THCB

Categories

Author Archives

matthew holt

Has Sensemaking Collapsed When It Comes To U.S. Healthcare?

By MIKE MAGEE

This past week my wife and I were at a family event to celebrate my brother-in-law’s 70th birthday. Our extended family has more than a few doctors. A physician nephew who had read CODE BLUE and had a strong interest in health policy asked if I felt I (and others) were too hard on doctors. My response was yes, but that it was intentional and came with the territory. Combining scientific, sometimes life and death expertise, with high-touch compassion, understanding and partnership has always been a “big ask” but that was what we and others had signed up for as “health professionals.”

But can a health professional be “professional” in a fundamentally misaligned health system? And, if not, does a health professional have a responsibility to engage in an effort to reform and transform the system to behave professionally?

Professionals are generally members of a vocation with special training, highly educated, enjoy special trust and work autonomy, abide by strict moral and ethical obligations, and in return are generally self-regulating. Their academic training is expected to reliably provide those they serve with special skills, judgement, and services. When they deliver, society responds with confidence and trust and durable long-term relationships.

My nephew and many of his contemporaries have come to believe that this is neigh impossible under the current heavily corporatized, profit driven, inequitable, under-insured, and widely inaccessible system. They have begun to voice that being an ethical and competent professional in an unprofessional system is not possible, and not their fault.

System redesign guru, W. Edward Deming, the father of Quality Control Management, and the man credited with assisting the Japanese in transforming their auto industry, had this to say about transformation in 1993: “The prevailing style of management must undergo transformation. A system cannot understand itself. The transformation requires a view from outside…The individual, once transformed, will: set an example; be a good listener, but will not compromise; continually teach other people; and help people to pull away from their current practices and beliefs and move into the new philosophy without a feeling of guilt about the past.”

Six years later Don Berwick MD, Emeritus President of the Institute For Healthcare Improvement and now Harvard Health Policy professor, delivered a classic speech, “Escape Fire: Lessons for the Future of Health Care”,  sponsored by the Commonwealth Foundation. In it Don recounted the events surrounding the tragic fire at Mann Gulch, Montana which claimed the lives of 13 “smokejumpers” on August 5, 1949. He reviewed the lessons learned in a system analysis by Professor Karl E. Weick of the University of Michigan, in his paper titled,“The Collapse of Sensemaking in Organizations: The Mann Gulch Disaster.”

Berwick explained, “Sensemaking is the process through which the fluid, multilayered world is given order, within which people can orient themselves, find purpose, and take effective action. Weick is a postmodern thinker. He believes that there is little or no preexisting sense of organization in the world—that is, no order that comes before the definition of order. Organizations don’t discover sense, they create it…In groups of interdependent people, organizations create sense out of possible chaos. Organizations unravel when sensemaking collapses, when they can no longer supply meaning, when they cling to interpretations that no longer work.”

Now roughly a quarter century ago, Berwick concluded, “I love medicine. I love the purpose of our work. But we are unraveling, I think…Sense is collapsing… We need to face reality…Why did it take the Mann Gulch crew so long to realize they were in trouble? The soundest explanation is not that the threat was too small to see; it is that it was too big. Some problems are too overwhelming to name. I now think that that is where we have come in health care; I have been radicalized.”

Clearly the visions we have been using are under-powered, and we seem to be heading in the wrong direction with information technology and AI fully prepared to make permanent a system that is moving patients to despair and doctors to early retirement. What are the questions my nephew and his health policy colleagues should be asking now?

1. How do we make America and all Americans healthy?

2. What is our national health care plan, and who is in charge?

3. How do we balance national and state responsibilities?

4. How do we maintain balanced humanistic and scientific care, and preserve patient and health professional autonomy over complex life and death decision making?

5. How do we advance healthy behaviors while providing high touch access to health professionals for acute and moderate issues?

6. How do we use information technology and AI to expand human and social, rather than just financial, capital?

7. How do we prioritize investment in human contact between patients and health professionals over wealth enhancement and brick and mortar expansions?

8. How do we put a smile (independent of money) back on the faces of doctors, nurses and patients?

9. How do we separate hospital and physician profit driven research from direct patient care?

10. How do we move to geographic annual budgeting of comprehensive care and eliminate individual billing/reimbursement operations?

Mike Magee M.D. is a Medical Historian and regular contributor to THCB. He is the author of CODE BLUE: Inside the Medical-Industrial Complex (Grove/2020).

