February 1998
Managed Care:
The Challenge Ahead
The ultimate objective is not improvement, but mass customization
By Curtis P. McLaughlin and Arnold D. Kaluzny
Managed care has had a major impact on all aspects of health care. More than half of all U. S. workers and their covered dependents are under such programs and both Medicaid and Medicare are rapidly moving in that direction.
The initial impact of managed care has been the discounting of prices from 30 to 60 percent in major markets, plus the introduction of specific controls such as prior approvals for elective procedures and limitations on lengths of hospital stays; privatization and consolidation of health care institutions with a focus on short-run results; physicians upset and suspicious; patients concerned about quality; and employers happy with the slowed growth of premium benefits for their employees. The future challenge to managed care is its ability to move from simply the management of access and the reduction of premiums to the substantive management of care with the full recognition of the complexities of the care process. This transition requires a re-examination of continuous quality improvement within the context of managed care.
Meanwhile, the movement for total quality management or continuous quality improvement (CQI) in health care has slowed. The Joint Commission for the Accreditation of Healthcare Organizations (JCAHO) has apparently shifted priorities from CQI toward outcomes management [JCAHO, 1997]. Reported success rates for CQI efforts show substantial proportions of failures [Huq, 1995; Øvretveit, 1997]. With the sharp drop off in revenues, people are less satisfied with a change process that may take years to institutionalize. Sometimes this participatory process is undermined by losses of trust when accompanied by staff reductions, salary cuts and losses of professional autonomy. Griffith et al. [1995], for example, have emphasized the importance of going beyond CQI to re-engineer processes; retaining the principles of top management leadership, customer-focused clinical care, and decision-making involving physicians, and adding strong, linked information system development.
The New Requirements
For continuous improvement efforts to be relevant to managed care, they must be concluded in shorter periods of time and with greater impact on cost, quality and access the three key elements of effective care. Physicians must feel that they have contributed to these efforts and that they benefit them as well. Top management must understand the need to make sweeping changes in organizational structure, process understanding and information flows and systems. It means identifying and empowering responsible process owners at the appropriate level of aggregation. This term implies not focusing on the process for replacing the left elbow, but on the rationalization of the job shop that provides the majority of orthopedic surgeries and integrating surgery and rehabilitation into one process. The definition of process at the appropriate level of aggregation is critical to impact. Too low a level and the impact is insignificant. Too high and the impact is not likely to be realized.
Recognizing Fundamental Change
Revitalizing the improvement process rests with a better understanding of the underlying fundamental change that is overtaking health care and where that should be taking us. This change is the industrialization of parts of what has long been organized as a craft industry, industrialization of those parts of medicine where science has replaced art. In the past, most of medicine was based on empiricism, on what had or had not worked in the past. Training in this craft came by rounding with the most skilled and knowledgeable practitioners. This, however, led to great variability in what was done among clinicians and from region to region. The hospital was organized as a job shop with the tasks assigned to subspecialties and the patient shunted from one department to the other. Information systems were developed locally based on their impact on compartmentalized revenues and each case was handled as if it was to be treated uniquely.
In the 50 years since World War II, medical research has exploded and the potential and power of the health professions has grown with it. So has the proportion of Gross Domestic Product devoted to health care, now approaching 14 percent.
The history of many industries has been science developing clearly best practices followed by industrialization. During the Industrial Revolution, mass production replaced craft production in industry after industry. However, the public and the professions are quite averse to the delivery of health care under mass production conditions across the board. In an earlier article in OR/MS Today [McLaughlin, 1994] discussed the applicability of the Boynton-Victor-Pine model of process change [1993] to a number of issues of health care quality, but did not try to link these process changes to managed care. This analysis suggested that continuous improvement was a suitable way station en route to mass customization in health care. Hence the emphasis on continuous improvement by the JCAHO and numerous leading institutions.
Figure 1 presents two routes for industrialization within health care. One route, marked A, follows the traditional route of industrialization as illustrated by the bundling of cataract operations into a few high-volume, specialized centers. However, most health care activities have followed the B route, accepting high variability in patient needs and using techniques of CQI and process re-engineering.
