Identifying the Root Causes Porter and Teisberg on Redefining Health CareHarvard Business School

Identifying the Root Causes

Scoping the Problem | Identifying the Root Causes | How Reform Went Wrong | Value–Based Competition

Some have argued that competition does not work in health care because health care is different: it is complex, consumers cannot understand medical practice, services are highly customized, and insurers, employers, or government pay for most of the care. While health care indeed has many of these characteristics, so do other industries where competition works well.

Others have argued that the problem in health care is too much competition. Competition is blamed for duplication, excess investment, and wasteful administrative costs. Competition from specialized hospitals or specialized outpatient facilities is seen as draining revenues from community hospitals. Competition among physicians is seen as driving the overprovision of services.

While these symptoms are real enough, the fundamental flaw in the health care sector is not competition, but the wrong kind of competition.

Zero-Sum Competition

Health care competition is not focused on delivering value for patients. Instead, it has become zero sum: the system participants struggle to divide value when they could be increasing it. Although health care offers tremendous value, the unnecessary costs of zero-sum competition undermine and erode that value. It is the zero-sum competition in health care that has created the unacceptable results detailed in Scoping the Problem: high costs, low or variable quality, under- and overtreatment, too many preventable errors in diagnosis and treatment, restrictions on choice, rationing of services, limited access, and a raft of costly lawsuits.

Zero-sum competition in health care is manifested in a number of ways, none of which creates value for patients:

  • Competition to shift costs
  • Competition to increase bargaining power
  • Competition to capture patients and restrict choice
  • Competition to reduce costs by restricting services

 Competition at the Wrong Level

Why is competition in health care not focused on value? The most fundamental, unrecognized problem with the U.S. health care system is that competition operates at the wrong level. Competition is both too broad and too narrow. Competition is too broad because much competition now takes place at the level of health plans, networks, hospital groups, physician groups, and clinics. It should occur in addressing particular medical conditions. Competition is too narrow because it now takes place at the level of discrete interventions or services. It should take place for addressing medical conditions over the full cycle of care, including monitoring and prevention, diagnosis, treatment, and the ongoing management of the condition.

Value in health care is created or destroyed at the medical condition level, not at the level of a hospital or physician practice. A medical condition (e.g., chronic kidney disease, diabetes, pregnancy) is a set of patient health circumstances that benefit from dedicated, coordinated care. The term medical condition encompasses diseases, illnesses, injuries, and natural circumstances such as pregnancy. A medical condition can be defined to encompass common co-occuring conditions if care for them involves the need for tight coordination and patient care benefits from common facilities.

It is in addressing a particular medical condition that patient value is delivered. Today, multiple entities can be involved in patient care. It is at this level where huge differences in costs and quality persist and where the lack of competition allows providers with worse outcomes and higher charges to remain in business. And it is here where healthy competition would drive improvements in efficiency and effectiveness, reduce errors, and spark innovation.

Why Is Health Care Competition at the Wrong Level?

  • The Wrong Conception of Health Care Itself: The Commodity Mind-set
  • The Wrong Objective over the Wrong Time Horizon
  • The Wrong Geographic Market
  • The Wrong Strategies
  • The Wrong Structure of Care Delivery
  • The Wrong Industry Structure
  • The Wrong Information
  • The Wrong Patient Attitudes and Motivations
  • The Wrong Incentives for Health Plans
  • The Wrong Incentives for Providers
The Institute for Strategy and Competitiveness at HBS