HLTH 5613 Module 3 Strategic Options Analysis Example

Five Ways to Win Back Joint Replacements, and the One a Community Hospital Can Afford: A Strategic Options Analysis

Student Name

American College of Education

HLTH5613: Leading and Strategy Development in Healthcare Organizations

Module 3 Assignment

Instructor Name

March 20, 2028

The Problem and the Criteria

Earlier modules established that the course's invented 180-bed hospital, Cedar Plains Regional Medical Center, lost about a fifth of its joint replacement cases in five years because the county's largest orthopedic group joined an academic network and a second group opened a physician-owned surgery center, taking many commercially insured patients with it. Orthopedic contribution margin fell by more than $2 million a year. The strategy committee has asked for options, and the finance committee has set a limit: no more than $6 million in capital over three years, because the hospital must also replace its imaging equipment.

Ginter et al. (2018) describe strategic alternatives as a set of choices evaluated against criteria reflecting the organization's mission, resources and external situation. Five criteria were set before any option was scored: capital required within the $6 million limit, time to measurable impact, the likelihood of winning back commercially insured cases, fit with the hospital's community mission and the risk that the option fails or is copied. Each option was scored from 1, poor, to 5, strong, on each criterion. The capital limit is not one criterion among five; it decides which options are real.

Options One and Two: Employ Surgeons or Build a Center of Excellence

Option one is to recruit and employ four orthopedic surgeons to rebuild a hospital-aligned group. It is attractive because employed surgeons would bring their cases to the hospital, and recruitment would restore capacity. It is expensive and slow: recruitment packages, salary guarantees during practice ramp-up and the cost of building referral relationships would likely exceed $4 million over three years, and new surgeons take time to build practices. It also does nothing about the payment shift that makes hospital-based joint replacement less profitable. Scores: capital 2, time 2, commercial recapture 3, mission fit 4, risk 2.

Option two is to position Cedar Plains as a center for complex and revision joint replacements, the cases the surgery center cannot take and patients may prefer to have close to home. It is attractive because it plays to a hospital's strengths, but it competes directly with the academic center's main advantage, requires surgeons with subspecialty training that the hospital lacks and targets a mostly Medicare population with lower margins. Scores: capital 3, time 2, commercial recapture 1, mission fit 4, risk 3.

Options Three and Four: Direct Contracting or a Joint Venture

Option three is a direct contract with regional employers for a bundled price covering the entire joint replacement episode. Employers seeking predictable costs have used bundled contracts, and evidence from Medicare's mandatory bundled payment program suggests that episode-based payment can reduce spending modestly without harming quality; a two-year evaluation found a 3.1 percent differential decrease in institutional spending per episode, driven mainly by fewer discharges to post-acute facilities, with no significant change in complications (Barnett et al., 2019). The option requires little capital but depends on employers large enough to steer patients and on surgeons willing to operate at Cedar Plains. Scores: capital 5, time 3, commercial recapture 3, mission fit 3, risk 3.

Option four is a joint venture ambulatory surgery center, owned jointly by Cedar Plains and the independent orthopedic group that still operates at the hospital, with ownership offered to additional surgeons. It is attractive because it meets surgeons where the incentives already point: physician ownership has been associated with higher surgical volume at surgery centers (Hollingsworth et al., 2010), and a joint venture lets the hospital share in that volume rather than compete against it. Building a two-room center within an existing hospital-owned outpatient building would cost an estimated $4.8 million, of which the hospital's share would be about $2.9 million. Scores: capital 4, time 4, commercial recapture 5, mission fit 3, risk 3.

Option Five: Hold and Harvest

The fifth option is to accept a smaller orthopedic role, stop competing for elective joint replacement and redeploy resources to cardiology, the hospital's most profitable service line. It is attractive because it requires no capital and avoids a costly fight. It would, however, reduce the margin that funds obstetrics and behavioral health, leave the county's independent surgeons without a hospital partner and likely accelerate the decline. Scores: capital 5, time 5, commercial recapture 1, mission fit 2, risk 2.

Comparing the Options

Summed across the five criteria, option four scores 19, option three scores 17, option one 13, option two 13 and option five 15. The totals matter less than the pattern. Only option four scores well on commercial recapture, the factor that drives the margin loss identified in the previous module, and it does so within the capital limit. Option three is the strongest low-cost option and could complement option four, since a bundled contract would be easier to price in a lower-cost setting. Options one and two address capacity or complexity but not the ownership and payment forces that moved the volume, and option five gives up the margin the hospital's community services rely on.

Casalino et al. (2003) described physician-owned specialty facilities as focused factories that compete with community hospitals for profitable patients, and they noted that hospitals often respond by partnering with physicians rather than competing against them. The joint venture is not a surrender to the surgery center model; it is a decision to own part of it.

The Recommendation and Its Main Risk

The recommendation is option four, a joint venture ambulatory surgery center with the independent orthopedic group, open to additional surgeon investors, with option three, a bundled employer contract, pursued in parallel once the center opens. The main risk is surgeon participation. If the independent group's two surgeons are the only investors, the center will not reach the volume needed to break even; the plan requires at least two more surgeons to invest within the first year, either from the region or through recruitment. The next module will price the chosen option in detail and name what it displaces from the hospital's budget.

The scoring was tested for sensitivity. If time to impact were weighted twice as heavily, option five would rise but still fall short of option four, because it scores so poorly on commercial recapture. If mission fit were weighted twice as heavily, option one would close some of the gap but would still exceed the capital limit in the likely case. The recommendation holds under each alternative weighting, which gives the committee confidence that it does not depend on how the criteria happened to be balanced.

Conclusion

Five options could each have restored part of Cedar Plains' orthopedic position, and four of them were attractive enough to argue for. Testing them against the same criteria, with the capital limit applied honestly, narrowed the field to one: a joint venture surgery center that aligns the hospital with the ownership incentives that moved the volume away, supported by a direct employer contract. The choice is fundable, addresses the root cause and carries a clear risk that the hospital can plan for.

References

Barnett, M. L., Wilcock, A., McWilliams, J. M., Epstein, A. M., Joynt Maddox, K. E., Orav, E. J., Grabowski, D. C., & Mehrotra, A. (2019). Two-year evaluation of mandatory bundled payments for joint replacement. New England Journal of Medicine, 380(3), 252-262. https://doi.org/10.1056/NEJMsa1809010

Casalino, L. P., Devers, K. J., & Brewster, L. R. (2003). Focused factories? Physician-owned specialty facilities. Health Affairs, 22(6), 56-67. https://doi.org/10.1377/hlthaff.22.6.56

Ginter, P. M., Duncan, W. J., & Swayne, L. E. (2018). Strategic management of health care organizations (8th ed.). Wiley.

Hollingsworth, J. M., Ye, Z., Strope, S. A., Krein, S. L., Hollenbeck, A. T., & Hollenbeck, B. K. (2010). Physician-ownership of ambulatory surgery centers linked to higher volume of surgeries. Health Affairs, 29(4), 683-689. https://doi.org/10.1377/hlthaff.2008.0567