Monday, January 28, 2013

Organizations That Can’t Fall . . . Die on Their Feet

A not entirely unintended consequence of the various aspects of health care reform in the United States is the growing concentration of ownership of hospitals and physician organizations.  This is occurring because hospitals and doctors are predicting that they will be forced to take on a greater portion of the financial risk of patient care.  Creating larger networks is one strategy for dealing with this.  Larger networks provide more actuarial support, in terms of a diverse risk pool.  Also, by incorporating primary, secondary, and tertiary care into a network, the potential exists for more effective case management.  Finally, a larger market share is viewed as helpful in asserting leverage over the insurance companies.

I seek not to discuss in this post whether today's management cadre is capable of executing the business strategy of a system, as compared to a single hospital or physician group. While that is a topic worthy of discussion, my purpose today is to focus on broader issues.  In particular, let's explore the possibility that the growth of hospital networks can lead to such a reduction in competition that the result is one or more systems that are "too big to fail" in a given geographic area.  When firms reach this status in society, there can be dangerous ramifications.

My Israeli colleague Boaz Tamir (Israel Lean Enterprise) recently wrote about these dangers in a paper originally published in Hebrew.  I offer excerpts from an English translation here.  The discussion covers several types of industries, but there is a clear connection to the health care world that is evolving in the US. The title:

Organizations That Can’t Fall . . . Die on Their Feet

Here in the empty land, in the ebbing time
      We live and do not live, die and do not die.*

Does the fact that an organization’s fall is likely to shake the foundations of the economy and the society in which it operates justify preserving it at any price? When the central-bank commissioner prevents the bank’s collapse in the name of “banking stability,” does he take into account the damage this entails for how the bank is managed, for the market and the customers? Does the insurance supervisor who prevents the collapse of an insurance company really help the public of insured persons?

Is it not clear that no government would dare close a hospital even it slid into bankruptcy because of failures of corporate governance and administrative atrophy? But does anyone take into account the destructive effects of this premise on the possibility of correcting the defects of management and service, or on the number of patients who will die as a result of them?

The dream of managers, workers, suppliers, and financiers is to belong to an organization that cannot fall. Once they are part of such an organization their niche is guaranteed, along with the future of their families and associates. But what about the future of the customers who were forgotten—the insured, the patients, or the small households?

An organization that cannot fall lives inside a bubble. The price of its services is determined according to its operating costs, padded by its cost-plus. Such an organization, if it lacks a leader capable of working against the “force of gravity,” will naturally oppose any change, show no interest in developments in its environment, and fail to repair administrative failures or systems that have atrophied within it. When there are no mechanisms for seriously assessing its efficiency, nothing will lead management to insist on operational excellence, attract professionals and excellent workers, prevent waste, reduce hidden unemployment, and focus on creating value for the customers—the declared goal of an organization that operates in a competitive environment and is not immune to a fall. 

Any organization, from the moment its existence is not dependent on its customers, is like a body whose nervous system is impaired and has lost the sense of pain that was intended to protect it. It has no real impulse to streamline, upgrade its capacity, or create value for customers, who are seen as a nuisance instead of the source of its life. Therefore, the default option of such an organization is to atrophy from within. The mission, the goal, and the vision that led to its establishment are already faded memories that hang on the walls of the building’s entrance beside pictures of CEOs. 

The raison d’tre of an organization that cannot fall, that is maintained at any price even when it has gone hollow, is preservation of a body that lacks any vital sign of value for the customer, or in other words, preservation of the interests of the managers, the workers, the local authority, the ruling party, or the shareholders—everyone except its real customers, whose benefit was the original justification for its existence. Sadly, experience teaches that from the moment an organization is “sanctified” as an institution and cannot fall, the process of systemic atrophy cannot be reversed. Nor can the inflated results, unwieldiness, inflexibility, and damaged functioning.  

It is, though, an illusion to think that an organization that cannot fall has not died. Arriving at atrophy and systemic collapse, its end is to die on its feet. No one dares uproot this tree even when its fruits have long expired and its higher managerial levels have dried out. No one will dare proclaim the end of an organization that cannot fall even if it stands only as a silent monument—not even to make way for the growth of a young, naïve organization that seeks to justify its existence by achieving its goal: providing service to its customers.
*"Here in the Land," from the book by Amir Or, Masah Meshugah, Keshev l’Shira, 2012 (in Hebrew).

1 comment:

Anonymous said...

With health networks in Mass (and elsewhere) taking on MASSIVE financial risk via the Medicare Pioneer ACO program (not to mention Commercial risk contracts), I think you will see local health networks fail.... especiallly ones that are not well capitalized but go headlong into risk regardless. All of the ACOs here in Mass are already lobbying to have losses for the 2012 contract year written off due to "lack of data from the Feds" but the bigger reason is that they're already seeing downside losses on this ACO population. These losses can be huge and there are some networks that won't have the cash to cover such a loss.... you always see who is swimming naked when the tide goes out.