Of course they should! (But not for the reason you may think)

The New York Times reports that Hospitals fear they may bear the brunt of Medicare cuts.  I should hope so!  But not because they are wildly profitable at the expense of efficiency and innovation elsewhere.

To be wildly profitable itself is, in my book, no sin.  But that’s moot in this case: the average hospital in the US breaks even—barely—as Forbes recently noted.  The fact that a small number put major dough on the bottom line only makes them like restaurants in the way that a few are able to monopolize a local market while most limp along.  Just because Wolfgang Puck can buy an island doesn’t mean your brother’s pizzeria will thrive.

As the insanely smart Clay Christensen has postulated in The Innovator’s Dilemma, hospitals are expensive because they are conflations of three highly contradictory business models: the first of these is the “Solution Shop,” as typified by a consulting or law firm.  These business are well-matched for the Fee-for-Service payment model.  Where hospitals are concerned, this is the realm of their diagnostic and intuitive medicine activities.  The value they create here is inherently open-ended.  The reimbursement structure should be as well.  The NYT’s own “Diagnosis” Series is a brilliant example of this.

The second of these is the “Value Adding Process” business, as seen elsewhere in manufacturing, restaurants and education.  Take something and do stuff to make it better.  Like a pizza.  Or a knee.  This is best financed through a fee-for-outcome model.  “I will pay you $12 for that lunch.”  When Atul Gawande wrote recently about what the Cheesecake Factory can teach hospitals, it was no doubt these types of medical procedures that he had in mind.  Lasik surgery or knee replacements are a good match for his famous “Checklist Manifesto.”  One need only to look at medical tourism to see how the market has responded as hospital execs lumber along under the weight of overhead which does not drop as the price of a new hip does.

The last of these three models is the “Facilitated Network.”  Think of your own insurance company.  You pay to get access to a risk pool.  Another example from healthcare that is slowly taking off is the communities of patients (cancer suvivors, people living with diabetes) who add value with each other through social networks.  One can certainly imagine many ways a thriving network of 5 million diabetics could make its sponsor a little cash.

In that hospitals are inefficiently organized, they are expensive.  In that they are expensive, they have sown the seeds of their own destruction.  As the market and policymakers alike look for oxen to gore, there are few better options.  Time will tell if the hospital business model can disentangle itself and reorganize before the entities holding these companies crash and burn.

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