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Hospital Industry Analysis
Ohio University Management 4800j
November 19th
, 2015
By: Bobby Abbett
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Table of Contents
Introduction……………………………………………………………………...………………2
PEST Analysis…………………………………………………………………...………………2
Political………………………………………………………………...…………………2
Economic…………………………………………………………...…………………….2
Social……………………………………………………...………………...….………...3
Technological…………………………………………………...………………………..3
Porter’s Five Forces Model………………………………………………………………...…...3
Competition…………………………………………………………………...…………3
Threat of New Entrants……………………………………………………………...….4
Threat of Substitutes…………………………………………………………………….4
Bargaining Power of Suppliers………………………………………………...……….4
Bargaining Power of Buyers…………………………………………...…………….....4
Key Success Factors………………………………………………………...…………………...4
Reinvent the Patient Experience…………………………………...…………………..5
Diversify Professionals……………………………………………...………………......5
Leverage Innovated Technology……………………………………...………………..5
Ranking System……………………………………………………...………………….5
Conclusion………………………………………………………………………...……………..6
References……………………………………………………………………………………….8
Appendix………………………………………………………………………………………...9
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Hospital Industry Final Draft
Intro
The hospital industry is one of the most important of all industries in the U.S.
Domestically, we have about 3,700 organizations, while there are approximately 5,686 U.S.
registered hospitals (FirstResearch, 2015; Health Forum LLC, 2015). Competition amongst the
industry is what drives the price down so that more people can afford help. It also encourages
innovation which will improve healthcare in the nation (ftc.gov, 2015).
The demand in the hospital industry is driven by people getting ill or injuring themselves.
Advances in medical care will increase the profits of individual hospitals because that is where
patients will prefer to go for help. This will increase the wages for doctors because the hospitals
would like to have the best staff in order for the medical care to optimize in value. There are,
however, many political factors that affect profits, affordability, and the technology provided by
hospitals.
PEST Analysis
Political
Politics in the hospital industry have a significant impact on the success of each
organization. There are different drug laws that pass and get banned, health insurance coverage
that is highly volatile, and many other factors. The Affordable Care Act is a recent program that
is designed to get more Americans covered, but has had a lot of negative outlook on the
economic consequences. The ACA, despite the negative opinions, is designed to expand
coverage, hold insurance companies accountable, lower health care costs, guarantee more choice,
and enhance the quality of care for all Americans (Medicaid.gov, 2015). This act alone has
changed the way the hospitals are able to run their organizations significantly.
The Affordable Care Act has gotten mixed reviews. In 2013, the law had an approval of
48%. Today, over two years after the 2013 approval rating, the approval has gone down to as
little as 37% but has increased up to 47% (Jones, 2015). Most political policies take around
eight years to see what progress there is on the economy, but these stats still portray the lack of
optimism many Americans have with this law, see Appendix A for details. There is another
interesting statistic to consider and that is the approval ratings among low income families.
According to gallup polls, the approval for low income households has improved to 68% in
2015. The disapprovals most likely come from people paying more for healthcare, but those
who could not afford previously are now covered. Still, the leading reason people go bankrupt is
because of medical expenses (Cussen, 2014). This causes much concern and sways people away
from treatment.
Economic
The state of the economy will always have an effect in any industry. The less disposable
income a household has, the less likely that family is to spend money. The same goes for the
hospital industry. As shown in Appendix B, the adjusted per capita income has a direct
correlation on how hospitals profit. The only significant spread between per capita income and
hospital margin is in 2011, but the very next year the gap quickly closes. Therefore, the
economy will strongly affect the hospital industry.
The effects are mutual, meaning that the hospital industry also affects the economy a
great deal. Hospitals employ 5.5 million people. The industry also supports an additional ten
million jobs. It also creates more than two trillion dollars in economic activity (AHA, 2015).
This is an industry that is vital to the economy but will also never disappear. With population
growth, more people will be needing help ultimately increasing the industry.
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Social
Social factors apply more to the US than it does anywhere else in the world. This is
because of the poor lifestyle that most of us choose to live. Diabetes is a disease that many
people achieve through poor food and exercise routines. The same applies to that of heart
conditions. Many of the prices of drugs are decided by an indirect negotiation between
pharmaceutical companies and consumers based on how much Americans are currently willing
to spend on their healthcare (MarketRealist, 2014).
Another concern for many Americans is that doctors distribute medicine based on
corporate influence. Big business makes it hard for many to believe that our well-being is the
industry’s first priority. This will sway consumers away from going to get care if they need it.
