Healthcare Delivery―An Exceptionally Different Industry
(I co-authored this article with Ryan Van Wert. We originally published it in 2021.)
The business of healthcare delivery differs markedly from other consumer and service industries in many ways. First and foremost, the economics differ. Specifically, the payers of medical care are often different from the customers, the government and third-party insurers are the primary payers, demand is inelastic, quality metrics are typically unavailable, and the industry consists largely of nonprofits that avoid taxes. And that’s just a start of the economic differences. These profound economic differences vis-a-vis other industries lead to fundamental deficiencies in healthcare governance, leadership, organizational design, infrastructure, and operations. We believe economic exceptionalism is the root cause. In this article, we provide four examples of the consequences of economic exceptionalism in healthcare delivery and then discuss what can be done about it.
1. Boards of Directors (Governance)
Large hospital system boards are significantly different from boards of large organizations in all other industries. Typically, across industries, a high-functioning board of directors is vital to a company’s success. A chair leads the board, which has on average ten additional members (range of three to 31), who often fill organizational gaps in skills and expertise. In healthcare, however, boards of directors are different―institutions often have large, unwieldy boards with members who may be impressive names in social and philanthropic circles but have neither the time nor direct experience to help the institution run more effectively. For example, the board of trustees of New York Presbyterian Hospital, is made up of 100 people, many of whom are prominent New York citizens from investment banking and real estate.
There’s no question that Presbyterian, and others like it, are large, complex organizations. But larger, more complex organizations in other industries make do with smaller boards. Alphabet, Amazon, and WalMart, have 8, 11, and 12 directors, respectively. As a $10 billion local health care organization, Presbyterian has a board that is about 10 times larger than the boards of the $80 billion to $520 billion global organizations.
We are comparing apples and oranges, you say, in terms of non-profits versus for-profits? Nope―the $3 billion non-profit, Red Cross, has 15 board members and the $4 billion United Way Worldwide has 12.
Our point is that in health care delivery, boards of directors are larger than the norm, and members often have less day-to-day relevance to the institution, and less operational impact, than boards of companies in other industries. At best, these healthcare boards help raise money for their institutions (by the way, money is not high in the priority of needs in healthcare) but at worst they are out of touch with organizational needs, unfocused on strategic and operational priorities, and inexperienced in governance.
2. Health System CEOs
CEOs of healthcare delivery organizations have different incoming experience, and different tenure, than CEOs at companies across other industries. In the US, the average tenure of a CEO is 7–8 years. But, the average tenure of a hospital system CEO is 3.5–5 years. That’s a significant decrease in tenure―about 43 percent shorter, in fact. A longer time in the top office lends itself to better performance, financials, operations, and culture. So, this major difference in leader tenure at non-healthcare versus healthcare organizations is important. Having to find a new CEO every 4.25 years is an inefficient human resources model that takes significant capital, time, and other resources, not to mention the additional leadership turnover that invariably occurs with an incoming new CEO.
A serious disconnect between low apparent supply of capable, experienced (in healthcare and in management/leadership) healthcare delivery CEOs versus high demand for capable, experienced CEOs is a main cause of shorter tenure. The hospital CEOs lack the combined management and healthcare delivery industry experience to lead their organizations effectively, and they depart earlier than CEOs in other industries. Here’s what was written about the problem in the Harvard Business Review. “Many physician leaders who are promoted to lead an entire enterprise or a business segment . . . lack the necessary experience for the job. They aren’t skilled in managing and blending functional and business strategies, portfolio assessment, factoring in short- and long-term tradeoffs, and taking a longer-term strategic approach to decisions. These shortfalls can render such leaders ineffective.”
When we do the “five-whys” to determine why there is such a gap in supply of leadership versus demand for leadership, we conclude that the board of directors is an underlying cause. A key and core job of a board of directors in every industry is to hire and fire a CEO. For years, healthcare delivery organization boards have not focused on the “elephant in the room” strategic problem of building a pipeline of qualified CEO talent. Therefore, the disconnect between supply and demand of CEOs for healthcare delivery organizations exists; CEO capabilities in the industry are lower; and CEO tenure is meaningfully less.
Richard Gunderman writes in The Atlantic about various problems with hospital CEOs and concludes, “To turn the tide, we need to call for a higher degree of expertise, dedication, and accountability from the boards of our 4,000 U.S. nonprofit hospitals. Board members need to deepen their understanding of what quality and value in healthcare really mean, and then hire, fire, and reward their hospital CEOs accordingly.”
