Solving the Health Care Conundrum

Executive summary of a presentation on reforming health care made by Professor Michael Porter at a Harvard Business School Publishing Virtual Seminar.
by Michael E. Porter

The U.S. health care industry is unique in that despite the presence of significant competition, which usually drives increased value through decreased costs and improved quality, the nature of the competition in health care has been "zero sum." Behaving as if health care were a commodity, the major actors have focused primarily on lowering and shifting costs, increasing their bargaining power, and restricting services. Providers have offered broad and undifferentiated services, competing based on convenience and historical reputation in their local market.

The right kind of competition involves competing to deliver the greatest value for patients. Value-based competition will see more innovation as providers will not be all things to all people, but will create focused "practice areas" that address specific diseases and conditions with higher-quality, lower-cost services. Health plans will eliminate their restrictive networks, allowing members to choose in a competitive (and regional or even national) marketplace the providers that offer the best value for their condition. Plans will help patients make the best decisions by offering counseling and support services as well as information that assesses the relative value delivered by providers.

Because the United States has competition in health care, we would expect to see improving value, but we see just the opposite.

Value-based competition is not a theoretical concept, but it is happening. Innovative providers are beginning to offer unique services, creating the facilities and organizations to effectively deliver them, and gathering the data to show superior performance and to continue to improve. Public policy can help accelerate these value-based changes, but providers, plans, and employers shouldn't wait for policy; they should act now to become early movers in leading these changes.


Professor Porter, having conducted in-depth research and analysis on the U.S. health care market, discussed his conclusions on the industry's problems and recommended solutions. His perspective on health care is unique, having looked deeply at competition in different industries around the world. This virtual seminar is based on the ideas in the June 2004 Harvard Business Review article, "Redefining Competition in Health Care," co-authored by Professor Porter and Professor Elizabeth Olmsted Teisberg.

Key Learnings

1. The U.S. health care system is a paradox in that it has competition yet fails to deliver improving value. Competition has been shown to be an incredibly powerful force in driving increased quality and decreased costs. This has been the case across industries and countries. However, despite the fact that the U.S. has more competition than virtually any other health care system in the world, the costs are high and rising without delivering higher quality.

The problems with the U.S. health care system are generally well known: costs that are rising much more quickly than inflation; restriction of access and services; standards of care that lag behind accepted benchmarks; frequent treatment errors; wide variations in practice patterns; slow adoption of best practices; and slow diffusion of innovation. What is not as well known is how this paradox is possible, why previous efforts to reform the system have not worked, and what to do about it.

2. The root cause of these problems is that the competition taking place has been the wrong kind. The major actors in health care—providers, health plans, and employers—have all behaved as if health care were a commodity, which is far from true, and have focused on lowering costs and improving their competitive position with the gains of one participant coming at the direct expense of others (zero-sum competition). This competition has focused on shifting the costs to other players, amassing size, especially in local markets, to increase bargaining power, capturing patients, restricting choices and services, and when all else fails, taking legal action.

This type of competition has resulted in large, undifferentiated health plans and provider networks that emphasize scale and breadth. Attempts at reform have been largely ineffective as they failed to address the root causes of the problems and have dealt instead with micromanaging and inspecting providers and forcing process compliance as opposed to achieving outcomes and results. The issue of zero-sum competition has been lack of value for patients and lack of innovation.

3. The key to addressing these problems is moving to value-based, positive-sum competition. Unlike zero-sum competition where there is a winner and a corresponding loser, positive-sum competition can involve multiple winners by creation of greater value for all parties.

Effective value-based competition will be centered on addressing health conditions over the entire life cycle of care (not the specific components of care such as surgery, office visits, home care, and so on), and competition will shift from local in nature to regional and even national as consumers seek the best health care value regardless of location. (Some consumers will continue to choose local care because of greater convenience even if the quality is not as good.) Value-based competition will be supported with detailed information that measures results and allows patients to make choices based on value. Value-based competition will serve to drive innovation.

4. Moving to value-based competition has important strategic implications for providers as well as health plans and employers.

Providers: In an environment where competition takes place based on value, instead of offering similar broad service lines, providers will develop strategies, structures, and processes to provide unique and differentiated services in a limited number of areas of strength.