Findings from New England Journal of Medicine suggest that those who make under $30,000
show a significant level of suspicion towards doctors. Researchers also suggest that just 58% of
Americans trust the health care system, putting us in 24th
tied with Croatia (Collins, 2014). This
is not a good sign of progress for the hospital industry. Even with how large the industry is,
people do not trust the system. Plenty of Americans feel that there is unequal access to health
care correlating to the amount of income you have. Large pharmaceutical corporations have
historically influenced the advice doctors provide its customers.
Technological
Technology ties into what is described in the brief explanation of the industry. For a
specific organization to be a successful hospital, they must be able to be up to date or ahead of
competition in terms of their technology. If an organization is behind on their technology then
more people who need help will lean towards the competition. This is what drives hospitals to
help the public have access to the greatest healthcare possible.
Medical technology plays a crucial role in sustaining health. This is driven through areas
such as biotechnology, pharmaceuticals, information technology, and more. Some health care
providers are working on robotic surgeries to improve accuracy and increase the success rating.
This could help the industry gain public approval.
Porter’s Five Forces
Competition
There is a high level of competition within the hospital industry. There is a need to be
innovative with the care that your hospital provides its patients so that you can have returning
customers (ftc.gov, 2015). A lot of the competition occurs at the local level. This is because
enough hospital visits are unplanned, so the person that needs care can only choose between as
many as 1, 2, or 3 hospitals near them. The competition is still high though, each of these
hospitals wants to be the one picked.
Competition among pharmaceutical companies will create competition in the industry.
These companies will compete with each other to sell their products to individual hospitals. One
of the common measures of competition is the Herfindahl-Hirshman Index (HHI). This
measurement is derived from taking the sum of squared market shares of firms in the hospital
market. There are additional factors that are considered while measuring competition. These
consist of the extent of integration between firms and the role of managed care (Rivers, 2010).
These measurements have led experts to believe that competition and health care costs have
predicted contradictory results. To conclude the HHI results, the impact of competition on
quality of health care is not clear. Also, the relationship between the quality of health care and
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cost to provide health care is unsure. Lastly, information regarding what drives customer
approval is not understood.
Threat of New Entrants
There is very low risk of new entrants in this industry. This is mainly because of the
amount of capital required to invest in research and also to develop your own drugs. Even if a
person can successfully make drugs to help people, getting them approved by the government
has been proven to be a relentlessly long fight. There are so many hospitals that cover plenty of
land that it is hard to imagine new entrants enter the industry (Opoku, 2015).
Another reason why the threat of entrants is low is because of government regulation.
The government must make sure that the hospitals entering the industry have the information and
technology necessary to run a health care center.
Threat of Substitute
There really are no substitutes in the hospital industry. Some people may not trust going
to the hospital for care, and that is the only form of substitute that comes to mind. The only
substitute that can occur has to do with finding the best ways to help people for both the cheapest
as well as healthiest reasons.
Some substitutes that can be considered are massage therapy or acupuncture which are
specific treatments. However, for emergency care and a place to go for professional doctorate
advice there is only hospitals to compete.
Bargaining Power of Suppliers
The bargaining power of suppliers is fairly moderate in this industry. There are too many
suppliers, mostly pharmaceutical companies, for them to have much power over the hospitals.
The hospital doctors can almost tell their patient to purchase any pill of their choosing, within
certain parameters. The point is that these pharmaceutical companies must create a relationship
with hospitals and their doctors that influence them to sell their product.
The reason that the bargaining power is not low is because of how much power these
physicians and other health care professionals do have. As a whole, the pharmaceutical
companies are what are keeping the hospital industry alive. For this reason, the pharmaceutical
companies have a major role in what specific drugs are distributed. These two arguments are
why the bargaining power of the suppliers is moderate.
Bargaining Power of Buyers
The bargaining power of the buyers in this industry is also fairly moderate. This is
because when somebody needs health care, there is almost no price one can put that they will not
pay. “When customers cherish particular products they end up paying more for that one product.
This positively affects the health care industry.” (wikiwealth, 2014) Thanks to competition these
prices will not become too ridiculous for consumers to afford, but the buyers in the industry have
close to no say in the matter. This competition alone is what keeps the bargaining power of
buyers moderate as opposed to low.
Key Success Factors
A key success factor is something that a hospital must do in order to be successful. It is
something that all hospitals already do, if not probably should. If these factors are accomplished
then that hospital will separate from their competition. There are three key success factors that
are the most important in the industry, listed in order by importance. Granted they are all
extremely important factors, but are still ranked by a level of urgency.
