The Missing Rivalry In Health Care

RISING health care costs are a major concern for virtually every American company. Michael E. Porter, an expert on competitive [...]

August 15 2004 by Chief Executive


RISING health care costs are a major concern for virtually every American company. Michael E. Porter, an expert on competitive strategy and the Bishop William Lawrence University professor at Harvard, argues that the heart of the problem is a health care system that needs less competition in some areas and more in others. Following are excerpts from a conversation with him:

 

Q. Is there a crisis in health care?

A. We certainly think so. Costs are going up at double-digit rates. Yet the general consumer feels that quality is suffering in the sense that there are more restrictions. People are having to pay a bigger piece of their health plan costs. And then all the data on quality and defects and errors are really quite alarming.

 

Q. You have argued that we have the wrong kinds of competition in health care. What does that mean?

 

A. The health care system is a great paradox. We in the United States have the most competition of any health care system in the world. That should be a powerful force for improving things. Yet we also have results that aren’t the worst results but certainly are not desirable results.

 

Q. What kind of competition did you find?

 

A. The relevant place where you want to have competition is diagnosing and treating particular diseases or conditions. We want people to compete to do that better and better.

 

 But as we looked at the United States health care system, we found that there’s almost no competition at that level. Instead, we see a lot of competition among provider networks, whether they consist of hospitals or doctors or both, to assemble bargaining power so they can strike a better deal for themselves.

 

 But that kind of cost-shifting or bargaining-power competition doesn’t create health care value. In many ways, it destroys value, because it injects massive administrative costs and complexity into the system. So the central point is that the kind of competition that drives value creation isn’t really occurring today.

 

Q. We have so many players, from pharmaceutical companies to hospitals to insurance companies to employers. Is there a particular villain?

 

A. We don’t think any one entity has made the fatal decisions that have caused the system to be the way it is. Indeed, there was a set of incentives created partly by government regulation and partly by history. They have led each actor in the system to behave in ways that were rational for them but were not aligned with improving health care value.

 

Q. Can’t employers promote the right kinds of competition when they pay for health care coverage?

 

A. Employers have made a lot of fundamental mistakes. They buy health care services as a commodity, by and large ignoring the issues of quality and ignoring the issues of value. They insist on signing up the health plan that gives them the best deal and then kind of holding their hands over their eyes and not paying any attention to what happens next.

 

Q. Does shifting costs to employees help solve the problem?

 

A. It used to be that employees might pay 5 percent of their health care costs. Now they’re being asked, in some cases, to pay 25 to 30 percent. But that is not improving value. That is not driving improvements in efficiency or quality. That’s just cost-shifting.

 

Q. So the system isn’t delivering enough quality?

 

A. It’s not built around quality. It also doesn’t really care about costs. The system is not designed to reward the most efficient providers. All providers get the same price. The health plans don’t even know what the true costs are. They don’t even care.

 

Q. How would it help if we knew those costs?

 

A. For example, I was recently with a group of physicians who practiced in the spine area. They said they’d learned that doubling the amount of time they spend with each patient on physical therapy has a dramatic payoff. That’s an example of how you spend more on one category of cost to dramatically lower other categories of cost. But that kind of thinking doesn’t typically occur in the health sector.

 

Q. Is it a problem that insurance companies don’t want to pay for tests that are diagnostic?

 

A. The problem is that we’ve not set up diagnosis as a business. I’d love to know who is the best at diagnosing in a particular field. And I’d like to know whether the doctors ordering more tests are better at getting the diagnosis right than the ones who order fewer tests.Q. Do the health care reform proposals being put forth by either President Bush or the Democratic candidate, Senator John Kerry, address the heart of the problem?

 

A. No, the proposals have to do almost exclusively with who pays.

 

Q. Is there any possibility that the system can be fixed?

 

A. It’s very possible to make substantial enhancements in the system. This industry is not that much more fragmented than many other industries. But in those other industries, people have to compete on value.

 

Q. So you’re actually optimistic that the system will move toward quality care?

 

A. I find myself, and this is probably a disease I have, quite optimistic. Things have gotten bad enough, and people have tried all the simple things, and they haven’t worked. I think most people are now stepping back and saying, “My God, we’ve got to rethink this whole system.”