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Michael E. Porter, Bishop William Lawrence University Professor at Harvard Business School, and Robert S. Kaplan, Senior Fellow and Marvin Bower Professor of Leadership Development, Emeritus at Harvard Business School, have developed, refined, and applied tools and approaches to the fundamental challenges of properly measuring healthcare costs and understanding the relationship between costs and patient outcomes. In an interview with Mark L. Frigo, Ledger & Quill Distinguished Professor of Strategy and Leadership at DePaul University, these renowned experts share their insights and experiences about how organizations can transform the way healthcare costs and value are measured and managed.
Rising healthcare costs are a major global challenge. A number of factors contribute to this trend, including aging populations and medical technology. But an underlying and misunderstood source of healthcare's escalating costs has been the inability of healthcare provider organizations (such as large medical centers) to properly measure and manage the true costs and value of healthcare.
How can healthcare provider organizations find better ways to measure and manage healthcare costs and value to achieve improved outcomes and lower costs? Let's take a look.
Taking on a Challenge
Frigo: Healthcare is obviously a very important and challenging area to study. As two Harvard Business School professors, why did you decide to address the issue? How did you start working on this together?
Porter: One of my strategy colleagues, Elizabeth Teisberg, had several unhappy encounters with the healthcare system. In our discussions, it became clear that this industry was competing differently from all the other industries we study and teach about in the strategy area. Healthcare is an industry with many and diverse competitors, a situation that generally leads to vigorous competition in which companies win by producing the best value for customers. In contrast, healthcare enterprises survived and succeeded even when they were high-cost and didn't deliver good outcomes for customers. As we examined healthcare more deeply, we concluded that we needed to change the nature of competition so that it would reward those who delivered the highest value for patients; we defined value as better outcomes achieved at lower cost. We first described the necessary transformation in a 2006 book, Redefining Health Care: Creating Value-Based Competition on Results. Since that time, I have been joined...