Over the past 30 years, hospitals and medical centers have enjoyed unparalleled growth. This expansion was fueled by scientific discovery and a marketplace orientation that encouraged spending in health care. Scientific breakthroughs have provided health care institutions with highly attractive products—the tools to actually prolong life and enhance its quality. The health care system's reliance on indemnity insurance and retrospective fee-for-service reimbursement stimulated use of care because each service provided increased income and profit (1). During the mid-1980s, payers for care, including industry, government and consumers, balked at the inflationary spiral in the cost of health care and turned to managed care to control costs (2,3,4,5,6,7).

Initially, managed care organizations, as agents for payers, focused containment measures on the use of inpatient services, which represented two-thirds of medical costs (8). Managed care organizations generated significant savings by using medical necessity criteria to justify the denial of inpatient admissions and continued stays (9,10). Additional savings were gained by reducing fees for services, forcing providers to bid against each other, and not allowing payment for clinical care to be used to subsidize training and research.

These managed care techniques had a profound impact on hospital departments and medical centers (11,12). Drastic reductions in hospital admissions created significant overcapacity of hospital beds in nearly every area of the country (13). Patient care was forced out of the hospital and into the community.

Like all American industries, the health care industry is reacting to market forces by struggling to recreate itself in form and function (14,15). Psychiatric service providers have been drawn into a debate about which changes are needed to adapt to an increasingly unforgiving marketplace (16). The specific changes needed depend partly on the type of organization and its unique characteristics at the outset of the re-engineering process. Medical centers, community hospitals, private psychiatric facilities, and community mental health programs differ in many ways, including their structure, mission, staffing, funding, and governance.

Although this paper takes these differences into consideration, its primary aim is to identify a common set of steps that these organizations can take to enhance their chance for survival and prosperity in the 21st century. The steps described below cover a range of issues, including leadership, strategic planning, organizational issues, development of provider networks and a variety of clinical services, administrative capability, packaging of services, business practices, and marketing strategies.

A crucial first step in any successful reorganization plan is to identify one or more leaders or a leadership group. These individuals must shepherd the reorganization process, serve as change agents, and deal with the conflicts and crises that inevitably accompany change. As a rule, it is wise from the beginning to involve everyone in the organization who can substantially facilitate or impede the re-engineering process.

The task force is a useful vehicle for spearheading reorganization. The task force should include those individuals who by position or power can effect the necessary change. Usually they include, at a minimum, chiefs or senior representatives of clinical psychiatry, administrative psychiatry, hospital administration, finance, and operations. Their prominence signals the larger organization's commitment to the process, increases the likelihood of systemwide buy-in, and enhances the exchange of information to essential levels within the organization.

Most health care systems are operating with a mission and strategy designed to foster growth under the support of fee-for-service medicine and generous research dollars. Many such solutions, which were successful in the past, are ill suited for the present and future. Reorganizing to survive first requires a reformulation of goals and a reconsideration of strategy. It is essential to gain an understanding of your program's historical and current mission, vision, values, and strategy. Re-evaluate specific program elements, including program structure, operating statistics, profitability, physician support, administrative support, and infrastructure.

Second, realistically identify your program's strengths, weaknesses, and likelihood for future success. Third, use this reappraisal to guide a reformulation of your mission and a redesign of your strategy for the future (17). The new strategic plan should address each of the program elements mentioned above. Pay special attention to goals, objectives, the steps necessary to achieve these objectives, and the people responsible for implementing your plans. Set target dates and identify indicators of success that can be monitored to inform future planning.

The next step in the reorganization process is the creation of a legal entity capable of signing contracts with payers and providers in compliance with local and federal regulations (18,19,20,21). Hospitals have gained access to the marketplace by creating freestanding companies capable of doing wholesale business, by purchasing or starting medical enterprises and practices, by collaborating with physicians through jointly owned physician-hospital organizations, by forming joint ventures with for-profit managed care organizations, and by founding their own health maintenance organizations (HMOs). Crucial issues to be confronted when creating these enterprises are the nature of their relationship with the parent organization and issues such as ownership, responsibilities, control and decision making, risks and rewards, and the place for profit in the venture.

All clinical and administrative personnel must be working to further the organization's articulated goals. Accomplishing this task requires clarity in decision making, predictable flow of information, and accountability. These elements are often lacking in medical institutions, where programs were frequently developed haphazardly by interested parties based on their own expertise or available funding. Too often, the result has been a simultaneous fragmentation of programs and redundancy of services and oversight.

The new health care marketplace rewards accountability, integration, and competitive pricing, which can be achieved only through organizational clarity. Organizational charts should identify roles, responsibilities, and lines of authority and reporting for all clinical and administrative personnel (22). The place for professional management and administration in running the business of the department should be clear.

The traditional symbiotic relationship between the hospital and its extensive attending staff is being threatened by managed care, which channels patients on the basis of contracting status rather than long-standing relationships. As clinicians earn less income from hospital practice, they become less willing to voluntarily serve as attending physicians who take emergency calls and sit on committees (23). When hospitals lose these services, they feel less obligated to their voluntary staff.

