Sustainability Through a Creative, Entrepreneurial Mindset

1
Sustainability Through a Creative,
Entrepreneurial Mindset

• THIRD ANNUALWESTERN REGIONFLEX CONFERENCE

Mark J. Dubow June 10, 2005
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OBJECTIVES

• Identify creative approaches to access
• Capital
• Clinical resources
• Expertise
• Explore the role of the small, rural hospital as
  economic growth catalyst
• Introduce 10 ways to generate growth strategy
  ideas

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ACCESS TO CAPITAL PREMISE

• Access to capital is fundamental to
  sustainability
• Replace/upgrade facilities and equipment to meet
  the needs of the community
• Invest in clinical resources to retain physicians
  and other clinical staff
• Appetite for capital exceeds capability through
  operations
• The CAH cost-based reimbursement and Flex program
  grant funds may not be sufficient resources
• Traditional capital formation options already
  exhausted
• ITS TIME TO GET CREATIVE !!!

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CAPITAL FORMATION OPTIONS FOR RURAL HOSPITALS
Traditional
New

• Sell naming rights
• Vendor partnering
• Citigroup pooled fund
• Partner with a GAC hospital
• Become a catalyst for local economic growth
• Other

• Bonds
• Community Tax Levy
• Federal and State Loan Guarantee Programs
• Grants
• Loans
• Philanthropy
• Private Foundations

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SELL NAMING RIGHTS

• Concept
• Offer local companies (or individuals) the
  opportunity to buy the right to put their name
  on a building, floor, room or piece of equipment
• Began with stadiums in 1980s
• Examples
• Sports arenas/stadiums
• Entertainment centers
• Museums
• Botanical gardens
• Libraries
• Municipal parks
• Malls
• Airports

Wild Wetland Trail
Concert Hall
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SELL NAMING RIGHTS contd

• Hospitals have used personal naming rights for
  many years (philanthropy)
• Recently, in urban centers, hospitals have
  focused on corporate naming
• Bristol-Meyers Squibb Children's Hospital at
  Robert Wood Johnson University Hospital (NJ)
• Hasbro Childrens Hospital (RI)
• Mattel Childrens Hospital at the University of
  California, Los Angeles (CA)
• Morgan Stanley Childrens Hospital of New York
  Presbyterian (NY)

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SELL NAMING RIGHTS contd

• Modify the approach in two ways
• Seek regional corporations (dairies, logging
  companies, etc) to support rural facilities
• Encourage emulation by smaller, local companies

Brighton DairiesObstetrics Department
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VENDOR PARTNERING

• Concept Use medical equipment companies to fund
  capital intensive projects and secure operational
  expertise
• Companies
• Alliance Imaging
• Varian Inc.
• GE Medical
• Siemens Medical
• Others
• Potential relationships
• Equipment financing
• Payment per unit of use (wholesale)
• Joint venture
• Management service agreements

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ALLIANCE IMAGING JOINT VENTURE MODEL
Radiologists

• Investors Radiologists, hospital and Alliance
  Imaging
• Asset
• Equipment alone single or multiple modality
  (MRI, CT, PET, PET/CT)
• Imaging center with equipment
• Contribution by Alliance Imaging
• Equipment
• Installation
• Operational staff
• PACS or other electronic linkage

AllianceImaging
Hospital
and/or
Mgmt fee

or land/building
Equipment,staff
MRI
Radiologists
AllianceImaging
Hospital
and/or
Mgmt fee

or land/building
Equipment,staff
Imaging Center
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ALLIANCE IMAGING WHOLESALE MODEL

• Investor Alliance Imaging
• Asset Equipment only
• Contribution by Alliance Imaging
• Equipment
• Installation
• Operational staff
• PACS or other electronic linkage
• Hospital pays Alliance Imaging a fee per unit of
  service
• Seven sites to date
• 4 in the Southeast, 1 MidAtlantic, 1 North
  Central, 1 Northwest
• All are MRI equipment

Equipment,staff
AllianceImaging
Hospital
/unit
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VARIAN INC.

