It seems surrealistic, what with the stock market and other signs of economic strength at record highs, to recall that not too long ago, grave markers were being placed on the U.S. economy. But instead of dying, it has come roaring back.
The same forces that revitalized the economy are now at work on the U.S. healthcare system. When they have completed their labors, the sector will be substantially restructured, with new consumer-responsive organizations that are closely focused on a chronic disease, procedure or type of care replacing many everything-for-everybody facilities.
The competitive advantages of focused, consumer-friendly organizations are demonstrated in the transformed U.S. economy. Take the superstores, such as Staples, for example, which increasingly dominate retailing. They are so successful because they fulfill busy consumers' need for convenience. The huge stores are hardly ever out of a stock, thus eliminating the need for a return visit, and are targeted at clear consumer needs, such as office supplies or home maintenance, thus taking the mystery out of shopping. Then, too, clear focus paves the way for the excellent information systems that help to lower costs and prices.
The U.S. automobile sector also found that paying attention to customers helped it to succeed. Rather than ignoring or denigrating his customers, Chrysler's chairman insisted that the J.D. Power survey criteria through which customers expressed their disappointment with a Chrysler's quality be built right into the company's internal quality measures. Small wonder Chrysler now leads the industry in profitability.
The forces that caused such transformations-consumers who are busy, well-informed, price- and quality-sensitive-are now at work on the healthcare system, too. Many providers are attempting to respond with vertically and horizontally integrated systems of care that produce the convenience consumers crave with an everything-for-everybody, seamless system of care. They hope to reduce costs with the massive economies of scale caused by their integration.
But the early results of such efforts are not encouraging. A large medical outcomes study revealed that integrated staff HMOs received significantly lower ratings for appointment waits, time spent with the patient, providers' personal skills and ease of telephone access compared with looser forms of health insurance. Although I belong to one, such organizations are losing market share because they don't provide important qualities that many consumers value.
Nor does vertical integration necessarily reduce costs. Humana's difficulties with vertical integration of new salaried physicians with its existing hospitals and insurers shows why. Even Humana's savvy managers found it difficult to run three businesses simultaneously, especially when two of them were new. Humana never achieved the physician productivity it initially envisioned. And lower-than-expected referral rates to its hospitals increased costs, a trend exacerbated by the faltering morale of the once-proud Humana hospital managers. After all, they who were once the stars of the Humana hospital chain were now the albatrosses around the neck of the integrated Humana system.
In the end, Humana survived as an HMO by cleaving the vertebrae of its vertically integrated system.
More promising are what I call healthcare "focused factories," units that provide all the care needed for a particular disease or procedure, and organizations that give consumers the convenience, control and information they seek. Despite the dehumanizing implications of the term "factories," I choose to emphasize that, like factories, these organizations consist of team members whose different skills are combined to achieve a clear, common goal.
Widely validated by the manufacturing sector, focused factories are just as appropriate in healthcare. For example, one medical study showed that hospitals with a high volume of open-heart surgeries had lower mortality statistics than others. Another study found that high-volume surgeons use fewer resources than others. The eminent heart surgeon Denton Cooley exemplifies both these qualities. By 1994, he had performed 60,000 open-heart procedures and his package price for a bypass was a third lower than the national average.
In healthcare, as everywhere, practice makes perfect. And perfect lowers costs, too. For this reason, a focused factory that provides integrated cancer care is not only well-liked by its patients but can also capitate its services.
A good model of the focused factory for the hospital field is Shouldice Hospital in Toronto. The facility concentrates on only one surgical procedure-the repair of abdominal hernias. It contends its charges are far below those of the typical U.S. general-purpose hospital, and the recurrence rate is less than 1%.
Because healthcare follows the 80-20 rule of cause and effect-for instance, 85% of all beer is quaffed by 15% of drinkers-a limited number of such organizations can cover the healthcare needs of many. For example, only two diagnostic categories accounted for 26% of 1987 medical expenditures and 10 for 75%.
Early-stage innovators that respond to people's need for convenience, information and support have proved successful, too. For example, one study showed that Healthtrac, a personalized risk assessment and health promotion firm, lowered by $598 the average total medical costs of the average retired enrollee who received its personalized health promotion support.
Widespread replication of such efforts will simultaneously improve quality and control costs-not only with the economies of focused delivery of care but also by providing people with the support needed for cost-effective self care. Of course, we need the government's regulation and safety nets, but it's the market-the dynamic interplay between innovative providers, both for-profit and not-for-profit, and consumers-that will create a new, improved healthcare system.
Herzlinger is a professor of business administration at Harvard Business School and author of the recently published book Market-Driven Health Care (Addison-Wesley).