CHAPTERTHE ORIGIN AND EVOLUTION OFMARKETING IN HEALTHCARE1Since the notion of marketing was introduced to healthcare providersduring the 1970s, the field has experienced periods of growth, decline,retrenchment, and renewed growth. This chapter reviews the historyof marketing in the US economy in general and traces its evolution in healthcare over the last quarter of the twentieth century. The chapter then turns tothe challenges marketers have faced in their efforts to gain a foothold inhealthcare.The History of MarketingMarketing, as the term is used today, is a modern concept. The term wasfirst used around 1910 to refer to what is called sales in the contemporarysense. Marketing is a uniquely American concept, but the word itself hasbeen adopted into the vocabulary of other languages that lack a word for thisactivity. Although the 1950s mark the beginning of the marketing era in theUnited States, the marketing function within the US economy took severaldecades (in stages) to become established, and marketers had to overcome anumber of factors that slowed the field’s development.Many of these factors reflected economic characteristics carried overfrom the World War II period. In the 1950s, America was still in the Industrial Age, and the economy was production oriented until well after the war.Because essentially all aspects of the economy were geared to production,the prevailing mind-set emphasized the producer’s interests over the consumer’s. This production orientation assumed that producers already knew whatconsumers needed. Products were made to the manufacturer’s specification,and then customers were sought. A “here is our product—take it or leave it”approach characterized most industries during this period.ProductionA focus ongenerating (ratherthan distributing)goods thatdeemphasizes therole of marketingStage 1: The Rise of Product Differentiation and ConsumerismA wide variety of new products and services emerged during the postwarperiod, particularly in consumer goods industries. Newly empowered consumers demanded a growing array of goods and services. This developmentcontributed to the emergence of marketing for three primary reasons. First,Copying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 337/11/14 8:52 AM

4Ma rk et in g H e a l th Se r vi c e sCultureA society’stangible andintangible aspectsreflecting itsbeliefs, values,and normsconsumers had to be introduced to and educated about these new goodsand services. Second, the entry of new producers into the market gave riseto a level of competition unknown in the prewar period. Mechanisms had tobe developed to make the public aware of a new product and to distinguishthat product (in the eyes of potential customers) from that offered by competitors. Consumers had to be made aware of purchase opportunities andthen persuaded to buy a certain brand. Third, the standardization of existing products during this period further contributed to the need to convincenewly empowered consumers to choose one good or service over another.Where few differences existed between the products in a market, the role ofmarketing became crucial. Marketers were enlisted to highlight and, if necessary, create differences between similar products.As a result of these developments, the seller’s market was transformedinto a buyer’s market. Once the consumer market began to be tapped, thehighly elastic demand for many types of goods became evident. The prewarmentality had emphasized meeting consumer needs and assumed that apopulation could purchase only a finite amount of goods and services. Withthe increase in discretionary income and the introduction of consumer creditafter World War II, consumers began to satisfy wants. Fledgling marketersdiscovered that not only could they influence consumers’ decision-makingprocesses but they also could create demand for certain goods and services.The growing acceptance of marketing was aided and abetted bychanges in American culture. The postwar period was marked by a growingemphasis on consumption and acquisition. The frugality of the Depressionera gave way to a degree of materialism that shocked older generations. Theavailability of consumer credit and a mind-set that emphasized “keepingup with the Joneses” generated demand for a growing range of goods andservices. This period witnessed the birth of the first generation of Americanswith a consumer mentality.By the 1970s, there was a growing emphasis on self-actualization inAmerican culture. This development called for additional goods and servicesand even created a fledgling market for consumer health services (e.g., psychotherapy, cosmetic surgery). A growing consumer market with expandingneeds, coupled with a proliferation of products, created a fertile field formarketing activity.Underlying these developments was the growing emphasis on changeitself. As society continued to undergo major transformations, change hadnot only become accepted as inevitable but also began to take on a positive connotation. Newly empowered consumers demanded an ever-growingarray of goods and services. The future orientation emerging within societyfurther underscored the importance of change in forging a path to a betterfuture. People began changing jobs, residences, and even spouses at a rateCopying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 47/11/14 8:52 AM

