How to Use Market Segmentation to Differentiate Yourself from the Competition

In a highly competitive market, organizations seek to differentiate themselves in the eyes of their referral sources. Often this is done through market segmentation – focusing your efforts on a particular portion of the market. In this feature, we discuss the criteria for market segmentation and specific ways home health agencies can segment their markets.

What Are the Criteria for Market Segmentation?

For a business to go after a particular market segment, the segment must meet several criteria:

  • The segment must be distinct, and the “buyers” in the segment must be easily identifiable.
  • The segment must be large enough to warrant the effort in going after it.
  • The organization must be willing to modify its operations to serve this segment.

Consider Progressive Insurance’s Segmentation Example

Several years ago, Progressive Auto Insurance discovered that drivers with better credit scores also had better driving records and fewer accidents. The company subsequently targeted drivers with good credit. Since Progressive could determine what classified as “good credit,” it could ensure that the segment was adequately large enough to serve. Progressive could easily identify potential customers with better credit by obtaining a credit score on every insurance applicant. Then, they accepted only applicants with higher scores. Although the company added expense to its underwriting process by obtaining credit scores from an outside service, this cost was more than offset by the comparatively lower levels of accident claims. The result was that Progressive could offer competitive rates and be more profitable by focusing on this particular market segment.

Market Segmentation in Home Health

In home health, many agencies have developed clinical programs to address the needs of particular patient segments, such as patients with diabetes. As we’ve demonstrated in a previous newsletter article, anywhere from 24% to 44% of home health patients have a primary or secondary diagnosis related to diabetes or an endocrine or metabolic deficiency, so this is clearly a large enough segment. Patients with diabetes can easily be identified through the referral process because they are distinct in terms of their medical histories and need for home health. They frequently develop severe skin wounds during their episode of care, for example, or come on service already with them. To properly serve these patients, agencies employ or contract for the services of a wound care nurse. This specialized clinician is critical for assessing the wounds and developing a plan of care, including ordering supplies. The agencies, in turn, will incur the added expenses of:

  • Paying the new employee or contractor’s salary.
  • Developing a system to document the patients’ conditions photographically.
  • Adding high-cost products that promote wound healing to their supply formulary.

Market Segmentation That Was Used to Abuse the System

Several years ago in southern Florida, agencies abused the outlier payment system by using a market segmentation strategy. They identified patients who required frequent visits, such as wound care patients needing care at least twice a day. The market was not large in terms of the numbers of patients, but it was more than adequate in the dollars reimbursed. These shady agencies then hired licensed practical nurses (LPNs) to perform almost all of the visits. Since the outlier reimbursement exceeded their direct costs, they found this business to be highly profitable.

How to Segment Your Market Properly and Effectively

The first step in the segmentation process is to size the market. This can be accomplished by determining the number of patients who have a particular illness as their primary diagnosis. We choose primary diagnosis because it will reflect your marketing efforts, especially at the physician level. (Refer to our Discharges by Primary Diagnoses Report for more information.)

Next, you need to understand if the market segment is financially attractive. Such metrics as Low Utilization Payment Adjustment (LUPA) rate, average reimbursement per episode, case weight, recert rate, and visit levels per episode can be useful as they will help you to create a mini-profit and loss by primary diagnosis group. For example, patients with diabetes are chronic patients typically with high numbers of recert per discharge and few LUPAs. These patients are not heavy users of therapy, however, which would increase the average case weight. The cost of the expensive supplies may be balanced by the extra dollars in the claim reimbursement from the high supply cost factor in the Home Health Resource Group (HHRG). These patients come with a high risk of needing numerous nursing visits should they develop a pressure wound that does not heal quickly, requiring frequent dressing changes over a long time. The jury remains out as to whether this market segment can be highly profitable. (Refer to our Key Indicators by Diagnosis Report for more information.)

If you have a program that focuses on a particular diagnosis, it’s beneficial to see if the added resources are providing a return on investment in the marketplace. This can be measured by determining if your agency’s market share for this segment of patients is higher than for the rest of the patients. If not, it may call for a re-examination of carrying the added costs associated with the program.

While some agencies have become specialists in certain disease types, there are also other ways to segment the market, as well. Examples include focusing on sites of care, such as assisted living facilities, or on specific ethnic or cultural groups, such as Hispanics.

Do you have questions about how market segmentation could potentially benefit your agency? Contact us or give us a call today at 215-657-7373 to discuss ways Healthcare Market Resources’ data can be used to help you effectively grow your business.