In Defense of Health Care Management

By J. Daniel Beckham

In Defense of Health Care Management

There are some highly successful hospitals in America. What does that say about the people who run them?

The revolution failed. Despite the ability of the entrepreneurs, the enthusiasm of its powerful backers, the billions of dollars spent to fuel its engines, the nobility of the cause, and the clarity of the mandate, it failed. Despite the vaunted efficiencies to be created by new services and competition, costs proved intractable. Services remained inconvenient and variable in quality. The scientific breakthroughs that pioneers have created have yet to be reaped as effective medical technologies.

What went wrong? I claim that the failure was almost entirely that of management, not of strategy.

Regina Herzlinger
Harvard Business Review, March, 1989

In March of 1989, Regina Herzlinger, a professor at Harvard, published an article in the Harvard Business Review called "The Failed Revolution in Healthcare -- The Role of Management." A shorter version of the article appeared earlier in an issue of Fortune. At first glance, Professor Herzlinger appeared to be launching an attack on the wave of entrepreneurs who entered the health care industry in the 70's and 80's. On closer reading, it's apparent that she meant her criticism for other players as well. Hospitals and doctors also received her attention. Her central message was clear -- health care suffers from a general retardation in management skills.

In 1980 when I first went to work for a hospital, I must admit I carried some of Herzlinger's prejudices about health care managers with me. I had worked, up to that point, in the management ranks of three Fortune 500 companies. At each of those companies:

We knew our mission was, above all, to make a profit -- to maximize the wealth of our shareholders. In the hospital, I found myself and others struggling with very fundamental questions like "Why are we here?" "Who do we serve?" "How much profit is enough?"

We knew we could exercise influence and at least some control over the folks who manufactured our products. They were on our payroll after all. Or they were vendors who very much wanted to keep us as customers. In the hospital, I discovered that production of our "products" depended, for the most part, on the good will of completely independent physicians engaged in what might properly be described as America's last "cottage industry." Obviously, this raised some real dilemmas when it came to controlling costs and quality (not to mention creating unity of effort).

We always had a relatively good feel for where our products were in their life cycle and what their prospects for the future were. Certainly we had to contend with competitors and new technologies but we never had to face, as hospitals do, the possibility that a government regulator, with a flick of a pen, might turn our most profitable business into a loser overnight.

We knew that our capital equipment required continual investment and would eventually become outmoded, but we never had to deal with technological obsolescence over a one to two year time span the way hospitals now do. Nor did our manufacturing processes demand constant waves of ever better trained professionals the way a hospital's constantly changing technology does.

We knew that our products would be sold to people who wanted them. Although we hoped those products were enthusiastically desired, we never had to consider the complexities or the rigors of selling services to people whose lives were often, literally, balanced on the precipice -- people who, if they had their druthers, would have preferred to have been buying just about anything but what we had to sell.

Every industry, every business views itself as different. And indeed it is different. The key factors for success vary depending on whether you are building an airline, selling cars or pushing hamburgers. Some businesses are also more complex than others. Peter Drucker has called the American hospital the most complex of all business enterprises. A year before Herzlinger's article appeared in the Harvard Business Review, Drucker published an article in the same journal called "The Coming of the New Organization." Drucker predicted that today's traditional corporation will disappear 20 years from now and in its place will be organizations more closely resembling -- now hold onto your seats -- ". . . the hospital, the university, the symphony orchestra." He anticipated "information-based organizations" composed of highly trained specialists operating in ad hoc task forces led by an executive with the same skills an orchestra conductor brings to bear.

The point Professor Herzlinger has missed (or has refused to acknowledge) is that there are some highly successful hospitals in America. And if these are more complex organizations than most typical American corporations, which is my experience and seems to be Drucker's contention, then what does that say about the people who run successful hospitals? Are they more or less successful than their counterparts in other industries? Which perhaps begs another question -- How do you define success?

Do you measure success by profits? Since most of America's hospitals are still non-profit, this seems an inappropriate measure, but let's apply it anyway. In 1987, The Methodist Hospital in Houston earned $37,569,928 in "excess revenues" on $338,604,928. (My calculator says that's 11%.) How about the quality of their service? Well, Ron Zemke and Dick Schaaf thought enough of Beth Israel (Boston), Riverside Methodist (Columbus, Ohio) and Mayo Clinic to include them in their book, The Service Edge, which listed 101 of America's top service organizations (in the company of such standouts as Nordstrom's, Hyatt and McDonald's).

Another useful comparison might ask how the services and products of the health care industry perform in the world market next to those of other American corporations. Of course, many American products still shine internationally -- Levis jeans, Coca-Cola and Boeing jets come to mind. But there is another piece of American technology and craftsmanship that, despite its inefficiencies and variability, attracts customers worldwide. It is American health care. Is the ever growing influx of foreign patients to Cleveland, Houston, Boston, Baltimore and dozens of other American cities that are home to world class doctors and hospitals a legitimate indicator of success? I contend it is.

Early in her Harvard Business Review article, Herzlinger blames high health care costs for hampering "control of our disastrous trade deficit." Although these high costs are certainly a drag on American competitiveness internationally, they are not nearly as fundamental to our problems as our growing global reputation for poor relative quality and value in industries outside health care.

