Keywords

FormalPara Case: Anji

Anji has been an academic hospitalist in a large teaching hospital for the past 7 years. She is generally satisfied with her job as she gets to work with students and residents, and she enjoys the pace of hospital medicine. While making rounds, she notices the increasing number of patients who are hospitalized at the end of their lives with terminal conditions. Although Anji derives career satisfaction from dealing with patients in the end of their lives, and in spite of the fact that she finds these patients to provide valuable teaching points for her trainees, Anji wonders if a palliative care service would be a better way to care for such patients. Moreover, Anji believes that such a service would not only improve patient care and trainee education but may also be cost effective. She does a quick calculation of hospital costs and the costs of implementing a new service, but is unclear if her math is correct. Anji has been at various meetings with hospital administrators who talk about business plans for new endeavors, but she has no idea where to start. She knows that she will need to make a strong business case for any new service as the hospital has been operating on a very narrow margin. How should she proceed?

Nearly every MBA program in the country includes a course on entrepreneurship, yet physicians, who are typically innovative problem solvers, do not recognize their work as entrepreneurial. In fact, many physicians’ innovations are entrepreneurial, and the ability to make a strong business case for a new idea is a very valuable skill which will make the physician unique and special within the practice or the organization. Although some physicians are uncomfortable talking about medicine as a business, medicine is very much a business, and every young doctor should be aware of the basic knowledge of business that is discussed in this book. There is nothing unethical about the business of medicine; in fact, creating a sustainable model for patient care typifies ethical behavior, especially when we consider distributive justice. As resources are always limited, an innovation that is financially sustainable is much more likely to provide services for a large number of patients than one that is costly and inefficient.

Although many physicians naively consider a business plan to be nothing more than a financial analysis including projected income statements, sources of funds, and maybe a breakeven analysis, a complete business plan is much more than merely the financials. The very process of creating a carefully constructed business plan necessitates market research, careful thought, and strategic planning, all important aspects in making a case for your idea. Furthermore, a well-developed business plan is more likely to get a project approved than one that is poorly constructed and incomplete. There are many suggested formats for business plans, but in this chapter, business plans will be divided into the following sections: (1) the executive summary, (2) description of the project, (3) trends analysis, (4) target market, (5) competition, (6) risk assessment, (7) marketing plan, (8) operations, (9) technology plan, (10) management and organization, (11) milestones, and (12) financials.

The executive summary is probably the most important component of a business plan, and often it is the only section that will be read by people who have the authority to either accept or reject your idea. If the executive summary is compelling, then the rest of your plan will be evaluated; if it is not compelling, your idea will likely not be considered further. Because the executive summary is so critical, it is recommended that you write this section after creating the other components of the business plan. An executive summary can be an itemized synopsis highlighting the other chapters in the plan, or it can be a narrative that tells the story of your idea. The narrative format has the advantage of providing information that gets the reader excited about your idea. In a narrative format, you can identify the problem that you are trying to solve and generate an emotional response from your readers, especially if the problem is compelling, like Anji’s suggestion of “trying to improve the care of dying patients and to provide support for their families.” The executive summary needs to be brief, no more than one page, but effective, akin to an elevator pitch where you have only 2 or 3 minutes to make a case for your idea. Because the executive summary is so critical, it is important to obtain input on the executive summary and provide constructive suggestions so that you motivate the decision makers on this most important section.

The project description briefly provides the mission and objectives of your idea. This is where you define what you plan to do and why. This section may also include your progress to date in implementing your idea. For example, this part of the business plan outlines the resources necessary for a palliative care service. Resources would include space and personnel including physicians, nurses, and trainees. The project description might also include the fact that space has already been identified for the potential unit. The project description also includes a statement confirming the need for your idea: to reduce the inpatient census and to provide specialized palliative care services for terminal patients. Finally, this section could include the fact that you already have residents assigned to cover such patients included in the residents’ educational program , a fact that makes your idea more likely to be approved.

Trends analysis allows you to compare the landscape for your idea to other hospitals, cities, or locales. This section allows you to articulate a strategy on how your innovation might maintain a strategic advantage for your hospital or practice. Moreover, this section should also include any assessment of potential growth in the area of your innovation. Any strategic decisions that may be dependent on seasonality, such as flu season, or variations in practice patterns due to vacations, should be included in this section. For example, this section could include an analysis of trends in palliative care services in the USA. It could also include whether your competitors have such services and if not, why implementing a palliative care service would provide your institution a strategic advantage over competitors.

