In 1999, Richard Townsend, M.D., the newly appointed Executive Director (CEO) of the Liberty Medical Foundation (LMF) was sitting in his Pittsburgh office reviewing materials for a presentation the following day to the Board of Directors. Dr. Townsend was responsible for both the Liberty Medical Group (LMG) a large 3,000 physician multispecialty medical group that provided health care to two million subscribers and the Liberty Medical Plan (LMP), a non-profit insurance company. It was his first official meeting as CEO with the Board and a critical one. In it he would formally present to the Board his strategy for the struggling Liberty Medical Foundation. Townsend had stepped into a difficult situation. His predecessor had resigned with three years left on his term and LMF was facing serious challenges. During 1997 and 1998, Liberty Medical Foundation had lost approximately $200 million each year. Moreover, from 1994 to 1998, although the quality of medical care continued to be excellent, the number of patients who reported being satisfied had dropped by over 5%. In addition, the medical group was confronting a number of internal challenges. The overall satisfaction of the 3,000 LMG physicians had declined substantially and the recruitment of physicians had become more difficult. In his presentation, Rich planned to summarize these challenges and outline the strategic issues LMF was facing and the options for dealing with them. Townsend believed that Liberty faced a stark strategic choice: either dramatically lower its rates through cost cutting to once again become a cost leader or to differentiate itself by building a reputation for both quality and service. The first option would require them to re-establish a price advantage by reducing the cost structure by 10-15 percent. This tact would almost certainly entail layoffs and salary reductions. The second option would be to raise rates and rely on a service, access and quality strategy. "But," he wondered, "do we have the ability to overcome our 60-year cultural history and implement the service and quality agenda?"
