05 Jun 2006  Research & Ideas

Using Competition to Reform Healthcare

In their new book, HBS Professor Michael Porter and Elizabeth Olmsted Teisberg argue that the very structure of U.S. healthcare must be redesigned to create value and effective competition throughout the system. An excerpt from Redefining Health Care: Creating Value-Based Competition on Results.

 

Editor's Note— The ills of the U.S. healthcare system are well chronicled—soaring costs, low customer satisfaction, increasing problems with quality, and restricted coverage lead the list. But do we really understand the underlying issues well enough to write a prescription?

In their new book Redefining Health Care: Creating Value-Based Competition on Results, Michael E. Porter and Elizabeth Olmsted Teisberg take a systemic approach to healthcare reform. Today's system is dysfunctional, they argue, rewarding participants who redirect costs and restrict services rather than those who create value for the consumer. The system needs to be redesigned so that each participant is motivated to increase value, measured by health outcomes per dollar expended. This excerpt discusses how healthcare providers can shift to a value-based model.

An interview with Professor Porter will be featured in HBS Working Knowledge next month.

How can providers compete on value? To do so, they must embrace a series of strategic and organizational imperatives, shown in Figure 5-1. We describe the imperatives in the context of hospitals and physician groups. However, they apply even to the practice of an individual physician. A growing number of providers have begun to address several of the imperatives, but few, if any, providers are currently addressing all of them. The shift to a value-based model is self-reinforcing. As more of these imperatives are addressed, the benefits grow disproportionately.

Redefine the business around medical conditions

The starting point for developing strategy in any field is to define the relevant business or businesses in which an organization competes. Health care delivery is no different. Health care providers do not think of themselves as businesses, but they are in the business of providing services to patients. (Those who are uncomfortable with the notion of businesses in health care can substitute the term service lines.)

The question "What business are we in?" is an important one because it guides an organization's thinking about who its customer is, what needs it is trying to meet, and how it should organize. Implicit in every business definition is a view of how value is created. Aligning an organization's view of value with actual value is a precondition for excellent performance.

In some fields, defining the relevant business is straightforward. In health care this is not the case, in part because of the way medicine has traditionally been structured and organized. Many hospitals, for example, see themselves in the "hospital" business or the "health care delivery" business, competing with other hospitals based on their overall service offering. An even broader definition of the business, "health care," is common among experts in health policy. This leads them to favor large health systems, believing that health care is best organized by combining insurance and health care delivery into one vertically integrated, full-line system.

Other providers, including most physician practices, define their business around specific functions or specialties. An anesthesiology group defines itself as in the anesthesia business; a nephrology group sees itself as in the nephrology business. Hospitals, to the extent that they think in terms of service lines, normally define them in terms of specialties such as internal medicine, radiology, urology, surgery, and so on.

Both of these prevailing modes of business definition in health care providers represent obstacles to value creation. They are doctor centric, procedure centric, or institution centric, not patient centric. They are also misaligned with how patient value is actually created.

Patient value in health care delivery . . . can only be understood at the level of medical conditions. Overwhelmingly, value is determined by how well a provider delivers care in each medical condition, not its overall breadth of services. The value delivered in a medical condition arises from the full set of activities and specialties involved. It is not the individual roles, skills, or functions that matter, but the overall result. Moreover, for each aspect of care, value is determined by how well the needed set of skills and functions come together. In surgery, for example, value depends on not only the surgeon but also the anesthesiologist, the nurses, the radiologist, the skilled technicians, and others, all performing well. Yet no matter how skilled the surgical team, the overall care cycle is crucial. Unless the patient's problem is accurately diagnosed, the patient is properly prepared, and recovery and rehabilitation are managed well, patient results will suffer. Indeed, the impact of the cycle of care is even broader. Value may be enhanced by not performing the surgery at all, and treating the case in a different way. Value may be still greater if preventive care and advice is provided over time so that little or no treatment is needed at all.

The relevant business in health care delivery, then, is a medical condition seen over the full cycle of care. The business is congestive heart failure, for example, not heart surgery, cardiology, angiography, or anesthesiology. Traditional specialties are often too broad. The business is not nephrology, but chronic kidney disease, end stage renal disease (dialysis), kidney transplantation, and hypertension. The medical condition is not orthopedic care, but several conditions, including spine disorders, hip disorders, and so forth. Cancer care also involves many distinct medical conditions.

Aligning an organization's view of value with actual value is a precondition for excellent performance.

Note that in academic medical centers, laboratory research and teaching should also be treated as separate businesses from patient care in most cases, rather than co-mingled as they are today. Clinical outcome research, however, needs to be expanded and better integrated with patient care.

Business definition always involves a geographic component. A health care provider must understand the geographic market or service area over which it must compete. Otherwise, the provider will misunderstand the true benchmarks for performance it must meet and the strategic options it has available. As we have discussed, even if some services must be provided locally, the relevant market for most medical conditions should be regional or even national. Providers that fail to think in these terms will become more and more vulnerable to competition. They will also miss opportunities to grow and form partnerships across geography.