The timing of when you first implement your plan may be important. For example, because fellows with specific training in hospice and palliative medicine finish training in June, if you were going to recruit new physicians, you would need ample lead time prior to June if your plan were to attract new graduates.

The target market section describes who will be served by your idea. Is this a particular group of patients, physicians, or referring doctors? What is the expected volume of patients who might receive the services you are planning to provide? Is your idea scalable so that you could expect an increased market share in the future? Identifying a target market also allows you to advertise to particular groups. In the case of a new palliative care service, your target market would not only include patients but also physicians and nurses who would be a source of referrals for your palliative care. Especially in the case of hospice services, physicians typically write the order for these services but it is the nurses and social workers who decide which hospice to use. Do not omit this important target market.

The size of your target market allows you to better estimate expenses and revenue. In your business plan, it will be important to make sure that your target market is large enough to support the initial investment in space and personnel, but not so large that planning becomes untenable. It is your job to formulate your target market such that decision makers can be convinced that your plan is viable.

Identifying the competition in your market space allows you to assess the likelihood of the success for your plan. Competitors are important because if your idea truly had no competition, a savvy decision maker might wonder if your idea has merit. The competitive analysis of your business plan should identify who your competitors are, on what basis you compete, how you compare with your competitors, how you anticipate the arrival of new competitors, and how you have identified barriers to entry for new competitors. The business sage, David Porter, described strategy as the interaction of five elements that he termed “forces”: (1) supplier’s power, (2) buyer’s power, (3) threat of substitution, (4) threat of new entry, and (5) competitive rivalry [1]. These elements are critical in assessing your competition. In medicine, the suppliers are typically the referral sources whose power derives from their ability to direct patient flow. The buyers are the patients themselves or the insurers who pay for medical services. Substitution may include alternative diagnostic or therapeutic procedures to those that you are proposing in your business plan. New entrants into a market space are frequent in the modern healthcare arena with hospital and insurer mergers that create larger entities providing services in a given geographical region. Rivalry is also obvious in the competitive healthcare space. These competitors are the entities doing the same or very similar functions as you are proposing. Your business plan should address each of these issues as you make the case for your new idea.

Assessing risk is important in any business decision. What are the strengths of your plan compared to other ideas? How can you be sure to attract market share? Is your idea new to the market providing a “first-mover advantage?” This section of your business plan should address the types of risk inherent in implementing your idea. Every new innovation has some element of risk, but how you communicate your ability to deal with this risk dictates the success of your plan. Risk includes market risk where your idea may not catch on. The market may not be ready for your idea. For example, it was a slow start when the hospitalist movement first began, because of deep-seated fears that hospitalists would lead to a breakdown in patient care due to fragmentation of care. Competitive risk is the risk assumed due to changes in the way the competition does business. If you start a palliative care service, will others follow? Will you still be able to attract market share? Execution risk is the risk that you will not be able to manage the initial phase of your plan. If your hospital is not ready to start accepting new palliative care patients due to preexisting insurance contracts, space issues in the hospital, or personnel issues in the hospital, then your plan is likely to fail. Finally, there is a capitalization risk that you may have underestimated costs and overestimated revenue such that your costs exceed revenue making your plan untenable. It is obviously best to be conservative in financial predications, but not so conservative that your innovation looks like a financial failure from the start. It is important to recognize that implementation of any innovation has risk. Your job in your business plan is to identify those risks and to be able to provide reasonable assurances that despite these risks, your idea will still be successful.

In the marketing plan section of your business plan, you will clearly articulate how you will attract business. How will you let patients and referring doctors become aware of your services? What message will you use in your advertising? Where will you advertise? How will you use social media? Marketing courses in business school typically talk about the “four P’s of marketing”: product, price, place, and promotion. Product defines the tangible aspects of what you are providing, price defines your cost and provides examples of why you are cost advantageous over your competitors, place describes where you are offering your services, and promotion describes your marketing activities. Remember, people buy services, not features. For example, people buy an electric drill not for the material used to construct the drill housing, but they buy an electric drill because they need a hole. Similarly, people choose a palliative care service because they want care that is compassionate during the dying process. They do not usually choose a palliative care service because of the specific medications used to mollify symptoms of the terminally ill.