3. Health System Infrastructure
Hospital systems often have outdated and high-cost physical infrastructure. This, too, differs from how consumer-facing companies in other industries operate. Consumer-facing companies generally must aim to develop customer-pleasing facilities. They invest heavily and consistently to create facilities with improved point-of-sale systems and friendly, modern layouts, décor, parking, workflows, consumer experiences, and more. Coffee companies mimic European cafes and American front porches. Tech companies offer light, airy architecture, lots of space, ample and modern signage, and customer flow that promotes interactivity.
In contrast, health care systems do things very differently, in terms of infrastructure and design. They certainly don’t seem to prioritize patient- (or employee-) friendly layouts or design. Hospitals and other health care facilities often have labyrinthine designs, outdated decor, insufficient signage, and poor parking. Anyone who has been to Boston’s Longwood Medical Area, where multiple major medical institutions populate a few square blocks, experiences this. As one of us (Joe) knows from experience, the aged and infirm dread having to navigate to their respective destinations on Longwood Avenue; Joe feels viscerally, at these times, that healthcare leaders have deprioritized the importance of user-friendly physical facilities. On a less personal level, Ken Shine, former president of the Institute of Medicine, has said, “We operate our health care system like a cottage industry, big, big cottages with state-of-the-art technologies to care for patients, but infrastructure which is totally inadequate, systems which don’t talk to each other.”
Cyber infrastructure is also different in healthcare than in other industries. Take cybersecurity; it is widely believed that healthcare is more vulnerable than other industries to cyberattacks. A 2018 HealthIT Security article stated, “The healthcare industry is taking the lion’s share of ransomware attacks . . . Ransomware attacks grew three-fold last year, with healthcare being affected the most by this increase . . .” The facts show that hospital systems have been slow and reluctant to invest adequate capital in establishing a cybersecurity infrastructure, including upgraded cyber-security staffing, for ensuring clinicians avoid catastrophe. Personal health information is 50 times more valuable on the black market than financial information, yet in healthcare 98 percent of “internet of things” devices are unencrypted and unsecured. A report found that “The health care industry significantly lags behind other industries in terms of cybersecurity and digital literacy.”
This should come as no surprise―consider the woefully slow transition to electronic record keeping, which only accelerated when the government mandated and incented the industry transition to electronic medical records. The point is, healthcare infrastructure — physical and digital — is different from the infrastructure in all other industries in its relative importance (high) and yet also its backwardness (also high).
4. Health System Operations & Execution
The operational and human resource model in healthcare delivery is also different. For instance, Americans have tacitly accepted crummy workflow and operational understanding at hospitals for decades in a way that they have not accepted in other industries. Actually, healthcare delivery employees accept this as much as patients do. Consider this fact — in most U.S. health care delivery systems, the highest paid, best trained professionals — physicians — do basic data entry for hours a day. In what other industry do the highest paid individuals do basic data entry? Imagine if airline CEOs required pilots to input passengers’ frequent flyer info and TSA numbers.
The COVID-19 pandemic lay bare how poorly hospitals are run. Hospitals responded differently to the COVID-19 emergency than other industries have responded to their own historical emergencies. Since books have been and will be written about this topic, we’ll keep it brief. But, suffice it to say, health care executives’ insufficient management training compared to execs in other industries showed up in spades — too few had deep operations know-how, and too many displayed perplexing ignorance around best practices in negotiations, supply chain management, emergency preparedness (i.e., COVID-19 testing and administration of vaccines), and staffing. These are areas leaders with extensive skills training and operations expertise, in other industries, have accumulated over years of education, work, mistakes, successes, and accountability.
Many people (Bill Gates, for instance) have for years stated that a pandemic could destroy the operationally weak American health care delivery system. In an article titled “How the Pandemic Defeated America,” in The Atlantic, Ed Yong wrote, “. . . the coronavirus created thousands of sickly hosts that it then rode into America’s hospitals. It should have found facilities armed with state-of-the-art medical technologies, detailed pandemic plans, and ample supplies of protective equipment and life-saving medicines. Instead, it found a brittle system in danger of collapse.”
A “brittle system in danger of collapse” is not just pockets of ill preparedness here and there. It’s an operational model and structure that is different than other industries that are not “in danger of collapse.” Emergency preparedness is another example where the healthcare delivery industry performs worse, despite having scads of capital. For what it’s worth, we acknowledge that there are vast income and wealth disparities that exacerbate the healthcare delivery problem, but we think it bears repeating that overall in healthcare delivery, lack of systemic capital is not the problem.)
So What?
