Let Them Eat Cheesecake!

This is Atul Gawande, writing about The Cheesecake Factory in The New Yorker:

You may know the chain: a hundred and sixty restaurants with a catalogue-like menu that, when I did a count, listed three hundred and eight dinner items (including the forty-nine on the “Skinnylicious” menu), plus a hundred and twenty-four choices of beverage.

How many different dinners — say with two food items and one beverage — can you draw from 308 food choices and 124 beverages? I used to know how to do this. It must be in the millions. So how do you make that work? Timing is everything:

Computer monitors positioned head-high every few feet flashed the orders for a given station. Luz showed me the touch-screen tabs for the recipe for each order and a photo showing the proper presentation. The recipe has the ingredients on the left part of the screen and the steps on the right. A timer counts down to a target time for completion. The background turns from green to yellow as the order nears the target time and to red when it has exceeded it.

The restaurant doesn’t just get plates on the table, however. It aims for perfection:

At every Cheesecake Factory restaurant, a kitchen manager is stationed at the counter where the food comes off the line, and he rates the food on a scale of one to ten. A nine is near-perfect. An eight requires one or two corrections before going out to a guest. A seven needs three. A six is unacceptable and has to be redone.

Gawande wants to know how we can make the health care system more like this restaurant. He envisions that this is the goal of health reform. I want to ask a more perverse, but perhaps more instructive question: What if we wanted to make the restaurant look like the health care system. What would we have to do?

Like Gawande, I too have been fascinated by the efficiency with which restaurant chains function. I’ve also talked to managers and owners about how they do it. My conclusion: a modern hospital might indeed function like The Cheesecake Factory. That it doesn’t is not the fault of doctors wedded to tradition or unimaginative hospital managers. It’s the fault of public policy.

Let’s return to my question: What public policy changes would we need to enact to make The Cheesecake Factory resemble a typical hospital?

To begin with, we need to eliminate out-of-pocket payment for restaurant food. To get that done, we need laws that encourage, or perhaps even require, restaurant food insurance. There can be many such insurers and each negotiates prices with the restaurants.

Third-party insurance immediately changes the incentives of the restaurant in radical ways. To begin with, we can dispense with the intricate and costly systems that achieve near perfect timing and quality control. So what if the hot meal doesn’t arrive at the table when it’s hot. Or if the ice cream arrives after it’s melted. Or if the two side dishes don’t arrive at the same time as the entree. Customers may be unhappy. But remember, food is now free at the point of consumption. We have patrons lined up outside, waiting to get in. The quality of the dining experience can decline quite a lot and not hurt the restaurant’s bottom line one whit.

To make sure of that fact, we can pass certificate of need laws for restaurants, just to make sure new entrants can’t steal customers away. We can suspend antitrust laws and allow the restaurant to buy up its competitors, just to make sure they don’t expand the market by increasing their capacity.

The elaborate systems designed to ensure proper timing and quality control will be replaced by equally elaborate systems designed for a new purpose: maximizing against the third-party payment formulas. Does toast and butter served separately command a higher fee than buttered toast? Then make sure we’re always out of buttered toast. Does BlueCross overpay for chicken added to Caesar salad? Then always rave about Caesar with chicken when a BlueCross diner comes in the door. Does Aetna underpay for the additional chicken? Then make sure you discourage that choice when an Aetna customer arrives.

I believe that skillful maximizing against third-party payment formulas is every bit as complicated, time-consuming and expensive as meeting the needs of cash paying customers. In fact it’s more so, for the following reasons.

On the demand side, the biggest problem with third-party payment is “moral hazard.” When food is free, people will select the most expensive items on the menu. They will order food they don’t need. They will order food they don’t even eat — and leave it on the plate! To deal with this problem, the insurers will have to invoke all kinds of rules and restrictions on what can happen in a restaurant. For starters, the insurer will greatly restrict the number of items it will pay for. Out of millions of possible food orders, it will pay for only a small subset. Instead of 30 different kinds of pasta, say, it might pay for only three. Then among the items it will pay for, the insurer will limit what any one customer can have. For example, you might be allowed ice cream or pie, but not both. The two together constitute “unnecessary” consumption. To enforce this rule, it might require servers to get pre-approval before placing a customer’s order. Or, it might just refuse to pay any bill that has the words “pie a la mode” written on it.

Then, of course, we will need a law prohibiting the corporate practice of food preparation. Food should be left to chefs, not to profit-seeking MBAs. But won’t the chefs’ decisions be tainted by the profit-making side of the restaurant? No problem. We’ll just pass a Stark law making it illegal for them to share in the profits or losses.

To put this in perspective, consider the problem of how much of each type of food the restaurant should order to be ready to meet the customers’ wants. Here is how Gawande describes the problem of wasted food:

Although the company buys in bulk from regional suppliers, groceries are the biggest expense after labor, and the most unpredictable. Everything — the chicken, the beef, the lettuce, the eggs, and all the rest — has a shelf life. If a restaurant were to stock too much, it could end up throwing away hundreds of thousands of dollars’ worth of food. If a restaurant stocks too little, it will have to tell customers that their favorite dish is not available, and they may never come back.

Remarkably, here is how The Cheesecake Factory handles this problem:

The company’s target last year was at least 97.5 percent efficiency: the managers aimed at throwing away no more than 2.5 percent of the groceries they bought, without running out. This seemed to me an absurd target. Achieving it would require knowing in advance almost exactly how many customers would be coming in and what they were going to want, then insuring that the cooks didn’t spill or toss or waste anything. Yet this is precisely what the organization has learned to do. The chain-restaurant industry has produced a field of computer analytics known as “guest forecasting.”

So if we want to end all this efficient ordering and make the restaurant resemble a typical hospital, how do we do that? Make the ordering of food the sole prerogative of the chefs and insulate them from the economic consequences of their decisions in the manner described above.

One more thing to consider: how often do the providers find it necessary to change whatever it is that they are doing?

Every six months, The Cheesecake Factory puts out a new menu. This means that everyone who works in its restaurants expects to learn something new twice a year. The March 2012, Cheesecake Factory menu included thirteen new items. The teaching process is now finely honed: from start to finish, rollout takes just seven weeks.

Contrast this with the experience in medicine:

One study examined how long it took several major discoveries, such as the finding that the use of beta-blockers after a heart attack improves survival, to reach even half of Americans. The answer was, on average, more than fifteen years.

So how do we get rid of the restaurant’s nimble response to market demand? Again, let the chefs make the decisions about what to prepare and how to prepare it, but completely insulate them from the economic consequences of their decisions. Remember, under rationing by waiting a restaurant doesn’t have to worry very much about whether it is responding to changes in demand. If patrons pay a price of zero for their food, the food has to be worth only a little bit more than zero to be a good buy.

There, I have shown you how to make The Cheesecake Factory function like a typical hospital. Any takers?

Ah, but if you want to move in the other direction — making the hospital look like The Cheesecake Factory — then you have to start repealing laws, not passing new ones.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.