Fwd: How A Health Care Company Creates Value

On Jun 19, 2018, at 3:16 AM, Tom Schramski <tschramski@vertess.com> wrote:

Michael Porter, the renowned Harvard Business School professor, famously said that there are only two types of competitive advantage that a

Volume 5 Issue 13, June 19, 2018

How A Health Care Company Creates Value

by Bill Fotsch and John Case

Michael Porter, the renowned Harvard Business School professor, famously said that there are only two types of competitive advantage that a company can sustain. It can be the low-cost provider and thus offer lower prices. Or it can somehow differentiate itself from competitors—through quality, branding, and so on. In the health care sector, the competing-on-price avenue is pretty much closed off. If reimbursement rates are fixed, for example, then everyone in a given category receives the same amount per patient or per procedure. Anyway, not many health care organizations want to be known for bargain-basement prices. Few consumers decide to take Grannie to the cheapest nursing home or Junior to the cheapest pediatrician purely on the basis of price.

So, to create long-term value, a health care organization has to choose Porter's second option: differentiating itself from competitors. But this strategy entails its own challenges. Only a few organizations have any kind of proprietary technology or assets. Only the largest and best-known have any kind of sustainable brand or market position.

What a health-care company can do, of course, is differentiate itself on service quality. This is an approach taken by organizations ranging from local nursing homes to world-class medical centers. "Every life deserves world-class care," advertises the Cleveland Clinic. "Excellence every day," boasts the Massachusetts General Hospital. But service quality has to be more than a slogan. It has to be built into an organization's DNA, and it has to be systematically reinforced every day in the way care givers and other employees go about their jobs. All of which raises a key question for owners, executives, and would-be acquirers in the industry: if the quality of service in an organization isn't where it should be, how can we go about raising it? And in particular, how do we do so without pushing costs through the roof? These questions bring us to a little story. It's about the critical care unit in a major east coast hospital that one of us, Bill, was called in to advise. You would recognize the name. The hospital was known at the time for its innovative approach to management. Each unit was run by a local head of nursing, the relevant physicians, and an administrator. But management of the CCU had reached an impasse. The administrator pushed for lower costs. The nursing head pressed for higher quality—in particular, increasing the number of RNs and reducing the number of LPNs—and never mind the cost. The physicians just didn't want to deal with the strife. We don't know whether it was a move of desperation or genius, but the administrator finally just gave up. He turned financial responsibility for the unit over to the nurses. They sat down with the hospital's head of nursing and talked about strategies. To add interest, the head of nursing told the CCU team that they could split 15% of any improvement in the financial performance of the unit, assuming there was no compromise on quality.

Before long, amazing things started to happen. The nurses, knowing they were responsible for the unit, began offering even better service, both to the patients they cared for and to the physicians they attended. The physicians, responding to the new attitude, began referring more patients to the unit. That led to an increase in the unit's census, a key driver of profitability.

Expenses came under scrutiny, as the nurses understood that they were also responsible for lowering costs. Though most were RNs, they realized there was a lot of nursing work that did not require that level of training and expertise. Besides, the RNs did not like doing the less-skilled work that an LPN could do. When an RN left, he or she was likely to be replaced by an LPN at a lower cost. Over time, the unit's costs dropped, its profitability soared, and quality indicators such as patient satisfaction remained at a high level. We draw a couple of lessons from this story—lessons that we think are widely applicable in the health-care sector. One is that it's a mistake to separate accountability, with one group or individual responsible for quality and another for costs. That's bound to put people at loggerheads, and compromise care. Another is that the people doing the job can often take responsibility for running their own unit, provided—and this is a big proviso—that they understand the economics of the business they are responsible for. This can be a tough one, because many people in health care don't like to think of themselves as "in business" at all, and they particularly don't want to worry about costs. But how else can you assure quality without driving costs up, except by giving responsibility to the care givers themselves? Nurses and other care givers are likely to welcome the idea that they are helping to reduce the rising cost of health care. A third is that only when people do understand the economics—and do take responsibility for costs and quality alike—can an organization sustain a high level of service over time. If that's how the company differentiates itself in the marketplace, then great service is a guarantee of long-term success and job security. Even people who aren't "in business" and have never heard of Michael Porter can understand and work toward those objectives. They will create better organizations—and far greater value—by doing so.

Bill Fotsch is Founder and President of Open-Book Coaching. John Case is author of Open-Book Management and several other books. They write regularly in Forbes. If you're interested in learning more about Open-Book Coaching, Bill can be reached at bill.fotsch@openbookcoaching.com.

Bill Fotsch John Case

Note: I've admired Bill and John's work for many years and implemented OBM in my old healthcare company with great success. We found that trusting our employees with critical financial information elevated the quality and sustainability of our services. It's worth an in-depth look more than ever….Tom Schramski.

In the next edition of SalientValue... What happened in healthcare M+A during the first half of 2018? We'll look at recent developments as well as expected trends for the second half in the July 3 issue.

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