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Reducing Healthcare Business Risk While Increasing Value

Reducing Healthcare Business Risk While Increasing Value

By: Karan Girotra and Serguei Netessine, authors of The Risk-Driven Business Model: Four Questions That Will Define your Company (Harvard Business Review Press, 2014)

Large general hospitals face a wide range of risks, the stakes of which are dramatically higher than those faced in most other industries. The risks fall into four main categories:

1) There is the purely medical risk of contagion associated with the interaction of the many patients and procedures that a general hospital handles. For example, infectious patients can kill relatively healthy ones.

About a hundred thousand people die every year in the United States from infections acquired inside the hospital.  Most of these are spread through ventilation systems or caused by improper sanitization and disinfecting procedures. Much of this risk arises from the decision to service any and all patients in the same facility.

2) Many information risks result from variable, highly unpredictable demand. Emergency rooms, for example, can be overwhelmed by flu epidemics, industrial or highway accidents, or multiple gunshot victims, all on top of the steady flow of uninsured patients who come to the ER for routine medical care.

3) Information flow in a general hospital can be a challenge, especially around shift changes, leading to characteristic inefficiencies. For example, unless accurate patient status  information is exchanged between departing and arriving nurses, elements of care can either fall through the cracks or be duplicated needlessly (sometimes dangerously).

4) Finally, incentive-alignment inefficiencies sometimes come into play when doctors and others make decisions motivated by reasons other than the patient’s best interest.

New Approachs to Walk-In Care
None of these problems exist at Laastari Lähiklinikka, a chain of small Finnish clinics located in shopping malls and other densely populated areas. The clinics pursue a focused what strategy by treating a limited set of the most common illnesses, including allergies, colds, sore throats, flu, and simple infections.

They also administer the most common vaccinations. Depending on a patient’s needs, the fee for a visit might range between €25 and €45 [approximately $33 – $59 US Dollars] (the same services would likely cost €100 [$132} at a Finnish general hospital). Clinics are open seven days a week, require no appointment, and claim to have earned 100 percent customer satisfaction.

Patient experiences are more predictable in the clinics, where there is lower risk than in a general hospital of coming into contact with virulent infectious diseases. Laastari Lähiklinikka saves on labor costs by having nurses, not physicians, deliver services; and it saves on infrastructure because the clinics don’t need expensive diagnostic equipment. (Patients whose needs go beyond what the clinics can provide are, of course, referred to a full-service hospital.)

All procedures take ten to fifteen minutes of provider time. This makes workloads predictable and long lines unlikely, which in turn enables staff utilization to approach its theoretical maximum. Laastari Lähiklinikka is neither unique nor the first such health-care venture to realize the risk-reducing benefits of focus.

The US-based MinuteClinic chain has been around since 2000, offering a similar list of limited services provided by nurse practitioners or physician assistants at roughly six hundred centers in CVS pharmacy stores.

According to the latest data, MinuteClinic’s operating costs were 40 percent to 80 percent lower than in general hospitals, yet the entire chain of clinics broke even in 2010 and has continued to grow (CVS Caremark acquired the chain in 2006).

Offering More than Walk-In Care
Focused health-care approaches can do more than administer vaccines or treat cold and flu symptoms.

A small Canadian hospital called Shouldice has done nothing but repair abdominal hernias since 1945. Its focus on one particular surgery has allowed it to deliver superior quality at a far lower cost than a general hospital could ever achieve. Yet it offers its doctors and nurses higher salaries than do other hospitals.

Although Shouldice is a private hospital in the mainly government-run Canadian medical system, the government happily pays for Shouldice surgeries because they are less expensive than elsewhere.

And there is a steady stream of cash-paying US patients who are regularly drawn to Canada by Shouldice’s reputation for quality. (Shouldice, after seventy years on its own, was acquired in September 2012 by Toronto-based Centric Health.)

Since hernias are neither life-threatening nor thought to be especially complicated, they are often performed by general surgeons. However, since Shouldice operates only on hernias, over time it has perfected a quick and efficient production-line approach.

There is just one basic procedure, and Shouldice has standardized it the way Henry Ford standardized automobile assembly a hundred years ago.

Moreover, because each doctor performs hundreds of procedures every year, individual surgeons attain high proficiency very quickly. The quality of patient outcomes is consequently also high, with customer satisfaction to match.
Offering Quality Healthcare for Less
Hernia repair is far from being the most complicated procedure a focused hospital can perform. In 2011, The Economist honored Indian cardiac surgeon Devi Shetty with an award in the field of business process innovation.

The award cited Shetty’s Narayana Hrudayalaya Hospital in Bangalore for “reducing health-care costs using mass-production techniques. His hospital performs more heart operations at a lower cost and a lower mortality rate than leading American hospitals.” 

Narayana Hrudayalaya employs forty-two cardiac surgeons who do more than three thousand bypass surgeries per year, along with many other less demanding cardiac procedures.

Shetty, like Shouldice, drew inspiration from automobile assembly lines. “Japanese companies reinvented the process of making cars,” Shetty told the Wall Street Journal. “That’s what we’re doing in healthcare. What healthcare needs is process innovation, not product innovation.”

We are not suggesting that general hospitals are a thing of the past. Many patients suffer from a number of ailments in combination and are best served by large, multi-specialty institutions. But focus can be a powerful strategic lever in any number of industries.

Reprinted by permission of Harvard Business Review Press. Excerpted from The Risk-Driven Business Model: Four Questions that Will Define Your Company. Copyright 2014. Harvard Business School Publishing Corporation. All rights reserved.


Author Bios:
Karan Girotra
is Professor of Technology and Operations Management at INSEAD. Karan's main teaching and research interests are in the areas of entrepreneurship, business model audit, design and innovation.

Karan's research has examined the substance and process of business model innovation. Karan routinely designs and leads workshops on the generation, selection and refinement of new business opportunities, for participants ranging from aspiring entrepreneurs to large corporations. He is winner of the best professor in the MBA program award, runner-up for the best professor in the executive MBA program and four-time winner of the dean's award for excellence in teaching.

Serguei Netessine is The Timken Chaired Professor of Global Technology and Innovation at INSEAD and the Research Director of the INSEAD-Wharton alliance. Prior to joining INSEAD in 2010, he has been a faculty member at the Wharton School, University of Pennsylvania.

Prof. Netessine received BS/MS degrees in Computer Science and Electrical Engineering from Moscow Institute of Electronic Technology and, after working for Motorola and Lucent Technologies, he also received MS/Ph.D. degrees in Operations Management from the University of Rochester.