Redefining Health Care: Creating Value‐based Competition on Results

Avinandan Mukherjee (School of Business, Montclair State University, Montclair, New Jersey, USA)

International Journal of Pharmaceutical and Healthcare Marketing

ISSN: 1750-6123

Article publication date: 4 April 2008

615

Keywords

Citation

Mukherjee, A. (2008), "Redefining Health Care: Creating Value‐based Competition on Results", International Journal of Pharmaceutical and Healthcare Marketing, Vol. 2 No. 1, pp. 76-79. https://doi.org/10.1108/17506120810865442

Publisher

:

Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited


“The US health care system is in crisis.” No wonder, Harvard guru Michael Porter, after defining competitive strategies in several business sectors, has now set his eyes on the health care industry. This is a sector that is in dire need of transition; hence Porter and Teisberg's work is timely and insightful. It raises pertinent questions, delineates critical issues, conducts strategic analysis, and offers creative solutions. It is difficult for one book to do all this – however, Redefining Health Care is one of those books that have the potential to redefine an entire industry. In this book, Porter and Teisberg argue that the problem with the US health care system is not that it is private and subject to more competition than virtually any other country. The fact that competition in this case has not led to expected reductions in cost and improvements in quality is because of the presence of the wrong kind of competition. The authors propose in this book that the only way to truly reform health care is to reform the nature of competition itself, from zero‐ to positive‐sum competition. More specifically, the central focus of this book is how to transform health care by realigning competition with value for patients. This book has achieved several objectives. First, the current problems in the health care sector are adequately captured in the discussions in the first few chapters. Second, the authors prescribe “a powerful and actionable agenda for change” by reforming the nature of competition in the sector. Third, the book seamlessly combines concepts from industrial organization, competitive strategy, and health care policy to offer a refreshing perspective on the multifarious debates in this critical sector of society and economy.

Porter and Tiesberg contend that the current competitive environment in the US health care system is dysfunctional, serving to “shift costs, accumulate bargaining power, and restrict services,” and ultimately misplaced, focusing on the business dynamics of providers and health plans, rather than on the diagnosis, treatment, and prevention of illness. According to them, the other consequences of this dysfunctional competition are:

… misaligned incentives and a series of understandable but unfortunate strategic, organizational, and regulatory choices by each participant in the system that feed on and exacerbate each other. All actors in the system share responsibility for the problem … The problem is that competition does not take place at the medical condition level, nor over the full care cycle. Competition in the current system is at the same time too broad, too narrow, and too local.

The end results of all this dysfunctional competition in the US health care system are high costs, poor quality, consumer dissatisfaction, uneven access, and skyrocketing health insurance premiums.

In this book, the authors examine health care issues in three broad areas. The first is the cost of and access to health insurance. The second is standards for coverage, or the types of care that should be covered by insurance versus being the responsibility of the individual. The third is the structure of health care delivery itself. Many of the ideas in this book have evolved from Porter and Teisberg's (2004) path‐breaking article “Redefining competition in health care” published in the Harvard Business Review.

The book is essentially divided into three major sections, and organized into eight chapters. The first section of the book provides the background on the health care sector. The first chapter “Scoping the problem” introduces the reader to the myriad problems facing the health care sector. In order to explain those critical issues, the authors provide detailed analysis with figures and various anecdotal evidences. The several organized illustrations and real‐life case studies provided in the first chapter can help the readers to develop a perspective of the problems facing the US health care system. Chapter 2 titled “Identifying the root causes” discusses the positive‐ versus zero‐sum competition by introducing the concept of value. According to the authors, the root cause of problems in health care is that the competition is at the wrong level. More specifically, the authors list 11 problematic features of zero‐sum competition in health care: wrong conception of health care (commodity mindset); wrong objective over the wrong time horizon; wrong geographic market; wrong strategies; wrong structure of care delivery; wrong industry structure; wrong information; wrong patient attitudes and motivations; wrong incentives for health plans; wrong incentives for providers; and wrong response from employers. These misunderstood objectives of competition trigger a chain relation of internal and external weaknesses. By profiling the health care system by the cause‐effect method, the authors hope that readers could be aware of what kind of elements could lead to the whole healthcare system becoming imperfect. Chapter 3, called “How reform went wrong,” discusses the challenges with group health insurance and managed care. The chapter takes the reader though an interesting discussion on a variety of ideas and experiments that have been espoused in the US health care sector over the past decade, such as the Clinton Plan, medical or health savings accounts, consumer driven health care, single payer system, etc.

The second section, comprising Chapter 4 titled “Principles of value‐based competition” provides the core of the argument of this book. The focus on value instead of costs alone can provide the best solution to the health care situation. Value‐based competition is based on results and centered on medical conditions over the full cycle of care. Value can be driven by provider experience, scale, learning in medical conditions, and innovations.