Innovative providers will redefine their business around integrated practice areas where all organizational resources are coordinated and aligned to focus on one or more specific diseases or conditions, such as cancer or heart disease. The organizational structure and staffing, work processes, and facilities will evolve to provide the highest value, highest quality, and most efficient care; this may involve separating diagnosis and treatment into distinct units because the skills and processes required for each are quite different. Services and locations will be better aligned, providing greater control and efficiency. Organizations will gather data on results and on process to demonstrate the superior value that they are delivering, and as a tool to continuously improve their processes. Innovative providers will market their areas of excellence and will grow geographically as opposed to growing solely by offering new products. There will be significant rewards for early movers.

These value-focused practices hold the potential to create a virtuous cycle in health care delivery with many winners. Areas of excellence will lead to accumulating greater experience, which will result in increasing efficiency and gathering better information on results and processes.

Specific focus on conditions will result in forming a more fully dedicated team, developing facilities that allow for better optimization of specialized care, greater leverage in purchasing based on focus and volume, greater capacity for sub-specialization, and eventually, an improving, self-enforcing reputation.

None of these forms of competition increase health care value for patients.

Health Plans: Plans will continue to have an important role, but that role will change. Competition among plans is desired (as opposed to a single-plan system) and independence between plans and providers is essential. In contrast to the traditional and failed role of health plans that involved powerful networks, restrictive choice, and management of physicians, in a value-based model patients will be given wide latitude to select the providers that offer the greatest value. Plans will serve the role of measuring providers based on results, experience, and costs. Plans will deliver value in sharing this information with patients and helping to support and counsel patients in selecting providers. Plans will widen their geographic scope, providing patients with access to providers that offer the greatest value regardless of location—a move that is in the interests of both patients and plans. Also, plans will simplify billing, reimbursement, and claims processing, making them more efficient and transparent.

Employers: Employers can and should act as the agents of change, based on their clout and economic interests in driving the system toward value-based competition. To do so, employers must change their buying behavior to focus on value. They should push plans to provide employees with broad access to providers and to provide information measuring results and value on a disease/condition basis.

5. Public policy can serve as an important catalyst to accelerate change; however, policy changes are not necessary to initiate migration to value-based competition. The policy debate is complex, political, and often focuses on the wrong subjects. The debate is often around access as opposed to the configuration and value of the health care delivery system. By focusing on greater value, the issues of who should be covered (access) and what should be covered will be easier to resolve. While policy changes to require informational disclosure and to align incentives can help speed up the process of moving to value-based competition, policy changes are not essential for these changes to happen. Key policy areas to be addressed are:

Access: Ultimately, access to care must be addressed through mandatory health insurance with subsidies for low-income citizens not covered by Medicaid or Medicare. This is important for equity, and the best value is achieved when everyone is part of the system.

Coverage: To resolve ongoing debates regarding exactly what is and is not covered, one national list of minimum necessary coverage is required. The list provided by the Federal Employees Health Benefits Program is a good solution; this list determines what is covered for federal employees and members of Congress, with a process for addressing new areas to be covered.

Configuration and value of health care delivery: To facilitate competition, redundant and anticompetitive state licensing should be eliminated and strict antitrust review of M&A activity must take place; mandatory public reporting must be required documenting experience and outcome information based on defined standards (just as the SEC requires reporting of certain information); and Medicare pricing must be addressed.


Michael E. Porter is the Bishop William Lawrence University Professor, based at Harvard Business School. Professor Porter is a leading authority on competitive strategy and the competitiveness and economic development of nations, states, and regions. Professor Porter's ideas on strategy have now become the foundation for the required strategy course at the Harvard Business School, and are taught in virtually every business school in the world. Professor Porter currently leads Harvard's programs for chief executive officers of billion dollar and larger corporations and created a University-wide course on the microeconomics of economic development that is also taught simultaneously, using Internet-delivered material, in seventeen other universities. Professor Porter also speaks widely on competitive strategy and international competitiveness to business and government audiences throughout the world. In 2001, Harvard Business School and Harvard University jointly created the Institute for Strategy and Competitiveness, led by Professor Porter, to further his work. Professor Porter is the author of sixteen books and over 100 articles.

Thomas A. Stewart is the editor of the Harvard Business Review. Prior to joining HBR, Stewart was editorial director of Business 2.0, where he set editorial policy, developed story ideas, wrote feature articles on management trends, and penned a Web column, "Barely Managing." Stewart also served as a member of the Board of Editors at Fortune magazine. In a series of Fortune articles, he pioneered the field of intellectual capital, which led to his groundbreaking 1997 book, Intellectual Capital: The New Wealth of Organizations. His second book, The Wealth of Knowledge: Intellectual Capital and the Twenty-first Century Organization, reveals how today's companies are applying the concept of intellectual capital to their day-to-day operations.