How one children's hospital is thriving in lean times

In response to the financial pressures facing hospitals, the non-profit Children's Hospital of Philadelphia (CHOP) has altered its business strategy to operate more like a venture capital firm, Fortune reports.

Despite its nonprofit status, CHOP generates about $2 billion in revenue, 85 percent coming from patients and another 8 percent from federal research funding, according to the article. After material costs, rents, salaries, a $55 million research budget and $74 million in uncompensated care, the organization still has an average surplus of about $150 million.

CHOP's business strategy is threefold, according to the article:

Expansion beyond the main facility. CHOP runs a regional network with branches in the suburbs of Philadelphia and central New Jersey, as well as 30 satellite primary care offices and nine specialty care centers for same-day procedures. This suburban revenue base results in a lower percentage of patients covered by Medicaid than most children's hospitals, and as a result, CHOP makes more per procedure than more Medicaid-reliant hospitals. "Having a broad network diversifies our base of payers," CHOP CEO Steven Altschuler, M.D., told Fortune.

Concentration on specialty procedures or "luminary procedures," as Altschuler calls them. For example, CHOP's surgeons performed 1,000 fetal interventions for children with congenital conditions, such as spina bifida. Its specialties bring in "medical tourists" from outside its home market, according to Fortune. About 15 percent of the hospital's revenue comes from tourists, 80 percent of whom are from the Middle East. 

Marketing its own innovations. For example, in 2008, CHOP sold the royalty stream for a vaccine it developed for rotavirus for $180 million. The hospital's gene therapy research unit has spun into an independent company fully owned by CHOP, which currently has drug treatments for blindness and hemophilia in clinical trials. "With the Affordable Care Act, revenues may decrease," CHOP CFO Tom Todorow told Fortune. "So we took a fantastic opportunity to spin off a company, and at the end of the day to maximize our future return."

CHOP's success comes as other children's hospitals are feeling the strain congenital conditions put on the system, especially as the number of patients with those conditions grows, FierceHealthFinance previously reported.

To learn more:
- here's the Fortune article