Profit margins for hospitals are slim and precarious. While many organizations would like to pursue clinical innovations and new business opportunities, a prudent level of risk aversion surrounds investment decisions in this industry. Decision-makers are asking a number of important "what if " questions to understand and mitigate risks. "What if technology makes this new service obsolete?" "What if our competitor builds a bigger, better, newer facility?" "What if inpatient use rates continue to fall and we have to carry unused capacity?" "What if our preeminent surgeons retire or leave and we can't replace them?"

Now more than ever, investment decisions are aided by analyzing scenarios that quantify the magnitude of risks and pinpoint the variables that drive results.

Cattaneo & Stroud, Inc (C&S) has developed sophisticated approaches to forecast demand and optimize decision-making among key stakeholders. Our expertise in statistical analysis, econometrics and software development combined with our in-depth experience in program development, facilities planning and process management provides clients with a comprehensive team to manage the planning and investment decision process. This approach provides a robust and interactive model for forecasting, sizing and strategic analysis. We focus clients on the dynamics of economic and market variables through analysis of past trends, identifying the forces that alter those trends and testing a range of variables to quantify the impact on performance.

Our approach emphasizes understanding the drivers of success and facilitating process for building consensus among stakeholders. And, once a decision has been adopted, our clients often use the analysis as a baseline for tracking changes in the factors that determine success.

Components of the Model

C&S develops models and processes specific to the client's situation and the type of decision to be made, such as inpatient demand forecasting, specialty-specific physician clinical practice demand or outpatient utilization patterns. Variables include population growth, product lines, physician supply and the market geography and size. Market share and incidence rates are calculated from historical data. Then, through structured discussions, the organization's leaders make judgments about future trends. These assumptions become inputs to the forecast model and are used in building scenarios that test the sensitivity of alternative courses of action.

Population Projections: Population projections are a critical component of the forecast. C&S uses age specific projections at either the county or zip code level. The data are available from a number of vendors and we can assist clients in selecting the resource that best fits their situation.

Product Line Definition: The size of the organization and the type of decision affects the definition of product lines. Any combination of DRG, ICD9 or CPT4 codes may be used, as well as other patient characteristics (e.g. pediatric), depending on the data source (OSHPD, IDX, or other clinical dataset). Factors such as payer class and tracking of unique patients over time are useful for many analyses. We have often linked internal and external datasets both to validate external data and to enrich the analysis to include outpatient or program-specific utilization trends.

Market Definition: Most often the market is defined by the hospital's patient origin. The hospital may draw patients from a large area, however, due to location of competitors, small distances can have a substantial impact on market share. Consequently, the market area should be defined according to historical use, expected strategies of competitors and the impact of the client's intended initiatives.

Our model enables testing of market growth assumptions by tracking the impact on competitors of increased market share. In some cases we found that a particular growth assumption could only be met if market share were taken from system affiliates or if unrealistic inroads were made into a strong competitor In many situations, it is important to use distinguishing market definitions for each service since obstetrical or NICU services may be substantially different from the cardiovascular surgery market.

Market Share: Market share trends must be evaluated relative to changes in physicians, facilities and technology investments. When the analysis of historical market share shows significant volatility, it could reflect small markets, limited product lines and/or external events such as relocation of key physicians. Our model includes techniques that can adjust for such problems. C&S's approach and insight in strategic planning leads the organization through deliberations on the potential impact of external and competitive events or client-generated initiatives. These often result in scenarios that are tested in an interactive way to assess possible outcomes.

Data on inpatient use are available in many states. In California, inpatient data are available for a number of years accounting for over 20 million patient records with up to 24 diagnostic codes. Other states also have certain outpatient data sets available.

Recent Findings
In recent work with clients, our analysis resulted in some unanticipated findings.

1) In some markets, the use rates, measured as discharges per 1000 population, appear to have hit a trough and are inching upward. In addition, acute care lengths of stay have stabilized or increased.

This is particularly true in markets with mature managed care experience like San Mateo County.

2) The "baby boom effect" is dramatically evident by 2020. In one market we studied, there was a 20% increase in beds is forecast between 2010 and 2020 due solely to the increase of people over age 65 as the initial "boomers" reach age 75. The increase remained following adjustment for declining use rates and various length of stay adjustments. The finding had critical implications for bed need in a facility that was planned to open in 2008-2010.

3) Even where use rates continue to fall, some markets are experiencing such rapid population growth that additional beds will be required. For instance, in the urban portions of Santa Clara County, an additional 100,000 people are projected by 2010. This increase is too substantial to be offset by continuing reductions in length of stay.

4) Technological advances continue to drive treatment to outpatient settings or reduced lengths of stay. In a few instances, however, increased admissions are expected and will benefit those hospitals which are well-positioned in the relevant specialty.

"What If. . ." Scenarios
The forecasting model is the foundation we use with clients to evaluate alternative investment options. Through sensitivity analyses, the scenarios quantify the impact of changing the assumptions for key variables.

In California, forecasting demand has been particularly important for hospitals facing substantial investment to meet the seismic requirements of SB1953. With enormous capital at risk to comply with the law, hospital leaders and financing authorities are looking for careful and thoughtful analyses to justify bed capacity.

In dealing with variables like market share, there is an opportunity to test the potential risks - both upside and downside - of strategic initiatives.

In one C&S client situation, we worked with a group of senior board, management and medical staff leaders to assess the range and depth of various strategic initiatives - both those of the client as well as those of competitors. In this client's market, the population is projected to grow rapidly, at more than 2% compounded annual growth. With minimal managed care influence, use rates were declining in a relatively slow and manageable way.

The leadership group agreed to use the state's population projections and continue the recent use rate trends. We then identified the range of competitive initiatives, both the client's as well as the competitors. For each initiative, the group assessed:

a) the potential impact (direction and magnitude) in terms of discharges or days, and

b) likelihood of each event occurring within 10 years, expressed as a probability.

In this particularly dynamic market, the group identified growth potential of 10% and downside, competitive risk of almost 30%. The risk assessment allowed management to size its plans according to a prudent level of risk.

Other C&S clients with multiple facilities have found the approach useful in evaluating options for development or consolidation of services across sites.

• The distribution of capacity among sites may be modeled, while testing scenarios of bed configurations across geographies and payer mixes.
• Business planning among sister institutions for consolidation of a single service line can project use of secondary and tertiary level procedures at each site.
• Options to close acute care services and transition to specialized or sub-acute services can be tested from a regional perspective, analyzing the potential impacts across a region.

In each of these cases, the analysis depends on careful consideration of multiple variables. The process of modeling alternative scenarios creates a platform for reaching consensus where longstanding cultures and organizational traditions are also key considerations.

Our forecasting techniques have also been applied to large medical groups, employing multiple clinical, financial and scheduling datasets to create tools for productivity analysis, impact of changes in provider mix and impact of benefit changes.

Concluding Observations
Creating a robust forecasting model requires both technical expertise and detailed knowledge of a market and service delivery system. C&S's approach emphasizes the analysis of components relevant to the specific situation and management of a decision-making process that focuses client's efforts on the drivers of demand, competitive forces and magnitude of risks based on various scenarios.

Forecasts provide no guarantee of actual events or performance. They do, however, provide the opportunity to hone in on the optimal decision that balances risks and reflects an organization's culture and vision.