^{Posted on June 11, 2004}

Porter & Teisberg: Redefining competition in health care

The Boston Globe
June 8, 2004
A prescription for healthcare
Professor: Get industry to compete over quality instead of shifting
costs
By Robert Weisman

Michael E. Porter has a new problem to fix.

The Harvard Business School professor, often described as America’s foremost
business strategist, has never shied away from tackling intractableproblems.

…his latest challenge is one that has stumped the best and brightest business theorists, politicians, and policy makers: America’s dysfunctional healthcare system. And Porter is staking his reputation on a prescription that calls for a healthy dose of competition.

In a long essay in the June edition of Harvard Business Review, the 57-year-old Porter argues for redefining healthcare competition on the level of specific diseases and treatments, rather than on the level of health plans, networks, or hospital groups. ”The wrong kinds of competition have made a mess of the American healthcare system,” contend Porter and his coauthor, Elizabeth Olmsted Teisberg of the University of Virginia.

”The right kind of competition can straighten it out.”

The article is significant not only for its critique, but also because it bears the Michael Porter stamp. One of only 15 ”university professors” (the highest designation for faculty members) at Harvard University, his 16 books on strategy, competitive advantage, and business clusters have made him among the most sought-after business thinkers in the world. Porter consults for corporations, regions, and even nations.

Porter and Teisberg have a deceptively simple diagnosis: Healthcare competition today works on the wrong level. The players — health plans, payers, providers, and doctors — engage in what the authors call ‘zero-sum competition,” dividing value rather than creating it. They seek to transfer costs onto one another, limit access to care, hoard information, and stifle innovation, all to the detriment of patients.

The right kind of competition should occur at the level of preventing, identifying, and treating patients’ conditions and diseases, Porter and Teisberg assert. They call for collecting and disseminating information about the outcome of medical procedures, so patients can make intelligent choices about physicians and hospitals. They also recommend transparency in billing and pricing to reduce cost shifting, discrimination, and other inefficiencies. And they propose increased specialization by healthcare providers, resulting in more centers of excellence in conditions and treatments that compete for patients.

Most of the tried-and-failed healthcare reform efforts of the past decade have emphasized government playing a larger role, as it does in Canada, the United Kingdom, and other countries. By contrast, the Porter-Teisberg approach would be a largely private sector solution, with employers helping to instigate change by negotiating with health insurers and providers for quality, choice, and transparency.

Government would have a role, not as a ”single payer” or an insurer of last resort, but by blocking network restrictions, hospital consolidation, and multiple hospitalization bills, and helping to set a framework for reform through its Medicare program. The role of health plans, meanwhile, would be more akin to that of coaches and advisers, helping their members navigate the system and find the best care.

Teisberg… speaking of herself and Porter, said, ”Neither one of us has come at this as a healthcare expert. We’re out there talking to people because we care about this. It matters.”

http://www.boston.com/business/articles/2004/06/08/a_prescription_for_healthcare/?

Harvard Business Review
June 2004
Redefining Competition in Health Care
The wrong kinds of competition have made a mess of the American health
care system. The right kinds of competition can straighten it out.
by Michael E. Porter and Elizabeth Olmsted Teisberg

We believe that competition is the root of the problem with U.S. health care performance. But this does not mean we advocate a state-controlled system or
a single-payer system; those approaches would only make matters worse. On
the contrary, competition is also the solution, but the nature of competition in health care must change. Our research shows that competition in the health care system occurs at the wrong level, over the wrong things, in the wrong geographic markets, and at the wrong time. Competition has actually been all but eliminated just where and when it is most important.

The most fundamental and unrecognized problem in U.S. health care today is that competition operates at the wrong level. It takes places at the level of health plans, networks, and hospital groups. It should occur in the prevention, diagnosis, and treatment of individual health conditions or co-occurring conditions. It is at this level that true value is created-or destroyed-disease by disease and patient by patient. It is here where huge differences in cost and quality persist. And it is here where competition would drive improvements in efficiency and effectiveness, reduce errors, and spark innovation. Yet competition at the level of individual health conditions is all but absent.

To access the report (fee $16.95):
http://harvardbusinessonline.hbsp.harvard.edu/b02/en/home/index.jhtml;jsessionid=FVZ2U4LSFGSSECTEQENSELQ?_requestid=5752
and click on “Curing U.S. Health Care (HBR OnPoint Collection)”

Comment: The debate rages on as to whether the financing of health care should be guided by a government program or by competitive forces in the private marketplace. Innumerable studies have refuted the claim that, in health care, private marketplace competition improves quality and lowers costs. Professors Michael Porter and Elizabeth Teisberg concede that the existing “zero-sum competition” has “made a mess of the American health care system.” They now describe “positive-sum competition” as the solution. They contend that preserving market forces through a new model of competition would be the best means of providing value by improving quality while controlling costs.

Their article is to be followed by a book on the subject, with the intention that it be the guide to revolutionary reform of the health care marketplace. Because of the prestige and credibility of the authors, we should become well informed on their vision of reform, and be prepared to respond appropriately.

