Bob Kaplan: Our Health System is Sick

HBS professor Bob Kaplan explains why he and Michael Porter believe that redefining the value equation for health care delivery in the United States is the solution to better care at lower cost.


The burning platform in health care is that the health care system really is not working. In fact, to even call it a system does an injustice to the word system. In the U.S. we spend perhaps 50% more per capita than anyone else in the world, and currently we have worse outcomes. So this is not a good situation when we're spending more than $3 trillion a year, 18% of our gross domestic product in an industry that is basically sick.

This is work I'm doing in collaboration with my colleague and friend, Michael Porter at Harvard Business School. Michael's a professor of strategy, and in fact, founded the field and he got interested in health care 10 to 15 years ago because he wondered, "How do you have a system like this sustain itself in such an inefficient way?" As he sort of threw it, he realized that the fundamentals for healthy competition, which ultimately is what drives value to consumers, does not exist in health care that we don't even agree on what goal of the system is.

So Michael has proposed, and I fully agree, that the basis for organizing the health care sector is around value, but we have a very specific definition of value is that for each medical condition, how do we improve the outcomes that are delivered and experienced by the patient and how do we lower the cost of delivering those outcomes, which doesn't seem revolutionary. But it is revolutionary because no one has defined the problem and the solution in that way. They've been all around this thing, how do we use checklists, how do we use lean and process improvement, how do we deliver better outcomes to patients and lower the cost of doing that?

So you think about a $3 trillion a year industry in the U.S. that doesn't know what its outcomes are and doesn't measure its cost, that explains a lot about the system that we have. And I got involved because I have developed a technology of how to measure cost and Michael's developed an approach on how to measure outcomes.

And then there's a third part, is when you have outcome measurements and you have cost measurements, you can reimburse providers in a very different way and right now, providers are reimbursed, in the U.S. mostly, by fee for service, and that rewards volume of stuff but not value, not good outcomes because the fees are independent of what outcomes get produced. And in fact, if you don't do a very good job and the patient has to come back for more work, you get more revenues. That's not a very good way of paying for health care.

So we're advocates of an approach that's beginning to come in called bundled payment reimbursement where you make a single payment to cover the treatment to entire medical condition. But we are actually doing it with [inaudible 00:03:04] flavor which is base it on, make the payment contingent on delivering good outcomes, which seems normal because if you buy a car and it doesn't work, you return it because it doesn't work. Every other industry that straight forward in health care, this is revolutionary. My role in this agenda primarily at this stage is the costing element and what I found does exist is that costs are not measured well in health care at the specific medical condition level.

Obviously, hospitals know how much they're spending. They can trace some of their spending to various clinical departments like orthopedics and cancer care, neurosurgery. They can't take the cost of that department level and drive it down to the patient level treating the patient for the clinical condition. I've helped to develop an approach called time-driven activity based costing which enables that assignment of expenses to be done well at the patient level. It just consists of really two types of two estimates and one of them is to understand the clinical pathway that is used to treat a patient with a medical condition.

What actually happens when the time they show up with a complaint until you diagnose it, treat it, through the surgery, the recovery and then the therapy and release them. What are all the clinical and administrative processes that are performed to get the patient through the entire cycle of care? And when we do that we try to find out at each process step, who is doing it. We can actually calculate how many minutes per year that a person or piece of equipment is available for patient work. That typically comes out to be 90 or 100,000 minutes a year. As you divide their annual expenses by their capacity, you get a cost per minute for every single individual.

And what's really fascinating about health care is the variation and cost rates. Until we have the MDs, whose cost rates could be somewhere between three and a half to six or eight dollars a minute. That would be typical rates, but you have a nurse, might be a dollar or a dollar and a half a minute and you have clinical assistants or scribes or receptionists for around $0.50 or $0.60 a minute. So you get this 10, 12 to 1 variation between the least highly and the most highly paid person which is really interesting because it says even if everybody is busy all the time and they're doing work, if you have a $5 a minute person doing something, that an 87 minute person could do equally well or slightly less efficiently, that's an inefficient use of the resources.

So there's an expression in medical care called have people work at the top of their license. But they don't really see the rationale or the economics behind it until you get to this caustic procedure. So combination of . . . they would take the process times for each person multiplied by their cost rate, cost per minute that tells you the cost of that person or the process step, and we just add it up across all the process steps over the whole cycle of care, and that tells you the total cost. This is not a quantum mechanics or genomic sequencing, it's really simple. What makes it difficult is just there's so many process steps.

So Michael and I are sitting there at the Harvard Business School four or five years ago and we realized, okay, this looks like this could work. But how do we get people other than the two of us to realize that this really could work in practice, there's a lot of good theories that don't work in practice. I said, well, the only way we're going to do this is to test it in practice and so we have to find pilot sites that are willing to try this out because we think we'll be able to create the change by demonstrating that it works. We want to work with leading providers. We're really excellent and they want to be better and they also want to prepare for the new environment where there will be fewer resources available to pay for health care.

And so the ones that are proactive and thinking ahead that they realize that this very forgiving fee for service environment will phase out over the next five years and they want to be ahead of the curve and see what can replace them. Currently, we're working with at least two dozen organizations and they're really distinguished organizations. They are leaders, the Boston-based hospitals and Yale Clinic and Cleveland Clinic, then about six or eight months ago, got contacted by Dr. Vivian Lee here at the University of Utah Health Center and Dr. Lee is a great visionary leader and those are the kinds of people I like working with.

So starting in January, I and my team came out here, we presented the ideas and we formed five teams to work on applying the time-driven ABC in three clinical areas and two support areas. We had the benefit of Dr. Lee, had already put into motion, with some terrific staff here, an emerging system called value-driven outcomes. We're getting outcome measurements very well at the clinical level as well as tracing starting to trace costs to the clinical level as well. And we had to just refine the costing module within that and to build upon this value driven outcomes approach that was being implemented.

It's been a great place to collaborate. We have the opportunity, the UHC has the opportunity maybe with some of our systems to really be one of the national leaders in implementing this value-based health care delivery approach. And so if we can use this as a shine, light, the example, this really can be done and it can deliver major improvements, and patients are better off and we're doing this at lower cost, people will see that this is really a successful way for transforming the way we deliver health care in the United States. There's a lot of skepticism in health care and they'll tell you 200 reasons why any innovation approach won't work and my role is to show it can work.