Porter and Teisberg put health care on the CEO's agenda: a book review

Citation

Davidson, A. (2006), "Porter and Teisberg put health care on the CEO's agenda: a book review", Strategy & Leadership, Vol. 34 No. 6. https://doi.org/10.1108/sl.2006.26134fae.001

Porter and Teisberg put health care on the CEO's agenda: a book review

Porter and Teisberg put health care on the CEO’s agenda: a book review

Alistair DavidsonConsultant specializing in corporate and technology strategy, is located in Redwood City, California (Alistair@eclicktick.com). A Strategy & Leadership Contributing Editor, his article “Managing webmavens: relationships with sophisticated customers via the internet can transform marketing and speed innovation,” co-authored with Jonathan Copulsky, appeared in Vol. 34, No. 3.

Redefining Health Care: Creating Value-based Competition on Results

Michael Porter and Elizabeth Olmsted TeisbergHarvard Business School Press, 2006

The cost and efficacy of health care is a significant environmental and competitive issue for all American companies. From the point of view of a corporate CEO, health care is a time bomb, consuming more and more resources, raising the cost of America’s products, yet not delivering optimum value. Health care –with its powerful constituencies battling for advantage – does not allow would-be reformers an easy grip, much less an obvious solution. But two of the USA’s best and brightest strategists, Michael Porter and Elizabeth Olmsted Teisberg, present a revolutionary prospectus for health care reform – Redefining Health Care: Creating Value-based Competition on Results. The central message of the book: while some aspects of the American health care system are excellent, overall it is too expensive, offers poor value for money, is inconsistent in its delivery of best practices, and is increasing in cost. So what can be done?

The book’s key takeaways are:

1. 1.

   Business leaders need to link up and actively lobby for dramatic change to the health care system. The prescriptions in Redefining Health Care represent a reframing of how health care should operate in the USA and are potentially attractive to both political parties.

2. 2.

   Fixing the health care system will require a comprehensive reformation – of regulation, health care organization, coverage policies and management of treatment delivery and medical record keeping. A key goal of this reorganization is the creation of dynamic competition to improve the outcome for patients through innovation. Currently, efforts to introduce important beneficial innovation are repeatedly stymied by ill-considered regulation and its unintended consequences.

3. 3.

   The potential business benefit: significantly lower costs of providing health care coverage, healthier employees and improved competitive advantage relative to other countries with more cost effective health care.

In sum, the book warns that senior managements aren’t doing their job if they don’t pay attention to the current and future cost of health care. Though industries are hampered by health care costs to varying degrees, the current problems of General Motors and Ford can be attributed at least in part to the fact that health care contributes about $2,000 to the price tag of each car they make. And if such concerns were not enough, the demographics of health care delivery are going to worsen as the Baby Boomers age and become more expensive to care for.

As with Porter’s previous work on strategy (Competitive Strategy, Competitive Advantage) and on national competitive advantage (The Competitive Advantage of Nations), this latest book offers a powerful combination of strategic theory and detailed investigation. As past readers of Porter’s work would expect, the authors apply Porter’s familiar value chain analysis to support the book’s conclusions about the health care industry.

Health care in crisis

Porter and Teisberg present data that should convince even the most nationalistic and privileged of American readers that the US health care system is in crisis. While their data is not new to those who have studied health care, their analytical presentation should convince business leaders, dissatisfied consumers and policy makers on both ends of the political spectrum that change is required and possible.

They start their analysis by reviewing the performance of the health care industry and the many attempts at its reform. Their conclusions are that, by multiple measure of performance, the system is in trouble:

• •

  US per capita expenditures on health care of $5,200 are approximately twice as much per capita than most developed countries. Between 1990 and 2003, total expenditures on health care rose from $696 billion to $1,679 billion.

• •

  Forty percent of US citizens with health problems did not get appropriate treatment or medication due to the cost of health care in 2004.

• •

  The US has the highest level of dissatisfaction with its health care of major developed countries.

• •

  The US has the worst performance on the relationship between spending and life expectancy in the 29 OECD countries.

• •

  Health systems in the US typically only deliver best care 55 percent of the time, though with some conditions the rate is as low as 10 percent. In other words, ignoring issues of coverage, the US is currently incapable of delivering a consistent best practice on a national basis. On a regional basis, there is enormous and inexplicable variation in medical practices.

• •

  Medical errors are a significant cause of death in the US; there are some 200,000 iatrogenic deaths per year.

• •

  Preventable adverse drug events add almost $5,000 to the cost of treating each patient experiencing such mistreatment, which occurs in 2 percent of hospital in-patients.

• •

  Medical expenses and treatment patterns vary dramatically and randomly across states.

• •

  Time spent on medical paperwork runs between 33 percent and 50 percent of medical costs depending upon the medical area.

• •

  Health insurance premiums are growing dramatically faster than inflation.

From functional management to disease life cycle management

The authors argue for management of diseases rather than functional management of patient relationships, and for performance improvement through benchmarking, and empowering consumers. They believe in the critical importance of informed customer choice so that consumers can select providers based upon treatment outcomes. This is in stark contrast to the current system’s focus upon constraining choice and cost and supply management:

The fundamental problem in the US health care system is that the structure of health care delivery is broken. That is what all the data about rising costs and alarming quality are telling us. And the structure of health care delivery is broken because competition is broken … All of the well-intended reform movements have failed because they did not address the underlying nature of competition.

