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HOSPITALS/POLICY/QUALITY: Harvard Business Professor #2 doesn’t understand economics

Today, following yesterdays lashing out at Reggie, the next Harvard Prof who’s been teeing me off is Michael Porter (and his Virginia colleague Elizabeth Teisberg).

I’d been meaning to comment on Michael Porter’s latest piece in JAMA (not that I get to read it being too cheap to subscribe), but I did see the write-up in The Boston Globe and I have read the book he wrote with Elizabeth Teisbgerg. Now even if Teisberg was somehow unable to be interviewed about it after her PR agent initially hunted me down (She wasn’t concerned that she couldn’t defend her ideas, per chance? Elizabeth, my podcast offer is still open!), it has made many otherwise sensible people go gaga. Apparently Porter gets $100K a day for showing up for hospital consulting gigs and McKinsey did a straight copy and paste of his ideas for one of their articles recently (and it costs a lot more than $100K for them to show up!)

Now to be fair the first chapter of their book has the most thorough review of what’s wrong with American health care that I’ve ever seen. I’ve always assumed that if you are a big-shot Professor at Harvard or Virginia you get the best research assistants that graduate stipends can buy, and that chapter certainly proves me out.

But as I said three years ago when he was talking about it, Porter is quite correct to say that many improvements could be made in health care. The problem, he says, is that we’re competing about the wrong things. He wants to change all that by appealing to providers to do it better.

Most proposals to overhaul US healthcare systems — including
extending insurance to all Americans — address the "margins" of the
problem, Porter said. Doctors, he added, must lead the effort to help
create "a system where everyone is rewarded for value." For
example, a patient undergoing treatment for breast cancer typically has
to make repeat appointments with different doctors and specialists on
different days. Under his model, Porter said, the same patient should
be able to walk into one building and meet various specialists on the
same day, and those specialists should immediately consult with one
another.Then, he said, the hospital should closely follow its
cases, tracking survival rates, recovery times, and patient
satisfaction, among other things.

Well this is brilliant new thinking. OK, so Codman came up with that last part about tracking quality measures over 90 years ago, and some other guy has been harping on about it for a while too. But now Porter’s on the case it’s bound to happen, and even though Codman’s grave and Berwick’s shop are a short cab ride away, why expect him not to reinvent that wheel? After all he’s not the innovator guy (more on Christensen coming later on THCB).

Unfortunately the same thing is true for that team approach centered around the patient. Kaiser Permanente has been talking about it (and possibly even doing it) for years. Even Bernie Salick was doing something like that in his cancer centers by attempting to build all the activity around the patients’ need. And they are by no means the only examples. But that was back in the 1980s. Obviously because Michael Porter brings this up now it’s a great new idea.

Or just maybe there’s another reason why this approach hasn’t happened. Perhaps, no one’s been prepared to use the power of money to enforce it on the medical establishment.

Because if you do use the power of money, they will respond in a highly market-driven fashion. And there’s a great example of this response in the very same issue of JAMA in which Porter’s words of wisdom are printed. Over at The Doctor Weighs In, Pat Salber gives an excellent explanation of the case in point which is is the rash of one-stop heart hospitals that opened in the late 1990s and early 2000s.

These seem to be the incarnation of what Porter and (lord save us) Reggie Herzlinger are talking about. Dedicated one-stop consumer friendly, high efficiency focused-factories that treat only one disease very well, and give a complete ranges of services centered around that consumer. But of course one minor, teeny issue, is that heart procedures are still more or less paid for an a fee-per-episode basis.

So what does the data tell us? You know the answer, but let me have Pat Salber tell you anyway:

Of course, it is possible that new specialty hospitals would just
compete with existing facilities in general hospitals, taking volume
from them, but keeping the overall rates of services the same. But that
doesn’t appear to be what happens when one of these cardiac specialty
hospitals opens in a community. Instead, the JAMA study documents that
there is an incremental increase in the number of coronary
revascularization procedures performed after a specialty heart hospital
opens. Capacity increases and more people get these procedures.

