“How many of you are the sons or daughters of physicians?” I asked the students in my course at Harvard Business School, “Managing in the New Health Care Sector.” A forest of hands, representing nearly half of the 87 students, shot up.
“Why didn’t you go to medical school?” I asked one student.
“My mother told me not to,” he said. “She said physicians are no longer free to practice medicine. She said I wouldn’t be happy.” A concurring murmur rippled through the classroom.
Many practicing physicians share the outlook of these students, all candidates for a master’s degree in business administration. In fact, the class included five MDs. As I looked out at the group, I realized I was more optimistic than they were. My cause for hope? After studying the health care sector for some time, I’ve concluded that it will go the way other American businesses have gone — and I think that’s good news. I predict that medical care will respond to market forces, becoming more focused and hence more efficient and satisfying for patient and doctor alike. Furthermore, I think market forces will put decision making back in the hands of physicians. Why? Because doctors are the professionals best qualified to run the business of medicine — and consumers actively dislike managed care’s intervention in the patient-doctor relationship.
Everything for Everybody?
The recent crisis in health care has arisen in part from what’s known as vertical integration, which comes from the desire of huge organizations to be everything for everybody. Enterprises in other fields have made the same basic mistake. When United Air Lines decided a few years back that it was no longer a mere carrier but rather a one-stop source of services for the business traveler, replete with rental cars and hotels, its fortunes sank — until it reversed its strategy and concentrated on what it knew best, flying customers to their destinations.
Eastman Kodak learned a similar lesson. After bogging down while trying to conduct pharmaceutical and diagnostic side businesses (sound familiar?), the company had to refocus on its best shot: photography. Once that decision was made, the leaders beefed up research and development, introduced new camera technology, and dramatically increased profits. In the end both companies succeeded by narrowing their goals and concentrating on what their customers really wanted from them.
How does this apply to medicine? Here, too, some organizations have tried to offer everything for everybody and have faltered in the process. Take the case of Humana. In the 1980s, when its chief executive officer concluded that the hospital vacancy rate would remain high, he created a vertically integrated system that included hospitals, physicians, and a health maintenance organization.
The combination appeared foolproof. The Humana HMO was sure to be cost efficient because money would be saved by hospitalizing patients in Humana hospitals. Enrollees in the HMO would thus receive convenient, one-stop shopping and low-cost health insurance. What could possibly go wrong?
Well, so much went wrong that the corporation ultimately sold its physician practices and spun off its hospitals to shareholders, retaining only the HMO. In short, it dumped the strategy of trying to do so much for so many.
Even Humana’s skilled hospital managers found it too difficult to operate three discrete businesses simultaneously. The insurance and medical units had opposite agendas: The insurer wanted to minimize medical-loss ratios, while the medical facilities wanted to maximize use of their services.
Then again, running an insurance business and a physician practice is a tough job for anyone. Humana’s staff physicians never saw as many patients as the company had anticipated they would, and the occupancy rates of Humana hospitals continued to drop.
Vertical integration led to human relations problems, too. Physicians not employed by Humana increasingly referred their hospital patients elsewhere, perhaps in retaliation for the fact that Humana was competing with them. And some of Humana’s own hospital managers were dispirited by the company’s move into nonhospital services.
Other vertically integrated health care operations appear to have gone through similar troubles. As an executive of UniHealth, a formerly multifaceted company, points out, “We failed to recognize that being a hospital and being a physician group are fundamentally different businesses.”
Specialization Pays
Gainful health care organizations, like gainful businesses in other fields, are learning that it pays to acquire experience in doing one thing well. In short, it pays to specialize. They are also realizing that it’s smart to provide quality at a reasonable price and that it’s a good idea to listen to the consumer.
Denton Cooley had the right idea when he launched an open-heart-surgery factory, the Texas Heart Institute in Houston. The eminent surgeon, who in 1994 had performed more than 60,000 cardiac bypasses himself, began by charging about one-third less than the national average price. Like other health care factories with a focus, his appears to be simultaneously cheaper and better. Why? Because the goals are distinct, and practice makes perfect. Studies show that health care units whose volume provides workers with lots of practice deliver better quality and lower costs.
“The achievement that may have the greatest impact on health care did not occur in the operating room or the research laboratory,” Cooley was quoted as saying in the New York Times. “It happened on a piece of paper ten years ago when we created the first-ever packaged pricing plan for cardiovascular surgical procedures.”
Quality at the right price. Cooley’s enterprise is obviously exemplary, but strange as it may seem, health care organizations might also want to follow the example of Home Depot, the chain of focused, well-run superstores that help customers do it themselves. If you look at success stories in the consumer sector, Americans, an assertive and pragmatic people, want competitive pricing; convenience (one-stop shopping); assistance in accomplishing things themselves; and reliable, useful information. In short, the public’s expectations of a health care system do not fundamentally differ from what they want from any other part of the economy.