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Reinvent the Patient Experience
The reason this is the first key success factor is because of how much the normal hospital
patient dislikes the normal hospital experience. Waiting in the waiting room, nervously being
called in by a nurse who looks as though they are a pessimist, and then waiting some more when
you get called into the doctor’s office or emergency room until a professional gives you the
information and assistance that you came for is what scares consumers away from attending
these hospitals. For a hospital to be successful against other competitors, they must create the
best patient experience that can possibly be created.
To create the best experience, the hospital must create a positive environment. This can
be done by having friendlier employees. A lot of hospitals hire their employees and have them
work upwards of 10 hour shifts. This makes it hard for anybody to appreciate being at their job,
no matter how much they truly enjoy what they do. To change this, a hospital can lower some of
their employee’s hours. This will encourage any level employee to be pleasant at work, and give
their best effort to not only treat patients, but also have an attitude that is as optimistic and
positive as possible.
Diversified Professionals
What is meant by saying diversified professionals is to have many doctors of many
medical backgrounds. Patients do not want to have a general doctor who operates on many
different procedures. They want a doctor who is an expert in their specific field. A hospital
should have some different doctors for head injuries, back, limbs, etc. That way, when a patient
has an injury, they can feel more comfortable hearing that the specific expert in that injurie’s
field is operating on them. Of course doctors need to have a background that is large and wide in
case of any medical emergency, but having multiple medical experts in many different health
related fields will help ensure patient satisfaction.
Another diversity approach is having doctors of different cultural backgrounds. These
backgrounds should match the backgrounds of the population they are serving. For example, if a
hospital is in a town that is 70% white, 25% black, and 5% Hispanic, then the hospital should try
its best to have a ratio of doctors that closely resembles these percentages. This will attract more
patients creating an atmosphere of doctors that the patients can actually relate to.
Leveraging Innovative Technology
Innovative technology is a key core competency for hospitals to obtain. If a hospital
clearly has more up to date health care technologies than its closest competitor, then it will most
definitely lead the market share. Assuming that the innovation is equal, then it comes down to
how this technology is leveraged. A hospital must make it clear to its patients that they have the
most innovative technology. This can be done through mobile and web technology. Online
technology has become so widespread that patients want to see hospitals utilizing their usage of
it. It will help hospitals prove to their patients that they have the latest technology and that the
hospital is the best place to go to for health care.
Ranking System The reason that reinventing the patient experience is the most important is because of
how impactful this is to the hospital’s most important customers, those who attend hospitals
constantly. If an unlucky patient is periodically in a hospital for any reason, the hospital must
make sure to optimize their stay otherwise the next visit will not be with that hospital. Giving
patients the best service possible is necessary to separate them from competition, and can also
lead to dipping into the market share by taking away patients from their competition.
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Diversifying a hospital’s professionals is next important because it also affects a patient’s
satisfaction. Diversification is what makes many businesses successful. This does not change
for hospitals. Having women and multicultural doctors creates a bond between the hospital and
its patients that is inseparable. It is important to make sure that it matches the population that is
being served because this will make the patient-doctor connection even stronger.
Leveraging Innovative Technology is third because it is not found to help keep those
neighborhood customers. It is still extremely important to give patients the best help possible.
However, this will not be held as a core competency by any hospital. Once a new technology
comes out, it will not be long until the industry catches on and implements. It is important to
innovate so that the hospital stays relevant, but the hospital needs to focus on its long term
customers in order to be more profitable.
In the appendix you will find a chart that grades these key success factors based on a
weighted scale. Please refer to it and get a more detailed image of how the rankings were made.
Keep in mind that it is opinionated after extensive research. In essence, you will find
information elsewhere that contradicts the rankings, but these rankings also were made with the
necessary data to back it up.
Unattractive Industry
The hospital industry is an unattractive industry to enter today for many reasons. As
mentioned earlier there is a low threat of new entrants because of multiple factors, first of which
being political. The Affordable Care Act has made it more difficult for hospitals to profit as it
stands, adding more hospitals would only hurt the industry. Another reason the hospital industry
is unattractive to enter is because the suppliers have a decent amount of bargaining power. As a
new hospital, you would not be able to minimize costs to the point where the prices could be
cheaper than competition. If the price is not cheaper than competition, customers will stay at the
hospital that they have been at for yours. It is a difficult, fast-cycle market, to enter. Constant
innovation is required along with a large amount of capital. Also, any new hospitals will be
competing against hospitals that have been around for a much longer time. The industry, as it
stands today, is an unattractive industry to enter.
