Training left physicians unprepared for market-based medicine. Doctors can compete by understanding forces that determine any industry’s profitability.
In times past, medicine was Camelot and physicians its kings. No longer. While American medical training is generally regarded as the best in the world, it was not conceived with the idea that physicians lead health care in a market economy. Physicians’ failure to understand and adapt to the rapidly changing economic rules of health care are a chief cause of their downsized role, influence and autonomy. Their decline in competitiveness — to put it into a business context — can be chalked up to the misalignment of the values and skills conveyed by the academic medical community that trains physicians and the business world that they increasingly navigate.
Declining physician morale, skyrocketing physician disability claims and often rocky relationships between physicians and health plans are merely symptoms of this misalignment. To regain leadership and restore morale, physicians need skills and strategies to help them work effectively in a maturing industry.
Equally important, but less apparent, they also need the psychological capacity to make these changes. Without this ability, doctors between the ages of 40 and 65 are likely to remain in a kind of frozen grief — idealizing a past era of medicine, but unable to compete effectively in the present one.
On the whole, physicians are not a happy lot these days. Thirty-six percent of those responding to a recent J.D. Powers/Medstat survey of 30,000 physicians reported low morale; 53 percent indicated that their morale had grown worse during the last year. A striking 46 percent revealed they often thought about leaving clinical practice.
Part of the problem is that medical training does not provide the practical or intellectual framework for understanding the new economics of health care, nor has it framed an effective response to the decline in physician competitiveness. Traditionally, the “ideal physician” has been modeled on the clinician-researcher with an almost monastic devotion to patient care and science. Leaders in American medicine have been acclaimed medical school clinicians, researchers and scientists. Prestige and professorships went to those publishing in such academic journals as the New England Journal of Medicine, Annals of Internal Medicine and Journal of the American Medical Association. While peer review has advanced the science of medicine by ensuring the safety and efficacy of new treatments, its nature as an insider’s game has also isolated physician leaders from the tumult of ideas and changes in the larger economy.
One of the key functions of leadership is to scan the external environment and identify threats to the profession or industry. But for physicians, competition has traditionally meant access to the best specialty training, practices and academic affiliations. Threats posed by the external environment, most notably the growing power of buyers, were not even a remote concern. The focus in training was on patients and providing the best clinical care, regardless of cost — not the larger web of relationships between providers, suppliers, buyers, patients and advocacy organizations that determine industry profitability.
Another risk that physicians didn’t perceive was the commitment to spend a decade in highly specialized training. While such training assured high incomes and professional respect when medicine was predominately a fee-for-service business, such an investment in intellectual capital represents a risk from a business point of view, especially if low-cost providers gain market entry, or if the market changes in some other way.
Simply put, the skills taught in medical school do not assure financial success in today’s market. A protected monopoly in which physicians enjoyed unchallenged pricing freedom during the past 30 years has given way to a deregulated market. The psychological attitudes and expectations formed under this monopoly — continued high incomes without need for change or innovation — have eroded physicians’ competitiveness. A new intensity of competition in the health care market has emerged — a situation that is mirrored in the energy, banking and airline industries.
Porter’s five forces
Having devoted the better part of their adult lives to specialized training, many physicians are perplexed by the new terrain. How can physicians position themselves to meet the demands of a newly competitive market?
Michael Porter, a professor at Harvard Business School and a leading business strategist, provides a framework for understanding how companies and industries gain, sustain or lose profitability. According to Porter’s so-called five forces model, an industry’s attractiveness and profitability hinge on the balance of power between (1) suppliers (in the case of medicine, physicians), (2) buyers (large businesses and HMOs) and (3) competitors (other providers), as well as (4) the availability of substitute products (clinical nurse specialists substituting for primary care physicians or master’s-level social workers providing treatment once given by psychiatrists) and (5) the degree of difficulty of entering or leaving the industry.
Today in health care, powerful buyers — businesses and purchasing coalitions — have forced a dramatic change in the balance of power and magnified their power over fragmented physicians and physician groups. As a result they are able to name their price and shift the financial risk for treatment onto providers. Normally, participants in an industry undergoing contraction would migrate to a more attractive one. But physicians, whose highly specialized skills are not easily transferred to other industries, are often unable or unwilling to leave. The prospect of retraining at 35 or 40 is daunting at best. Meanwhile, lower cost providers, such as nurses and allied health professionals, substitute their services in the market as few physicians or physician groups possess data to justify their higher costs. The problem is compounded by the large number of physicians who were attracted to health care during the boom times; the resulting surplus drives down the profitability of the industry as a whole.
Porter notes that for small businesses, in particular, strategy is important, as small businesses do not have the cash reserves to tide themselves over during an industry downturn. Medical practices — even large ones — face similar challenges. What counts is an ability to find a successful niche, especially if one is in a competitive industry or caught in the transition to one. To compete effectively, one must be either a low-cost producer or a specialized provider with a special offering. Differentiating one’s skills or products is crucial. The road to dwindling profitability is, says Porter, to be stuck in the middle — to practice one’s craft without a strategic approach to the market.
