Guest commentary: To profit from uncertainty, health enterprises must become anti-fragile

It is difficult for healthcare managers to watch the political struggles in Washington over the fate of the Affordable Care Act and not worry about the potential damage to their organizations. What can healthcare managers do to fortify themselves against potential non-incremental change in federal health policy that exposes them to financial hardship? In the spirit of preparing for the unknown, I recently reread Nassim Taleb's overlooked Anti-Fragile: Things That Gain from Disorder, published in 2011.

Taleb is a mathematician and financier who managed hedge funds and traded derivatives. He is an expert on risk and volatility in financial markets, whose Black Swan: The Impact of the Highly Improbable (2007) exposed flaws in the risk assessment strategies of banks and financial institutions like Fannie Mae that rendered them vulnerable to unforeseen adverse events, such as the subprime mortgage crisis that brought down the economy in 2008.

In Anti-Fragile, Taleb argues that corporate executives and government leaders should seek not only to open their eyes to potentially damaging downside risks, but be nimble and adaptable to unpredictable changes in their worlds. Taleb cited biological systems' response to stress in nature and businesses' response to market turbulence in financial affairs as examples how unpredictability simultaneously stresses the unwary and rewards creative response.

Taleb's warnings are prescient. One need only look at the institutions lauded by management books like Tom Peters' In Search of Excellence or Jim Collins' From Good to Great to realize how impermanent industry leadership is. Precisely because larger institutions become more bureaucratic, risk-averse and in thrall of their legal departments, they have much greater difficulty responding to adverse events than smaller or newer institutions. They also systematically mis-estimate franchise risks, particularly the Black Swan-type downside risks that threaten the business's independence.

While he did not explicitly address hospital systems or health insurers in his book, Taleb argued that scale and the search for security in the corporate and financial world actually increased those institutions' fragility and exposure to franchise risk. The reciprocal drive of health delivery systems and health insurers to become larger and more "unavoidable" may, ironically, have made them more, rather than less, vulnerable to economic shocks. The fact that many health systems have assumed insurance risk exposes them to economic cross currents they did not face when they were merely care enterprises, further increasing the fragility of their institutions.

What will help health enterprises be less fragile?

Empowering younger leaders. The baby boom era of senior healthcare managers, clinical leaders and board members is drawing to a close. Being willing to skip a generation and convey power to leaders in their 40s is an important contributor to anti-fragility. Younger leaders with fresh eyes and quicker hands may be more aggressive in pruning back unsuccessful activities and more willing to exploit new product and service opportunities.

Markedly quickening the pace of decision-making. As some health systems and insurers have grown to the scale of tens of billions in revenue, their decision cycles have lengthened to the point where major strategic decisions can take years. This is not tolerable. The costs of delaying decisions are likely to be more severe than those associated with "failing fast" and moving on.

Pruning back the portfolio of products, services, facilities and contracts. Tolerating duplication or propping up excess capacity or compensation is going to become increasingly untenable. Being willing to shed excess capacity, kill things that don't work and prune back the portfolio of contractual relationships that do not add value is a major part of being anti-fragile.

Listening more acutely to customers. Since patients are paying more of the healthcare bill themselves, they are likely to be less tolerant of indifferent customer service, products that don't meet their expectations or care that delivers poor clinical results. Growth in future revenue and market share for care providers and pharmaceutical firms is likely to be consumer- not insurer-directed. Happy customers tell friends and family about their experiences.

Taleb's book is not easy reading; it is dense with historical references, literary allusions and gratuitous score-settling with professional colleagues with whom he disagrees. But his writing is worth reviewing as healthcare managers consider how to cope with and benefit from uncertainty. As Taleb says: "We just don't want to survive uncertainty, to just about make it. We want to survive uncertainty and, in addition. . . have the last word."

Jeff Goldsmith, Ph.D., is president of Health Futures Inc. and national adviser at Navigant Healthcare. He is also an associate professor of public health sciences at the University of Virginia.