Value-Based Competition Porter and Teisberg on Redefining Health CareHarvard Business School

Value-Based Competition

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

Healthy competition is competition to improve value for customers, or the quality of products or services relative to their price. It leads to relentless improvements in efficiency. Product quality and customer service improve. Innovation propels advances in the state of the art. Quality adjusted prices fall, and the market expands and more customer needs are met. Choice expands as firms work to distinguish their products or services from others. Excellent firms prosper while firms with low quality, poor service, or high costs decline or go out of business unless they make fundamental improvements in the way they operate. This is what value based competition looks like, but it is a far cry from what we see today in health care.

Value-based competition is positive sum. When value improves, both capable firms and consumers benefit. The firms that find unique ways to deliver superior value are winners, and are rewarded with more business. But customers also win as quality increases and prices fall. The more firms that find ways to provide high value for customers, the more winners there are. The only losers are firms that fail to deliver good value. Value-based competition is the type of competition we see in virtually every field: retailing, airlines, financial services, aerospace, and computer services. Such competition has transformed previously regulated fields, such as telecommunications and trucking, as well as sclerotic economies, such as those in eastern Europe, with extraordinary benefits.

Health care competition must be transformed to a value-based competition on results. This is the best way, and the only way, to drive sustained improvements in quality and efficiency. The experience in numerous other industries tells us that this transformation is possible. It also tells us that there can be stunning progress when the right kind of competition is unleashed.

Value-based competition on results is a positive-sum competition in which all system participants can benefit: When providers win by delivering superior care more efficiently, patients, employers, and health plans also win. When health plans help patients and referring physicians make better choices, assist in coordination, and reward excellent care, providers benefit. And competing on value goes beyond winning in a narrow sense. When providers and health plans compete to achieve the best medical outcomes for patients, they pursue the aims that led them to the profession in the first place.

The Institute for Strategy and Competitiveness at HBS