POLICY/HEALTH PLANS/PROVIDERS: Michael Porter sinking into the healthcare quagmire

So the nice folks at Harvard Business School publishing invited me to attend the Michael Porter virtual seminar, and very interesting it was too. Porter says that the overall problem is that we haven't defined health care as the delivery of value to patients. We need to get innovation within the system at the patient level. That's what he said in his article published back in June (here's an interview about it as the whole article is sub only), backed up with the version of the article presented in his talk. Most of his criticisms of the system are very familiar to THCB readers. And we mostly agree about what's wrong.

There was also some new research from Porter's team discussed in the seminar, which is about how to get "there" from "here". For example, Porter believes that there is little benefit in broad provider networks, but instead providers they should try to be excellent and unique regionally and nationally. Porter also suggests that providers should consider one bill (as a patient I applaud this!) and organize around one practice area for each disease state. In order to get this team unity potentially hospitals should hire physicians and put them all on salary. In any event providers need to organize themselves surrounding the patient practice areas and move away from procedural functional areas as they are now organized. In addition providers should separate diagnosis and treatment into different functions (Ed note: Isn't that what managed care tried to do with outside review? Maybe, but with very limited success). What Porter was leading up to is that providers need to be distinctive and have a market niche or brand strategy that's comparable to other businesses in other industries. He then proceeded to give several examples of providers that have made big improvements by adopting some of these innovative business methodologies.

Porter continually stressed that the local versus regional/national axis is a really important one for providers to focus on, and that excellent providers should expand regionally and manage care on a much wider level. Interesting idea and the branding impact may have some impact, but how can it be a major trend when health care is produced and consumed locally, mostly because people want their services delivered locally? Incidentally, the reason for horizontal hospital mergers was to amass local monopsony power versus strong regional payers. Any hospital backing out of that for some mythical value creation strategy is looking at economic suicide given the current incentives in the market. It's the Sutter Healths of the world using their market clout to jack up fees and revenue who are doing well!

On the insurance side, Porter believes that health plans should stay independent from providers and should stay in market--he thinks they can "add value". But not by extending the managed care network control model, which he believes has failed. He thinks health plans will provide value in 3 areas --providing information, helping support consumers and efficient claims processors. But he notes that patients don't trust their health plans, and that was the political reason for managed care network model's failure. But the reason health plans went away from the narrow network model is because their customers (plans and employers) asked them to, and were prepared to pay more (the increases of the last 5 years) for those wider networks. And the last 5 years have been very profitable for plans that have gone back to the old ways of picking their risks very carefully.

In my interpretation Porter gave a fascinating lecture about how health care providers might have changed had Enthoven-style managed competition become a dominant force in American health care. Unfortunately for political reasons managed competition didn't become that force and without the financial incentives, providers didn't have to change what they did. What Porter says is, thankfully, more coherent than Reggie Herzlinger's notions about a consumerized system, but everything he says about provider innovation being possible Alain Enthoven said 15 years ago. These include single prices and bills for a lifecycle of care, which sounds a lot like capitation or defined costs for DSM to me! Porter says that health plans need common information protocols, as there are no common standards, and people need to be able to understand the choices they make based on good information. All standard stuff I heard in Enthoven's lectures in 1990 (and he'd been saying them for more than a decade by then).

But it's where Enthoven went next was important. He said that to get to the type of innovation Porter wants you'd need a) a significant change to the incentives in the system brought about by tighter (or more accurately) very different regulation of health plan behavior and the insurance market, and b) that consumers needed help from intermediaries to understand what they were buying because it's too hard for them to figure out the differences based purely on price without understanding outcomes.