Medical conditions represent the basic unit of analysis for thinking about value in health care. Medical conditions are patient centric, not provider centric. We use the term medical conditions, rather than diseases, injuries, or other patient circumstances, such as pregnancy, because the term is more general. The term organ systems, used by some providers, is provider centric and not a medical condition at all.

How to define the appropriate set of medical conditions around which to organize care sometimes involves judgments, as does where to begin and end the care cycle. Different providers can, and should, define medical conditions differently based on their strategies, the complexity of the cases they undertake, and the patient groups they serve. The ultimate arbiter of the appropriate definition is patient value.

Every provider, then, must clearly and explicitly define the set of medical conditions in which it participates. For each of these medical conditions, the provider must define where it currently fits in the care cycle. Addressing these questions is the first step in devising a strategy, organizing care delivery, and measuring results.

Choose the range and types of services provided

Perhaps the most basic strategic decision for every provider is the set of services to be delivered. In other words, what businesses does the provider want to be in? Providers must choose the set of medical conditions in which they can achieve true excellence in terms of patient value, given their particular patient mix, skills, and other circumstances. In each medical condition, providers must decide what roles they will play in the care cycle, and what services to offer to ensure good overall patient results. The choices will be different for each provider. Academic centers will make different choices than community or rural hospitals. A provider may make different choices from peers nearby.

Part of the strategic choice of service lines is to match the complexity and acuity of the conditions diagnosed and treated with the skill, technology, facilities, and cost base of the institution. Routine or simple services should not be offered by institutions that cannot deliver them at competitive cost. Conversely, complex or unusual services should not be offered by institutions that lack the experience, scale, and capabilities to provide excellent results.

In value-based competition, most hospitals and physician groups will retain an array of service lines but will stop trying to offer everything. Most institutions should narrow the range of medical conditions served, or at least the types of cases they seek to address. Some practices may be phased out completely, while others are significantly reorganized. In most businesses, it is common sense to concentrate on products and services that create unique value. For many hospitals and other health care providers, however, doing so will require a significant change in mind-set in a field used to handling any patient who walks in the door. And deciding what not to do is an even more radical idea. In health care, the need for strategic choice of services has been avoided because of the lack of information and the lack of accountability for results.

An array of specialized hospitals, which are or are among the leaders in their fields, is testament to the ability to deliver superior value without serving all needs. Many of these hospitals, such as the Bascom Palmer Eve Institute (Miami), the Hospital for Specialty Surgery (orthopedics, New York), M. D. Anderson Cancer Center (Houston), and Memorial Sloan-Kettering Cancer Center (New York), are among the top-rated institutions in the United States in their fields. While specialization is not a prerequisite for excellence, as wider-line providers such as Massachusetts General Hospital and the Mayo Clinic attest, it is not a disadvantage.

Strategic focus is not about narrow specialization, but the pursuit of excellence and deepening penetration in the chosen fields. At Fairview-University Children's Hospital (Minnesota), for example, a long-term commitment to excellence in the area of cystic fibrosis has resulted in the top treatment facility for cystic fibrosis in the country, with a median patient survival age of forty-six years compared with the U.S. average of thirty-two.3,4 The Minnesota Cystic Fibrosis Center has developed age-specific programs serving the needs of particular patient groups: pediatric (through age twelve), adolescent (ages thirteen to twenty-two), and adult (over the age of twenty-two). Its expertise with adult patients has led to the development of a specialized reproductive practice for cystic fibrosis patients, with excellent results.5 The center has specialized diabetes and gastrointestinal clinics to help its patients deal with the conditions that frequently co-occur with cystic fibrosis, as well as lung transplantation program for cystic fibrosis patients that has achieved a 76 percent one-year survival rate and a 66 percent five-year survival rate, well above the national averages.6

Figure 5-1: Moving to value-based competition: Imperatives for providers

  • Redefine the business around medical conditions
  • Choose the range and types of services provided
  • Organize around medically integrated practice units
  • Create a distinctive strategy in each practice unit
  • Measure results, experience, methods, and patient attributes by practice unit
  • Move to single bills and new approaches to pricing
  • Market services based on excellence, uniqueness, and results
  • Grow locally and geographically in areas of strength

Excerpted with permission from Redefining Health Care: Creating Value-Based Competition on Results, Harvard Business School Press. Copyright 2006 Michael E. Porter and Elizabeth Olmsted Teisberg. All rights reserved.

Footnotes:

3. U.S. Cystic Fibrosis Foundation Registry (1998).

4. This dedication has also resulted in the commercialization of such inventions as the chest-thumping vest, used by some 45,000 patients suffering from cystic fibrosis and other lung diseases worldwide. See Gawande (2004).

5. Fairview has achieved more carried-to-term pregnancies and live births for women with cystic fibrosis than any other provided in the country.

6. Fairview-University Children's Hospital (2005).

About the authors

Michael E. Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on competition, company strategy, and international competitiveness.

Elizabeth Olmsted Teisberg is an associate professor at the University of Virginia's Darden Graduate School of Business, and an expert on strategy and innovation.

Excerpted with permission from Redefining Health Care: Creating Value-Based Competition on Results, Harvard Business School Press. Copyright 2006 Michael E. Porter and Elizabeth Olmsted Teisberg. All rights reserved.

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