But institutions reorganizing for the 21st century must have a clinician workforce (24,25). This workforce must consist of the entire range of behavioral health care providers including physicians, psychologists, social workers, nurses, certified drug counselors, and other physician extenders in order to satisfy payers' cost and service requirements (26).

Hospitals can choose from among a wide range of options in developing their provider networks (27,28,29). They include the following:

• Creating a multidisciplinary behavioral group practice of salaried clinicians who work on the main campus and in satellite offices

• Stimulating the formation of a community-based independent practitioner association consisting of clinicians who contract with the hospital but for whom the hospital has no direct salary responsibility

• Organizing a faculty practice plan or physicians association, into which all professional fees and compensation flow

• Creating a physician-hospital organization or HMO as a joint venture with other community providers in which psychiatry is one of many medical specialties

• Purchasing behavioral group practices

• Renting networks as part of a joint venture with for-profit managed care companies (30).

In creating new provider networks, hospitals must recognize that not all clinicians are willing or able to provide services organized around the population-based perspective and principle of parsimony (31,32,33). Forward-thinking institutions will select providers with experience in managed care, monitor their performance, and create incentives for productivity (34,35,36). Training for less experienced clinicians and retraining for more seasoned providers is a requirement for creating effective and efficient delivery systems (37,38,39,40).

One of the most significant consequences of managed care has been the development of an array of services over an expanding continuum (41). Payers are becoming increasingly willing to support these services because they make it possible to transfer patients "sicker and quicker" to less intensive and therefore less expensive sites and services.

To qualify as a preferred provider for a managed care organization or bid directly for capitated contracts, a provider must offer at least the following clinical services:

• A centralized intake system accessible 24 hours a day, seven days a week through an 800 number

• Services for children, adolescents, adults, and special populations

• A full range of outpatient services, including individual, family, and group services and medication management

• Emergency evaluation and hospital diversion programs

• Mobile crisis response teams

• Intensive outpatient programs for psychiatric and substance abuse problems

• Respite beds

• Evening and weekend partial hospital programs

• Twenty-three-hour stabilization beds

• Twenty-four-hour acute hospital beds

• Residential programs.

For patients suffering from chronic and persistent mental illness, additional services are required. They include drop-in centers, social skills programs, family support interventions, vocational rehabilitation programs, and residential programs that offer supervised living situations.

An important question for every organization piecing together a comprehensive continuum is which services the organization itself must provide. For many organizations, renting and joint venturing will offer advantages over buying or building.

Reorganizing systems must develop the administrative capability to run a business whose product is the delivery of a broad range of health care services over a wide geographic area under significant financial constraints (42,43). Competent managers must be on staff. Traditionally, clinicians have failed to recognize the importance of management and administration and have been reluctant to commit the necessary dollars to address the operations needs of their enterprises (44).

Essential management and administrative functions, often called infrastructure, must be in place to serve patients under global budgets. These functions include patient registration and authorization, billing and collections, claims payment, management information systems, and contracting with payers and providers. Other essential functions are network development, credentialing, human resources, medical records, clinical and administrative policies and procedures, quality assurance programs, outcomes data systems, cost accounting and budget, actuarial risk analyses, and marketing and sales.

Special attention must be paid to management information systems (45,46,47). The necessary hardware and software, including special managed care packages, are expensive, but the ability to evaluate and utilize data is crucial for success (48).

A network of multispeciality behavioral health care clinicians with experience in managed care, a continuum of services, and an administrative infrastructure are the building blocks of an organization that is prepared to face managed care. However, to survive, organizations must package and position these components for success (49).

One useful strategy is to link individual services into an integrated delivery system. These systems combine the continuum of clinical services and all essential administrative functions to satisfy payer and consumer demand for one-stop shopping. The effectiveness of these programs is highly dependent on the linkage between the various components. Patients must be able to move freely up and down and in and out of services at different levels of care. Organizations must be able to handle the flow of information and dollars to support clinical care. In addition to providing clinical services, integrated delivery systems must have clinical management expertise in a variety of areas, including service use, information, quality, outcomes, and resources, as well as case management.

Another useful but very different strategy is to package clinical services as products and product lines. Examples of products that are highly valued by managed care organizations are 24-hour evaluation, hospital diversion services, outpatient detoxification for substance abusers, and intensive outpatient programs for psychiatric and substance abuse problems. Product lines link an array of these services over a continuum. For example, a product line could address the needs of a special population such as children and adolescents, substance abusers, or geriatric patients. Besides being attractive to managed care organizations, products and product lines also position the provider organization to bid on its own for carve-out business.

For many organizations, a business plan that addresses the financial implications of the strategic plan is essential for the success of any re-engineering process. This financial analysis should identify the resources necessary to implement each activity, the costs associated with each activity, the source of all start-up and operational expenses, and projected profits and losses.

