Beyond any of the political skirmishing around the recent health reform law lies the issue of the poor performance of the US health system. Almost as frightening as its cost is how poorly it performs.
More money per person is spent on health care in the United States than in any other nation in the world, yet US life expectancy lags 42nd in the world. That’s well behind most rich nations, and after Chile (35th) and Cuba (37th). Yes, Cuba! One can debate how far the health care system itself is responsible for these shocking statistics, since access to care has been far from universal. But it is hard to argue with the death rates from medical errors.
Clayton Christensen: the analogy to the PC industry
Clayton Christensen has an interesting short video on Forbes that seeks to explain why health system reform doesn't happen. He uses an analogy with the PC industry.
Christensen begins by describing how a personal computer is made up of various parts—a keyboard, a processor, a hard drive, memory chips, a DVD player, a screen, and so on. Each part is made by a different manufacturer. Each manufacturer can optimize its individual piece of the PC, but none of them is able to optimize the whole system. That can only be done by the firm responsible for the overall PC, such as Apple [AAPL].
Similarly, he argues, the health system is made up of different parts—hospitals, insurers, doctors, nurses, primary care facilities, pharmaceutical manufacturers, and so on. Each of them can optimize their individual piece of the system. But none of them can optimize the whole system. That would have to be the responsibility of whoever is responsible for the well-being of the overall system. The problem is that there is no such entity like Apple who is responsible for the overall well-being of the health system. Hence overall reform of the health system as a whole doesn’t happen.
The argument is interesting as far as it goes. But does it get to the root cause?
The problem of “management viewed as optimization”
Christensen has written brilliantly about the phenomenon of disruptive innovation in his book, The Innovator's Dilemma (HBSP, 1997). In it, he describes how market-leading companies in industry after industry have missed game-changing transformations.
But the mistakes that were made by those companies were not the result of "bad" management. Instead, as Alan Murray has noted in his article in the Wall Street Journal, the disasters have occurred because managers were following the dictates of "good" management, when management is viewed as optimization. They studied their customers. They carefully researched the market and new technologies. They meticulously cultivated innovation. They stringently evaluated new development and weighed the cost of new investment against potential gains. And in the process, they missed disruptive innovations that opened up new customers and markets for alternative blockbuster products.
A recent example of the phenomenon is at Nokia.
If one listens carefully to Christensen’s video talk, one can hear that he is still assuming that management consists of “optimization of the parts”, whether it’s making a PC or running a health system. It’s an inside-out perspective of tweaking the value chain and searching for internal efficiencies as the main goal of management. It’s precisely the kind of management that is the root cause of the phenomenon of disruptive innovation, about which Christensen has written so brilliantly. Put another way, disruptive innovation is a symptom of traditional inside-out management.
The results of "management viewed as optimization"
The result of running private sector organizations in this fashion has been disastrous, as shown by in a comprehensive study of some 20,000 US firms by Deloitte’s Center for the Edge.
- The rate of return on assets of US firms is one quarter of what it was in 1965.
- The life expectancy of a firm in the Fortune 500 has declined to less than 15 years and is heading towards 5 years unless something changes.
- Executive turnover is accelerating.
- The topple rate of leading firms is speeding up.
- Only one in five workers is fully engaged in his or her work: the larger the company, the lower the level of passion among the workers.
It doesn’t work for industry. There is no reason to think that it will work for the health system.
The alternative: “management that adds value to customers”
The alternative to the model of “management as optimization” is an outside-in customer-driven approach in which everyone in the organization is focused on finding ways of adding more value to the ultimate customer (or primary stakeholder) and delivering that value sooner. The approach is described by Roger Martin his classic HBR article “The Age of Customer Capitalism.” Harvard Business Review, Jan. 2010, pp. 58–65. It is also reflected in The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison, Reorganize for Resilience by Professor Ranjay Gulati, or Leadership in a Wiki World by Rod Collins.
My own book, The Leader’s Guide to Radical Management (Jossey-Bass 2010) offers a comprehensive account of the principles and practices involved.
In business, the task of management becomes that of delighting the customer, and providing a continuous stream of additional value and delivering it sooner.
A “patients first” health system
Christensen is right that reform of the health system will be impossible if the players in the game are merely trying to optimize their particular part. The health system will infected with the same bureaucracy that has hamstrung the private sector and the government.
The solution however is not, as Christensen implies, to appoint some authority, or czar, to be the master designer of the overall system. Quite apart from political difficulty of setting up such an approach, it is precisely the kind of top-down thinking that has led to such poor results in industry.
Real reform in health means getting away from a system that is focused on optimization of costs and where administrators, insurance companies and health professionals are trying to optimize their particular part of the system. It means transforming the health system into one in which everyone is truly focused on “patients first”, with genuine patient-driven care. All of the players must be focused on continuously adding more value for patients, and finding ways to deliver that value sooner. In this way, the system will self-optimize for the good of the patients, without the need for any kind of health czaar.
The good news is that we know how to do this.
To learn more
If you would like to learn even more about reinventing management for both the private sector and for the health system,, please join me for two days on May 12-13, 2011 in Washington DC in a workshop that is all about cool, innovative and serious fun. More details here.