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The revolution revisited.

The Revolution Revisited Entrepreneurs moved into the health care market in the early eighties under the encouraging lolicies of government. Professor Herzlinger reviewed the decade's entrepreneurial efforts and concluded that the "revolution" was a failure. The health care entrepreneurs failed to fulfill their tacit promises of improving access, controlling costs, standardizing quality, and maximizing the potential advantages of technology. Professor Herzlinger would place the blame at the feet of managers whose eyes were blinded by the lure of the market's financial rewards and by marketing's promises. They forgot the basics of staying close to the customer, did not correct pay inequities within the nursing and medical professions, failed to establish control mechanisms for new ventures, and did not adopt a coherent management philosophy.

A postmortem on the eighties might well reveal more problems and more failures than the shortsightedness of profit-minded managers. What really failed? Surely not the system's ability to perform technological miracles. The evening news programs, print media, and videotapes of congressional investigations are replete with the wonders of cardiac transplantation, multiple liver transplantations, magnetic resonance imaging devices, in vitro fertilization, and other procedures. Rather, the "failures" involve service distribution, equitable access, cost control, information distribution, product definition, and perceived value. But are these the fault of entrepreneurs?

Entrepreneurs and competition have produced spectacular results. The accompanying creativity, innovation, and initiative are laudable and needed in the industry. The failures we now decry may be less the responsibility of entrepreneurs than of the model they represent. Free market competition may be an imperfect model for solving the cost, access, and quality problems within the health care system.

The competitive marketplace has generally served the American public quite well. Yet it demands adherence to a set of principles and conditions that is currently not present in the health care industry. A purchaser informed about the product, its alternatives, and their costs is needed. The supply and demand of goods and services should be independently determined by price. Entry into the market should be easy so that many suppliers can compete for the attention of many purchasers. When these conditions are met, Adam Smith asserts, each individual's purchasing decision will be led by an "invisilbe hand" that ultimately promotes the good of society through pursuit of the individual's own interests. [1]

There is some reason to question whether the free market model described by Smith can meet expectations for change within the private health care market. There is very good reason to question if it can meet expectations in the public sector. Reilly and Fuhr argue that the current competitive model omits significant portions of the marketplace it hopes to influence. Hospitals typically receive 50 percent of their income from public sources, such as Medicaid and Medicare, [2] and these reimbursements are not determined by supply and demand.

Supply and demand in health care may be too heavily influenced by providers. Physician suppliers of services, in particular, appear to induce demand. [3] Purchasers have little expertise and generally defer to specialty physicians for highly technical decisions. There is little incentive to explore cost information, to research alternatives to the recommended plan of care, or to "shop around," particularly during a time of injury or illness. The structure of most insurance plans insulates individual purchasers from the cost of their decisions. Demand-generating providers are insulated from the cost implications of their decisions.

While competition has produced an appealing variety of customer choices, it has also produced some unexpected and undesirable results. Where competition is most acute, as measured by the number of providers within a given geograhic area, there is duplication of prorams and facilities, higher average costs to purchasers, and a possible deterioration in quality of care. [4] Some suggest that highly competitive markets offer more services than less competitive ones, that service duplication in competitive markets is more expensive, and that case loads in competitive markets are frequently low. As a result of the lower case loads, poorer patient outcomes may results. [5] Shortell and Hughes have identified an association between the intensity of competition in the

marketplace and a higher mortality rate among inpatients. [6] Competition in the local market place, case mix, age of the facility, and scope of services are important determinants of average cost in one study. [7] Other studies have found an association between competition and longer lengths of stay. [8] Even deep market penetration by HMOs did not lead to a decrease in hospital expenses per capita. [9] Nor have the entrepreneurial incentives of for-profit hospitals produced better results in controlling costs. [7]

Competition may lead to some business failures, thereby providing opportunities for consolidation of resources. Closing hospitals that provide duplicative open heart surgery, beds, CAT scanning facilities, and radiation therapy units would produce and annual savings of more than one billion dollars, still less than 2 percent of total health care expenditures. [10] Aggregate costs in the affected community may not be reduced in spite of hospital closings. [11]

Competition has had some salutory effects. A recent Rand Corporation study has demonstrated a fall in costs when California hospitals were asked to bid for state-financed patient care contracts. [12] As more costs are born by patients, price sensitivity is increasing. [13]

One conclusion can be drawn from even a brief review of competition and health care costs. As presently conducted, health care's competitive activities have had little effect in reducing costs. One explanation offered for this failure is that hospitals oj't often compete on the basis of price. [9,14] Rather, hospitals compete on the basis of perceived "quality," technology, and the availability of amenities, conveniences, and services. Hospitals also compete for doctors whose decisions to admit patients, fill the order sheet, and schedule procedures directly affect a hospital's well-being. But competition for doctors can foster oversupply, duplication, and added expense to operations.

The traditional competitive strategy may not be the right model for health care in the United States, because it fails to address major social policy issues. Inequitable distribution of insurance has left millions uninsured and their access to care threatened. Governmentally reimbursed care does not pay for the costs incurred in providing that care. If entrepreneurism is the proxy for competition in health care, if price competition is the anecdote for rising costs, if government fiscal policy precludes equitable payment for the care it has promised, who will purchase care for the uninsured? It is now fashionable to examine hospitals' levels of charitable care--sufficient "free" care being a condition of tax-exempt status. Yet there is no "free" care. It is free to some and paid for by someone else.