C h a p te r 1: T h e O r i gin and Evolution of Mar keting in H ealthc are5unheard of to their forebears. The social and economic advancement of eachgeneration, improving over the previous one, became a maxim—a part of theAmerican dream.Stage 2: The Shifting Role of SalesThe second stage of marketing evolution focused on sales. Many US producers had enjoyed regional monopolies (or at least oligopolies) since the dawnof the Industrial Age. Under these conditions, sales representatives tookorders from what were essentially captive audiences. Marketing would havebeen considered an unnecessary expense under this scenario. However, ascompetition increased in most industries after World War II, these regionalmonopolies began to weaken.The emphasis on sales that characterized the economy during the lastthird of the twentieth century continued to reflect the production orientation of society. Sales representatives eventually served as a bridge betweenthe production economy and the service economy as they developed andmaintained relationships. Their roles progressed from being “order takers”to being “consultants” to their clients, sending information from customersback to producers and facilitating the emergence of a market orientation inAmerican business. Even so, the emphasis on sales continued to overshadowthe nascent emphasis on services.SalesAn approach tobusiness thatemphasizestransactions ratherthan promotionsAudiencePeople ororganizations thatread, view, hear,or are otherwiseexposed to apromotionalmessageStage 3: The Emergence of the Consumer’s Point of Viewand the Service EconomyBy the last quarter of the twentieth century, the industrial economy had givenway to a service economy, and the remaining production industries becameincreasingly standardized. This shift from a product orientation to a serviceorientation represented a sea change for marketing. Service industries tend tobe market driven, and American corporations began abandoning their “fatherknows best” mind-set in favor of a market orientation. For the first time,progressive managers in a wide range of industries sought to determine whatconsumers wanted and then strived to fulfill those needs. This shift openedthe door to market research and to the exploitation of consumer desires byprofessional marketers. The new market-driven firms adopted an outside-inway of thinking that viewed service delivery from the customer’s point ofview.The emergence of a service economy had important implications forboth marketing and healthcare. Services are distinguished from goods inthat they are generally consumed as they are produced and cannot be storedor taken away. The marketing of services is different from the marketing ofgoods, representing a different set of challenges for marketers in any field,including healthcare. A new mind-set accompanied by new promotionalCopying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 57/11/14 8:52 AM

6Ma rk et in g H e a l th Se r vi c e sapproaches to the marketing of services had to be developed as the UnitedStates became a service-oriented economy.Stage 4: The Rise of the Electronic AgePatient Protectionand AffordableCare Act (ACA)2010 legislationthat aims toexpand healthinsurance coverageand improvehealthcare deliveryand qualityAs the twenty-first century dawned, healthcare marketing like marketing inother sectors of the economy experienced an electronic revolution. Electronically empowered consumers could now research, compare, and buyhealth-related products on the World Wide Web and, with the advent ofsocial media, instantaneously share their healthcare experiences and opinionson the services they received. In addition, consumers could consult websitesfor information on medical conditions, healthcare providers, and healthcarefacilities. Healthcare organizations, too, began to increasingly incorporateelectronic health records and other secure data systems into their operations.Healthcare organizations also started to offer a growing number of optionsfor interacting with their patients online—through websites, blogs, and socialnetworks, among others.Social networking sites like Facebook—through profiles “owned” byan organization, a provider, or an individual consumer—have become forumsfor consumers to discuss the quality of care at a facility, a doctor’s characteristics or expertise, general information about a provider or a group, diseasesymptoms and diagnoses, treatment options, pricing or cost of services, andhealthcare industry news. For example, when the Patient Protection andAffordable Care Act (ACA) was enacted in 2010, social networks wereabuzz with information (and misinformation) on the healthcare reform’sprovisions and implementation. (This edition devotes Chapter 11 to socialmedia, reflecting this topic’s ascendancy in American society.)The Introduction of Marketing in HealthcareHealthcare did not adopt marketing approaches to any significant extentuntil the 1980s, although some healthcare organizations in the retail andsupplier sectors had long employed marketing techniques to promote theirproducts. Well after other industries had adopted marketing, these activitieswere still uncommon among organizations involved in patient care.Nevertheless, some precursors to marketing were well established inthe industry. Every hospital and many other healthcare organizations hadlong-standing public relations functions that disseminated information aboutthe organization and announced new developments (e.g., new staff, equipment purchases). The public relations staff worked mainly with the media—disseminating press releases, responding to requests for information, anddealing with the press when a negative event occurred.Copying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 67/11/14 8:52 AM