In a normal market, competition drives relentless improvement in quality and cost. Rapid innovation leads to rapid diffusion of new technologies and better ways of doing things. Excellent competitors prosper and grow, while weaker rivals are restructured or go out of business. Quality adjusted prices fall, value improves and the market expands to meet the needs of more consumers. This is the trajectory of all well functioning industries …

Health care competition could not be more different. Costs are high and rising … Quality problems persist. The failure of competition is evident in the large and inexplicable differences in cost and quality for the same type of care across providers and across geographic areas.

In brief, they contend that:

1. 1.

   Health care reform in recent years has largely involved the transfer of costs between funding sources (government, insurance companies, and consumers), health care delivery organizations and medical professionals. Often, what has been sold as reform has merely been an attempt to transfer costs between funders.

2. 2.

   Hospitals simultaneously experience too much and too little competition. And the competition tends to be based upon on breadth of service in local markets rather than on the disease specific outcomes. Improvement is rarely based on regional, national or international comparisons.

3. 3.

   Current revenue models in health care tend to be based upon transactions (that offer doctors incentives to over-service patients) or on capitation (per capita) revenue models (that tend to cause the average American to receive non-optimum treatment).

4. 4.

   Best practices in health care disseminate extremely slowly, leading to poor outcomes and higher costs and high variability in implementation of best medical practice.

5. 5.

   Perverse incentives in the system encourage under-specialization, low levels of utilization of equipment, under treatment of disease and failure to invest in preventive health care. A surprising example: Health Savings Accounts can have damaging consequences because, to preserve their savings, some account owners postpone early treatment and diagnosis of diseases, leading to higher downstream treatment costs.

6. 6.

   From the point of view of plan providers, the key to the medical coverage business in the US is to avoid patients with high health care costs. From an equity and efficiency perspective, Porter and Teisberg argue for universal coverage to increase resources available to the health care system and to avoid the problem that younger, healthier people do not contribute to the overall costs of the system until they need health care.

Universal coverage and value creation

As one of the US’s most respected researchers and consultants, Porter cannot be dismissed as an unrealistic utopian. He and Teisberg, a specialist in innovation, argue convincingly, that competition and market forces are powerful and effective, and that they should be the basis for pursuing dynamic improvement in the health care system. If this doesn’t sound revolutionary then consider that, in most cases, the current system doesn’t reward institutions that devise ways to prevent disease or lower the cost of treatment by making patients healthier. Competition, the authors argue, should be based upon disease outcomes over the full life cycle of the disease.

This approach is a reversal for the health care industry. It rejects the approach of most hospitals’ and doctors’ practices and instead emulates the best performing health care systems such as the Veterans Administration and Kaiser Permanente that attempt to develop, disseminate and improve upon best practices though performance management.

Eight principles guide the authors’ policy advice:

1. 1.

   The focus should be on value for the patient, not just lowering costs.

2. 2.

   Competition must be based upon results.

3. 3.

   Competition should center on medical conditions over the full cycle of care.

4. 4.

   High quality care should be less costly.

5. 5.

   Value must be driven by provide experience, scale and learning at the medical condition level.

6. 6.

   Competition should be regional and national not just local.

7. 7.

   Results information to support value-based competition must be widely available.

8. 8.

   Innovations that increase value must be strongly rewarded (see Exhibit 1).

Exhibit 1 Summary of Porter/Teisberg reform approach

Challenges to reform

The prescriptions of Redefining Health Care should be acceptable to almost the entire spectrum of stakeholders. Universal coverage will appeal to those who believe in social responsibility. Competition to improve performance should appeal to those who believe in market forces. The insight that universal coverage is required for performance improvement is a powerful proposition. But the unanswered question, as with all strategies, is how to get there. It is in this area that the book is at its weakest.

A looming budgetary crisis is likely to make the ideas in this book increasingly attractive. But without strong pressure from business leaders, the innovative transformation promoted by the book will likely be difficult to achieve or will emerge slowly. Coverage cutbacks will be the first option of many state governments, but they will not solve the problems of the system.

Anticipating skeptics and pessimists, the authors argue that we already point to instances where focusing on disease treatment outcomes has dramatically improved patient outcomes (for example, heart surgery in New York City and national organ transplant programs). They have identified organizations that have centralized medical record keeping and obtained better dissemination of best practices (Kaiser and the Veterans Administration). They have identified organizations that have specialized and changed their relationships with feeder providers (Cleveland Clinic). So their argument is that the health care industry demonstrates how their reform proposals work on a small scale.

Next steps

While the recent reform proposals in Massachusetts (universal mandatory coverage) don’t fully embody all the key recommendations of Porter and Teisberg (for example, they don’t encourage competition on the basis of disease outcomes), they do indicate that leading decision makers and health care consumers all recognize that change is needed.

This is encouraging because clearly American business is being damaged by today’s ponderous and stumbling health care system. It’s up to America’s CEOs to start the country on a path to a new system, one based on enlightened self interest market forces and sound strategy. Porter and Teisberg deserve a lot of credit for blazing the trail.