Health MR

Market Concentration as a Predictor of Growth

Is there opportunity for expansion in your current home health or hospice market? Is the potential for business growth better within your primary market or other nearby markets? Market concentration plays an important role in answering these questions and determining the best strategy for growing your agency.

Market Concentration and the Rule of 3
The growth pattern of competitive markets – including home health and hospice – tend to follow the Rule of 3: Eventually three major providers emerge that together control 70% of the market share. A result of two professors’ academic research, the Rule of 3 has been proven across many industries.

Although there is no magic number that classifies a market as concentrated, when 65% to 70% or more of the market share is accounted for by very few companies it is considered concentrated. In a concentrated home health or hospice market, growth is limited because referral patterns are already established and it is difficult to take market share away from the major providers.

Understanding the Structure of a Market
To determine the potential for business growth in home health and hospice, agencies need to first understand the structure of their market. The following are steps to help evaluate your market:

1. Define the region for analysis. For example, are you looking at a single county or multiple-county area?
2. Segment the market into captive and non-captive and determine the size of each segment. An agency is considered captive if it is owned by a referral source such as a hospital or nursing home. Because opportunity for growth in the captive portion of a market is limited, agencies looking to expand should focus on the non-captive market.
3. Determine the market concentration of the non-captive market by looking at the size and number of agencies vying for non-captive market share.

As illustrated in the table below, there are basically four scenarios defining the extent of opportunity in a market, with the best opportunity found in a large market that is not concentrated.

	Small Market	Large Market
Concentrated: Referral patterns are already established.	Minimal Opportunity	Minimal Opportunity (unless acquisition is possible)
Not Concentrated: Referrers are in the mode of trying new agencies.	Some Opportunity (limited by market size)	Best opportunity

Consider an Actual Market Concentration Example
As an example, let’s analyze the market structure of a single county in a major U.S. metropolitan area:

• The non-captive market accounts for $24 million (44%) of the total $54 million Medicare revenue.
• The local Visiting Nurse Association has nearly 55% share of the non-captive market, while two other agencies account for 12% of the market.
• There is only $8 million left to compete for in the non-captive market.

To truly understand their potential opportunity for growth, an agency in this county would also need to determine the number and size of the other providers competing for the remaining $8 million, as well as those providers’ market focus.

Creating Opportunity in a Concentrated Market
In a concentrated market where growth potential is limited – such as in the example presented – agencies have several options to help find or create opportunity:

• Look for a different, less concentrated geographic area.
• Try to identify new sources of patients for referral.
• Offer something unique to differentiate yourself from the other providers and overcome the inertia of current referral patterns. (If other agencies close at 4 p.m., for example, attract after-hour referrals by providing 24-hour live intakes.)
• Create a market that hasn’t been built yet. (For example, increase hospice revenue in a region where hospice penetration is far below the national average.)

In summary, to best determine your growth opportunities, you should first understand the structure of your market by answering the following questions: What market are you looking at? What is the proportion of captive to non-captive in this market? What is the concentration of the non-captive market? With this information, you can easily identify the opportunity available and decide where your resources should be focused, as well as the best strategies for successful growth.

We hope this has helped give you a better understanding why it is important to be aware of your market’s structure to best predict your opportunities for growth. Click here or give us a call at 215-657-7373 for more information about how Healthcare Market Resources Inc.’s in-depth, local market data – Home Health Market Profiles, Market Development Reports and Hospice Market Profiles – can be used to help you determine and successfully grow your agency’s market share.