As academic leaders in the business world, it is no surprise that they are determined to make competition work in health care, with almost a religious
fervor. They concede that they are relative novices in the health care arena, but they believe that they can introduce innovative approaches to competition that would have a positive impact on the health care system. In spite of being health care novices, they have identified much in the health policy literature that confirms that competition has not provided enough value to offset the impaired quality that permeates our system, thus their “zero-sum” thesis.

As pro-competitive, free market advocates, they cannot accept a model, such
as single payer, that uses government mechanisms to achieve quality and control costs. But in their fervor to depend on private competition as the driving force for value, problems begin to appear as they develop their positive-sum” thesis. Only a small sampling of the issues will be listed here. If, in fact, their proposals gain political traction, a more detailed analysis can be prepared later, describing what is good and what is bad about their concepts.

(Quotations are from their paper.)

They appropriately emphasize that we need greater value in health care. But most of their concepts are directed at improving quality, the more important component of value, whereas very little are directed toward controlling costs. It is true that eliminating ineffective or detrimental care does reduce costs, but an explosion in technological advances, some of dubious value, has been a major driver of cost escalation. They do not adequately address this important concern.

Most of their recommendations for improving quality have already been covered extensively in the health policy literature. Efforts are already being made to address them, and even greater efforts will inevitably be made in the future.

“The most fundamental and unrecognized problem in U.S. health care today is that competition operates at the wrong level. It takes place at the level of health plans, networks, and hospital groups. It should occur in the prevention, diagnosis and treatment of individual health conditions or co-occurring conditions.” What does competition have to do with this? We do recognize that many of the problems are in our approaches to prevention, diagnosis and treatment. We definitely need to continue to identify these problems and then correct them. But is that best approached by establishing an elaborate and necessarily imperfect system of measuring and reporting quality parameters for the purpose of enabling providers to be rewarded by relatively unsophisticated purchasers in the marketplace? Or would it be better to establish a single, integrated system of funding care that directs the financial resources to beneficial preventive, diagnostic and therapeutic services with incentives for higher quality? It seems that the direct approach would be more efficient and effective.

“Under positive-sum competition, providers would have to issue a single bill for each service bundle, rather than a myriad of bills for each discrete service.” Billing abuses occur both with bundling and unbundling of charges. Suggesting that billing problems for chronic disorders would be solved by mandated bundling is simplistic reasoning at best.

They suggest that hospitals should develop “unique expertise” and not try to “be all things to everyone.” Hospitals then could compete (nationally?) with other hospitals providing similar unique expertise. This ignores the fact that hospitals provide mostly very routine services and need to be geographically accessible in a timely manner. Also the emphasis on increased specialization has been demonstrated to decrease health care value, driving up spending without a commensurate improvement in outcomes.

“Network restrictions” would be eliminated, and “co-pays would be the same inside and outside of the network.” Does this mean that price would no longer be a dominant factor in a competitive marketplace? Though it should be stated here that their emphasis on the goal of improving quality is to be commended.

Although a major goal would be to keep the government out of the competitive marketplace, “antitrust authorities would scrutinize system participants” to prevent market domination. If higher quality is the goal, shouldn’t higher quality providers be allowed to dominate the market? And would we be able to stabilize the capacity of the system if the remaining providers were not able to survive financially? Wouldn’t it be more rational to adopt programs aimed at improving the quality of all providers, rather than a competitive model that automatically sacrifices those who fall on the lower part of the curve?

To “eliminate price differentials for favored groups… the federal government could limit the spread between the most discounted price and the highest price charged by a provider for any service and then reduce this spread each year over a five year period.” How do price controls fit in with free market competition? And what happens when destabilization returns after the five years have passed?

“For high-risk people unable to buy health plans, assigned risk pools, like those used in automobile insurance, will need to be developed.” Why didn’t we think of that?

“Large deductibles combined with medical savings accounts would let some patients take financial responsibility for their choices.” But also under their model, the legal responsibility for bills would shift from the patients to the payers who would “bear full legal responsibility for the medical bills of paid-up subscribers.” Well, make up your mind. Is the financial responsibility that of the patient or of the payer?

Although they give competition much credit as a potential driver of quality, they ignore the fact that a single payer system would address many of the quality issues that they describe. In fact, by design, the singlepayer system would attack the quality problems aggressively and effectively, whereas their competition model would approach them with primary attention given to the bottom line. But profits in health care have almost no correlation with quality, and their model, in spite of their rhetoric, provides negligible financial incentives to improve quality on a global basis, though it may be effective in a few isolated instances.

Professors Porter and Teisberg still have much to learn about the health care system. Let’s hope that they do not limit their exposure to their colleagues who believe that we must rely strictly on competition in free markets no matter how compelling the evidence that they simply do not work in health care. Maybe they’d like to take a closer look at the single payer model. A single payer system would provide value by enabling higher quality within the limits of the resources we have, and isn’t that what good business is all about?