20th Birthday Classic: “Healthcare” vs. “Health Care”: The Definitive Word(s)

This is the last of the classics that THCB will run to celebrate our 20th birthday. And we are finally tackling the most important of questions. Is what we call this thing one word or two? Back in 2012 Michael Millenson had the definitive answer–Matthew Holt

By MICHAEL L. MILLENSON

A recent contributor to this blog wondered about the correctness of “health care” versus “healthcare.” I’d like to answer that question by channeling my inner William Safire (the late, great New York Times language maven). If you’ll stick with me, I’ll also disclose why the Centers for Medicare & Medicaid Services is not abbreviated as CMMS and reveal something you may not have known about God – linguistically, if not theologically.

The two-word rule for “health care” is followed by major news organizations (New York Times, Washington Post, Wall Street Journal) and medical journals (New England Journal of Medicine, JAMA, Annals of Internal Medicine). Their decision seems consistent with the way most references to the word “care” are handled.

Even the editorial writers of Modern Healthcare magazine do not inveigh against errors in medical care driving up costs in acutecare hospitals and nursinghomes. They write about “medical care,” “acute care” and “nursing homes,” separating the adjectives from the nouns they modify. Some in the general media go even farther, applying the traditional rule of hyphenating adjectival phrases; hence, “health-care reform,” just as you’d write “general-interest magazine” or “old-fashioned editor.”

Most importantly of all, the Associated Press decrees that the correct usage is, “health care.” That decision is not substantive – there is absolutely no definitional difference between “health care” and “healthcare,” despite what you might read elsewhere — but stylistic. As in The Associated Press Stylebook.

The AP is a cooperative formed back in 1846 by newspapers to share reporting via a wire service. Today, the AP calls itself the backbone of global news information, serving “thousands of daily newspaper, radio, television, and online customers….On any given day, more than half the world’s population sees news from the AP.” When that news arrives in text format, its spelling is determined by the AP stylebook. Which means a few billion people see the spelling, “health care.”

A stylebook? Isn’t spelling determined by dictionaries? Perhaps, but when you’re sharing content on deadline across the world, it helps if everyone agrees to refer to, say, the Midwest, not the Mid-West, and to use other common linguistic conventions.

Stylebooks differ. The AP would say that health care is two words; the Chicago Manual of Style, popular in academia, would write that as 2 words, but agree with the premise.

So why isn’t that the end of the issue? Because conventions are not set in concrete. For example, at the time the Internet first became popular, the AP preferred the term “Web site” over “website” because the World Wide Web is a proper name. A successful lobbying campaign on behalf of the lower-case form helped persuade the AP to adopt the new spelling in its 2010 stylebook update.

When Modern Hospitals changed its name to become Modern Healthcare back in 1976, it did so in part to seem, well, modern. It hadn’t been that many years, after all, since airplanes were flown by air lines, not airlines. Then, in the business-oriented 1980s, “healthcare system” became a convenient linguistic upgrade of the dowdy “hospital” that had gobbled up ownership of doctors’ offices providing outpatient (not out-patient) care.

At the same time, a growing number of companies decided to make this expansive new word part of their proper name or, at the very least, their style sheet. For instance, HCA, founded in 1968 as Hospital Corporation of America, today describes itself as “the nation’s leading provider of healthcare services.” The Reuters news service, heavily involved in business news, now uses “healthcare” in its stories.

The 2001 Institute of Medicine report Crossing the Quality Chasm provides a snapshot of the term’s transition. The report declares, “Between the healthcare we have and the care we could have lies not just a gap, but a chasm.” The author of that ringing statement is the Committee on the Quality of Health Care in America.

However, I think a tipping point for fusing “health” and “care” was reached with the federal legislation setting up the Agency for Healthcare Research and Quality at the end of 1999. AHRQ was a renamed and refocused version of the old Agency for Health Care Policy and Research, created in 1989. AHCPR, in turn, had almost been named the Agency for Health Care Research and Policy until an alert Senate staffer realized that the abbreviation would be pronounced, “ah, crap.”

Speaking of abbreviations, Tom Scully, the first administrator of the Center for Medicare & Medicaid Services, once explained to me why it is known as CMS, not CMMS. It seems that Health and Human Services Secretary Tommy Thompson wanted an agency name with a catchy three-letter abbreviation, like FTC or CIA, to replace the old HCFA (Health Care Financing Administration). So a legal opinion was obtained from the HHS counsel that employing an ampersand to separate the words “Medicare” and “Medicaid” permitted the use of the CMS designation. Some might suspect this Solomonic ruling of caving in to a bit of pressure from above.