Akin to the four P’s of marketing that businesses use, customers want the “five F’s ”: (1) function (how the service meets their needs), (2) finances (what will this cost), (3) freedom (how convenient is the service), (4) feelings (are they comfortable with the services), and (5) future (what will happen to services over time). It is important to address each of these points in your marketing plan.

In the operations section of the business plan, you have the opportunity to describe how you will manage your innovation. Who will be in charge? Who will you employ? What is the reporting structure? How will you measure outcomes? How will you grow? It will also be important to discuss how you will manage complaints by patients or referring physicians. What are your processes for resolution? Other aspects of the operation if your innovation needs to be included are information such as to how money is handled and demonstration of HIPAA compliance.

Deciding on a technology platform should be articulated in a separate section in your business plan. Technology includes not only the electronic health record but may also include the systems used for billing and collections and the systems used to measure quality outcomes. An appreciation of cost of technology should be included. Finally, a discussion on new technologies that may be useful in the future may make your business plan more complete and may help to define future strategies.

In the management and organization section, you will list the people who will be part of your plan. Deciding who is on the management team may be critical in the success of your innovation. Many senior administrators understand that getting the right people in the right places is critical to the success of any business.

The milestones section of your business plan is used to establish a road map to keep you on track for success. This includes both short- and long-term goals. It also articulates priorities. Priorities may include patient satisfaction, cost savings, or revenue at different points on the time horizon.

FormalPara Finally, the last section in a business plan includes the financials

Typically presented as a pro forma, where assumptions are made to predict future performance, it is this section that can make or break your plan. In addition to the three basic financial statements (income statement, balance sheet, cash flow projection), this section typically includes a statement of sources and use of funds and a breakeven analysis. It is critical to clearly define the assumptions used in your pro forma statements from the onset, and these are often listed in their own unique part of the financial section. Assumptions typically include projections of future costs, future revenues, and inflation. These statements include more than one time frame so as to be complete in your analysis. For the income statement, for the first year, monthly projections are provided, quarterly for years two and three and annual projections for years four and five. Cash flow is projected monthly for the first year and quarterly for years two and three. The balance sheet is projected quarterly for the first year and then annually for years two through five. A complete description of financial statements is provided in Chap. 3.

You will want to include a list of sources of funds, including those that are recurring and those that are one time. Sources may include the hospital, health system, medical school, or philanthropy.

Finally, you will want to estimate how much income you will need to pay back your expenses and at what point you will break even. In general, to calculate the gross revenue needed to break even, you will need to know your fixed expenses (rent, salaries, utilities, etc.) and your variable expenses. For example, if your fixed expenses were $70,000 a month, you would need to generate more than just $70,000 to break even, because each month you have costs that vary depending on patient volume including costs of disposable equipment (e.g., tongue depressors), costs for medications, and costs for supplies. If you know your variable costs as a percentage of gross income, then you can calculate your breakeven revenue as follows:

Fixed Expenses/Gross Profit Margin

In the above example, if 30% of your gross revenue went to cover variable costs each month, then your breakeven point would be $70,000/0.7 = $100,000 of revenue a month. You could also look at your pro forma to see at what point in time you would break even with an estimated revenue of $100,000 per month. This type of analysis is important in determining the financial feasibility of your endeavor.

Back to the Case

Anji met with the business manager of her department and began to gather information necessary to construct a business plan. She met weekly with her business manager to clearly articulate her idea, strategy, and expectations. Together, they generated reasonable financial assumptions and constructed a pro forma that suggested that her palliative care service would break even in about 2.5 years. Because her plan was financially viable with a reasonable return on investment, and because it was consistent with the mission of the medical center to provide excellence in patient care, the plan was approved. Anji waited patiently to see the fruits of her work including patient satisfaction and to see if her financial assumptions were correct.

Bottom Line

  1. 1.

    A well-written business plan can allow you to get support for your innovations.

  2. 2.

    Physicians are, by nature, entrepreneurs.

  3. 3.

    Setting reasonable assumptions allows for the projection of future financial viability.