BUSI 691 Week 2 Group Assurance of Learning Exercise 1 Example

Compete, Concede or Co-Own? A Group Case Analysis of a Community Hospital Facing a Surgeon-Owned Surgery Center

Case Summary

Riverbend Medical Center is a 240-bed nonprofit community hospital in a mid-sized city with one competing hospital twelve miles away. Its orthopedic surgery program, staffed by a twelve-surgeon independent group, performs about 2,900 procedures a year and produces roughly 22% of the hospital's surgical contribution margin. Last month the orthopedic group announced plans to open a four-room ambulatory surgery center across the street within eighteen months, owned by the surgeons and a management company, and to move most outpatient joint, spine and sports procedures there. The surgeons have said they would keep operating on complex and high-risk patients at Riverbend. The board has asked leadership for a strategy.

Strategic Issue

Our group framed the issue as one question: how should Riverbend respond to the migration of outpatient orthopedic surgery to a physician-owned center so that it protects its financial base, keeps its relationship with the surgeons and preserves quality and access for patients who still need the hospital?

External Analysis

Walston (2018) describes environmental analysis as identifying the forces outside an organization that will shape its future, including payment policy, technology and competitors' moves. Each points the same way here. Payment policy has opened outpatient settings to procedures that once required admission, anesthesia and pain control now permit same-day discharge for many patients and commercial insurers steer patients toward lower-cost sites. National data show the scale of the shift. Kaye et al. (2020) analyzed Medicare claims from 2008 to 2014 and found that payments for inpatient surgery fell while spending on outpatient surgery rose 28.7%, with spending at ambulatory surgery centers up 36.6%. Stern et al. (2026) found that between 2019 and 2022, the share of primary knee replacements performed in hospitals fell from 64% to 14%, while outpatient facilities took most of the rest, and that outpatient patients were younger, healthier and more often commercially insured. Ownership adds a further incentive. Hollingsworth et al. (2010) found that physician ownership of surgery centers in Florida was associated with significantly higher surgical volume for five common procedures, which suggests the new center will draw not only Riverbend's existing cases but additional ones. Using the competitive forces Walston (2018) describes, the surgeons are both Riverbend's suppliers of cases and its emerging rival, and payers act as powerful buyers who favor the lower-cost site. The threat of substitutes is also rising, since some joint replacement patients now go home the same day from any qualified outpatient site, and new entrants backed by management companies and private investors are actively seeking surgeon partners in mid-sized markets like Riverbend's. The external analysis therefore suggests that even if this group of surgeons stayed, another would eventually build a center nearby.

Internal Analysis

Riverbend's strengths in orthopedics are its trauma coverage, its inpatient rehabilitation unit, an experienced orthopedic nursing staff and good outcomes for complex joint revisions. Its weaknesses are outpatient costs about 40% higher than a typical surgery center, operating room turnover times that surgeons describe as slow and a scheduling system that often delays elective cases behind emergencies. Those weaknesses are the reasons the surgeons gave for leaving. If the outpatient cases go, Riverbend will keep the older, sicker and more often Medicare and Medicaid patients, whose care pays less, while fixed costs remain. Our group estimated that losing 1,800 outpatient cases would reduce Riverbend's annual contribution margin by about $6.5 million and leave two of its eleven operating rooms idle most days. Riverbend does have assets the surgeons need, however: credentialing and quality systems, purchasing contracts that lower implant costs, an existing relationship with every major payer in the region and a trauma program the surgeons depend on for call coverage income. Those assets give Riverbend bargaining power it has not yet used.

Alternatives

Our group evaluated three alternatives against four criteria: financial effect over five years, quality and access for patients, relationships with the surgeons and risk.

Competing directly would require capital Riverbend can ill afford and would likely push the surgeons to move every case they can, including some inpatient work, to the competing hospital. Ceding outpatient work protects the relationship but leaves Riverbend with the least profitable patients and an underused operating suite. A joint venture, in which Riverbend owns a minority or equal share of the new center, captures part of the margin that will leave anyway, aligns the hospital with the surgeons and gives Riverbend a voice in which patients are treated where. The joint venture's main risks are legal and cultural. Federal rules on physician investment and referrals require that returns be based on ownership share rather than on referrals, and the hospital's managers and the surgeons have very different expectations about speed and decision making. Both risks can be managed with experienced counsel and a governance structure that gives surgeons operational control of the center while Riverbend handles business functions.

Recommendation

Our group recommends that Riverbend propose a joint venture in which it owns 40% to 49% of the surgery center and provides management services such as purchasing and credentialing. The agreement should include clear criteria for which patients are suitable for the center, a transfer agreement with Riverbend for complications and a commitment by the surgeons to keep taking emergency call. The surgery is leaving the hospital either way; the strategic choice is whether Riverbend leaves with it as a partner or watches from across the street. In parallel, Riverbend should fix the weaknesses that drove the surgeons away by redesigning operating room scheduling and turnover for its remaining surgical services. Riverbend should also consider repurposing one of the operating rooms freed by the shift for a growing service with higher acuity, such as vascular or robotic general surgery, so that fixed costs are spread over new volume rather than carried by fewer cases.

Action Plan

In the first sixty days, the chief executive and the chief strategy officer will open negotiations with the orthopedic group, with legal counsel reviewing the arrangement for compliance with federal rules on referrals and investment. By month four, the parties will sign a letter of intent setting ownership, governance and patient selection criteria. By month six, the chief operating officer will launch a redesign of operating room scheduling with a target of reducing turnover time by 25%. At twelve months, leadership will report to the board on joint venture progress, retained inpatient orthopedic volume, surgeon satisfaction and transfer outcomes, and will adjust the plan if retained volume falls more than 15% below forecast.

Conclusion

The migration of outpatient surgery is a national trend that Riverbend cannot stop. Walston (2018) argues that strategy succeeds when it positions an organization for the environment it will actually face, and the evidence suggests Riverbend's future in orthopedics lies in partnership for outpatient care and excellence in complex inpatient care. The joint venture lets Riverbend keep a share of the outpatient future, while improving its own operating rooms protects the inpatient business that only a hospital can provide. The plan also gives the board measurable checkpoints, so that if negotiations fail or retained volume falls faster than expected, leadership can return to the second alternative and focus on complex care with clear eyes.

References

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

Kaye, D. R., Luckenbaugh, A. N., Oerline, M., Hollenbeck, B. K., Herrel, L. A., Dimick, J. B., & Hollingsworth, J. M. (2020). Understanding the costs associated with surgical care delivery in the Medicare population. Annals of Surgery, 271(1), 23-28. https://doi.org/10.1097/SLA.0000000000003165

Stern, J. M., Geller, J. S., Fernandez-Perez, A. M., Cruz-Ossa, N., & D'Apuzzo, M. R. (2026). Migration of primary total knee arthroplasty from inpatient to outpatient facilities in the United States (2019 to 2022): Trends, demographics, and comorbidities. The Journal of Arthroplasty, 41(10), 2927-2931. https://doi.org/10.1016/j.arth.2026.01.004

Walston, S. L. (2018). Strategic healthcare management: Planning and execution (2nd ed.). Health Administration Press.