A Lesson in Business
To apply such lessons from the retail sector to the health care industry, consider the struggle of U.S. institutions to treat diabetes. In today’s system all too many diabetics don’t get the care they require because elements of it are spread over several places and no one provider is responsible for coordinating the whole. According to a Johns Hopkins University study published in a 1995 issue of the Journal of the American Medical Association, 84 percent of elderly diabetics did not receive an important hemoglobin test and a significant number of doctors did not follow other protocols recommended for maintenance of their diabetic patients. These errors most likely increase the incidence of other problems — such as kidney and heart disease, blindness, and amputations — that may result from the condition. No wonder diabetes has accounted for almost 6 percent of personal health care expenditures in recent years.
Doctors and hospitals do not cause such problems. Rather the failing is in the absence of a specific system for treating the condition. Such a system could include convenient, community-based sources of testing and support: a neighborhood pharmacy for drugs, other medical supplies, and guidance from specially trained pharmacists; computer or video programs for information, support group linkups, and daily monitoring of self-care; and diabetes centers in shopping malls, staffed by multiskilled teams.
The coordinated efforts of physicians, nurses, podiatrists, therapists, and nutritionists could help diabetics with the difficult task of changing the deadly habits that worsen the disease, such as eating poorly, smoking, and leading a sedentary life. A few hospitals in each state could specialize in the surgical and medical procedures that diabetics often require.
When applied to the other chronic diseases (including arthritis and asthma) that together account for 76 percent of medical care costs, such a focused approach would help the many weary people who are now forced to stitch together a fragmented treatment plan from numerous providers — doctors, hospitals, therapists, nutritionists, and others. It would sharply reduce the amounts of wasted time and money for both patients and caregivers.
One innovator, who developed a focused diabetes care system in Hawaii, notes that the approach decreased the number of patients expected to require dialysis or to risk diabetes-related vision loss in the next ten years by 50 percent.
Indeed, it is the lack of convenience, information, support, and specialized centers that has increased health care costs. Not only diabetics but asthmatics require expensive emergency and other hospital care because they don’t receive the advice and encouragement they need to carry out the complex self-care a chronic illness demands. The absence of custom-tailored care goes a long way toward explaining the shockingly high rates of adverse drug effects, many of them avoidable, in everything-for-everybody hospitals.
The One Stop Hernia Shop
Consider the outcome when an institution does narrow its goals and pay attention to the consumer — right down to the smallest detail. Toronto’s Shouldice Hospital is a hernia facility so beloved by its patients that it hosts an alumni reunion for them. The hospital’s focus on one procedure enables it to manage the thousands of details that surgery for any condition entails. The thoughtful amenities that engender this amazing loyalty include a facility specially designed with low-rise stairs, so that patients can comfortably walk after their operations, and beautifully landscaped grounds to lure them outdoors. But even if they can resist Mother Nature, Shouldice patients must get on their feet because the hospital does not provide regular meals in the rooms and attendants are trained to urge supine patients to go for walks.
So why do the patients love it? For one thing, the Shouldice system empowers the patient. He is not a passive, reclining lump but an upright, active participant in the healing process. Indeed, many Shouldice patients ask to go there. All prepare themselves for surgery by participating in orientation classes. And, of course, the quality of care is good. The surgical team’s concentration on a single procedure gives rise to continual refinements, efficiency, and high standards.
Doesn’t all of this regard for the customer increase costs? The evidence says no. Shouldice claims lower costs and better results than most general hospitals.
Just as is true in other industries, consumer-responsive, specialized systems provide a win-win solution to the current predicament in the health care sector. The approach is good for society, good for patients, and good for the organizations themselves. Success is not guaranteed, of course. But savvy venture capitalists are already financing physician-led organizations that provide targeted services for primary care, chronic diseases, or certain high-volume procedures at a capitated fee.
Good results are not derived from giving people less than what they pay for, as managed care has been accused of doing, nor by providing unnecessary services, as some fee-for-service providers supposedly do. Instead, the delivery process is creatively resized to give people more while using fewer resources. Indeed, the ultimate success of these organizations will increase the possibility of resolving the plight of poor people who are uninsured. Highly productive, efficient providers may be able to provide the poor with the health care they need, without bankrupting the country.
The Future
It is no accident that two of the organizations I cite as models were led by physicians — Denton Cooley in one case, Byrnes Shouldice, the son of a Shouldice Hospital cofounder, in the other. After all, those who actually provide the care are the ones who best understand how to resize the caregiving process.
So here’s my message for people who love medicine but worry about their ability to practice it: Don’t despair. Market forces will fix the health care system just as they’ve fixed other parts of the economy. They will radically alter managed care. The new managed care insurers, whose hefty administrative expenses averaged 12.4 percent of revenues in 1996, should eagerly contract with focused providers. HMOs will thus reduce both their costs and their direct involvement in managing health care. They will serve as brokers, selecting the capitated specialty groups that treat their enrollees.
Market forces will also diminish the number of mammoth everything-for-everybody, hospital-centered systems, as more hospitals cultivate specific-care systems. Consumers will play an increasingly active role in the purchase of health care, thus restoring many lost elements of the patient-doctor relationship.
Focused health care organizations led by physicians? Influential consumers? Attenuated insurers and the diminishment of all-inclusive health care systems? Straightforward information that serves consumers? Where do these ideas come from? It’s simple. They reflect the best of American business — the characteristics and achievements of organizations that have triumphed in the nonhealth sectors of the economy.