POLICY: Klepper on Porter

I’ve been in a healthy dialog with Brian Klepper and Pat Salber from the Center for Practical Health Reform in the last few weeks.  While I don’t agree with everything in their analysis, we have huge areas of common ground, and one part of that is in their view of Michael Porter’s thesis.  I wrote about this in THCB last year.  Here’s Brian Klepper’s response to Porter’s article.

A colleague recently commented on the similarities between CPHR’s work, and
Michael Porter’s and Elizabeth Teisberg’s recent Harvard Business Review article
on health care market competition. That led to the question of whether I had
contributed to their article. The question was passed to me, along with an
invitation to comment.
I rarely pass up such juicy invitations. Here’s
the short answer.

I did not contribute to the Porter/Teisberg piece. Michael
Porter is a well-established and highly respected thinker on markets. I have a
presentation with similar content he made a couple years ago; it’s clear he’s
been working on these health care concepts for a while.
But there’s more. When I read this new piece a few weeks ago, I had two thoughts.

One was that the article is a well thought through and accurate description of health
care’s two deepest problems: high fragmentation and a lack of systemic
management capability. In Porter’s and Teisberg’s zero-sum competition
framework, financial success is achieved more often through cost-shifting or
service reductions than efficiencies, and while organizations may benefit, the
larger enterprise rarely saves. In my work, I have described the same
circumstances, noting that in the highly fragmented HC marketplace, literally
thousands of organizations and millions of professionals pursue their
self-interests independent of their impacts on the whole. Fragmentation also
produces political gridlock that blocks change, because every potentially
positive reform gores somebody’s ox, and many groups have the power to kill any

In the same vein, Porter/Teisberg talk in depth about the lack of the right
information in the right hands at the right time, and how that hinders the
ability of the health care marketplace to work properly and in everyone’s
interest. This, of course, restates the classic point made by the famous
economist Adam Smith, who said that markets can not work without perfect
information. CPHR has also relied on that point in its call for "standardized
management capability" in 4 areas: 1)universally compatible IT (which is the
predicate for systemic efficiencies), 2) standards (in the forms of
evidence-based medicine and management), 3) accountability/transparency at every
level of the system, and 4) technology assessment before innovations reach the
market and we begin to pay for them.

other words, my first thought was that Porter/Teisberg offer an insightful
explication of the system’s structural flaws. While they don’t really talk in
depth about current impacts, those flaws now appear to be effecting a
contraction in the health care economy that is unrelated to normal business

But I differ with Drs. Porter and Teisberg on how we can effect
the changes that are so essential to improving competitiveness and fortifying
market stability. They offer a range of solutions, some of which mirror the
ideas our group has settled on (e.g., Transparency, A Minimum List of Coverage
Benefits), and others that are far more specific to certain industry sectors
(e.g., Simplified Billing, Non-Discriminatory Insurance Underwriting). In any
case, the authors appear to believe that once market players recognize the harm
caused by current dynamics, they will migrate to their solutions (or variations
on them). This, in turn, will improve competitiveness and bring the system back
to homeostasis. To me, this betrays two basic misunderstandings: one relates to
the trajectory of the current crisis, and the other to how power

As a practical matter, we have come to believe that corporations
are the primary influencers of change in 21st Century America, and that health
care’s solutions lie at the convergence of the special and public interests. As
long as the system remains "normal" and unchanged, the traditional reform ideals
that Drs. Porter and Teisberg call for will be systematically blocked. For
example, employers will likely not buy into universal coverage if they believe
they’ll have to pay for it and if the cost continues to spiral up at seven times
general inflation. Health plans, physicians and hospitals will not likely agree
to transparency and performance accountability, for good and not-so-good reasons
associated with liability, exposure and profitability.

So if we want overcome gridlock and galvanize disparate interests toward a common vision of
change, a common value proposition is necessary. We must find something that
everyone, independent of perspective or special interest, can agree on and buy
into. And that agreement must be on something so powerful (and almost certainly,
alarming), that organizations will be willing to compromise their current
circumstances to achieve it.

We believe that value proposition is this. We are now witnessing a series of linked, rapidly intensifying economic phenomena that threaten the industry and the national economy. Porter and
Teisberg’s zero sum competition has generated a cost explosion that has driven
premium, where all cost converges, beyond a threshold of affordability for an
increasing percentage of individual, corporate and governmental purchasers.
(There’s lots of very compelling evidence for this, which I’ll be glad to
forward if anyone’s interested.) The shrinking commitment to coverage has
translated to an erosion of premium (masked by premium inflation), which in turn
constitutes a reduction in the total funds available to buy health care products
and services. This economic contraction could ultimately result in market
instability, the most feared of all market states, because in an environment of
significantly reduced resources and increasing demand, commerce grinds to a
halt. And that’s the thing that nobody wants to happen. Nobody wants health care
and its associated commerce to become immobilized.

And if health care,
the economy’s largest sector with 1 dollar in 7 and 1 job in 11, is disrupted,
then the chaos will almost certainly cascade to the larger US economy.

In recent months, CPHR has had many discussions with influential organizations
throughout health care and the broader business sector that have become
increasingly aware of the threat to corporate interests represented by impending
health care market instability. They have bought into the common value
proposition that instability must be averted, and they have agreed that our (and
to a large degree, Porter’s and Teisberg’s) principle set – informed
decision-making, universal basic coverage, and health care liability reform –
represents a narrowly defined set of structural (rather than philosophical)
principles that everyone in the system can abide, if they recognize that the
alternative is market instability.

In other words, the impetus for health care reform, in our view, is common self-interested buy-in by the nation’s most influential groups to the very severe threat posed by the economic implications
of current system flaws. The task then becomes mobilizing and positioning to
effect optimally positive change at the moment when the environment becomes
receptive to it.

To me, understanding health care’s current problems and
identifying solutions is not the hard part of the problem. Lots of people
seasoned in the industry have done this: The Institute of Medicine, Paul
Ellwood’s Jackson Hole Group, Dr. George Lundberg, the National Coalition on
Health Care (in the report they released last week), and so on. The harder part
is effecting change in a highly fragmented environment dominated by opposing
powerful interests. In my view, Dr. Porter and Teisberg handled the first part
very well but glossed over the latter part. Once CPHR became convinced that its
principles for change were refined and correct, we focused hardest on the latter
part, because that is the key to effectiveness, to the translation from idea to

One last point. Drs. Porter and Teisberg really call for reform
that is based entirely on market-based solutions. They don’t frame their
solutions in terms of regulatory changes that can guide accelerated solutions
toward, for example, national standards (e.g., for IT compatibility, publicly
available performance information, minimum coverage) or rules of redress (in the
case of medical malpractice). In other words, they believe that organizations
will, on their own, execute programming that will be sufficient to resolve our
current problems and save the system.

We are less optimistic. Our argument would be that, at its heart, public policy should serve two important
purposes. First, it should protect the public from the overreaching grasp of
special interests (e.g., Enron). Second, in times of crisis, it should
facilitate a course correction that can save the system. Left to its own
devices, there is little evidence that the health care marketplace has the
organizational capability to effect enterprise-wide change that can avert market
instability. While new programs and tools (e.g., Disease Management,
Claims-Based Population-Level Management Tools, Patient-Decision Support Tools)
have the capacity to vastly improve our operations and effect savings, the
adjustments necessary to save America’s market-based health system require rapid
and pervasive implementation. This is one of those cases when the market simply
can’t do the job by itself. We need policy adjustment too.

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  1. “informed decision-making, universal basic coverage, and health care liability reform”
    Replace liability reform with pay for performance and I agree completely.

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