Associate Professor Raffaella Sadun (left) and Professor Leemore Dafny (right); image by John Ritter

Professors Raffaella Sadun and Leemore Dafny are both economists who have studied hospitals extensively—Sadun’s research has looked at the economics of management, while Dafny’s examines interactions between health care providers and payers, as well as antitrust enforcement. Here, they discuss what it would take to improve the provision of care.

Say you’re settling into your seat for a short-haul flight, and your seatmate is a newly installed hospital CEO, determined to improve patient care. How would you advise them?

Leemore Dafny: What I’d say is something that holds true in most health care service markets in the United States: You should think about what market position you occupy, how it is differentiated from others’, and whether you are fulfilling the needs of your target market. It’s amazing how many providers are striving for the same thing: to serve all patients, all needs, and through all channels. Professor Michael Porter and Elizabeth Olmsted Teisberg in their book, Redefining Health Care, use the term “strategy vacuum” to describe what’s happening in these markets.

Raffaella Sadun: I would add that their lack of focus might be the reason why it’s so hard for them to actually excel in implementation. The hospital is a complex, multiproduct organization, and spreading your resources everywhere might prevent you from actually being good at anything.

LD: Right, success in either strategy or implementation requires making trade-offs. In the absence of those trade-offs, you have a lot of mediocrity.

RS: I would also tell the CEO that he or she needs to take a hard and deep look at what’s happening in terms of management practices in their hospital. What I see in my studies mapping the adoption of basic management practices across hospitals is a wide dispersion: There are some points of excellence where organizations really know what they are doing, and there is so much mediocrity. Considering how much money is spent in the field and the advances that the US economy has made on so many other fronts, that is really shocking.

LD: And that variation in management practice is also supported by enormous variation in output prices. Given the lack of positioning, prices should be a lot more uniform than they are. With “one best price,” only firms with excellent management practices would thrive. But if hospital prices have a wide range—even for the same service—then managerial quality can be very uneven.

RS: Of course, there’s also variation in quality of care.

LD: Yes, which is even harder to measure than price. But there’s a great amount of price variation that doesn’t seem to be correlated to quality (at least to quality that we can measure). Which brings us to the question of why: Why can an industry like this that is so important and massive continue to function with these markers of poor market performance?

And what’s your response to that?

LD: It is heavily linked to the limited and diminishing degree of competition in so many health care sectors.

RS: And we actually see that in the data. Researchers in the UK mapped the relationship between competition and management practices, and they found a strong relationship between the level of competition and the quality of management practices adopted in hospitals.

LD: There’s also quite a lot of research demonstrating that hospital consolidation causally leads to higher prices without any evidence of quality improvements—nonetheless, so many organizations continue to pursue them. So you wonder why leaders are choosing this route. One answer might be that the strategy Raffaella is talking about—improving management practice—is really hard. It’s probably a surer thing to take out a rival through consolidation than to excel on your own merits.

RS: That may be true. I’m also starting to think that there might be some intentionality. Virginia Mason Hospital in Seattle is famous for having done a lean transformation that completely changed how the hospital is run. That type of transformation takes years. It requires full commitment from the top, down to every person you hire. It’s a set of interconnected choices that have to be perfectly aligned. Once it works it’s phenomenal, but it’s really costly and hard to do. Some managers might have a sense that they don’t have the time or energy to get there.

LD: Or maybe they don’t have the strength of conviction that it will work. Hospitals have also largely been really focused on themselves: Where do we want to practice? How do we interact with one another? What medical records are most useful for billing? The exciting innovation in the industry is coming from entrants that say, “Let’s start with the patient perspective.”

RS: Absolutely. And hopefully these new models will dispel the idea that there is a trade-off between providing excellent care and actually making money. There may be a sense that it has to be one or the other, but that is not always true. The reasons are partly financial—meaning that by managing your operations well you may be able to eliminate wasteful activity, such as unnecessary hospitalizations. And partly I think that’s because well-managed organizations can create much more engagement and push for improvement from their employees and clinicians. If we can shift attention to the organizations that have found a way to achieve both aims—financial and quality—that’s really the exciting direction. But getting there is not going to happen through incremental or isolated changes.

What would it take to force change of that magnitude?

LD: We’re talking about pretty painful and uncertain measures, and they require a lot of work. You can see why people are, in my view, overly content with the status quo. When the next recession hits, I expect to see the employers that are purchasing health plans start to demand something different, which in turn is going to require insurers to deliver a product that is more focused on what patients need. Hopefully, that also pressures providers to provide high quality care at a lower price.

RS: I agree, but these incentives for change may not be sufficient. I would like the next recession to come after we’ve had a chance to give proper management training to the people who are actually going to implement that change. It requires a fundamentally different approach in the day-to-day work, which is something the sector needs badly.

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