So unless we change the incentives behind the system, any new fangled way of doing things (team work, new dedicated focused-factories patient-friendly clinics, etc, etc) will be used by the system to provide more stuff to the same number of people and to charge more overall money.

The team work, the new processes, the new procedures, etc, all that good stuff Porter (and the rest of us) want to see more of will emerge as a result of incentives. Right now there aren’t really any incentives to provide care in a cost-effective and patient friendly way, which is why the outliers that Michael Porter wants everyone else to turn into are just that–outliers.

None of this stuff has any relevance to mainstream provider groups which essentially face economic suicide if they adopt any of his more extreme approaches–such as specializing in only one type of condition and competing nationally versus locally. What’s even more worrying is that that seems to be exactly what McKinsey is recommending.

Instead we currently have a market which is the result of a set of incentives that encourages more to be done. More to be done, it must be noted, in the absence of any evidence that more needs to be done, but in a market where cardiologists have a strong demand for second homes and newer Porsches. Hence the current mess with specialty heart hospitals. (And imaging centers, overuse of chemo drugs community oncologists, spine surgeons doing too many fusions, etc, etc… the list goes on).

What we need is to change the incentive system so that somebody (consumers, their agents, the government, someone) gets to make a rational choice about the right level to pay per unit of care as compared to other ways to get value from that marginal dollar. And the "unit" should be not the cost of a single procedure, nor a bundle of services for particular illnesses, but the average cost of care for a population over time. If there was real competition over dollars between agents/plans/aggregators/integrated systems (call them what you like) to provide the best answer to that conundrum — and people could walk with their attached dollars, vouchers, whatever, to the competition if they were doing it better — then you would see all the innovations, team work and Kaizen processes that you want.

That’s how it works in other markets. But those other markets don’t have the complication of third-party coverage which is essential to spread costs of the huge disparity in needs for care.

But that’s not where the health care market is now, and we’re a damn long way from it going there, and instead the money is flowing in the wrong place for the wrong things–as Porter points out. Getting there of course requires a political change because it requires fundamentally changing the entire insurance system, moving to universal coverage, instituting a visible or hidden set of subsidies, and doing a raft of other stuff that Alain Enthoven and others have been calling for since 1975 (or before). And they know how difficult that is.

According to Porter "Most proposals to overhaul US healthcare systems — including
extending insurance to all Americans — address the "margins" of the
problem".
How is that the "margins of the problem". It IS the damn problem and if it were sorted out all the things Porter’s talking about would more or less take care of themselves. 

I guess being a mere business school professor Porter just doesn’t have the economics background to understand why incentives matter so much in health care. On the other hand, if he can become millionaire from a mere 10 days work consulting in the field, then perhaps he does?

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15 replies »

  1. “…I am one of the few posters who recognize that a tweak here and there will not rescue us from looming unaffordable health costs unless the improvements are passed on to purchasers of healthcare system wide.”
    Actually, quite a few of us recognize tweaking our current system will not work, but I do not share Peter’s opinion that a single payer system provides the necessary ‘overhaul’. After all, healthcare costs are escalating everywhere, in countries with single-payer systems and in countries without.
    Further, I do not believe the solution will “come from up on high” (read, government), but from down low. I don’t know about the whole of the healthcare world, but in my small corner of experience (emergency medicine & family medicine practitioner for 14 years) it is the physician and his/her practice style lies at the heart of the healthcare cost conundrum. It is the physician who ultimately spends 80 cents or more of every healthcare dollar, thus simultaneously defining the problem and providing the solution. It is the micro-scale of the patient/provider encounter that must be altered for cost containment to occur, not the macro-scale of government and payer programs.
    While it is absolutely essential to empower the patient with information, and saddle him with a larger share of the costs, consumer driven healthcare will not be sufficient in my opinion. This is because the patient does not operate as an independent entity, but rather as a member of the patient/provider team. Thus decision-making is shared – just as it should be. In order to contain costs within a healthcare system (whatever system ultimately arises), the physician too must be empowered with information (what is the best treatment for A?) and impacted by the cost-efficiencies of his/her shared decision.
    The phenomenal waste in terms of unnecessary services (in an opinios shared by Porter, Don Berwick and others, it would be inaccurate to call much of what we deliver “care”) and operational inefficiencies that I am confronted with daily is where the true opportunities for reigning in costs lay. It is the consumer (that is, patient) who must decide what is worth paying for individually, and the provider who must decide how best to deliver it. Both must be incentivized to perform optimally before costs can be contained.

