Marketing medical services to the affluent

by Michael J. Pulaski, FACMPE

Abstract
Society is split between a desire for access to quality health care and a reluctance, by some, to pay for it. Looking at this cost/access dichotomy historically enables one to recognize an emerging niche market - designer care delivered in a boutique setting.

This article was based on a professional paper written in fulfillment of the requirements for Fellowship in the American College of Medical Practice Executive (ACMPE).

A new niche market of affluent health care consumers is emerging as a result of the growth and consolidation of managed care delivery systems in the United States.

As managed care companies increase their market share, they achieve the advantage of leveraging their market position when negotiating with providers of health care services. The negotiations result in providers discounting their fees up to 34 percent. The managed care companies take these negotiated "savings" and keep them for executive bonuses, shareholder distributions and increased corporate cash flow. The added cash flow allows the managed care companies to purchase local and regional plans, at times driving superior plans out of existence in order to gain even larger market share. This concentration of national-based managed care plans has created oligopolistic market conditions in some locales, which, in turn, has caused the actual cost of health services in these locales to exceed national averages.

The consequence of this market concentration on the consumer of health services is less access to lower quality of care. Service providers, squeezed by reduced managed care fees, are pressured into seeing more patients in the same amount of time while delaying or denying access to certain treatments. The concept of the cost/ access dichotomy, introduced in Part I of this article, explains this dynamic (see July/August issue of MGM Journal).

Under managed care, the contracted provider is made a gatekeeper for the profitability of the managed care company, creating a conflict with the tenets of informed consent and the traditional provider role of patient advocate. Worse, some providers have been required to sign "gag clauses" as part of their managed care agreements, which place them in ethical dilemmas. As a result, many educated and sophisticated patients have begun to question the basis for their provider-ordered treatments, ending up losing trust in the doctor-patient relationship.

The dynamics of the cost/access dichotomy are evident in other Western industrialized societies. Although socialized, the Swedish, British and Canadian systems show a relation between government decreases in per capita spending on health care benefits and an increase of affluent patients seeking "private" care outside their societal systems.

This article argues that this consumer behavior is no different in a socialized medicine system than in one that is not socialized. There is a point in the dynamic of the cost/ access dichotomy where certain consumers defect from the status quo to seek health care services elsewhere. This article argues that those persons most likely to defect are the affluent, those with household incomes of $70,000 and above, representing 13 percent of the U.S. population. This describes the new niche market opportunity. This second installment of "a new niche market opportunity" explains ways to seize this business opportunity.

Successful penetration of this new niche market opportunity requires a health care services product that is designed to attract the discriminating, sophisticated and affluent consumer - one based on relationship marketing. Studies of the purchasing tendencies of the affluent show that they are predisposed to purchase customized products from specialty vendors; they demand high quality of product and of service. This new niche market requires the service delivery organization to treat each patient as an individual and to customize interpersonal contacts to each individual based on information learned about that person on a continuing basis. This approach is exemplified by Individual Care, or I-Care, a business entity created in this article for illustration purposes.

The I-Care example
When Toyota introduced its luxury Lexus line, it insisted that its dealers locate new showrooms a minimum distance from parent dealerships and make every possible provision to separate the luxury car division from the company's other product lines. Great effort and expense were used to create a different, more upscale image. A new corporate culture was created and imbued into all luxury division employees. However, certain "invisible" ties were kept. Information systems, customer databases, suppliers and technical employees were commonly maintained to take advantage of economies of scale.

The Cleveland Clinic Foundation and Nalle Clinic in Charlotte, N.C., have been experimenting with similar approaches to niche markets. In each of these clinics, a certain set of patients is identified for special treatment. At the Cleveland Clinic, foreign dignitaries are selected for special treatment, such as meeting them at the airport with escorts, providing them with a concierge and other special accommodations for their families and giving the families and patients more time-intensive staff attention. It is noteworthy that although these patients comprise only 5 percent of Cleveland Clinic's patient volume, the revenue generated from this market niche is more than 9 percent.

The Nalle Clinic isolates time-conscious executives for their special treatment. A remote section of the clinic is set aside for these patients. While the decorum and staff are no different from those for other Nalle patients, the time spent with each executive and the qualities of the services are different. The physician spends twice the amount of time with each executive, who is never made to wait. When the results of the testing and examination are complete and a written report has been generated, the executive has the option of having the results presented at his or her office, instead of coming to the clinic for a second visit.