Which brings us to God. Some years back, the AP decided that while “God” would remain capitalized (the pope was not similarly blessed), the second reference would be “his,” not “His.” As influential as the AP might be in this world, those concerned with a Higher Authority still write about God as if He were something more than an ordinary man.

I keep waiting for the AP editor who made that decision to be struck down with lightning by the Deity. But, on the other hand, She may have a sense of humor.

Michael Millenson is a Highland Park, IL-based consultant, a visiting scholar at the Kellogg School of Management and the author of “Demanding Medical Excellence: Doctors and Accountability in the Information Age”.

THCB 20th Birthday Classic: Value-based care – no progress since 1997?

As the 20th Birthday rolls on I thought I’d bring out a more recent piece first published in October 2020, albeit one that relies heavily on 25 year old data to make a point. This is some evidence to back up Jeff Goldsmith’s comment on the original that for all the talk “ ‘Value based” payment is a religious movement, not a business trend’ ” By the way, Humana updated these numbers last year and there’s been basically no change — Matthew Holt

By MATTHEW HOLT

Humana is out with a report saying that its Medicare Advantage members who are covered by value-based care (VBC) arrangements do better and cost less than either their Medicare Advantage members who aren’t or people in regular Medicare FFS. To us wonks this is motherhood, apple pie, etc, particularly as proportionately Humana is the insurer that relies the most on Medicare Advantage for its business and has one of the larger publicity machines behind its innovation group. Not to mention Humana has decent slugs of ownership of at-home doctors group Heal and the now publicly-traded capitated medical group Oak Street Health.

Humana has 4m Medicare advantage members with ~2/3rds of those in value-based care arrangements. The report has lots of data about how Humana makes everything better for those Medicare Advantage members and how VBC shows slightly better outcomes at a lower cost. But that wasn’t really what caught my eye. What did was their chart about how they pay their physicians/medical group

What it says on the surface is that of their Medicare Advantage members, 67% are in VBC arrangements. But that covers a wide range of different payment schemes. The 67% VBC schemes include:

  • Global capitation for everything 19%
  • Global cap for everything but not drugs 5%
  • FFS + care coordination payment + some shared savings 7%
  • FFS + some share savings 36%
  • FFS + some bonus 19%
  • FFS only 14%

What Humana doesn’t say is how much risk the middle group is at. Those are the 7% of PCP groups being paid “FFS + care coordination payment + some shared savings” and the 36% getting “FFS + some share savings.” My guess is not much. So they could have been put in the non-VBC group. But the interesting thing is the results.

Continue reading…

Torben Nielsen, CEO, Uptiv Health

Early this month I caught up with Torben Nielsen who is now CEO of Uptiv Health. Another one from the Redesign Health factory, Uptiv Health came out of stealth recently with the goal of improving the experience and reducing the cost of those patients who have to have regular infusion treatments. Uptiv Health just raised $7.5m and is opening its first location in Detroit at the end of August 2023, with a goal of becoming the health home of those chronic disease patients. Why do we need a new offering in infusion care? Torben will tell you–Matthew Holt

THCB 20th Birthday classics: A Brief History of Price Controls by Annoyed Republican Administrations

By UWE REINHARDT

One of the greatest pleasures of running THCB has been to get to know and host the writings of some of my health policy heroes. This week I have already published work from Jeff Goldsmith, and Ian Morrison & Michael Millenson among others will be featured next week (as the party won’t quite stop). Perhaps one of the most amazing things was that the doyen of health economists, Uwe Reinhardt, offered to write some original pieces for THCB…prodded by former editor John Irvine. This is one of my favorites, riffing on a talk I heard him give in (I think) 1993 about how HCFA was like the Kremlin and how free market Reaganite Republicans had made it so. This piece is from Jan 2017 and Uwe sadly died that November.–Matthew Holt

Although, unlike most other nations, the U.S. has only two parties worth the name, their professed doctrines compared with their actions strikes me as more confusing than the well-known Slutsky Decomposition which, as everyone knows, can be derived simply from a straightforward application of Kramer’s rule to a matrix of second partial derivatives of a multivariable demand function.