  2. “I am one of the few posters who recognize . . .”
    Indeed. The Great Oz himself by god.
    Just look at all that smoke and curtains and stuff!

  3. “But one out of three is not so hot.”
    Clever Stella, I guess I did leave myself open to a snide comment. I’m not here to get any new best friends or even and acquaintance. However I am one of the few posters who recognize that a tweak here and there will not rescue us from looming unaffordable health costs unless the improvements are passed on to purchasers of healthcare system wide.

  4. “We’re just spinning our wheels with intelligent and interesting conversation.”
    Spinning your wheels? Yes.
    But one out of three is not so hot.

  5. It seems a lot of the comments recognize that team work and efficiency of care are laudable goals, dah. But those comments also seem to understand that in the present disjointed health system of multi-layer, multi-agenda providers there is no one at the helm. How are these improvements of Michael Porter’s musings equated to overall system measurement? The hospital can measure them, the patient can measure them terms of less hassle, but how does that get passsed on to lower costs and premiums? The loop is not complete. Without a single pay system to force system wide change/benefit then the problems of a competing multi agenda health system will remain. We’re just spinning our wheels with intelligent and interesting conversation.

  6. The whole Porter/Teisberg “insight” can be summarized in 2 points:
    1. Competition is good…as long as:
    2. There are risk-adjusted outcomes measures(a.k.a. measures of “value”) on which to judge providers’ quality.
    Everything else they they write and say is either an anecdote or a rather obvious conclusion of the above two points. They actually get way off-base with their whole foray into focused factories: given #1 and #2, who are they to say what organizational conformation will be best? Maybe it will end up being the full-service organizations they despise. After all, the focused factories that are currently profitable owe their success to prices that are not set by a free market. Can Porter/Teisberg out-think the wisdom of the market? I doubt even they would say so.
    But here’s the rub: with very few specialized and quite controversial exceptions, risk-adjusted health outcomes measures are theoretical at this point. Porter and Teisberg–newcomers to the whole field of health care measurement–don’t know what they don’t know. It’s like the old joke where the economist starts off dinner by saying “assume a pizza.” Without having lived through the difficulties obtaining valid process measures (let alone outcomes), it’s no surprise that they think this is no big deal.
    Without copious, cheap, and valid risk-adjusted health outcomes data their whole argument falls apart. That’s it…they’re done. I don’t really see the point of listening to them any further until these outcomes measures materialize.

  7. The report suggests that providers could be measured on outcomes and resource use, using efficient organizations like Mayo or Intermountain in Salt Lake City as benchmarks.
    At a meeting last week with the new CEO and long time CFO of Wellpoint, I asked them about exactly this. While I did not get a detailed answer, they did say that they recently eliminated one-third of their network of specialists who provide cardiac interventions and surgeries in Indiana. Patients are now directed to 13 Centers of Excellence. Mortality rates are significantly below the statewide average while overall care quality is better as well. They did not specifically speak to the utilization issue, however.
    I suspect utilization and outcomes analysis, like the focused factories, would be easier and work better for patients who just need treatment for one condition. One area where I believe we still need improvement is in individual risk scoring. With better, more accurate and more comprehensive risk scoring, we should be better able to accurately assess and risk adjust both outcomes and resource utilization for patient populations of both large medical provider groups and individual doctors. Clearly, if a doctor realizes that his or her utilization and outcomes are being tracked and poor performance could ultimately result in removal from the network of approved providers, there should be a positive effect on both utilization and outcomes over time.