The approach for I-Care will be closer to the Lexus business model than what is done at the Cleveland and Nalle clinics. The I-Care facilities will have separate, unique locations, with sophisticated elegance for decorum and a different name than their "parent." However, like the Nalle and Cleveland clinics, the professional service providers will be supplied by the parent clinic, which is either free standing or university affiliated. In addition to the regular advertising and marketing efforts to solicit new business, and because of I-Care's business relationship with the parent clinic, potential customers will be identified from the parent's database and will be solicited to convert to I-Care's provider organization.

Certain back office functions will be done by the parent clinic, such as billing, insurance processing, transcription, accounting and purchasing. These functions will use different forms and stationery as well as different guidelines regarding customer or vendor interface. Enhancements to the parent's computer software will be made to reflect all the requirements of learned relationship marketing. The software enhancements and proprietary database information will be physically located on I-Care's local area network, while billing, accounting and purchasing will be interactive with the central host.

The initial contact the patient has with I-Care will be with a patient manager. While the patient manager may have some duties similar to those of traditional medical office receptionists, much more will be required. The patient manager must be a college graduate, thereby drawing from a different demographic profile than that of a typical receptionist. Besides being the initial contact person, the patient manager will be responsible for a certain set of patients, managing each patient's economy of scope and lifetime value.

The patient manager (as well as all other I-Care employees) is empowered to make on-the-spot economic decisions, most of which lead to immediate resolution of non-medical patient problems. In addition, the patient manager is responsible for the depth of relationship with each patient. The identification of individual patient needs is done by a process of customer interactive dialogue that all I-Care service providers and non-service providers conduct and record on its management information system.

In order to fully develop the depth of relationship, the patient manager will collaborate with the capability manager, who also is a college graduate and is responsible for contracting or building service delivery products for I-Care.

The ambiance of the service setting will reflect first-class accommodations. The decorum of its service facilities will be understated elegance with an abundance of silks, leather, Oriental rugs, fine art, cut flowers and classical music. The patients will experience designer care in a boutique setting.

There will be no waiting rooms. Rather, the patient will be whisked in to see the service provider immediately upon arrival. The length of each patient encounter will be twice that of the norm in practice today. If the patient's lifestyle requires that the encounter be in the home or office, I-Care's providers will make the out-call. In addition, its mobile diagnostic vans will be available to provide most testing remotely.

The corporate culture of I-Care will be markedly different from that of the traditional clinic. Recognition of the chained relationship of employee satisfaction and loyalty to patient satisfaction and loyalty, which influences the enterprise's profitability, will result in a departure from the traditional roles, interactions, selection criteria and compensation of the employees. A focus on front-line employees and patient relationships will take on a greater priority in resource allocation. Emphasis on high employee and patient satisfaction indices will become as great as the emphasis placed on profit because the philosophy of the enterprise is that they are essentially the same thing.

The selection criteria for I-Care employees will be high in regard to education levels as well as technical and interpersonal skills. I-Care employees will be compensated above the average, with a high salary and level of benefits, stock options and a bonus program tied to patient satisfaction/loyalty levels.

The description of I-Care's operations and economics is not as utopian and extravagant as one would normally think. If the reimbursement for services performed by I-Care is accomplished without discount to insurance plans, there will be up to 36 percent more revenue per procedure available to cover added overhead. According to 1994 MGMA statistics, the median discount rate for the largest multi-specialty groups is 36 percent; that is, the statistical median of the groups studied wrote off 36 percent of their fees due to various contractual agreements with Medicare and other insurers. I-Care will not make any such agreements. Rather, each patient will be responsible for paying the full fee. Since the patients will be affluent, it is assumed that the collection rate will be close to 100 percent. However, I-Care business personnel will assist in every way possible so the patient gets whatever insurance benefit is due.

Preliminary financial analysis shows the profitability for an I-Care organization to be higher than the traditional practice. This same phenomenon did not escape the Lexus developers and marketers. They understood there is more profit per unit sale in the high-end market than in the traditional market.

Relationship marketing
Mass marketing is not valid when applied to penetrating a niche market of discriminating, affluent consumers. Instead, the successful service delivery organization needs to implement attributes of mass customization. The concept of mass customization is the result of an alternative marketing philosophy that is relatively new: relationship marketing and its extension, learned relationship marketing. With this approach, the marketing of services cannot be separated from overall operations management.