• Scenario
• Radiation therapy breakeven 18 - 20 patients
  per day. Sufficient demand in service area
• High profit service
• Investment too large for hospital
• Equipment
• Staff (physicist, dosimetrist)
• Solution
• Varian Inc. finances equipment
• Standard conventional operating lease, capital
  lease
• Creative step lease, adjustable lease,
  payment/unit of service

t/xplanning
HospitalRadiationTherapy
equipment
D3
/payment

• Hospital contracts with remote treatment planning
  company
• D3
• Florida AMS
• Other

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POOLED INCOME FUND

• Concept Access funds at a lower cost, fewer
  restrictions and more rapidly than through
  FHA/HUD or USDA
• Citigroups Rural Healthcare Capital Trust
• Collaboration of Pine Creek Healthcare Capital
  LLC and Citigroup
• 2.5 billion pool specifically for rural and
  small hospitals
• Expect several issues of 400-500 million/issue
  first will be end of 05, second will be in 06
• Funds available to a hospital 3-30 million
  (prefer lt15 million)
• Fixed rate (7), tax-exempt loan
• Term 25-30 years
• No mortgage insurance or credit enhancement
  required
• Loans closed and funded in 120-150 days

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POOLED INCOME FUND contd

• Funds may be used for any tax-exempt purpose
• Remodel and refurbish buildings
• Design/build new facilities
• Equipment upgrades
• Technology improvements (including PACS)
• Refinancing

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PARTNER WITH A HOSPITAL

• Concept Use resources and expertise of a larger
  hospital or hospital system to support clinical
  program development, access to medical
  specialists and implementation of emerging
  technology
• Potential applications
• Clinical programs cardiac, pediatrics,
  oncology, critical care, imaging
• Technology PACS, EMR
• Management

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PARTNER WITH A HOSPITAL contd

• eICU
• Example 1 Aurora Health Care in Eastern
  Wisconsin
• Remote management of intensive care patients in
  outlying hospitals including small rural
  facilities
• 24-hour monitoring of vital signs and laboratory
  data plus visual monitoring using telemedicine
  technology
• Example 2 Sutter Health System in California
• Sutter Coast Hospital (59 beds)
• 10-bed ICU remotely monitored

RuralHospitalICU
Aurora eICU
UrbanHospitalICU
CommunityHospitalICU
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PARTNER WITH A HOSPITAL contd

• Management Services Examples
• Example 1 Lawrence County Hospital (Monticello,
  MS)
• 25-bed critical access hospital
• Managed by Southwest Mississippi Regional Medical
  Center (McComb, MS)
• Supported clinical service and IT upgrades
• Example 2 St. Joseph Community Hospital
  (Hillsboro, WI)
• 25-bed critical access hospital, 75-bed SNF, 3
  family clinics
• Serves five-county area with 18,000 residents
• Formed alliance with Franciscan Sisters of
  Perpetual Adoration
• Supported access to management, purchasing and
  other resources

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BECOME A CATALYST FOR LOCAL ECONOMIC GROWTH

• Concept Hospital management proactively works
  with local economic development agency to attract
  new employers to the area, thereby expanding the
  economic base, and building an insured patient
  pool

• Example St. Joseph Regional Medical Center
  (Lewiston, ID)
• 145-bed hospital
• Lewiston historically dependent on paper mills
  and agriculture
• Economic development targets service and light
  industry companies
• Management active in recruitment of new employers

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ROLE OF GROWTH IN SUSTAINABILITY

• Sustainability requires growth
• No business is mature, no markets are fully
  penetrated. (Ram Charan and Noel Tichy, Every
  Business Is A Growth Business)
• Three broad approaches to generating new ideas
  for growth
• Evolutionary methods
• Service (product) development
• Market development
• Transformational methods

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EVOLUTIONARY METHODS OF IDEA GENERATION

• Service (Product) Development
• - Experience gaps
• - Concurrent service gaps
• - Follow on service gaps
• Market Development
• - Define market in new way
• - Segmentation
• - Distribution channels

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SERVICE DEVELOPMENT APPROACHES
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MARKET DEVELOPMENT APPROACHES
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TRANSFORMATIONAL METHODS OF IDEA GENERATION

• Purple Cows
• Patterns
• Demand Innovations
• Disruptive Innovations

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PURPLE COWSMATERIAL CHANGES TO A PRODUCT

• Examples
• Otis Elevator sorts traffic and speeds it up
• Tombstone Pizza frozen
• Dutch Boy Paints jugs

• Questions to develop by
• What niche is underserved?
• What would the top 20 percent of customers find
  extra special?
• Ask why?/why not?