C h a p te r 1: T h e O r i gin and Evolution of Mar keting in H ealthc are7Most large provider organizations also had communications functions (oftenunder the auspices of the public relations department). Communications staffwould develop materials to disseminate to the public and to the employees ofthe organization, such as internal—and, later, patient-oriented—newslettersand patient-education materials.Some of the larger healthcare organizations also established government relations offices. Government relations staff was responsible for trackingregulatory and legislative activities that might affect the organization, servedas an interface with government officials, and acted as lobbyists when necessary. Government relations offices frequently became involved in addressingthe requirements of regulatory agencies.Healthcare organizations of all types were involved in informal promotional activities to an extent. Hospitals sponsored health education seminars,held open houses at new facilities, or supported community events. Hospitalsmarketed themselves by making their facilities available to the communityfor public meetings and otherwise attempting to be good corporate citizens.Physicians marketed themselves through such activities as networking withcolleagues at the country club, sending letters of appreciation to referringphysicians, and providing services to high school athletic teams. See Exhibit1.1 for a discussion of some of the key developments in the history of healthcare marketing.Although the 1970s marked the formal emergence of marketing in thehealth services industry, few healthcare organizations—as organizations—had yet bought into marketing. For-profit hospital chains likeColumbia and HCA may have had more of a marketing orientation, whileEvanston (Indiana) Hospital had a vice president of marketing in 1976.However, many observers of the field would cite the publication of PhilipKotler’s (1975) Marketing for Non-Profit Organizations as the event thatlegitimized marketing within the not-for-profit healthcare sector.The emergence of marketing in healthcare was driven by a handful of assertive and creative people who took the initiative and, oftenagainst great odds, established marketing programs. True, a few healthcare organizations developed permanent marketing programs early on,but the inroads marketing made in the 1970s and 1980s were a result ofthe tenacity of a handful of true believers.The field was given impetus by the pioneering activities of ScottMacStravic and popularized through his 1977 book Marketing HealthCare. MacStravic served as an officer in various professional organizations for healthcare marketers and strategists and helped establish(continued)EXHIBIT 1.1A Brief Historyof HealthcareMarketingNot-for-profitAn organizationgranted taxexempt statusby the InternalRevenue ServiceCopying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 77/11/14 8:52 AM

8Ma rk et in g H e a l th Se r vi c e sSociety forHealthcareStrategy & MarketDevelopmentA division of theAmerican HospitalAssociation thatserves marketingand planningprofessionals inhealthcareAmericanMarketingAssociationThe primaryorganizationdevoted to themarketing fieldhealthcare marketing as a separate profession. In the academic arena,Eric Berkowitz, a marketing professor at the University of Massachusetts, built on Kotler’s early work and helped establish healthcaremarketing as a legitimate component of academic marketing throughnumerous books and articles on the topic. Other academics who contributed to the establishment of healthcare marketing were StevenW. Brown, who contributed numerous publications in the 1980s, andRoberta Clark, who collaborated with Kotler in applying marketing principles to healthcare.By the end of the 1980s, marketing was being incorporated intothe structure of healthcare organizations. Marketing departments werebeing established, and marketing expenses were being factored intoorganizational budgets. Marketers were being promoted to managers,directors, and, ultimately, vice presidents. Marketing was moving fromthe periphery of the organization to the boardroom. Once technicalresources who were consulted as needed, marketers were becomingfull partners in the corporate decision-making process. The most progressive healthcare organizations developed a marketing mind-set toensure that marketing was a consideration in every initiative and thatmarketers provided input on the direction of the enterprise.By the 2000s, the marketing activities of hospitals were beginningto look more like those of their counterparts in the for-profit sector(e.g., pharmaceutical companies, medical device companies). The typical hospital marketing department included a staff of five or more withbudgets in the millions of dollars. Marketing executives were increasingly at the vice president level, earning salaries comparable with thoseof other healthcare executives.The importance of marketing in healthcare is also reflected in theemergence of publications devoted to the topic, including MarketingHealth Services (the healthcare journal of the American Marketing Association) and Health Marketing Quarterly. Articles on healthcare marketing regularly appear in other marketing publications as well (such asin Advertising Age). Numerous newsletters are devoted to healthcaremarketing or some component of it, such as health communications orpublic relations.Associations for healthcare marketers have been established, suchas the Society for Healthcare Strategy & Market Development of theAmerican Hospital Association. The American Marketing Associationhas an active healthcare marketing division, and one of its eight specialinterest groups is devoted to healthcare.Copying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 87/11/14 8:52 AM