In this lecture Porter never got to these points. He managed to talk for 45 minutes about how providers should change behavior without mentioning incentives. I asked a question about why he felt that the system might change in the absence of Medicare or any other big payer pushing a change in incentives. As part of the question I mentioned that the changes he wanted were the same ones that Enthoven's managed competition would have brought into fruition. Porter was pretty dismissive of managed competition and Enthoven, saying that there was no such thing as competition that could be "managed", but here he's just wrong. Any market is bounded by regulation and market players are acting out their rational incentives within that regulatory framework. If the government uses regulation and subsidies to change the market, in one way or another it's "managing" competition. And governments do this in every market either by deliberate action or by inaction.

Health care is a prime example. The incentives are wrong because the regulation allows them to be. For instance, Porter's patient-centered value delivery sounds very like disease management to me. So why has DSM failed? Mostly because health plans and payers have competed to get rid of patients from their plans who need that DSM, and because providers haven't been rewarded based on patient outcomes. The reason that providers are rewarded the wrong way is due to the historical fee-for-service system that was set up by insurers and adopted by government. And that system is still the basis for healthcare incentives. Unless Porter has repealed the laws of economics providers will still, more or less, follow the money.

In the rest of his answer to my question, Porter said that although Medicare is important, we don’t need it to change for the system to adopt his principles. He still thinks that we could have dramatic improvements in care cost and quality and providers can do well doing it, in the absence of policy change (although he grants that it would be helpful). He believes that providers are driving this change, and are integrating their care around practice areas. One of his prime examples (mentioned several times in his talk) was Intermountain Health Care. You'll get no argument from me that they are doing great work. Unfortunately historically very few organizations have been copying them. Intermountain had the luxury of a wealthy benefactor--the Mormon Church--insulating it from market incentives and helping it get set up to do the right things, such as comprehensive care management, reducing medical errors, and cutting waste by getting procedures right the first time. More importantly they have been leaving money on the table by doing that!! Their quality guru, Brent James said so himself on the front page of the NY Times last year, and Michael Millenson wrote much more on the providers who "got quality too early" to their own fiscal detriment in his book "Demanding Medical Excellence".

Porter thinks that we don't need to wait for public policy, although some of the changes he advocates are sensible like a move to a defined benefit package along the FEBHP lines (something again from Enthoven c. 1985). But Porter said loud and clear that everyone in health care should move in the direction he advocates even without regulatory change and would do better financially by doing so. While they might follow his lead, it is extremely unlikely whether the typical provider or plan would benefit from doing so.

Instead of looking at the big-name outliers and assuming that they're the ones who are going to do well, Porter needs to realize that it’s the mass of American physicians and hospitals who are going to have to change for the overall patient experience to change, and they have no incentives to do so. When, as Wennberg shows us, providers in Florida are practicing on patients at three times the rate as those in Minnesota, there's a reason for it. They get something like three times the money!

There are ways out of this, and to be fair Porter mentions them in his paper, even if he belittled them in his talk. Putting Medicare into a Pay for Performance mode is one important element, Changing regulations governing the insurance system so that health plans are rewarded for better handling of the treatment of sick patients is another. But HSAs and Association Health Plans are pushing incentives in the opposite direction, and the Medicare P4P movement is very, very nascent. Porter seems to think that the system can change itself. As the old joke about the light bulb and the psychiatrists goes, the system has to want to change. And right now it doesn't. And there's $1.5 trillion worth of political influence to stop the reforms needed to make it change.

I think looking back in 10 years Porter's ideas may share Enthoven's fate. He'll be wondering why no one paid attention given that the solutions were so obvious. Unfortunately this is typical of a really bright person entering health care from another perspective and being totally bewildered by the ferocity of the political reaction they'll get. Porter comes from the rarefied air of international business, but this also happened to Enthoven even though he was one of Macnamara's whiz kids at Defense Dept in the 1960s.

For now Porter will raise some fuss on the conference circuit, and these ideas may be fad of the month at hospitals, just as integrated delivery systems were 10 years ago. But unless he wants to go to Washington and explain how public and private payers need to change their incentive structures and get the lawmakers to agree over the interests of their campaign contributors, few of the provider-specific innovations that we all agree are needed to promote value in health care will survive in the current market.