The leaders of the drug industry, for example, probably are now breaking out the champagne in the soothing belief that their aggressive pricing policies for even old drugs are safe for at least the next eight years from the allegedly fearsome, regulation-prone, price-controlling Democrats. My advice to them is: Cool it! Follow me through a brief history of Republican health policy, to learn what Republicans will do to the health-care sector when it ticks them off.

Republicans like to tar Democrats over allegedly socialist policy instruments such as price controls, global budgets and deficit-financed government spending. Democrats usually roll over to take that abuse, almost like hanging onto their posteriors signs that says “Kick me.”  I say “abuse,” because Republicans have never shied away from using the Democrats’ allegedly left-wing tactics when health care chews up their budgets or turns voters against them.

Continue reading…

Academics Weigh In On How To Bring Down Trump

By MIKE MAGEE

This week, as a fourth indictment came due, a tragic Donald Trump headed back to social media, digging himself into a hole that will eventually lead to some personal hell. But before Donald Trump, there was William Frederick Kohler.

He made his appearance on the American stage on February 28, 1995, an historian who had just completed his “Great Work” – The Guilt and Innocence of Hitler’s Germany. He was odd and dark and duplicitous. His life’s work was ready to go. All that was left was to write the introduction to his book. Instead his attention was diverted, as he followed his impulse to memorialize his own story dedicated to the “concealment of history beneath my exposition of it.”

Secretive and opaque, he was focused on a very special audience he labeled the “Party of the Disappointed People”, a group with whom he shared the affinity “that the loss has been caused in great part by others.” He hid the pages of the new and very personal (but incomplete) story from wife Marta inside the pages of the near completed Nazi history. And for some reason, he inexplicably headed to his basement and began to dig a tunnel to escape (or uncover) evil.

Kohler, like Trump, was not normal. Those who have analyzed his character describe him this way:  “Preoccupied with evil, the nature of truth, and the effects of an individual’s relationship with others, he recalls his bookish childhood with a mother who drank to remember the ‘good old days’ and a bigoted father; graduate work in prewar Germany, where he hurled a brick on Kristallnacht; his unhappy marriage; and the lost love of his life, Lou, a former student. Kohler’s story exhibits the same inconsistencies and deceits he finds in history: Kohler, the personal memoirist … is as unreliable as Kohler, the eminent historian. A virtuoso performance without a grand finale.”

Kohler is the fictional creation of philosopher and novelist William H. Gass, author of the award winning novel, “The Tunnel.”  The author is described in the opening line of his 2017 New York Times obituary as “a proudly postmodern author who valued form and language more than literary conventions like plot and character.” He died on December 7 of that year, at age 93, in St. Louis, where he had taught philosophy and linguistics for 30 years. Born in Fargo, North Dakota, he was translocated to Warren, Ohio at 6 months, and raised according to his own account by “an abusive, racist father and a passive, alcoholic mother.” These revealing personal details trace back to a writing style he developed and labeled, “metafiction,” or stories in which the author inserts himself.

Of more relevance to America’s current political dilemma is that Gass received his PhD from Cornell in 1954, in return for his dissertation “A Philosophical Investigation of Metaphor.” A metaphor, as we know, is “a figure of speech in which a word or phrase literally denoting one kind of object or idea is used in place of another to suggest a likeness or analogy between them (as in drowning in money).”

Gass’s love of metaphor is on full display in “The Tunnel”.  You can almost hear the beloved high school advanced placement English teacher pleadingly asking her sleepy students “What do you think the tunnel represents?” Of the novel, one critic wrote, “As the novel progresses we see the lies, half-truths, violent emotions, and relative chaos of Kohler’s life laid bare, and while he continues to dig away at the memories of his past he also begins digging a tunnel out from the basement where he works, a reflection of his tunneling through himself.”

Beyond Gass’s own story line, and that of William Frederick Kohler, one can easily catch glimpses of  Donald Trump.  As he entered the strange world of politics, he embraced the use of metaphor with memorable 3 and 4 world phrases like “drain the swamp”, “the system is rigged,” and “take our country back.”