An accurate review of the financial performance of psychiatric services is often difficult because institutional accounting systems frequently assign overhead on a systemwide basis, loading expensive equipment and staffing costs onto a relatively inexpensive mental health service. In addition, revenues are often credited to the department indirectly.

Re-engineering offers an organization the opportunity to clarify its financial picture and create fidelity of funding, the actual allocation of expenses and income to individual services, programs, and products. Distinct departmental missions such as clinical care, research, and teaching can be evaluated according to actual revenues, costs, profits, and losses. Similarly, individual products, such as inpatient beds, an intensive outpatient program, or an eating disorders program, and product lines, such as services for children and adolescents, geriatric patients, or patients with chronic and persistent mental illness, can be judged on the basis of real contribution margins.

Few, if any, psychiatric departments will be able to survive if they are standing outside of their overarching systems. Effective positioning is complicated by the fact that psychiatric services are often embedded in much larger entities including hospitals, medical schools, and universities. The interests of these entities are not always synonymous with those of the psychiatric services. Departments that are reorganizing should make special efforts to position themselves to foster synergies, to benefit from the larger organization's successes, and to spread the cost of expensive management and administrative services. The department should position itself to serve as the exclusive provider of psychiatric services for all patients seen within the medical system.

Psychiatric programs rarely engage in formal marketing. An organized marketing effort entails conducting a market analysis to determine customer needs and ability to pay (50), developing a marketing plan (51), identifying staff accountabilities and responsibilities, and creating a system to measure the success of the marketing effort.

The starting point for any marketing program is a market analysis that includes a demographic analysis, a survey of major employers, interviews with major public and private payers, an analysis of competitors' or partners' strengths and weaknesses, and interviews with consumers and referral sources. The second step is to integrate this information into a marketing plan that outlines which services should be marketed to which referral sources and payer groups and by what specific techniques. Develop only those programs for which there is an identifiable need and a willing payer.

The third step is to identify a marketing coordinator who will be responsible for implementing the marketing plan. A person with expertise in marketing psychiatric services is needed. However, individual departments can rarely afford to hire an employee who will be a dedicated marketer of psychiatric services. At the same time, staff of hospital marketing departments often do not bring significant expertise or enthusiasm to the task. To address this situation, departments and hospitals must decide whether to hire an outside marketing consultant with expertise in marketing psychiatric services or train existing hospital marketing staff for the task.

Reorganization and re-engineering are the fashionable terms for effecting change in large systems. Achieving this goal requires not only identifying fundamental problems but, perhaps more important, also facilitating the change process.

Nearly 40 years ago, the American Psychiatric Association created its own consultation service to help its members and their institutions create change. Consultation service consultants have identified three phases through which the typical consultation unfolds. The initial phase focuses on problem identification and development of recommended solutions. In some instances, clinical and administrative staff members recognize the need for change but do not know which changes would be most helpful for their organization. More often, farsighted individuals within the organization can identify problems and solutions but are not in the position to make things happen. The initial phase of a consultation, which resembles the diagnostic and treatment planning process with which physicians are so familiar, routinely concludes with the submission of a formal report highlighting specific areas of concern and strategies for reorganization.

The second phase of the consultation process can be described as an implementation phase. This phase focuses on operationalizing the reorganization plan with special attention to the tasks to be accomplished, the people involved, the multiple resistances to change within the system, and the actual process by which change unfolds. The devil really does lurk in the details, and these details must be dealt with before the essential operations problems can be corrected.

The third and final phase of a consultation is sales and marketing. Competence and commitment to marketing and sales have not often been strengths of psychiatric services, but they will assume an ever more prominent position in the new highly competitive health care marketplace.

Psychiatrists devote their clinical lives to facilitating change in individuals and small groups. This orientation does not automatically translate into the ability to effect change in large systems of care. Culminating the planning phase with a successful implementation phase is a challenge for most organizations. The task often demands the contributions of individuals with special skill sets and experience. Clinicians and administrators must learn how to mobilize the necessary expertise available from within existing structures to meet challenges. They must also learn when it is more efficient to turn to outside expertise for solutions that are beyond their training and that have proven effective in similar settings across the United States.

Possibilities for sources of consultation include experts in single areas, such as management information systems for mental health organizations or preparation of a site for a visit by the National Committee on Quality Assurance, as well as giant accounting firms specializing in health care practices that promise one-stop shopping for all of an organization's re-engineering needs. Careful selection of consultants with proven success in mental health care can be an important step in reconfiguring systems of care.

Departments of psychiatry, hospitals, and academic medical centers must reorganize clinically and administratively to meet the challenges of the 21st century. The fate of our institutions as centers for patient care, teaching, and, when possible, research depends on our ability to be flexible, creative, and responsive to the demands of the new health care marketplace.

Dr. Schreter is medical director of Sheppard Pratt Health Plan, 6501 North Charles Street, Baltimore, Maryland 21204. He is also assistant professor of psychiatry at Johns Hopkins University School of Medicine.