C h a p te r 1: T h e O r i gin and Evolution of Mar keting in H ealthc are9Textbooks on healthcare marketing began appearing in the 1980s,and healthcare marketing courses are part of the marketing curriculum in many US universities. Courses on the topic are now standard inhealthcare administration programs. Numerous universities and educational programs offer specialized training courses on various aspects ofhealthcare marketing.All of these developments reflect the growing importance of marketing in the healthcare arena and its changing role. The ways in whichmarketing is being transformed as it matures in the healthcare industryare discussed throughout this book.Periods of Growth for Healthcare MarketingThe periods through which marketing has evolved in the healthcare settingare outlined in this section. Exhibit 1.2 summarizes the implications of thisevolution for the hospital industry.The 1950sAlthough the 1950s are often viewed as the “age of marketing,” marketingdid not appear on healthcare’s radar screen until much later. The emergingpharmaceutical industry, however, was beginning to market to physicians,and the fledgling insurance industry was beginning to market health plansto consumers. In the healthcare trenches, providers were light-years awayfrom formal marketing activities. Hospitals and physicians, for the mostpart, considered marketing (read: advertising) to be inappropriate and evenunethical. This stance, however, did not preclude hospitals from offering freeeducational programs or implementing public relations campaigns, nor didit prevent physicians from cozying up to potential referring physicians andnetworking with colleagues at the country club. At the time, these activitieswere not thought of as marketing.Business OrientationManufacturerHospitalProductionProduce quality productDeliver quality careSalesGenerate volumeFill hospital bedsMarketingSatisfy consumerneeds/wantsSatisfy consumerneeds/wantsEXHIBIT 1.2The Evolutionof Marketing inHealthcareCopying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 97/11/14 8:52 AM

10Ma rk et in g H e a l th Se r vi c e sMonopolyOne organizationcontrols the totalmarket for a goodor serviceOligopolyA feworganizationsdominate a marketor an industryElectronic mediaMedia thattransmit contentelectronically, suchas radio, TV, andthe InternetAs the hospital industry came of age and many new facilities wereestablished, the industry continued to reflect a production orientation, whichwas by then waning throughout the rest of the economy. The demand forphysician and hospital services was considered inelastic, and little attentionwas paid to the characteristics of either current patients or prospective customers. The emphasis was on providing quality care, and most providers heldmonopolies or oligopolies that shielded them from competition within theirmarkets.The 1960sAs the health services sector expanded during the 1960s, the role of publicrelations was enhanced. Although the developments that would force hospitals and other healthcare organizations to embrace marketing were at leasta decade away, the public relations field was flourishing. This relatively basicmarketing function was the healthcare organization’s primary means of keeping in touch with its various stakeholders.The stakeholders of this period were primarily the physicians whoadmitted or referred patients to healthcare facilities and the donors whomade charitable contributions to the organization. Consumers were notconsidered an important constituency because they did not directly choosehospitals but were referred by their physicians. The use of media to advancestrategic marketing objectives had not evolved, and media relations in this eraoften consisted of answering reporters’ questions about patients’ conditions.Print was the medium of choice for communications throughout the1960s, despite the increasingly influential role that electronic media (TV andradio, at that time) were playing for marketers in other industries. This erawas marked by polished annual reports, informational brochures, and publications targeted to the community. Healthcare communications became awell-developed function, and hospitals continued to expand the role of publicrelations.Some segments of the healthcare industry not involved in patient careentered the sales stage (stage 2 in the evolution of the marketing function)during this decade. For example, pharmaceutical companies and insuranceplans established sales forces to promote their drugs to physicians and marketinsurance plans to employers and individuals, respectively.The 1970sDuring the 1970s, urgency began to grow among hospitals with regard topromoting their services within the community. The desire for greater marketpresence was reinforced by the growing conviction that, in the future, healthcare organizations were going to have to be able to attract customers. Manyorganizations expanded their public relations functions to include a broaderCopying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 107/11/14 8:52 AM

C h a p te r 1: T h e O r i gin and Evolution of Mar keting in H ealthc aremarketing mandate. These types of activities appeared to be particularly common in parts of the country where health maintenance organizations wereemerging.The for-profit hospital sector also grew in importance during the1970s. With few limits on reimbursement, both not-for-profit and for-profithospitals expanded their services. Continued high demand for health servicesand the stable payment system created by Medicare made the industry attractive to investor-owned companies. Numerous national for-profit hospital andnursing home chains emerged during this period.Some early attempts at advertising health services were made, andinterest in marketing research was beginning to emerge. These activities bythe healthcare establishment were “officially” recognized—and given legitimacy—at a conference on marketing sponsored by the American HospitalAssociation during the mid-1970s. The marketing movement in healthcarewas given further impetus by rulings that relaxed the restrictions on advertising, imposed early on by various regulatory agencies, for healthcare providers.For hospitals, the sales era began in the mid-1970s with the changesthat occurred in reimbursement. Under cost-based reimbursement (e.g.,Medicare), competition with other hospitals had not been a major concern.Hospitals had ample patients, and occupancy rates were high. The top priority was to attract as many customers as possible by enticing physicians toadmit their patients. To this end, hospitals developed physician relationsprograms and offered other enticements to encourage physician loyalty(Berkowitz 2010).When hospitals recognized that patients might play a role in the hospital selection decision, a second strategy for selling to the public emerged.In the mid-1970s, some hospitals adopted mass advertising strategies topromote their programs, including billboard displays and television andradio commercials that tout a particular service. The goal of the marketerwas to convince prospective patients to use his hospital when presented witha choice between competing hospitals (Berkowitz 2010). Communicationefforts were beginning to be targeted toward patients, and patient satisfactionresearch grew in importance. Even so, marketing in the sense of managingthe flow of services between an organization and its customers was still not arecognized function of most healthcare organizations. See Exhibit 1.3 for achronology of the development of healthcare marketing.11AdvertisingAny paid formof presentationor promotion ofideas, goods, orservicesThe 1980sIf healthcare marketing was born in the 1970s, it came of age in the 1980s.The healthcare industry had evolved from a seller’s market to a buyer’s market, a change that was to have a profound effect on the marketing of healthservices. Employers and consumers had become purchasers of healthcare, andCopying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.comHAP-Thomas.indb 117/11/14 8:52 AM