Porter notes that industry evolves proceeds from rapid and profitable periods of growth to less profitable periods of industrial maturity, when consolidation facilitates more cost-effective industry operation. During the growth phase, just about any participant could profit easily. In maturity, an industry’s growth rate declines, competition for market share increases and businesses face excess capacity (in health care, for instance, hospital beds, physicians and other providers). Competition focuses on cost and service — a situation seen in some markets where HMOs are hitting penetration ceilings. As improved operational efficiency becomes more important to profitability, the work becomes less glamorous, less exciting. The thrill associated with pioneering now gone, managers become concerned about survival and an industrywide malaise may set in.
Consistent with the changing nature of competition in the industry is a need for a change in the psychology of industry participants — a change usually met with resistance and denial. Of managers in industries in transition, Porter notes that “the general manager fails to recognize and accept the changes required, or lacks the required skills to succeed in the new order. As a result, [an organization’s] historical strategy and arrangements are doggedly continued. This rigidity is a common reaction to strategic difficulty not only during [industry transition] but also in other adverse company situations.”
During this transition, Porter adds, the specter of having to acquire a new set of skills often discourages a business or manager from attempting any kind of strategic shift at all. Calling such reactions “strategic pitfalls,” Porter says that a business in a maturing industry often responds to new competitive demands in a number of unsuccessful but characteristic ways, including resentment regarding changes in industry practice or the emergence of price competition; belief that price competition is destroying the industry; claiming the high ground of product quality to justify a refusal to compete on the basis of price; focusing on short-term profits rather than long-term growth; and maintaining excess capacity (for instance, too many hospital beds) rather than shedding unprofitable assets to compete more effectively.
Notably, Porter’s observations are not based on health care trends, but on those of many unrelated industries. That his ideas apply so powerfully to health care suggests the power of the notion of industry transitions. It also suggests that solutions to the competitive threats posed by industry maturity may be found by studying other industries.
Resistance to change
Medicine has traditionally met its practitioners’ need for a high degree of stability and recognition, and the uncertainty of today’s marketplace is probably what many sought to avoid. To expect physicians to now embrace new ways of working and thinking is to go against their psychological grain. Physician assumption of financial risk carries a new, uncomfortable degree of underlying psychological risk as well. Moreover, a physician’s own identity is strong. After years, if not decades, of training and socialization to a culture that thrived during medicine’s growth years, it is difficult to adapt to a leaner industry in its maturity, where buyers are in the catbird seat.
Few of us are comfortable trying to change attitudes, behaviors and aspirations acquired over the decades. To give up skills and attitudes acquired during years of training is to grieve the loss of part of oneself. Resistance to such losses is understandable, but it is also unfortunate. It makes moving on professionally more difficult.
What’s required is what Miles Shore, M.D., professor of psychiatry at Harvard Medical School, calls a process of “institutionalized grieving” in which health care organizations help physicians mourn their professional disappointments. True sadness is an emotion we all work to avoid. Yet if one fails to grieve, one runs the danger of remaining stuck in anger — less able to make the psychological and strategic changes needed to compete today.
Gaining competitive advantage
Much as an entrepreneur who guides a start-up company may not be the best person to run it during its maturity, the psychological, medical and administrative competencies physicians need today are different from what were needed during the industry’s growth. Physicians today must reduce their reliance on high-priced, high-tech interventions whose profitability is difficult to sustain and whose superiority is at times unclear. Instead, they must stress their unmatched understanding of the health care value chain (see “Look Ahead, Not Back,” at left). New skills are needed: compensation systems that reward physicians for improving outcomes and systems rather than just for seeing more patients; better communication with patients; improved efforts at health promotion; and service delivery enabled by information technology.
For their part, health plans increasingly need to develop strategies to reduce the misalignment between academic training and today’s business reality. While physicians often savage managed care and the “business of medicine,” case studies of successful and failing businesses in a variety of industries provide a rich store of ideas to assist in improving physician competitiveness and health care delivery. The booming market in M.B.A. and physician-leadership programs is helping to fill this void.
The new rules of the game are too important to be left to strategists at the top of health care organizations; physicians need to understand elements of health care strategy as well as executives do. Without a way to understand and respond to the vast changes in health care, doctors have become demoralized, and more than a few have already left practice. To regain leadership and a sense of purpose, they must recognize the new competitive basis of health care. While managed care is many providers’ favored whipping boy, it is useful to remember that purchasers, a maturing and consolidating industry and an increasingly competitive world economy fuel the relentless pressure to reduce costs. Managed care is a symptom, not a cause.
“It’s a damn shame physicians have to worry about running a business,” says my wife’s uncle, a distinguished physician, TV medical commentator, and early HMO investor. Like it or not, it is our present reality.