Relationship marketing is an approach that aligns marketing, customer service and the notion that all participants in a business relationship (however tangential or minor) should be concerned with quality. The focus is on customer retention, product benefit, a long-term view, high customer service orientation and interactive dialogue. Relationship marketing encompasses a strategy where the management of interactions and relationships are fundamental issues.

The key characteristics of relationship marketing are:

• Every customer is considered an individual person;
• Activities of the provider organization are directed toward existing customers;
• Interactions and dialogues are kept in a real-time, accessible computer database; and
• The provider organization achieves profitability through the fulfillment of promises, the decrease of customer turnover and the strengthening of customer relationships.

Proponents of relationship marketing conclude that provider organizations must move from a short- term, transaction-oriented goal to a long-term, relationship-building goal. They observe a need to shift the focus to retain customers and thus remain effective and profitable.

Relationship quality
Relationship marketing encourages the service provider to concentrate on the interactive dialogue function. To do this, the provider organization must observe the marketing impact on the patient during the consumption of services process where the patient typically interacts with service providers, systems and physical resources of the organization. These interactions occur between the patient and employees who normally are not considered traditional marketing people. Nevertheless, they are part-time marketers.

The perception of quality is basically a function of the consumer's view of two dimensions: the technical dimension of the medical outcome and the functional dimension of the interaction process. A typical patient is insecure about his or her knowledge of medical science; therefore, a patient normally will not make a decision about quality based on the technical dimension. However, this same patient is very comfortable with his or her knowledge regarding the functional quality of the encounter. This sophisticated consumer will judge the ambiance of the office setting, its cleanliness, the quality of interaction with providers and provider staff, convenience of service acquisition and timeliness of appointments and reports.

The transaction marketing approach includes minimized contacts outside the receipt of medical services. The benefits sought by the patient are embedded in the technical component provided by the medical service. The consumer will not receive much else that will provide added value, other than perhaps a professional provider's social status or "image." Hence, the technical quality of the product, or the consumer's satisfaction with the technical component of the outcome, is the dominating quality-creating source in transaction marketing.

However, in relationship marketing, the patient interface is intended to be broader, and the provider organization has opportunities to provide its patients with added value of various types. Hence, the second quality dimension, how the interaction process is perceived, grows in importance.

When several provider organizations can provide a similar technical quality, managing the interaction processes becomes imperative from a quality perspective. Thus, in relationship marketing, the functional quality dimension grows in importance and often becomes dominant. Of course, this does not mean that the technical quality can be neglected, but it is no longer the only quality dimension to be considered as one of strategic importance.

The blunting of price competition
In transaction marketing, there is not much more than the technical component and sometimes the image of a service provider that keeps the consumer attached to the seller. Therefore, in transaction marketing the price sensitivity of consumers is often high.

A provider organization pursuing a relationship marketing strategy, however, has created more value for its patients than that which is provided by the technical component alone. Such an organization develops broader and tighter ties over time with its patients. Such ties may be technological, knowledge-related, information-related or social in nature. If they are well handled, they provide patients with added value, something that is not provided by the core product itself. Of course, price is not unimportant, but it will become less of an issue. Thus, relationship marketing makes consumers less price sensitive.

Learning relationships
Consumers do not want more choices. They want exactly what they want - when, where and how they want it - and technology makes it possible for provider organizations to give it to them. Recorded interactive dialogue and computer database technology permit organizations to amass huge amounts of data on an individual patient's needs and preferences, enabling computer decision support applications to anticipate each patient's needs.

An organization that aspires to give patients exactly what they want and need must use technology to become a mass customizer. This is a process where a service organization efficiently provides individually customized services. This process includes the patient manager who elicits information from each patient about his or her specific needs and preferences.

This is called a learning relationship - an ongoing connection between the provider organization and the patient that becomes more focused as the two interact with each other, collaborating to meet the patient's needs over time. The more patients teach the provider organization, the better it becomes at providing exactly what they want - exactly how they want it - and the more difficult it will be for a competitor to entice them away. Similarly, the more patients teach the provider organization about themselves, the more reluctant these patients will be to repeat the process with a competing organization.

