Sg2 Letter April 2019: Growing Pains in the Quest for Scale

Over the past year, numerous Sg2 members grew into even larger health care systems. Our membership also boasts impressive small, independent players. As I’ve bounced between the board retreats of both archetypes, I’ve found one topic in particular consistently surfaces: Scale.

At face value, this relates to just how big the organization is today, will be tomorrow, should be over the long term. In an industry already dramatically transformed by perpetual consolidation, perhaps that’s to be expected. Bigger may indeed by an important part of surviving. And yet it’s not by itself sufficient to remain relevant.

It’s not surprising, then, that an inevitable question bubbles up midway through these discussions: Now what? After all the hard work of stitching together disparate business functions and clashing cultures, how do we leverage scale to deliver enhanced value to the communities we serve?

Sg2’s task is to help with that. This year we’re spending considerable time delving into where things currently stand in scaling the health care enterprise and what promise has yet to be fulfilled.

Unlike other pundits, we’ve never bought into this idea of a magic number in revenue or assets that equates to scale. We agree with those from other sectors who emphasize that growth and scale are not just different aspirations but different challenges entirely.

Bigger will not be better if size doesn’t align with your ambition, what you want to achieve as an organization. Perhaps aspirations compel you to be a national, mission-driven enterprise. Or maybe you remain steadfastly focused on meeting the needs of a relatively small market, perhaps a discrete community of 300,000. There are formulas capable of sustaining these fiercely independent organizations even amid the rise of the super-regionals. We offer just one caution: continue to test assumptions on market relevance. In fact, that balance between a national and local brand is a difficult but critical one to achieve.

The stakes are rising. The crucial subsidy from commercial payers that has sustained hospitals for decades could soon be stripped away. Pricing pressure is mounting nationally. Many large systems have already reaped the most clear-cut economies of scale, wringing costs out by eliminating duplicative back office functions. But that won’t be enough to sustain a margin as traditional approaches to contracting strategy come under fire.

Which is why this question of “Now what?” is so profound. We’re left with a set of challenges about scaling the enterprise on myriad fronts. An article last year in Entrepreneur summed up that challenge well across industries. “Businesses that have ambitious expansion plans need to look for ways to build in other aspects of competitiveness beyond just size itself…use scale to reinforce and strengthen those other elements that make up their value proposition…and raise the barriers to entry for copycats.”

At this year’s Sg2 Executive Summits, we will take on that broad array of competitive factors for health care that must be addressed to translate size into scale. So ask yourselves now: How far down the road are you to effectively scaling your ambulatory footprint, your workforce, your approach to value-based care or innovation?

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