Continue reading…

THCB 20th Birthday Classic: As I’ve always suspected, Health Care = Communism + Frappuccinos

• 1

By MATTHEW HOLT

Our 20th birthday continues with a few classics coming out. Back in 2005 I was really cutting a lyrical rug, and would never miss a chance to get that Cambridge training in Marxism into use. This essay about whether health care should be a public or private good has always been one of my favorites, even if I’m not sure Starbucks is still making Frappuccinos. And 18 years later the basic point of this essay remains true, even if many of you will not have a clue who Vioxx or Haliburton were or why they mattered back then!

Those of you who think I’m an unreconstructed commie will correctly suspect that I’ve always discussed Marxism in my health care talks. You’d be amazed at how many audiences of hospital administrators in the mid-west know nothing about the integral essentials of Marx’s theory of history. And I really enjoy bring the light to them, especially when I manage to reference Mongolia 1919, managed care and Communism in the same bullet point.

While I’ve always been very proud of that one (err.. maybe you have to be there, but you could always hire me to come tell it!), even if I am jesting, there’s a really loose use of the concept of Marxism in this 2005 piece (reprinted in 2009) called A Prescription for Marxism in Foreign Policy from (apparently) libertarian-leaning Harvard professor Kenneth Rogoff. He opens with this little nugget:

“Karl Marx may have suffered a second death at the end of the last century, but look for a spirited comeback in this one. The next great battle between socialism and capitalism will be waged over human health and life expectancy. As rich countries grow richer, and as healthcare technology continues to improve, people will spend ever growing shares of their income on living longer and healthier lives.”

Actually he’s right that there will be a backlash against the (allegedly) market-based capitalism — which has actually been closer to all-out mercantilist booty capitalism — that we’re seen over the last couple of decades. History tends to be reactive and societies go through long periods of reaction to what’s been seen before. In fact the 1980-20?? (10-15?) period of “conservatism” is a reaction to the 1930-1980 period of social corporatism seen in most of the western world. And any period in which the inequality of wealth and income in one society continues to grow at the current rate will eventually invite a reaction–you can ask Louis XVI of France about that.

But when Rogoff is talking about Marxism in health care what he really means is that, because health care by definition will consume more and more of our societal resources, the arguments about the creation and distribution of health care products and services will look more like the arguments seen in the debates about how the government used to allocate resources for “guns versus butter” in the 1950s. These days we are supposed to believe that government blindly accepts letting “the market” rule, even if for vast sways of the economy the government clearly rules the market, which in turn means that those corporations with political influence set the rules and the budgets (quick now, it begins with an H…).

Continue reading…

THCB 20th Birthday Classic: McKinsey wants to inspire lots of change; caveat emptor

by MATTHEW HOLT

So to celebrate 20 years, we’ll be publishing a few classics for the next week or so. This is one of my faves from the early days of THCB, back in 2006. It’s interesting to compare it with Jeff Goldsmith’s NEW piece from yesterday on vertical integration because at the time a pair of Harvard professors, Michael Porter and Elizabeth Teisberg were telling hospitals to change their operations in a way that seemed to me were going to destroy their business–cut down to one or two service lines they were best at and stop with the rest. McKinsey picked up on this and I went to town on why they were all wrong. In fact in the next decade and a half, despite all the fuss and consulting fees generated, almost no hospital system did anything other than merge horizontally with local competitors, stick up its prices, and buy feeder systems of primary care doctors or ally with/bribe specialists to keep their procedural referrals up. The result is the huge regional oligopolies that we have now. Despite all the ignoring of their advice, I don’t think Porter/Teisberg or McKinsey went broke in that same period.–Matthew Holt

McKinsey, an organization that prides itself on increasing the amount of consulting dollars it gets paid by improving the strategic direction of American business is making another foray into health care.

You may recall their last study on CDHPs was roundly criticized (see Tom Hillard for a good example including a hilarious and brutal smackdown of their research methodology in the last couple of paras), and this time they cleverly aren’t bothering with data—in fact they’re basically copying Porter and Teisberg. The piece, by Kurt Grote, Edward Levine and Paul Mango, is about hospitals and how they need to get into the 21st century.

And of course the idea is that hospitals need to change their business approach.  Well, given that I hadn’t noticed a rash of hospital closings and the the industry as a whole has been growing its revenues pretty successfully over the years, what exactly are the problems?