The Key Role of Operations Research
Operations researchers have played a key role in this industrialization, especially the work of a team headed by Robert Fetter and John Thompson at Yale who used statistical techniques to define a set of more than 400 standardized hospital outputs. This led to the DRG (Diagnosis Related Groups) classification system in the 1980s which allow organizations to collect data on costs, resource utilization and outcomes by product line. Then it became possible to benchmark processes and compare results after adjustments for patient types and case mix severity. Without such a breakthrough it would have been impossible to have the types of managed care we have today.
TQM and Managed Care
Both TQM and managed care acknowledge the dynamic nature of clinical processes and the ability and responsibility of both institutions and clinicians to improve their processes. Both are consistent with efforts to identify and implement best practices. However, these similarities should not mask fundamental differences. Continuous improvement must shift its focus from avoiding unnecessary variation to facilitating rapid organizational learning and institutionalizing mass customization into the delivery of health services [McLaughlin and Kaluzny, 1997, p.7].
We all recognize that the ideal care takes into account differences in each of us at both physical and emotional levels. The long-term future of health care lies not with mass production or continuous improvement, but with our ability to achieve mass customization [Shortell et al., 1996]. However, while mass customization is the endpoint toward which all health care ought to be striving, it is difficult to achieve. There are complexities of the health care environment that must be addressed. These include the fact that:
1. The delivery of health care is a complex, multistage process characterized as having a least three stages: diagnosis, treatment and aftercare.
2. At each stage for any given disease entity the ratio of art to science in the current state of-the-art may differ widely.
3. Different modes of delivery respond differently to different ratios of art to science.
4. Unfortunately, we have not yet been able to effectively tailor the delivery mode and its associated methods of payment and organization to the state of knowledge for a specific disease at a specific stage of care delivery.
These four characteristics account for many of the difficulties in applying effectively any one delivery mode with its organization and payment systems to the total delivery of health care. Each case presents a challenge to the art and science of medicine in diagnosis, in treatment and in aftercare. These stages may be quite disparate in the degree to which the chosen approach has a strong scientific underpinning. The diagnosis may be quite intuitive, while the treatment, if correctly diagnosed, may be quite straightforward, as is the course of aftercare. Figure 2 summarizes these dimensions with the vertical presenting a continuum from art to science and the horizontal dimension a continuum from pure craft through CQI to a pure mass customization mode of delivery. When all aspects of care were under the oversight of an individual primary care provider, there was not much of a problem. The problem emerges with the control systems adopted to deliver care in larger organizations or across organizations.Risk and Reward Systems
Today we have a mixture of art and science with science increasingly imbedded in a variety of risk and reward systems that vary from job costing (fee-for-service), with reimbursement for time and activities and little risk to fixed fee per time period (capitation), shifting all the risk to the provider. All of these may exist within a single practice. One urban cardiology practice that we looked at had 21 managed care contracts that varied widely in their requirements and incentives and risks, and all were imposed by the insurers, not negotiated. One driver of the urge to consolidate and merge practices has been to develop sufficient market power to actually engage in two-way negotiations over rates and control mechanisms. People are too engrossed in dealing with existing systems to think about the key role of configuration in mass customization and how to go about it.
So long as we attempt to have one control system govern all relationships between payer and provider in an environment of mixed art and science we are going to be stuck and never move on toward the goal of mass customization. Figure 2 shows some of the consequences of matching and mismatching managed care approaches to various stages of medical knowledge.
So long as the state-of-knowledge is one of art, the traditional craft organization of health care works well. The professional needs a great deal of autonomy to respond inventively to what the patient presents. The apprenticeship system of learning is an effective way of replicating artistic skills and the fee-for-service system works well. What one gets is high quality, but also high cost.
Where there is one clear best practice based on science, the response can be procedural, the care givers can learn that one procedure and how to adapt it to individual needs effectively, and the predictable costs can be bundled into one fixed price for managed care organizations. One can have both low cost and high quality. Where there is art and an attempt to organize along industrial lines there is conflict over professional autonomy and perceived lack of efficacy as well as over costs. There will be high variability in the quality of care delivered and there will be need to police the quality of care delivered as well as its cost. Where there is great scientific knowledge, we see the faults of the old health care system. Diffusion of best practice, based on professional methods of education such as continuing medical education (CME), is slow and uneven. There are high costs and highly variable quality and conflicts over professional autonomy versus efficiency of operation as reflected in billings and procedures utilized.