The third section of the book, spanning four chapters, is dedicated to strategic implications of the value‐based competition paradigm for various stakeholders. Chapter 5 discusses “Strategic implications for health care providers.” Porter and Teisberg propose eight key imperatives for health care providers (hospitals, clinics, physician groups, and individual physicians) to foster value‐based competition. The imperatives are:

  1. 1.

    redefine the business around medical conditions;

  2. 2.

    choose the range and types of services provided;

  3. 3.

    organize around medically integrated practice units;

  4. 4.

    create a distinctive strategy in each practice unit;

  5. 5.

    measure results, experience, methods, and patient attributes by practice unit;

  6. 6.

    move to single bills and new approaches to pricing;

  7. 7.

    market services based on excellence, uniqueness, and results; and

  8. 8.

    grow locally and geographically in areas of strength.

The concept of care delivery value chain (CDVC) is then presented with examples and illustration.

The topic of Chapter 6 is “Strategic implications for health plans.” This chapter emphasizes the significant role of health plans and redefines the objectives of health care projects with new meanings and methods. Following the new rules of health care competition, the authors provide fresh direction to improve the quality of health care services. Chapter 7 is concerned with “Implications for suppliers, consumers, and employers.” In contrast with the past roles of key stakeholders – suppliers, consumers, and employees in health care marketing, the authors carefully redesign their roles and responsibilities to highlight their contributions to the improvement of health care services. The authors adopt a comparison scheme to emphasize the enormous possibility of new health care plans in the new model as well as provide detailed approaches to renew the principles of traditional health care operation.

Last but certainly not the least, Chapter 8 discusses “Health care policy and value‐based competition: implications for government.” The government has the last and most important key role to implement practical health care plans. In accordance with the principles of value‐based competition, the authors propose policies and approaches for the government to improve the structure of health care delivery. Further, the authors also test their model of value‐based competition in the context of other nations' medical systems to prove its practicality and efficiency. As a result, one may possibly advocate that the US Government accept the authors' theories to reform and restructure the current health care market. The book provides an interesting case study on The Cleveland Clinic. The CVDC is illustrated in the Appendix B with three detailed examples: a chronic disease (kidney disease), an emergency care (stroke), and a care involving both surgery and other major procedures (breast cancer). Also, of interest is the large number of tables providing statistical information. The international comparison tables help the reader to understand the differences between US and international health care systems.

Countering the view that health care is not a market, the authors in this book see zero‐sum competition currently at work adding little value, fostering inefficiency and poor quality, and often harming patients. Focusing on how to move American health care to positive‐sum competition based on economic and clinical value for patients, Redefining Health Care provides a series of specific recommendations for the key players – notably, providers, health plans, employers, and Medicare/Medicaid policy makers. Through their research, Porter and Teisberg conclude that there should be no presumption that good quality of health care is more costly. On the contrary:

… better providers are usually more efficient. Good quality is less costly because of more accurate diagnoses, fewer treatment errors, lower complication rates, faster recovery, less invasive treatment, and the minimization of the need for treatment. More broadly, better health is less expensive than illness. Better providers can often earn higher margins at the same or lower prices, so quality improvement does not require ever‐escalating costs.

The effectiveness of providers over the entire cycle of care for an incident needs to be transparent, so that the best treatments and protocols can be determined. This would also allow those who get the best results to get more business, and those who cannot make the grade will eventually be weeded out. The entire care cycle for an incident needs to be integrated, so that you are not getting treatment (and bills) from various providers over the life of your condition. For instance, a knee replacement currently involves separate groups (and billings) from hospitals, doctors, auxiliary care, and various other entities. Since, there is no real integration, it is easy to make mistakes or optimize a single process that sub‐optimizes the whole. The lack of transparency also means there is little hope to know pricing and make decisions based on the value received for the dollars paid. All the reforms over the years have led us to this point we are currently at, and the norm is making sure the care cycle is optimized for provider reimbursement, not for the best interests of the patient.

The solutions proposed by Porter and Teisberg are innovative and refreshing. In comparison to more conventional options like state‐controlled system or single‐payer system, Porter and Teisberg's proposed solution in this book is better suited to address long‐term systemic problems. Shifting the health care delivery system to a value‐based competition model will shift the focus to delivering value over the care cycle, making results information transparent and available, and setting “single cost” pricing for care. Of course, the main challenge in its implementation will be in convincing the well‐entrenched stakeholders in the current system to adopt the new value‐based competition paradigm. Bits and pieces of their proposed plan are starting to emerge in the market (like publishing hospital results for a set of particular conditions), but it is still largely voluntary and not necessarily standard across the board. One of the most important benefits of the proposed solution would be that the changes would be self‐reinforcing:

Changes by health plans and providers to compete on values will reinforce and magnify each other, and will spur innovation by suppliers. As consumers and employers adopt these principles, providers and health plans will be more motivated, and more able, to improve the value they deliver.

This book provides a thought‐provoking, honest, profound, and powerful critical analysis of the American health care system. It is a pioneering effort to introduce serious management principles in the area of health care. Overall, this is a seminal piece of work in the health care management area, the impact of which on the discipline is likely to be felt for a long time to come. It is a must‐read for researchers, teachers, and students in business schools, health administration schools, medical schools, pharmacy schools, and public policy institutions.

References

Porter, M.E. and Teisberg, E.O. (2004), “Redefining competition in health care”, Harvard Business Review, Vol. 82 No. 6, pp. 6576.

Related articles