Conclusion
Hospitals are essential to both an economy as well as a healthy society. It will help drive
America to being as great of a nation as it can be. The individual hospitals play a key role in
driving the industry as a whole. It is difficult to get the nation to agree on any policies, but as
long as there is health care for anybody that needs the assistance then the country is
accomplishing its moral duty as human beings. It is sad to see, this industry especially, an
industry created to help people in need driven by money and serving higher quality to those who
have it. At the same time, however, the money that hospitals created circulates into the economy
making it easier for technology to improve and for individuals to afford the care.
If there is one thing to be learned from reading this analysis it is that the industry is profit
driven. This is explained through the key success factors that encourage hospitals to focus on
what gains the most money rather than what helps the most individuals.
External factors are also affecting the success of hospitals. These external factors include
both the suppliers and the buyers. The suppliers are driven by competition leading to a lower
price for medicine and health care technologies. The buyers drive hospital competition, forcing
the hospitals to create a better experience for its patients in order to ensure satisfaction.
These external factors of competition help to make hospitals better for everybody.
Affordable prices and top of the line health care is created through the motivation of threats.
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America’s large amount of wealth, compared to other first world countries, and capitalistic
society will help to make the best hospital industry that we can make, even though the initial
purpose of those in the industry are in it for profits.
It will be interesting to see where the industry goes with the current political factors
arising. Most every Republican wants to destroy the Affordable Care Act and other government
regulated funding. Bernie Sanders has every intention of making health care free in America.
Free health care in a capitalistic society is a strange though and is unimaginable to think what
will happen to the economy afterwards. Then there are other Democratic candidates who wish to
continue the Affordable Care Act and watch it progress for the future. This is something that the
hospitals should be aware of as it will greatly affect the businesses involved.
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References
(2014) Affordable Care Act, Available at:http://www.medicaid.gov/affordablecareact/affordable-
care-act.html (Accessed: 14th September 2015)
Sam P.K. Collins (2014) Americans Don't Trust The Medical profession, Available
at:http://thinkprogress.org/health/2014/10/23/3583625/americans-skeptical-doctors/(Accessed:
28th October 2015)
Jeffrey M. Jones (2015) Americans' Views of Healthcare Law Improve, Available
at:http://www.gallup.com/poll/184079/americans-views-healthcare-law-improve.aspx(Accessed:
27th October 2015)
(2004) Competition in the Health Care Marketplace, Available at:https://www.ftc.gov/tips-
advice/competition-guidance/industry-guidance/health-care(Accessed: 14th September 2015)
(2015) The Economic Contribution of Hospitals, Available
at:http://www.aha.org/research/reports/13econimpact.shtml (Accessed: 27th October 2015)
(2015) Hospitals Industry Profile, Available at: http://www.firstresearch.com/Industry-
Research/Hospitals.html (Accessed: 14th September 2015)
Margaret Patrick (2014) The key economic and social factors affecting hospital
revenues, Available at: http://marketrealist.com/2014/11/key-economic-social-factors-affecting-
hospital-revenues/ (Accessed: 15th September 2015)
Edward Opoku (2011) Porter's Five Forces Healthcare Industry, Available
at:http://eopoku3.blogspot.com/2011/03/porters-five-forces-healthcare-industry.html(Accessed:
15th September 2015)
(2014) Product is important to customer , Available at: http://www.wikiwealth.com/five-forces-
customer:health-care-industry:product-is-importa (Accessed: 16th September 2015)
Mark P. Cussen (2014) Top 5 Reasons Why People Go Bankrupt, Available
at:http://www.investopedia.com/financial-edge/0310/top-5-reasons-people-go-
bankrupt.aspx (Accessed: 15th October 2015)
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Appendix A
(Jones, 2015)
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Appendix B
(MarketRealist, 2014)
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Appendix C
Key Success
Factor
Maintains Bond
with
neighborhood
customers (5.5)
Helps treat
patients
(3)
Creates positive
environment
(1.5)
Totals
Reinvent the
Patient
Experience
9 5 10 82.5
Diversified
Professionals 10 6 6 82
Leverage
Innovative
Technology
7 10 6 77.5
These numbers are comprised of weights on how important it is to a hospital’s
profitability. It is important to realize that it is not explaining what makes a hospital better for
care specifically, but what is important to be profitable and challenge the competition. In
parenthesis you will find weights on how important each grade is. Maintaining a bond with a
hospital’s neighborhood customer is the most important because this will lead to constant profits.
All hospitals will get their share of emergency care based on location, but when it comes to
periodic visits, a patient will choose to travel further if they feel a level of comfort at a certain
hospital.
