Management Challenges at the Intersection of Public Policy Environments and Strategic Decision Making in Public Hospitals

Article excerpt

Strategic decisions in public hospitals are the province of senior-level managers and governing board members as these leaders establish their organization's essential characteristics, including markets and product/service lines. Strategic decisions reflect what leaders want their hospitals to achieve and how they wish to accomplish this within the context of the organization's threat and opportunity-generating external environment.

While the external environments of public hospitals, like all healthcare organizations, have many important components, public policy aspects are critical, and are becoming more so. For example, in the United States although private-sector health expenditures still exceed public-sector expenditures, public expenditures approximate 45 percent of the total as a percentage of GDP, and this proportion will grow under recently enacted reforms (Truffer, Keehan, Smith, Cylus, Sisko, Poisal, Lizonitz, & Clemens, 2010). Indeed public policy can heavily influence strategic decisions and actions in all healthcare organizations.

This article describes the intersection of public policy and strategic activity in public hospitals. It is intended to help managers and others in public hospitals better understand and more effectively respond to the policy aspects of their hospital's public policy environments. The article may also be of interest to policy makers as they establish policy that will affect public hospitals and other healthcare organizations. Finally, the article will identify research opportunities for scholars at the intersection of public policy environments and strategic activity in public hospitals.

The article has four main sections. First is a brief discussion of strategic decision making in public hospitals. Second is the introduction of the concept of the public policy environment of a public hospital, including its features and contents. Third is consideration of how public hospital managers and other leaders can take these environments into account in their strategic decision making. Finally, conclusions are drawn and implications are described for public hospital managers, public policy makers, and scholars.


In most conceptualizations strategic decision making, or strategy formulation as it is often called, is largely predicated on the circumstances of an organization's external environment and information obtained about these realities, or more accurately, interpretations of realities through external environmental analysis. This challenge is substantial. Managers, even with able support, work in the realm of informed opinions and guesses about the future, not certainty. They cannot always identify and correctly interpret all relevant information. Furthermore, even when relevant information is obtained and interpreted, it is not always possible for managers to have their organizations respond appropriately. For example, internal resources may be inadequate to implement certain desirable strategic decisions due to budgetary constraints.

Strategy formulation is a key part of the broader process, strategic management, which also incorporates implementation and control (see Figure 1). The focus here is on strategy formulation, or strategic decision making, but it is important to know that formulation occurs within a larger framework of related activities. A strategic decision to add a new service line because it is needed in a hospital's market area is a good decision only if the hospital has, or can acquire, the capabilities needed to effectively implement the decision.


All public hospitals are affected by circumstances in their external environments, and successful strategic decision making requires that these circumstances be appropriately considered (Glassman, Zell, & Duron, 2005).

A public hospital's strategically-relevant external environment includes all circumstances outside its physical boundaries that can influence its performance. …