Changes are needed in our health care system. An informed buyer is required, but truly comparative outcomes data are not yet available for educating that buyer. [15] Regional preferences in treatment protocols persist because of the lack of comparative outcomes data. New techniques and methods are introduced before the efficacy of older ones can be adequately assessed. Competing hospitals and physicians rush to be on the "cutting edge," risking unneccesary procedures, complications, and overuse. assessment of technology's risks, rewards, and benefits is lacking and needs to be given a higher priority. [16] The establishment of an outcomes management data base with its resulting improvement in predictability and more rational decision making offers a means of making informed medical purchasing decisions. [17]

The creation of health systems partnerships needs to be encouraged. Providers, third-party administrators, business management, and labor need to work collectively and cooperatively toward improved benefit design and control mechanisms. Synergistic coalitions seem more likely to reduce the current practice of frequent policy revisions and annual provider changes that minimize longer term benefits for employees. A continued focus on the quarterly finnacial statement and on cost reductions blurs the advantages of a quality program that stresses and rewards prevention and illness avoidance. The focus on teams will likely contribute more to desired continuous improvement in quality and cost management than the less cooperative and less long-range strategies that are now all too common.

Similar partnerships need to be forged among providers. Physicians and hospitals need to articulate goals for quality of care and for costs. There goals need the support of a common financial infrastructure. The regulatory solution of DRGs for hospitals and fee-for-service reimbursements for professional providers does not build the commonality of purpose and process that is needed.

Financial policy for health care needs redefinition. A predictable and equitable payment for providing care to the uninsured and the underinsured is a mandatory step toward ending cost shifting. Implicit in this redefinition is a fundamental restructuring of the health insurance market. A mechanism for funding prevention is a high priority and is partially dependent upon the restructuring of the insurance industry. Health plan incentives that recognize and reward healthy decisions can lead to a more productive and less expensive work force. The current practice of payment upon injury or illness does not creat the incentives needed to change health resource utilization.

Finally, consistent government policy is needed with respect to consolidation. The cost control needs of the nineties will be better serviced by allowing the health care industry to pursue the same cost saving consolidation options available to other industries. Perhaps as a salve for the federal government's belief that consolidations will compromise cost effective care, a trust funded by a portion of the projected savings might be established to partially underwrite charitable care.

Undoubtedly the entrepreneurs could have done better by paying closer attention to the principles of business. Undoubtedly, traditional health care administrators could have done better by adopting more aggressive business philosophies. What's less clear is whether the humanitarian responsibilities of health care can be better met by a competitive strategy that is fueled by Wall Street's need for a return oin investment and constrained by a society's refusal to finance the promises its leaders make.


[1] Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations. New York, N.Y.: The Modern Library, 1937.

[2] Reilly, B., and Fuhr, J. "Competition's Flawed Perspective on the Health Care Market and an Alternative Approach." Social Science and Medicine 17(12):795-801, 1983.

[3] Feldman, R., and Sloan, F. "Competition Among Physicians Revisited." Journal of Health Politics, Policy, and Law 13(2):239-61, Summer 1988.

[4] Robinson, J., and others. "Market and Regulatory Influences on the Availability of Coronary Angioplasty and Bypass Surgery in U.S. Hospitals." New England Journal of Medicine 317(2):85-90, July 9, 1987.

[5] Robinson, J., and Luft, H. "Competition and the Cost of Hospital Care, 1987." JAMA 257(23):3243-4, June 19, 1987.

[6] Shortell, S., and Hughes, E. "The Effects of Regulation, Competition, and Ownership on Mortality Rates among Hospital Inpatients." New England Journal of Medicine 318(17):1100-7, April 28, 1988.

[7] Friedman, B., and Shortell, S. "The Financial Performance of Selected Investor-Owned and Not-for-Profit Hospitals Before and After Medicare Prospective Payment." Health Services Research 23(2):237-67, June 1988.

[8] Robinson, J., and others. "Hospital Competition and Surgical Length of Stay." JAMA 259(5):696-700, Feb. 5, 1988.

[9] "Will '88 be the Year of Price Competition?" Hospitals 61(24):34-9, Dec. 20, 1987.

[10] Schwartz, W., and Joskow, P. "Duplicated Hospital Facilities: How Much Can We Save by Consolidating Them." New England Journal of }e icine 303(25):1449-57, Dec. 18, 1980.

[11] Salmon, J. "Who Benefits from Competition in Health Care?" Nursing Economics 1(2):129-34, Sept.-Oct. 1983.

[12] "Competition Lowers Cost at California Hospitals." Hospitals 61(1):56-58, Jan. 5, 1989.

[13] Ruffenbach, G. "Family Doctors Lose Favor-When It Pays." Wall Street Journal Jan. 2, 1990, p. B1.

[14] Chirikos, T., and White, S. "Competition in Health Care Markets and the Development of Alternative Forms of Service Delivery." Health Policy 8(3):325-38, 1987.

[15] Ginsburg, P., and Hammons, G. "Competition and the Quality of Care: The importance of Information." Inquiry 25(1):108-15, Spring 1988.

[16] Abrams, M. "Prescriptions for Our Ailing Health Care System." Hospitals 62(20):96, Oct. 20, 1988.

[17] Ellwood, P. "Shattuck Lecture--Outcomes Management: A Technology of Patient Experience." New England Journal of Medicine 318(23):1549-56, June 9, 1988.

Robert B. Klint, MD, MHA, FACPE, is President and CEO, SwedishAmerican Hospital, Rockford, Ill.
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Title Annotation:Health Care Management
Author:Klint, Robert B.
Publication:Physician Executive
Date:Mar 1, 1990
Previous Article:Success will require a conscience.
Next Article:Where will the leaders come from?

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