Posted on June 29, 2006

Porter and Teisberg's Redefining Health Care


Redefining Health Care
Creating Value-Based Competition on Results By Michael E. Porter and Elizabeth Olmsted Teisberg

(2006 - Harvard Business School Publishing)

The fundamental flaw in the health care sector is not competition, but the wrong kind of competition. Health care competition is not focused on delivering value for patients. Instead, it has become zero sum: the system participants struggle to divide value when they could be increasing it. Although health care offers tremendous value, the unnecessary costs of zero sum competition undermine and erode that value.

* Competition is based on results

If, and only if, providers have to demonstrate excellent results in addressing specific medical conditions will errors decline, unnecessary tests not be performed, unnecessary treatments stop, the use of ineffective treatments cease, and the withholding of effective services come to an end. Supply-induced demand for unneeded care will decline when results are measured and compared. Physicians who cannot demonstrate patient value will go out of business.

* Competition is centered on medical conditions over the full cycle of care

Providers should organize themselves around medical conditions, not skills of discrete specialties or services necessary to address a medical condition. Integrated practice units, as we term them, should include all the services necessary to address a medical condition, usually in dedicated facilities.

* Value is driven by provider experience, scale, and learning in medical conditions

Value in health care delivery is created by doing a few things well, not by trying to do everything. Yet health care delivery currently is not organized this way - indeed, the current system encourages just the opposite.

As in every field, health care providers that concentrate their effort and learn from experience in addressing a medical condition usually deliver the most value and innovate the most rapidly.

What is needed in health care delivery is not narrow specialization, but critical mass and experience in a medical condition over the care cycle.

* Competition is regional or national

The relevant geographic scope for competition in health care delivery is regional, national, or even international, not just local.

In obtaining care, patients, referring physicians, and health plans should seek out excellent care that best meets patient needs wherever it is located.

While traveling to a preeminent regional facility may sound expensive and inconvenient, cost savings and better short- and long-term medical outcomes can make travel clearly worthwhile for both patients and health plans. The cost and inconvenience of travel are easily justified by avoiding other, higher costs that arise with inferior outcomes (longer recovery times, less complete recovery, chronic pain, complications, and mistakes).

* Results information is widely available

In measuring results, data on medical outcomes is essential, but price information is just as important. Together, outcome and price data enable judgments to be made about value.

Current piecemeal prices for discrete interventions and services are not the prices that patients really want, or that matter for patient value. Prices should cover service bundles involved in episodes or full cycles of care.
The relevant price is the overall price for care, not the price of a visit, treatment, or service by an individual physician.

* Innovations that increase value are strongly rewarded

It is nonsensical to argue that disease-curing innovations do not lower costs and increase value. That stance confuses value creation in the treatment of a medical condition with costs of treating other conditions in the future. It ignores the productive contributions of more healthy individuals, including the revenues they contribute through premiums to the health insurance system, and the value (including less need for care) of a better quality of life for patients. Also, a substantial portion of health care costs occur early in life, so a patient may have decades of good health before succumbing to a different disease.

* The opportunity of value-based competition

If competition on results drove the pursuit of health care value for patients, the gains would be enormous.

To reap these benefits, however, the nature of competition must change. Each constituent in the system must shift its roles, strategies, and policies.


By Don McCanne, M.D.

This is an important book. Its authors are two of the most noted authorities on competition, strategy and innovation. If anyone could bring sense to the topic of competition in health care, certainly they should be able to.

Many policymakers in the United States have continued to cling to the theory that competition in the health care marketplace will provide better value by improving quality and reducing costs. Porter and Teisberg now join those who acknowledge that market failures in health care have resulted in mediocrity and very high costs, just the opposite of what market theorists would predict. In “Redefining Health Care,” Porter and Teisberg describe quite accurately many of the failures, though they contend that they are due to the fact that we have the wrong kind of competition in health care.

Being avid believers that only competition can improve value, they then describe changes that they believe should be made to the health care delivery system so that it would conform to the theory of market competition. Since competition is the be-all and end-all, they would abandon much of what does work well in the delivery system and substitute it with a contorted system that arguably would function even less well than our current, highly-flawed system.

Imagine a system in which care is delivered based on teams, without geographical limitations, organized around medical conditions, competing with other teams organized around the same conditions. Imagine your community hospital and its specialists providing care for a very limited list of medical conditions selected on the basis of providing better outcomes and lower prices. Your community hospital may very well lack a team that is dedicated to your particular problem, requiring you to travel to the next county, or maybe the next state, for care. Then allegedly to create transparency in pricing, you receive a single bill that totally obscures any understanding as to where your payment goes. You really have to read the book to understand the extent to which this line of reasoning is carried.
The flaws in their reasoning are due to the fact that they place market competition at the first order, and then would modify 15 percent of our economy, the $2 trillion health care industry, to comply with their academic exercise.

Since I was already aware of their theories, I decided to do a mental exercise when I read their book. Wherever they discussed “competition” as the solution to our health system flaws, I substituted “cooperation” and then imagined how that would play out. Think about that. Instead of a Lake Wobegon system where all providers are above average because “physicians who can’t demonstrate value would go out of business,” we would have a system in which everyone joins together to try to maximize health care value for the benefit of patients. This seems to represent a conflict of ideologies.

Competition is ideally suited for markets and the business community (a good thing - for commodities). Cooperation is ideally suited for democratic governments and its citizens (also a good thing - for health care services).
But then ideologies are abstractions. Health care isn’t.

This book would be of value to members of the policy community who may have struggled with the concept of competition in health care when it didn’t really seem to be relevant to their work. Reading it will provide reassurance that they can proceed without concerns that they might be ignoring a potent tool.

This book is also an important resource for avid supporters of market competition in health care. Since the best that these noted authors can come up with is the bizarre concept of competing medical-condition teams without geographical boundaries, then you know that you no longer have to look for the magic of the marketplace in health care. There’s no magic there.