Market Driven Health Care: Winners and Losers

Adapted from a speech delivered at the Harvard Business School, on June 22, 1999.

Three primal forces have revolutionized the US economy, and they are doing the same for health care. They will dictate who will win and who will lose.

The first of these forces is a different breed of consumer. These consumers are assertive, demanding, and unwilling to defer to authority or expertise. They are extremely busy, highly pragmatic, and demand convenience. Then, too, today’s consumers are more educated than their predecessors. They know how to find information themselves, and they want to be helped to help themselves. In response to consumer demand, businesses have become much more convenient to use. They also provide the information that consumers need to perform tasks themselves.

The health care transformation in response to this force will necessarily include the reduction of inconvenience. Although consumers love their physicians, they complain about a lack of convenience in hours, locations, and the packaging of care. They also want help in caring for themselves and want their intelligence and energy recognized.

The second force is the structure of the US economy. Although the United States is a young nation, our economic structure dates from the industrial revolution. This older economy was saddled with outdated methods and could not compare effectively with the newer economies of the Far East and postwar Germany. US companies have changed dramatically over the past decade. Their transformation from unfocused, everything-for-everybody organizations to focused ones holds important lessons for health care.

Technology, the third force, has also helped to transform this economy, making it one of the world’s most competitive (based primarily on its growth in productivity). Technology will transform the health care system for the better.

The Results for Consumers
When health care providers help consumers care for themselves, the results will be extraordinary. Providing consumers with convenience will also reduce health care costs by enhancing preventive and diagnostic measures. Quality of care will improve because consumers will have access to important preventive and self-care information.

If you think these changes unlikely, consider that the baby-boom generation is beginning to reach 55. This group has continually exhibited an astonishing ability to change society. When they reach the age when people begin to get sick—55—you can bet that their health care will be convenient, information rich, and aimed at helping them to help themselves.

The Results for Providers: The Focused Factory
US companies have become highly focused organizations, moving away from vertical integration and narrowing their product lines. The focused factories that outsourced components and concentrated on narrower product lines vastly increased their productivity.

In health care, however, focused systems are rare—despite the fact that hundreds of areas lend themselves to the focused-factory approach. Concentrated business opportunities exist because
• 76% of direct medical care costs are spent on care for chronic diseases;
• a handful of surgical procedures accounts for 80% of operations;
• five diagnostic categories are responsible for 50% of medical expenditures; and
• 40% of disabilities are attributable to two conditions.

Provider organizations that intend to do everything-for-everyone will make more mistakes and be less efficient than providers with a narrower focus. These health care problems can be rectified through focus.

Focus not only improves the quality of care, but by creating economies and reducing errors, it reduces costs. Economies of focus overwhelm economies of scale. Because treatment teams can concentrate on one procedure and work together constantly, the likelihood of error is greatly reduced; this, in turn, keeps costs low.

The focused factory in health care focuses on providing health care from a consumer’s point of view. It provides the entire multidisciplinary team of people needed to help its customers deal with their health care problems, and supplies the information that customers want. To provide access, it may cover many sites, from community support for self-care to monitoring and diagnosis to tertiary care, but it does not lose sight of its purpose.

In the eyes of US consumers, hospitals represent the worst value for money. Nonetheless, drugs and minimally invasive surgery are cost-effective interventions. Consumers like technology, but recognize that its wanton proliferation in everything-for-everybody hospitals raised costs unnecessarily.

The System of the Future
Clearly, focused health care organizations will be better prepared to take advantage of cost-reducing technologies. The everything-for-everybody health care system will decline, and focused health care organizations will win by providing what consumers want: integrated systems of care for chronic diseases; effective, high-quality systems for high-volume procedures; and community-based, convenient care that helps people manage their own problems.

Although I believe in the managed care concept, I do not see how HMOs, as presently constituted, will be able to survive. Today’s integrated delivery systems, too, have no more chance of survival than the integrated manufacturing organizations of long ago. They will be decimated by competition from focused factories, just as those manufacturers were.

These changes are inevitable because consumers dislike HMOs and are using the media and the legislative process to alter them. Consumer complaints are increasingly likely to lead to regulations that require HMOs to provide what can be very expensive care. Given such mandates, combined with higher administrative costs, HMOs can no longer compete, on the basis of price, with conventional insurers. Employers, in the absence of reliable measures of health care quality, will undoubtedly continue to make their purchasing decisions based on cost. Because HMOs can no longer survive as the low-cost health insurers, I see little future for them as presently constituted.

The Future of the System
The health care system of the future will include new consumers, insurers, and providers. The new consumers will demand that employers and entitlement programs permit them to use the money formerly spent on their behalf for health care to buy their own health insurance. Although consumers will not be allowed to spend these funds for other purposes, they will have a large choice among insurance providers and plans. Insurers, in response, will compete for the dollars of the individual. Most insurers will no longer manage care. They will market it and will act as consultants to health care providers in data management and actuarial areas, but most will not interfere with the care performed by providers.

The new providers will be highly focused and horizontally integrated, delivering all resources desired by the consumer. Focused factories will be multidisciplinary groups focused on providing a particular kind of care, for which they will receive capitated payment. They will give payors fixed prices and reduced administrative costs, and will provide reliable outcomes data.

Horizontal integration has already begun, in the form of physician practice management companies, but these will evolve beyond the random affiliation of practices and toward the focused factory. Health care providers, empowered by consumers who buy their own health care, will no longer be controlled by insurers.

The role of government will be to provide for the care of the uninsured, to provide data, and to protect consumers from fraud and abuse. The role of insurance companies will shift, returning them to their traditional role of marketing health care, not managing it.

In the new health care system, providers and consumers will be the leaders.

Regina E. Herzlinger, PhD, is Nancy R. McPherson Professor of Business Administration at the Harvard University Graduate School of Business Administration, Boston, where she was the first woman to gain tenure.