  8. The 30,000 foot scan of HBS and McKinsey types ignores the fact that cost and quality have many dimensions, maybe more so in health care than in other fields. People are willing to trade money for (less) time, and if you have your arteries opened you may prefer a fancy new specialty hospital with a room next to your golf buddy’s rather than a nasty old general hospital filled with sick people. People like this probably make better patients and have better outcomes, but are the outcomes because of the “focused factory” or because of the kind of patients who would go to a focused factory. (Real economists and social scientists know about endogeneity).
    Changing one parameter of Cost or Quality means people will respond to those new incentives, shifting towards a position they perceive more favorably. This may not be in the direction that policymakers, health care payers would prefer. But anyone who spends time thinking about health care is familiar with the metaphor of squeezing the balloon. What the experts hoping to improve costs and quality should be working on is in advising the likely directions the balloon will move and how to push it there, keeping in mind there will always be gusts that may pushing in a direction different from what was intended.

  9. On paper, the idea that patients should be treated in centers that specialize in just one chronic disease
    is a good one. But in reality, patients don’t present neatly, one chronic disease at a time. Typically, Medicare patients suffer from five different chronic diseases at once. (Porter seems to assume that they can be in five places at once–or spend a lot of time traveling.)
    This is why multi-specialty large group practices like the Mayo Clinic, or the VA, or Kaiser are in the best position to provide high quality, co-ordinated care to
    the average patients with multiple problems.(There is a place for the “focused factory” hospital that does just one thing, but only in areas of medicine where patients
    are not chronically ill, but are pretty healthy and in need of one treatment–a hernia operation, let’s say, or a new knee–and then will go home “cured.”)
    The problem with Porter’s book is that it ignores the messy realites of health care in a world where multiple chronic diseases that require long-term care are our biggest probem.
    He also over-estimates the value of compeititon, while ignoring the need for collaboration.
    In his fantasy world, doctors would compete for patients based on the quality of the care that they provide–and, as their reward, the best doctors would get “the most patients.” There is no need to “lift all boats,” Porter says (by improving the quality of care that the average doctor provides)– just identify the best physicians and reward them with more business.
    In reality, specialists who are reputed to be “the best”
    in their field already have more patients than they can handle. They can’t manufacture more hours in their day and don’t need or want more patients.
    Meanwhile, we do need to try to lift the quality of care that the average doctor provides–ideally, we need to move the whole bell curve of doctors to the right by having them work together, all looking at the same chart (as they do at places like Mayo). Thus, peer review is automatic–and the best doctors can help set “best practice” standards for the others. If one doctors fails to do something–or does something that doesn’t seem to fit guidelines for best practice, another Doc will say “Hey Joe-I’m wondering why did you prescribe . . ”
    Moreover, knowing that other docs are “looking over your shoulder”–reading your notes on the chart– also helps keep everyone at the top of their game.
    Matthew’s right that we need to realign financial incentives to encourage doctors to work together and to
    be efficient–to produce high quality care while conserving resources.
    A 2006 report on caring for chronically ill patients reveals that the Mayo Clinic manages to provide as good or better care as UCLA hopsital while using 50% fewer physicians. (see http://www.dartmouthatlas.org) This an excellent example of how the best care often costs less.
    Meanwhile a March 1 report by MedPac (Medicare’s advisory panel) offers some very interesting ideas about how Medicare mightreplace fee-for-service reimubusement with reimbursement that rewards (or penalizes) groups of health care providers (bundling payments to doctors and hospital together) for a combination of good outcomes and conserving resources.
    (See http://www.medpac.gov and click on Report to Congress, March 1, 2007).
    The report suggests that providers could be measured on outcomes and resource use, using efficient organizaions like Mayo or Intermountain in Salt Lake City as benchmarks.
    The report makes it pretty clear that fee-for-service needs to be replaced, and if Medicare led the way, insurers would follow . . .

  10. I seem to have lost my comment in the ether, so here goes again:
    Yeah, there’s a pie-in-the-sky quality to the Porter and Teisberg proposal, and yeah, individual forays in the direction they promote will be suicidal (or, in the case of single-specialty hospitals, possibly extremely lucrative).
    OK, so they don’t deal with the real world medical-idustrial complex. The question for the rest of us is what do we do here in the real world other than sniping at the folks in the ivory tower?
    Incrementalism, baby. . . . CMS demonstration projects on gainsharing, P4P and who knows what else; universal health care coverage experiments in the states; etc., etc.
    None of these will solve all our problems all at once, but, y’know, maybe we shouldn’t even try to go about it in that way. That has sorta been the problem, from HilaryCare forward . . . .
    Reminds me of the old elephant joke: Q: “How do you eat an elephant?” A: “One forkful at a time.” Bon appetit.
    (Oh, and MG – check out my post on the SGR as well; click on my name below and scroll back a few days.)