HAP-Thomas.indb 12Public ntGeneral publicPrimarytechniques:Main theme:Marketingtarget:**Patient care organizationsPremarketingStage:1950EXHIBIT 1.3Healthcare Marketing Timeline1970Government agenciesHealth plansRegulatory influenceConsumer researchGovernment hnologyapplicationsReferral irect-to-consumerMarketing research RelationshipmarketingDirect marketingSocial marketingPersonal salesInternet marketingIntroduction19802010ConsumersMarket segmentsConsumerengagementSocial mediaMaturity200012Ma rk et in g H e a l th Se r vi c e sCopying and distribution of this PDF is prohibited without written permission.For permission, please contact Copyright Clearance Center at www.copyright.com7/11/14 8:52 AM

C h a p te r 1: T h e O r i gin and Evolution of Mar keting in H ealthc arethe physician’s role in referring patients for hospital services was beginning todiminish. The hospital industry continued to grow during the 1980s, as centrally managed health systems (both for-profit and not-for-profit) expandedand national chains of hospitals, nursing homes, and home health agencieswere established.Marketers had to begin looking at target audiences in an entirely different way, and the importance of consumers was heightened by changes ininsurance reimbursement patterns. Hospitals began to think of medical carein terms of product or service lines, a development that had major consequences for the marketing of health services. Hospitals realized that marketing directly to consumers for such services as obstetrics, cosmetic surgery,and outpatient care could generate revenue and enhance market share.Although marketing was beginning to be accepted in healthcare, theindustry suffered from a lack of professional marketing personnel. Few marketers had experience with healthcare, and attempts at importing marketingtechniques from other industries were generally unsuccessful. Many healthcare administrators still saw marketing as an expensive gimmick and considered marketers to be outsiders with no place in healthcare.The rise of service-line marketing launched the great hospital advertising wars of the 1980s. Barely a blip on the healthcare marketing radar screena decade earlier, advertising grew dramatically during this decade. In 1983,hospitals spent 50 million on advertising; by 1986, that figure had risen to 500 million, a tenfold increase in three years. Once an enterprise of dubiousrespectability, advertising was now hailed as a marketing panacea for hospitals(Berkowitz 2010).A growing number of health professionals who suddenly foundthemselves in competition for patients came to see marketing as a key to competitive success. This perception brought about a surge in advertising activityby large healthcare organizations. Unfortunately, much of the advertising ofthe mid- to late 1980s was ineffectual at best and disastrous at worst. Manycampaigns were poorly conceived and wasted an enormous amount of money.Ad copy tended to be institutionally focused, and healthcare marketing initiatives lacked the impact of the advertising produced in other industries—inlarge part because of the conservative, risk-averse culture of hospitals.Advertising came to be the activity that epitomized marketing formany in healthcare during this period. Marketers themselves perpetuatedthis notion, and even today, many healthcare executives equate marketingwith advertising. Ultimately, the surge in advertising was both a blessing anda curse. On the one hand, advertising campaigns were something relativelyconcrete; an organization could invest in them and reasonably expect to incursome benefit as a result. On the other hand, the ineffectiveness of much ofthis advertising and the negative fallout it often generated were setbacks

A "here is our product—take it or leave it" approach characterized most industries during this period. . treatment options, pricing or cost of services, and healthcare industry news. For example, when the Patient Protection and Affordable Care Act (ACA) was enacted in 2010, social networks were abuzz with information (and misinformation .