Health Experiences
Peter Heywood wrote this on December 06, 2013 / no comments

How should the healthcare organization evolve?

One of the most important economists in history died in early September, at the remarkable age of 102. Ronald Coase, who won the Nobel Prize for Economics in 1991, taught and contributed to modern economics theory right up to this year. That we could all leave such long and productive lives.

Ronald CoaseCoase made his name in a short essay published in 1937 (if you can imagine) called “The Nature of the Firm.” In it, he proposed the theory of “transaction costs” as the reason why we have companies, rather than just marketplaces or networks of individuals providing specific services. The transaction costs of a network of individuals, such as setting up multitudes of contracts, managing individual vs. collective accountabilities, handling workflows and handoffs, marketing and sales etc, exceed the actual costs of making the final product or delivering a service. Thus, organizations—businesses—are created to internalize these processes and reduce the expenses, at least to the point where their organizational overhead doesn’t overwhelm the potential revenue.

Coase’s theories proposed that firms can grow to an even larger size through mitigating technologies such as the telephone. He never really addressed what happens when collaborative information management and communication technologies actually reduce transaction costs to the point where our conventional view of the firm changes. Will companies disappear or turn into mere aggregators of individual experts? And if they do develop these new and looser structures, what holds them together so that they can deliver effectively on the promise they make to their customers?

It’s interesting thinking of this in the context of healthcare. Healthcare has been, in many respects, the world’s largest cottage industry. In spite of some very large provider and payer companies, healthcare has been mostly defined by individuals and small organizations, very local and each with a unique perspective on the right behavior, patient relationships, protocols and so forth. Of course, it has also been notably inefficient and costly. Coase would claim, I’m sure, that this has much to do with the elevated transaction costs within healthcare’s fragmented structure. In his view, it would be a situation ripe for consolidation.

And so it has become. Hospitals are being purchased by larger health systems, but even more striking is the number of physician practices merging, or being purchased by larger IDNs or hospitals.

Some have argued that the Affordable Care Act and other regulations have accelerated consolidation, and that those in Washington behind health reform have a visceral dislike of the independent provider. Dr Scott Gottlieb of Indiana State wrote an interesting paper on this [].

Isn’t it ironic, however, that this trend to consolidation is occurring at precisely the time when enabling technologies could allow for the formation of “virtual healthcare companies” addressing the issue of transaction costs through shared information, processes and, maybe, brands, and not through outright consolidation? That would allow the continued independence of the centerpiece of transformed healthcare, the primary care physician, while bending the cost curve in the right direction.

And let’s face it, the last round of HMO-driven practice acquisitions twenty years ago was a disaster, for health systems, providers and patients. We need a new approach to address transaction costs, economies of scale and aggregation of population health data that also happens to provide a better experience for providers and patients. The right technologies (we’re not talking about you, EHRs!) provide that approach.

It will be important to keep an eye on evolving Accountable Care Organizations. The first participants have been in the large dominated by institutions, which have backfilled their primary care obligations through acquisitions (the M&ACO?). Once we get through the growing pains, I am optimistic that we’ll see ACOs that are truly collaborative networks, driven by physicians, tied together by technology and a powerful patient-focused brand, lowering their transaction costs while retaining the independence that most physicians crave. I wonder what Coase’s view on these would have been?






Peter Heywood wrote this on December 06, 2013 / no comments

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