Customization means delivering a service in response to a particular patient's needs, and mass customization means doing it in a cost-effective way for each patient of the enterprise. In contrast, transaction-centered mass marketing calls for pushing a limited set of pre-packaged options on the consumer and hoping that each option is embraced by enough patients to make its production worthwhile. This requires individual patients to hunt for the service they want from among an ever-growing array of alternatives.

To build relationships, provider organizations do not need product managers; they need patient managers who oversee the relationship with the patient. They serve as gatekeepers within the provider organization for all communication to and from each patient.

In addition, provider organizations need capability managers, each of whom executes a distinct production or delivery process for fulfilling each patient's requirements. The capability manager ensures that appropriate capacity exists and that the requested service process can be executed on a reliable, efficient and timely basis.

Often, a patient manager will learn of a need for some product or service component that the organization does not consider itself competent to produce or deliver. The capability manager might then arrange to obtain it from a strategic partner or a third-party vendor.

There are four components to building a successful learned relationship marketing effort:

• an information strategy for initiating dialogues with patients and recording their preferences;
• a delivery strategy for fulfilling needs as they arise based upon interactive dialogue with individual patients;
• an organizational strategy for managing both consumers and capabilities; and
• an assessment strategy for evaluating performance.

Depth of relationships
The evolving recognition of the importance of consumer retention and of consumer relationship economics reinforces the change in mainstream marketing. If the provider organization focuses on the establishment and growth of a relationship with each of its patients, they will reciprocate with their loyalty. Experts in the field estimate that a 5 percent increase in consumer loyalty can produce profit increases from 25 percent to 85 percent. They conclude that quality of market share, measured in terms of consumer loyalty, deserves as much attention as quantity of share.

Thus, the foundations of business strategy have shifted. Now, a service organization's share of the market is less important than its share of the consumer. Its economies of scale (built on the volume of its sales to a market) are less important than its economies of scope (built on the breadth of its sales to each individual consumer). Increasingly, the patient must be viewed and managed not as part of a large, homogeneous mass but rather as a unique individual representing a unique business asset. Accordingly, provider organizations must develop means to evaluate and measure the depth of relationship, or the number of services used by each patient.

In relationship marketing, the focus is on building the breadth rather than the number of consumer relationships. Economies of scope pertain at most businesses for a simple reason: Broad consumer relationships, where a large number of services are sold over an extended period of time, tend to be far more profitable than narrow relationships. As relationships broaden and lengthen, the cost-to-serve tends to fall, often dramatically.

In contrast, the pursuit of economies of scale can backfire. Because an unmanaged consumer base tends to obey the 80/20 rule - 80 percent of the profits are generated by 20 percent of the customers - efforts to attract as large a market share as possible can result in a big, but not necessarily profitable, consumer base. With relationship marketing, provider organizations target only those consumers who are profitable to serve and then focus efforts on building long-term relationships with them.

Long-term customer relationships
Traditional transaction marketing focuses on the short term in its attempt to maximize the volume of sales. "How can we get a buyer to buy?" is the question the transaction marketer seeks to answer.

Relationship marketing, in contrast, places the immediate transaction in the broader context of the patient's overall relationship with the provider organization. The relationship marketer asks: "How can we maximize the lifetime value of this patient to our organization?"

Provider organizations should decide which potential learning relationships they will pursue. The ideal way to approach this task is to think about a patient's lifetime value. Lifetime value is the sum of the future stream of profits and other benefits attributable to all purchases and transactions with an individual patient. Studies show that the longer consumers are retained by a provider organization, the more profitable they become because of in- creased purchases, referrals, price premiums, reduced operating costs and reduced patient acquisition costs.

Although it is a daunting task, companies seeking to build learning relationships should try to track as many of those elements as they can, using such information as transactional histories and consumer feedback. The key to successful tracking of these elements of data is the acquisition and maintenance of a powerful management information system.

Information systems
While transaction marketing focuses on getting messages to consumers, relationship marketing focuses on opening and maintaining dialogues with them. Getting information from consumers and having the capability of retaining it for enterprise-wide use is as important as getting information to consumers. For example, gathering and recording individual patient dialogue information while scheduling appointments, making contacts following visits or treatment, billing and performing other patient-contact functions become integral parts of relationship marketing.