We expect that most readers have noticed the differences we cite and have also noticed that these differences are negative, not positive differences. The big question is, why these structural and strategic differences exist and what can be done about it. We believe that the differences in healthcare versus other industries have arisen because of the economic differences in healthcare–those differences we cited at the beginning of this article. The study and emphasis of those economic differences started in 1963, when economist Kenneth Arrow (who later won a Nobel Prize) wrote a seminal paper in the American Economic Review, “Uncertainty and the Welfare Economics of Medical Care.” The paper gave birth to modern healthcare economics and thus many attempts to determine how different American healthcare is from other American industries. Some of the explanations of economic differences in healthcare developed a name―economic exceptionalism. Here’s an excerpt from a 2016 paper in the American Economic Review: “. . . ‘health care exceptionalism’ has a long tradition in health economics. It dates back at least to the seminal article of Arrow (1963), which started the modern field of health economics by emphasizing key features of the health care industry that distinguish it from most other sectors and therefore warrant tailored study . . .”
Note that the economic differences in healthcare are not just differences, they are a sense of exceptionalism. Exceptionalism is a loaded term, and so let’s define it.
Exceptionalism: The condition of being exceptional; uniqueness; a theory that a nation, region, or political system is exceptional and does not conform to the norm.
Exceptionalism can imply either a) a sense of being different, like “an exception to the rule,” or b) something extraordinarily good, like an “exceptional athlete,” or c) both. In his venerated 1840 treatise, “Democracy in America,” Alexis de Tocqueville described America as “exceptional,” which eventually led to the coining of the term American exceptionalism. That’s where or how you may have heard the term used, and politicos debate ad nauseam whether the term means a, b, or c in the above.
We believe that economic exceptionalism in healthcare, which began around the 1960s, connoted essentially the first sense — different or unique, but not better. And we further believe that this economic exceptionalism gave rise to a sense of strategic and cultural―because healthcare delivery system leaders operated economically exceptional (different) organizations in an economically exceptional (different) industry, they slowly came to believe that they themselves, their teams, and their organizations generally, were and are strategically and culturally exceptional. Further, we believe that they believe they are culturally exceptional in the “better than” sense of the word.
Why do we believe that? Because healthcare leaders’ behavior and words often show us their beliefs. There is a well-known term, medical narcissism, studied at length by John Banja and covered at length in his book, Medical Errors and Medical Narcissism. He shows that MDs often have “fantasies of omnipotence” and feelings of “specialness” that have developed to help them cope with the high levels of pressure and stress of their jobs. The MDs who are in leadership positions at healthcare delivery organizations in many cases personify a situation of factual economic exceptionalism plus medical narcissism. They often show through words and behavior that they believe that because they are economically exceptional in the first sense of the term (different), they are also generally exceptional in the second sense of the term (better).
For instance, in the face of generally poor industry and organizational performance, healthcare leaders carry on making relatively minor changes in their organizations and the industry. For instance, a colleague of ours attended a “fireside chat” with the CEO of a Top-Ten largest healthcare delivery organization in the US only to hear from the CEO that the main thing that can be done better for improved outcomes is . . . for citizens to take better care of themselves. In other words, he did not say clearly or strongly that healthcare overall or his organization should change to serve citizens better. He spoke as if he and the healthcare delivery industry uniquely face that pesky difficulty of human beings wanting good service and results and if they don’t receive it, it’s their fault. To us, that is an example of an attitude of exceptionalism in each sense of the word.
We believe that leadership’s engrained culture of exceptionalism drives today’s situation in which patient satisfaction is low, inefficiency is high, and patient outcomes are poor. We further believe that the industry can only solve its deeply entrenched problem through making a fundamental, long-term, steady shift from recognizing that its economic exceptionalism, in terms of being different, does not make it culturally or organizationally exceptional, as in superior or better. We believe that the best course of action would be for the industry to become economically unexceptional, i.e., normal. In other words, we think the industry should economically restructure to have for-profit providers that pay taxes, easily available quality metrics, clear and transparent pricing, and payers and customers that are well informed and aligned. We have written previously about healthcare delivery organizations that are economically non-exceptional and therefore, ironically, quite exceptional. These are organizations such as Devoted Health and One Medical (in which we have no financial stake).
Yet, we acknowledge that healthcare industry leaders will not agree to shift the economic structure of the industry. As such, leaders must urgently and importantly work on values and culture in their organizations. Beyond Hippocratic Oath and patient privacy being driving aspects of the MD-leader’s deeply engrained operating style, medical narcissism also lurks. A leadership style infused with medical narcissism intersects with economic exceptionalism to the great detriment of patients everywhere. Effective large company leaders have been shown to be modest, self-effacing, quiet, and reserved, uncharismatic to the point of unremarkable, but with indomitable will. Thus, medical narcissism must be replaced with this Level-5 Leader type of humility.
In summary, leaders in healthcare need to come to terms with and fix their beliefs in their own, their organizations’, and their industry’s exceptionalism at the strategic and cultural levels. Yes, we do know this is an exceedingly large and difficult undertaking, but we’re convinced it’s worthwhile, meaningful, and better than the alternative of the industry continuing as is and inadequately serving patients.
