continuing

Research

Basic research; clinical research; health services research; educational research

Health system support

Source for referrals; professional leadership; base for outreach activities; management of primary care

Employment

Inside: Health professionals; Other healthcare workers; Outside: suppliers; transport services

Societal

State legitimacy; political symbol; provider of social care; base for medical power; civic pride

The first three functions in the previous box (patient care, teaching and research) directly translate to service line activities inside the hospital, see Figure 3.3. Service line activities inside the hospitals are often grouped around a specific medical field (e.g. surgery) rather than a specific condition. There is a shift towards organizing around clinical pathways and diseases (e.g. diabetes, COPD, heart failure). This shift is an important shift towards focusing more on the customer. See Figure 3.3 for an overview of internal hospital (service line) activities.

Figure 3.3 Overview of internal hospital (service line) activities

Research Teaching Patient care Operating - Cardiology - Integrated care Physiotherapy - Surgery - Plastic surgery - Emergency medicine - Thorax surgery Obstetrics / gynaecology - Orthopedics - - Urology Internal - Internal medicine - Biomedical - Anatomy - Supporting - Allergy/asthma/immunology - Endocrinology - Hematology - Kidney diseases Rheumatology Gastroenterology - Oncology - Biochemistry - Cell biology

- Epidemics and statistics Pharmacology/ toxicology - -Transplantation immunology - Hematology laboratory - Chemical endocrinology - Clinical chemistry - Clinical pharmacy - Medical microbiology - Nuclear medicine - Radiotherapy - Pulmonology - Outpatient care - - Pathology - Radiology Medical- and biophysics

Extramural

- Nursing home care

- GP care

- Social medicine

- Diabetes care

- Heart failure clinic

- General Practitioner

- IVF treatment

- Prenatal diagnostics

- Mamma-care

- Neonatology

- Psychiatric ward (PAAZ)

- Emergency Care - Stroke Unit Neuro-sensing - Dermatology - Pediatrics

- Ophthalmology (eye care)

- Oral / dental surgery

- Psychiatrics - Geriatrics - Otolaryngology (ENT) - Neurosurgery - Neurology - Neurophysiology Diagnostics - MRI - CT -Ultrasound Bucky - Blood sampling - Endoscopy

Medical facilities Personal services

- Diabetes nurse - Dieticians - Religious support - Speech therapy - Anesthesiology - Intensive care - Sterilization - Admission desk - Operating theatres - Nursing ward

- Medical social work

- Mediator Manag - Supervisory - Medical staff ement - Board of Directors board - Working council Commercial activities - Advisory services Lifestyle advice - Independent clinic - Facility services - Non-medical facilities - Personnel en organization

Finance and control

- Pharmacy - Blood transfusion - Travel agency - Postal office - Facility management - ICT - - Library - Gift shop - Swimming pool - Maternity ward - Plaster room - Transport - Transfer point

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3.5 D

utch hospital reform: a short history

We have looked at the current-day strategic environment of Dutch hospitals. Certain current-day practices, such as governance issues arise from the long and sometimes difficult path of health reform in The Netherlands. To provide context on that we provide a short background on the Dutch hospital reform.

A chronology of main events in Dutch health policies 1941-2003 lists “many radical changes e been realized wit

that hav hin a relatively short period of time” (European Observatory on ere has been an increasing focus to increase competitiveness: regulated competition. This is not similar to a free healthcare market. Although government does not directly control volume, prices and productive capacity, they create necessary conditions to prevent the undesired effect of a free market (such as “cream sk

ef there most

sing ket-orie em, a huge increase in activities

rovement lity assuran ring the early 1990s. Probably the

main driving force for all of these quality-improving acti idea that quality of care will be a

major issue in a competitive he ea n Health Systems

and Policies, 2004, p. 124)

D the 1980s and 19 relat betw cialists, health insurers and

go ten was und s to implement new fee structures and fee

cuts never proved effective: “ uction of a fixed et for specialist care in 1988 was a disaster from a cost-control perspective. During the period 1980 to 1989, aggregate nominal expenditures for specialist care grew by an average of 2.6% per year. This average rose to 6.3% for the eriod 1990 to 1992, when it should have been nil. Budget overruns set the stage for intense conflict, te for overruns of previous years.” ). Another example is the fact that until

he Biesheuvel committee in 1994 stated that there was a need for fundamental Health Systems and Policies, 2004, p. 120). In the last decades th

imming” or “cherry picking”).