The rise of employer-sponsored insurance in the 1930s and 1940s, and the emergence of government-sponsored insurance in the 1960s all insulated hospitals from the need to compete for patients. Today hospitals are “price takers” for nearly 50 percent of their revenues, which is subject to the political whims of the federal and state governments. Hospitals are also required to see, evaluate, and treat virtually any patient who shows up, solvent or not. Furthermore, physicians were productive because hospitals put a great deal of capital at their disposal. Yet these hospitals didn’t enforce standardized and efficient approaches to the delivery of care. At many hospitals today, doctors still bear only limited economic
responsibility for the care decisions they make. Little wonder that it is often they who introduce expensive—and sometimes excessive—nonreimbursable technologies or that hospitals not only suffer from declining margins but are also performing less well than other players in the health care value chain 

The piece then has a pretty incomprehensible chart that compares the EBITDA (profit) of hospitals compared to drug companies and insurers. Surprisingly enough they make a whole lot less EBITDA than those businesses–although long time THCB readers will know we’ve been well down that path. And apparently their margins got worse and then better (from 25% in 1990 to 15% in 1995 to 10% in 2000 but back up to 15% in 2004).

McKinsey’s answer, basically filched from Porter/Teisberg, is for hospitals to specialize in particular service lines, stop being generalists and start trying to please the consumer who’ll be choosing among them. As a general mantra, this might be good for consultants to stick up on Powerpoint, but to be nice it’s massively oversimplified, and to be nasty it’s just plain wrong for most hospitals for the current and foreseeable medium-term future.

Their analysis ignores the fact that there are (at least) three broad categories of hospitals–inner city and rural  safety-net providers, big academic medical centers, and suburban community hospitals. Each of these has a completely different audience, completely different set of incentives, and more to McKinsey’s point, different profit margins.

Right up front they talk about the 50% of revenue that comes from the government–but for the first two categories, it’s more than that! And for everyone, as public programs grow, it’s going to be increasing.

Those hospitals relying on Medicare make most of their money but playing very careful attention to the DRG mix. The ones who play that game well and make most profit on Medicare outliers (like the for-profits McKinsey features in its metrics) don’t really want to change that by stopping their patients becoming those outliers, because if they get better at treating patients, they make less money. Brent James’ famous Intermountain story tells the truth, and until Medicare really changes the way it pays, you don’t want to be ahead of that curve. Intermountain may have spent more than 10 years leaving money on the table, but those rich Mormons can afford it.

Meanwhile, for the mainstream community hospitals, as more and more services and patients leave the building, the imperative is not to change their business model, it’s to get their hands on that revenue that’s leaving with them. That’s why most big hospitals are now-co-investing with physicians in specialty hospitals et al. But while that’s a defensive battle to build better “hotels” for the star surgeons, it’s still about building better “hotels”–not junking the model of being the nicest possible host to the big time admitting surgeons.

The McKinsey/Porter/Teisberg theory is of course that if you get good at one service line, you’ll be attractive to consumers, and that they’ll choose you. There is more truth to this notion now than there was five years ago, but not much more. Doctors choose hospitals for their patients. That’s always been the case, other for those that get admitted via the ED, and that’s a function of location. That’s why hospitals suck up to surgeons. But even when consumers make choices, they’re not very active consumers beyond the deductible, and basically all hospital spending is beyond the deductible, and even in the cash non-hospital business (the stuff like genetic testing) most consumers take their doctor’s advice.

Which leads of course to who the other real consumer for the hospital is, and that’s the third party payer. First rule of dealing with payers is to figure out how to play the Medicare system well enough that you make it very profitable, but not too “well” that you get busted, a la Columbia/HCA, Tenet & St Barnabas.

Second rule is that you need to get bargaining strength against the health plans. No one can pretend that health plans really care in a global sense about having their providers cut costs and improve care delivery. They may say they care about it, but health plans add a chunk on the top of what they pay providers and stick that to their clients (usually employers) — who basically take it in a mealy mouthed way.

There is, though, a fight in any local market about where to draw the line on hospital pricing. But this fight is not about having providers from outside (or even within) the region swooping in to capture all a payer’s business with better pricing on certain service lines, and payers moving patients to these disease-specific treatment centers.  Well, it is about that in the McKinsey/Porter/Teisberg fantasy land, but in reality the fight is about setting global pricing for all the services a payer needs for its members in that region.