  11. It amazes me that the folks at HBS and McKinsey continue to publish this healthcare stuff and get paid incredibly well to do so. You would think that these solutions are derived by some really bright people who are locked in a room, given a problem, and told to come up with some ideal solutions. Unfortunately, this does not take into account the current state of the US health care system.
    If you actually want to read someone who has some real insights into the problems concerning current payment methodologies in health care, read Gail Wilensky’s latest post on the Health Affairs blog. Attached below is the link:
    http://healthaffairs.org/blog/2007/03/09/medicare-can-we-fix-the-sgr-to-control-spending/

  12. In one paragraph you said “Kaiser Permanente has been…possibly even doing…” a healthcare “…team approach centered around the patient…” with facilities and such “for years.”
    In the next, you say “Or just maybe there’s another reason why this approach hasn’t happened. Perhaps, no one’s been prepared to use the power of money to enforce it on the medical establishment.”
    So, despite your skepticism, KP, and a whole host of private practitioners have been doing the “patient centered” concept for years. Thousands of hospitals across the country have promoted their surrounding outpatient medical office buildings as just that very “centered” concept for independent private practitioners.
    The missing concept, that Porter seems to be especially interested in, is the centralized billing aspect. With the consolidation we’re seeing on the coverage side, there’s a chance they’re going to use their growing clout to do more to force a much more intelligent payment process. I think you’re about to see insurers and health plans, indeed, “use the power of money” to force better outcomes. They’re already figuring out how to do it.
    Then there’s the always-looming specter of single-payer healthcare. That, alone, could force providers to band together in exactly the “patient centered” practices concept Porter is talking about, from physical location, billing, and record-sharing standpoints.
    As far as I can tell, Porter, and his research assistants, melded a bit of history, with a bit of insight, and a bit of common sense to put together a pretty decent blueprint for how we could somewhat-readily be doing healthcare better.
    Maybe we didn’t read the same book? Or maybe I sense a wee tinge of your latent cynicism, Matthew?

  13. “What we need is to change the incentive system so that somebody (consumers, their agents, the government, someone) gets to make a rational choice about the right level to pay per unit of care as compared to other ways to get value from that marginal dollar”
    The problem is the healthcare market is not consumer driven even though the consumer is the one receiving the product; being medical care or insurance benefits.
    It’s an industry driven market. You think the doctor gets rich from 20 dollar co-pays? You’re right, there is no incentive to reduce costs because the system marginalizes the consumer as a market force and creates an environment void of competition.

  14. Focused providers outperform generalists, both in terms of quality and costs. The well-known volume-outcome relationship helps make the case for focused provider models, regardless of the direction of causality in this relationship (“practice makes perfect” vs. “selective referral patterns”). Costs are also lower, both overhead (due to a lower complexity and variability in operations) and unit costs (that go down with cumulative experience in similar cases through learning economies).
    A different matter is how these focused providers fit with the current system, where the incentives to improve quality or efficiency are not all that clear. This fact, however, doesn´t invalidate what Herzlinger and Porter are proposing.

  15. As I understand it, Porter’s POV deals more with the payment (a global reimbursement for an episode of care), and – more importantly – rely on public reporting of meaningful outcomes data. You make a good point: unless the outcomes data reports the number of unnecessary, borderline, questionable, suspect, “grey,” soft-call procedures, there is nothing in the Porter approach that will cure the variability in health care. I think variability/overuse measures are within reach, which might address some of your concerns above?
    Finally, my impression is that specialty hospitals may also thrive because of their ability to pull the most out of the unbundled payment stream being provided by the best payors. If they were forced to compete as a partner as one part of an episode of care, that may also help rationalize things.

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