Besides certain negative fects, certainly are also positive results to report. “As a result of only discus a more mar nted health care syst

concerning quality imp and qua ce was observed du

vities was the

alth care system.” (Europ n Observatory o

uring 90s the ionship een spe

vernment of er pressure. Attempt

The introd total budg

p

because the Minister of Health used retrospective fee cuts to compensa (Maarse, Mur-Veenman, & Spreeuwenberg, 1997

1992 sickness funds had the legal obligation to enter into a uniform contract with each physician established in their working area, instead of having the option to selectively contract with physicians (European Observatory on Health Systems and Policies, 2004). T

reconsideration of the position of medical specialists. Their advice was to introduce management participation of specialists to also let them part of the responsibility for effective cost-control. The commission also recommended integration of the specialist’s revenues into the hospital budget to underscore the position of the hospital as an integrated healthcare delivery institution. Cautiously, to bypass opposition of the

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experiments suggests that e financing of specialists within budgets is a complicated matter with direct repercussions on professional

Observatory on Health Systems and Policies, 2004, p. 134). or a market oriented approach of healthcare there is a need for approximately 5%

3.6

National Association of Medical Specialist, the Minister of Health started with a small number of experiments in that direction. “Preliminary evaluation of the

th

behavior” (Maarse et al., 1997).

One of the difficulties in the current healthcare system is the unique position of medical specialists: there are few substitutes or competitors. One of the reasons for this is the underinvestment in human resources (training and education of medical specialists) in The Netherlands (European

F

overcapacity, but the Dutch government has not committed itself to this task. As long as this is so, a demand-driven system in healthcare will remain illusive (Raad voor de Volksgezondheid & Zorg, 2003, p. 138)

Conclusion

Hospitals have a long history of reactive growth and development. Proactive strategy development and subsequent decisions about products and services to deliver have therefore not for long been part of hospital decision making. Rather hospitals would follow established polices by “doing what they had been doing for long time.”

The current position of the Dutch hospital in the Dutch healthcare system is well established as an institution that “follows right behind” the gate keeping function of the

ever, this shift tends to mainly exist within the current oundaries and structures and is not accompanied by any major change in how the GP: if the GP is not able to “solve the problem” a patient is referred to the hospital. Hospitals between them have a role division of general, top-clinical, academic and specialist roles with the addition of private clinics as highly specialized institutions but with another access pattern (direct instead of through gate-keepers). The functions and activities of the hospital can be divided in six different types: patient care, teaching, research, health system support, employment and societal.

All in all Dutch hospitals have a well established and rather clear position. There tends to be an increase in focusing on customer needs by providing specific services to specific patient/customer groups. How

b

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him for a lifetime” -- CHINESE PROVERB

4

ection (4.1) and focus on the pecifics of one the most operationalized versions of the business model, Chesbrough

4.1 Concept of the business model

“Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed

Business model theory

Business model is a comprehensive approach to building strategy. It is a “conceptual tool that contains a set of elements and their relationships and allows expression of the business logic of a specific firm” (Osterwalder, Pigneur, & Tucci, 2005). We can use a business model as a tool to build strategy balancing both the internal, organizational views as well as the external, patient/consumer views. This sets the business model apart from other approaches at strategy which focus one side or the other.

We define the concept of the business model in the first s s

and Rosenbloom in the following section (4.2). An important part of this research is how the business model has a focus on value at its core which we highlight in 4.3. Section 4.4 and 4.5 detail the backgrounds of taking a model approach to strategy and balancing value (inside-out versus outside-in views).

The term ‘business model’ is often used these days but seldom defined explicitly (Henry Chesbrough & Richard S. Rosenbloom, 2002). A business model can be described as strategic model that explains how a company does business. If we analyze what such a description means we see that “how a company does business” draws on many different (strategic) aspects but is not limited to a specific focus on a single area. This sets the business model apart from other areas of strategic management, focusing on specific issues, such as marketing strategy or value chain analysis.

To research what is proposed in literature of the function of the business model we have analyzed different publications to compile a list of uses (Table 4.1)

Rethinking the hospital - The value of business models for hospitals