The key requirements of a management information system for a provider organization employing the relationship marketing strategy are:

• Adaptive strategies. Adaptability is at the heart of relationship marketing. Customers' needs, priorities and behavior change constantly - as their health status changes - and as competitors bring new value pro- positions to their attention. Sophisticated marketing databases, consisting of external target data purchased from demographic analysis firms, coupled with the data developed internally by the interactive dialogue process, can provide a dynamic source of information. The organization can follow the tendencies of each patient by continuously monitoring, in real-time, the stream of transactions and interactions;
• Measuring marketing performance. The adaptive strategies should be driven by marketing measurement and tracking systems that monitor the return on each marketing initiative and track key indicators of each patient's response. Through this process, it becomes possible to continually learn, refine individual programs and build marketing productivity as well as track its return on investment; and
• Decision support applications. Real-time computerized decision support systems can be viewed as a capability provided by the overall relationship marketing infrastructure. They can be used to gain insight about each patient that is then used by patient managers to guide their interactive dialogue. As a result, targeting and tailoring models provide a way to leverage patient data and gain significant economies by ensuring that the right value proposition is offered to the right patient by tailoring messages to the unique priorities of that patient.

The service-profit chain
Top-level executives of outstanding service organizations spend little time setting profit goals or focusing on market share. Instead, they understand that in the new economics of relationship marketing, front-line workers and consumers need to be the center of management concern. Successful managers pay attention to the factors that drive profitability in this new service paradigm: investment in people, technology that supports them, unique recruiting and training practices and compensation linked to performance for employees at every level.

The service-profit chain establishes relationships between a company's profitability, customer loyalty, employee satisfaction and productivity. The links in the chain (which should be regarded as propositions) are: Profit and growth, which are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the perceived value of services provided to the customer. Value is created by satisfied, loyal and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers.

As a result of employee satisfaction, there is an increase in customer satisfaction. Recent private surveys show that customers giving highest satisfaction ratings (5 out of 5) are six times more likely to repurchase than those who rate their satisfaction with a 4 out of 5. A goal for a provider organization, therefore, is to achieve an employee satisfaction level that converts the customer satisfaction level to the score of 5.

The prediction of a new business opportunity has been presented. The principles of relationship marketing and its operations extension, learned relationship marketing were explained and illustrated by the example of I-Care. The challenge to exploit this opportunity should serve as an open invitation to entrepreneurial organizations nationwide.

References
 

• Staff, "Nalle Clinic in Charlotte, NC Rolls Out the Red Carpet For Executives," Knight/Ridder/Tribune Business News, July 3, 1995.
• Berliner, Howard S. and J. Brian O'Toole, "Opportunities for the Development of Health-Related Tourism in Hawaii, Are International Patients the Answer to American Hospitals' Problems?," Health Care Management Review, Winter, 1988, pp. 39-46.
• MGMA, Cost Survey: 1995 Report Based on 1994 Data, Medical Group Management Association, Englewood, CO., 1995, p. 82.
• Gršnroos, Christian, From Marketing Mix to Relationship Marketing: Towards a Paradigm Shift in Marketing, MCB University Press. Melbourne, Australia, 1996.
• Christopher, M., A. Payne and D. Ballantyne, Relationship Marketing: Bringing Quality, Customer Service and Marketing Together, Butterworth, London, 1991.
• Blomqvist, R., J. Dahl, and T. Haeger, Relationship Marketing: Strategy and Methods for Service Competition, IHM Fšrlag, Gšteborg, Sweden, 1993.
• Kotler, P., "It's Time for Total Marketing," Business Week ADVANCE Executive Brief, Vol. 2, p.14, 1992.
• Gummesson, E., Quality Management in Service Organizations, ISQA (International Service Quality Association), New York, 1993.
• Pine, B.J., Peppers, D., M. Rogers, "Do You Want to Keep Your Customers Forever?," Harvard Business Review, March-April 1995.
• Reichheld, D., W. E. Sasser, Jr., "Zero Defections: Quality Comes to Services," Harvard Business Review, September-October 1990.
• Heskett, J. L., T. O. Jones, G. W. Loveman, W.E. Sasser and L.A. Schlesinger, "Putting the Service-Profit Chain to Work," Harvard Business Review, March-April, 1994.
• Pinto, Stephen K., "Relationship Marketing," This article appeared in the fourth edition of the Mercer Management Journal, Mercer Management Consulting, Inc., 1996.

Michael J. Pulaski, FACMPE, is CEO at Peachtree Orthopedic Clinic, and may be reached at  mjpulaski@earthlink.net