Adapted from Godin, In Praise of the Purple Cow,
Fast Company, February 2003
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PATTERN THINKINGNEW PRODUCTS

• 1. Subtraction remove something (best with
  complex products)
• Ex sugar in cola, lead in gas, buttons to
  streamline design
• 2. Multiplication alter copies
• Ex double bin trash to separate recyclables
• 3. Division into component parts
• Ex Hi-fi systems to speakers and turntables
  area rugs to kid squares
• 4. Task Unification into a single component
  (best when control desired)
• Ex suitcase with wheels, printing on packaging
• 5. Attribute Dependency Change of features or
  use
• Ex lenses changes with light, womens razors,
  indoor sprinklers

Adapted from Goldenberg, Horowitz, Levav
Mazursky, Finding Your Innovation Sweet Spot,
Harvard Business Review, March 2003
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DEMAND INNOVATIONS EXTENDING WHAT IS OFFERED TO
THE CUSTOMER

• Examples
• Cardinal Health drug distributor.
• Offered pharma. management to hospitals,
  automated reimbursement for chain stores.
• Johnson Controls assembled seats for auto
  makers. Expanded to assembling entire interior.
• John Deere Landscapes tractor and other lawn eq.
  manufacturer. Offered low-cost credit to
  contractors for their clients.

• Questions to develop by
• Do customers spend time, money, effort figuring
  out how to use your product?
• How can you help customers improve their costs,
  reduce complexity, make better decisions, speed
  their products to the market?

Adapted from Slywotzky Wise, Double-digit
Growth in No-growth Times, Fast Company, April
2003.
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DISRUPTIVE INNOVATIONSCREATING NEW MARKETS

• Characteristics
• Cheaper, simpler, smaller and more convenient
  products which create a new market of previously
  non-users by bringing a different value
  proposition to those who didnt need all of the
  performance offered by the original product.
• Examples
• QuickBooks (small businesses)
• Apples IPod (music lovers)
• Hondas small off-road motorcycles (thrill
  seekers)
• Hummers (public at large)

Adapted from Christensen, Raynor Anthony, Six
Keys to Creating New Growth Businesses, Harvard
Management Update, January 2003
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CRITICAL SUCCESS FACTORS FOR RURAL HOSPITAL
SUSTAINABILITY

• Maximize access to capital leverage other
  organizations
• Build physician (care giver) critical mass
• Focus on primary care and selected surgical
  specialties
• Emphasize retention
• Tap into rotating physicians and outreach
• Use extenders
• Apply eICU and other remote monitoring tools
• Seek general acute care hospital partners
• Service line clinical expertise
• Electronic linkages
• Expand your perspective - seek ideas from
• Healthcare organizations
• Other industries
• Day-to-day life experiences

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SPEAKER CONTACT INFORMATION

• Mark J. Dubow
• Vice President
• The Camden Group
• [phone]
• MDubow_at_TheCamdenGroup.com

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APPENDIX A Sources of Capital for Rural Hospitals
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A USEFUL RESOURCE
Published 2002 by Capital Link
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PRIVATE FOUNDATIONS(Examples)

• The Robert Wood Johnson Foundation
• The Kresge Foundation
• Otto Bremer Foundation
• The Kate B. Reynolds Charitable Trust
• Charles A. Frueauff Foundation
• William Randolph Hearst Foundation
• W. K. Kellogg Foundation
• David and Lucile Packard Foundation

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GRANTS FOR EQUIPMENT AND/OR CONSTRUCTION
(Examples)

• USDA Community Facilities Grant Program
• Direct loans, loan guarantees, grants for new
  projects (not refinancing)
• Two programs most attuned to rural hospitals
  Community Facilities loan program, Business and
  Industry program
• Distance Learning and Telemedicine Grant and Loan
  Program
• Rural Health Outreach Program Grant
• Funding for equipment but not construction
• HUD State community Block Grant (CDBG) Program

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FEDERAL LOAN AND LOAN GUARANTEE PROGRAMS
(Examples)

• USDA Community Facilities Direct and Guaranteed
  Loan Program
• Business and industry Guaranteed Loans
• Distance Learning and Telemedicine Grant and Loan
  Program
• HUD 242 FHA Hospital Mortgage Insurance Program
  (usable for new construction, refinancing, and
  modernization of facilities or to purchase major
  movable equipment)
• SBA Certified Development Company (504) Loan
  Program

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OTHER IDEAS

• Congressional appropriation
• Example Clearwater Valley (Orofino, ID) ER
  replacement, purchase of CT scanner
• As a state association of rural hospitals hire a
  community grant consultant
• Borrow ideas from fund raisers. Examples
• On-line auctions
• St. Jude Childrens Research Hospital (Memphis,
  TN)
• Miami Childrens Hospital (Miami, FLA)
• Dana-Farber Cancer Institute (Boston, MA)
• cMarket

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OTHER IDEAS contd

• Borrow ideas from fund raisers (contd)
• Raise funds from local small businesses who
  donate their product. Example Log A Load for
  Kids Loggers contribute value of a load of logs
  to childrens hospitals affiliated with the
  Childrens Miracle Network (27 states, 70
  participating hospitals)

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