Continue reading…

Vertical Integration Doesn’t Work in Healthcare:  Time to Move On

• 1

So in this week of THCB’s 20th birthday it’s a little ironic that we are running what is almost a mea culpa article from Jeff Goldsmith. I first heard Jeff speak in 1995 (I think!) at the now defunct UMGA meeting, where he explained how he felt virtual vertical integration was the best future for health care. Nearly 30 years on he has some reflections. If you want to read a longer version of this piece, it’s here—Matthew Holt

By JEFF GOLDSMITH

The concept of vertical integration has recently resurfaced in healthcare both as a solution to maturing demand for healthcare organizations’ traditional products and as a vehicle for ambitious outsiders to “disrupt” care delivery.    Vertical integration is a strategy which emerged in US in the 19th Century industrial economy.  It relied upon achieving economies of scale and co-ordination through managing the industrial value chain.    We are now in a post-industrial age, where economies of scale are in scarce supply.  Health enterprises that are pursuing vertical integration need to change course. If you look and feel like Sears or General Motors, you may well end up like them.  This essay outlines reasons for believing that vertical integration is a strategic dead end and what actions healthcare leaders need to take.

Where Did Vertical Integration Come From?

The River Rogue Ford Plant

The strategy of vertical integration was a creature of the US industrial Revolution. The concept was elucidated by the late Alfred DuPont Chandler, Jr. of the Harvard Business School. Chandler found a common pattern of growth and adaptation of 70 large US industrial firms. He looked in detail at four firms that came to dominate markedly different sectors of the US economy:  DuPont, General Motors, Sears Roebuck and Standard Oil of New Jersey. They all followed a common pattern: after growing horizontally through merging with like firms, they vertically integrated by acquiring firms that supplied them raw materials or intermediate products or who distributed the finished products to final customers. Vertical integration enabled firms to own and co-ordinate the entire value chain, squeezing out middlemens’ profits.

The most famous example of vertical integration was the famed 1200 acre River Rouge complex at Ford in Detroit, where literally iron ore to make steel, copper to make wiring and sand to make windshields went in one end of the plant and finished automobiles rolled out the other end. Only the tires, made in nearby Akron Ohio, were manufactured elsewhere. Ford owned 700 thousand acres of forest, iron and limestone mines in the Mesabi range, and built a fleet of ore boats to bring the ore and other raw materials down to Detroit to be made into cars. 

Subsequent stages of industrial evolution required two cycles of re-organization to achieve greater cost discipline and control, as well as diversification into related products and geographical markets. Industrial firms that did not follow this pattern either failed or were acquired. But Chandler also showed that the benefits of each stage of evolution were fleeting; specifically, the benefits conferred by controlling the entire value chain did not last unless companies took other actions. Those interested in this process should read Chandler’s pathbreaking book: Strategy and Structure: Chapters in the History of the US Industrial Enterprise (1962).   

By the late 1960’s, the sun was setting on the firms Chandler wrote about. Chandler’s writing coincided with an historic transition in the US economy from a manufacturing dominated industrial economy to a post-industrial economy dominated by technology and services. Supply chains re-oriented around relocating and coordinating the value-added process where it could be most efficient and profitable.  Owning the entire value chain no longer made economic sense. River Rouge was designated a SuperFund site and part of it has been repurposed as a factory for Ford’s new electric F-150 Lightning truck. 

Why Vertical Integration Arose in Healthcare

I met Alfred Chandler in 1976 when I was being recruited to the Harvard Business School faculty. As a result of this meeting and reading Chandler’s writing, I wrote about the relevance to healthcare of Chandler’s framework in the Harvard Business Review in 1980 and then in a 1981 book Can Hospitals Survive: The New Competitive Healthcare Market, which was, to my knowledge, the first serious discussion of vertical integration in health services.

Can Hospitals Survive correctly predicted a significant decline in inpatient hospital use (inpatient days fell 20% in the next decade!). It also argued that Chandler’s pattern of market evolution would prevail in hospital care as the market for its core product matured. However, some of the strategic advice in this book did not age well, because it focused on defending the hospital’s inpatient franchise rather than evolving toward a more agile and less costly business model. Ambulatory services, which are today almost half of hospital revenues, were viewed as precursors to hospitalization rather than the emerging care template.

Continue reading…

Happy 20th Birthday THCB

Hard to believe it but 20 years ago (Aug 12 2003) I started writing THCB! Somehow 20 years later it’s still here. Lots of changes over the years. Hundreds of people have written for THCB, thousands have been interviewed on it, and we’ve made a little dent in the world of health care.

Next week we will run some new articles, new interviews and re-run a selection of the greatest hits….

assetto corsa mods