In a tongue-in-cheek letter to the Board of Directors of General Motors Corporation in its March 26th issue, Business Week recommended that GM consider replacing Chairman Roger Smith with Frances Hesselbein who, they note, "with a work force of 751,000 people in 333 autonomous subsidiaries nationwide . . . plotted a strategy that reversed years of decline in market share and led to vastly improved performance." Hesselbein is the retiring national executive director of the Girl Scouts of the U.S.A.

Business Week's recommendation appeared in an issue that carried this headline on the cover, "Surprise - Some of America's Best Run Organizations are Nonprofits. Here's what Corporate America can Learn from Them." The article not only profiled the Girl Scouts, it also went on to identify the "Best Managers" in Education, Social Service, Culture, Foundations and Health Care. In fact, it listed five top managers in health care (all from hospitals): Robert Heyssel, Johns Hopkins, Baltimore; Larry Mathis, The Methodist, Houston; Boone Powell, Jr., Baylor, Dallas; Mitch Rabkin, Beth Israel, Boston, and Gail Warden, Henry Ford, Detroit.

On April 30, Forbes Magazine responded to the Business Week article by calling it "notably woolly-headed" and turned to Professor Herzlinger for reinforcement. She commented in an interview that non-profit hospitals, "Because of their structure and the things they do, are more disposed to be inefficient than for-profit organizations." She went on to suggest it's not true that non-profit hospitals meet their charitable obligations, "If you live in New York city, for instance, it is blatantly apparent that it's not true. It's impossible to walk the streets of the city . . . without tripping over some poor schizophrenic person who's lying under some tattered rag on a winter night. Those people are the responsibility of the hospitals. They are sick and poor. Who's taking care of them? It's scandalous." (It's an interesting observation. I wonder who we can hold responsible for illiteracy in Boston?)

In her Forbes interview, it becomes clear that Professor Herzlinger doesn't get around much. She generalizes about the "deterioration" of the hotel "function" in hospitals by observing that, "The bed in which the patient sleeps and the room in which he or she is housed is quite decrepit." How many hospitals has she been in lately? Although hospitals still don't meet the standards of a Hyatt (some come close), even the casual observer would agree that there has been a dramatic and widespread upgrading of hospital facilities and patient amenities nationally rather than a deterioration.

Herzlinger also comments in Forbes about the difficulty hospital board members have in judging the management and efficiency of the hospitals they govern. "Sitting on the board of Philip Morris, say, and trying to understand General Food's pudding pops is very different," she observes, "than sitting on the board of a hospital and trying to understand angioplasty or magnetic resonance imaging, for example." She's absolutely right! It's an infinitely more complex business. There's nothing that comes close to the technology, personalities and reimbursement mechanisms that make up the daily diet of hospital executives. But non-profit hospital boards tend to attract some of the best and the brightest in their communities. Few hospital board members have lobotomies before accepting their fiduciary responsibilities. They are, as a rule, quick learners. It's been my experience that most know the difference between pudding pops and angioplasty.

There are many successful hospitals in America. Some of them are non-profit others are for-profit. All demonstrate the same indicators of vitality -- growing market share, high occupancies, strong customer preference and satisfaction (among consumers, employers and physicians), turned on employees, new facilities and attractive amenities. There are also some unsuccessful hospitals and certainly there are some marginal ones. But contending that all hospitals are losers because some are is like generalizing GM's performance to Honda because both manufacture cars.

There's much managers in any industry can learn from America's successful hospital's including:

•How to create and articulate an organizational vision that gets people out of bed in the morning and fills them with purpose.

•How to get highly trained and largely independent specialists moving in the same direction.

•How to quickly adopt, apply, dismantle and discard technology so that the very latest capabilities are always brought to bear.

•How to meld technology, expertise and service into powerful advantage.

•How to create meaningful differentiation in an industry many regard as homogeneous.

•How to eke out profits while your labor and supply costs skyrocket.

•How to foster organizational flexibility in the face of waves of change.

•How to be competitive without losing your sense of social responsibility.

Professor Herzlinger has hoisted an old banner and it is this -- "If only health care organizations had been competent enough to manage themselves like real businesses, then they wouldn't have suffered the immense problems with which they are now faced (nor would they have created a crisis in health care costs for the nation as a whole)." She has breathed new life into the persona of Conrad Pickler. Remember Pickler? He was the bumbling, ineffectual administrator on television's House Calls. Unfortunately, Pickler represents the perception too many people in other industries, in government, and in academia have of health care managers.

When it comes to communicating the uniqueness of their enterprises and their own considerable accomplishments in managing them, health care executives have been ineffective. Until the Business Week articles profiled five of the industry's top executives, hospital CEOs were almost invisible to corporate America. Yet, they have engineered market shattering mergers, built powerful regional brands, created innovative delivery systems and rolled up impressive surpluses that have been plowed back into new services and technologies. Hospitals have their own Lee Iaccocas, Ross Perots and Max DePrees, but who knows about them? And to what extent have they served as role models for other hospitals? How can those outside health care be expected to respect the ability of hospital executives to responsibly manage challenges of quality and cost if their only impression is one of ineptitude?

Health care executives need to be more aggressive in telling their story. They need to be justifiably offended when they are portrayed as inept. And they need to look harder and longer at their own numerous success stories. If they don't, they'll continue to be easy targets and Conrad Pickler can look forward to a long, bumbling career.

Originally published in Health Forum Journal