So What is Needed?
First we need recognition of this existence of both art and science in the same delivery system. We must have rapid clinical change in response to science, but that art, too, must be recognized. Knowledge about what is historical practice and what is scientifically based practice is within the technological core of the health professions. Therefore, these individuals must be included in the decision-making process to a high degree. Management's role is one of implementing rapid change when consensus about best practice is reached. Management's future role is one of supporting mass customization in those areas where science facilitates it. Within this management has a number of tasks:
- Managing cognitive complexity, the capacity-limiting variable in mass customization, automating those functions that can be automated to free up the capacity of the professionals' minds to customize further.
- Developing skills at configuration management that involve the development of decision-making support systems and customized solutions.
- Provide information system support to take on less important tasks and to support the professionals in the process of configuring custom solutions and then delivering them effectively.
- Allocating scarce resources to the development of configuration skills and configuration support through appropriate research and development projects and through investments in systems to support their implementation.
- Overseeing the design of systems that allow mass customization, but still place limits on the range of solutions to maintain system integrity and protect the patient from inappropriate actions in terms of either costs or outcomes.
They have a number of alternatives available, some of which are already in use.
1. They may carve up (the health care term is a "carveout") the care; allocating specific procedures, such as cataract surgeries, to mass production centers; others, such as coronary artery bypass and other cardiovascular surgery, to mass customization organizations; and leave the residual tasks to craft organizations. The disadvantage of this is that one loses the benefits of an integrated delivery system and bears the added costs of assessing and allocating patients.
2. They may contract with organizations that are able to perform their own allocation functions based on their internal R&D and control systems using a single premium or capitation system. The problem there is that today only a small number of organizations are sufficiently integrated and encouraged to undertake this responsibility, and these are limited to a few specific regions. They would be able to provide mass customization to only pockets of enrollees.
3. They might set up reward and control systems that were more complex, that varied with the subspecialty and/or with the diagnosis depending on the degree to which customization was required. This would take a huge research effort and still might be infeasible given the complexity of the resulting system. However, it might well be an enlightening learning experience for all concerned.
The important thing is to recognize that we will stay stuck over issues of quality in the presence of managed care until we recognize that the ultimate objective is not quality improvement, but mass customization. That movement forward should have as its basis the understanding that this will proceed at the pace at which medical science allows it. It cannot be imposed by any reward or control system.
References
1. Boynton, A.C., Victor, B. and Pine, B.J., III, "New Competitive Strategies: Challenges to Organizations and Information Technology," IBM Systems Journal, Vol. 32, No. 1, pp. 40-64, 1993.
2. Griffith, J.R,, Sahney, V.K., and Mohr, R.A., "Reengineering Health Care: Building on CQI," Ann Arbor, MI: Health Administration Press, 1995.
3. Huq, Z., "A TQM framework for hospitals: observations from a study," International J. of Quality and Reliability Management, Vol. 13, No. 6, pp. 59-76, 1995.
4. Joint Commission for the Accreditation of Healthcare Organizations, website, November, 1997.
5. McLaughlin, C.P., "Strong Medicine for Health Care," OR/MS Today, Vol. 21, No. 4, pp. 26, 27,33, August 1994.
6. McLaughlin, C.P. and Kaluzny, A.D. "Total Quality Management Issues in Managed Care," Journal of Health Care Finance, Vol. 24, No. 1, pp. 7-16, 1997.
7. Øvretveit, J., "A comparison of hospital quality programs: lessons for other services," International Journal of Service Industry Management, Vol. 8, No. 3, pp. 220-235, 1997.
8. Shortell, S.M., Gillies, R.R., Anderson, D.A., Erickson, K.M. and Mitchell, J.B., "Reinventing Health Care in America," San Francisco: Jossey-Bass Publishers, 1996.
Curtis P. McLaughlin, D.B.A., is Professor of Business Administra-tion, Kenan-Flagler Business School, and Professor Emeritus of Health Policy and Administration, School of Public Health, University of North Carolina at Chapel Hill. Arnold D. Kaluzny, Ph.D., is Professor of Health Policy and Administration, UNC School of Public Health. Both authors are Senior Research Fellows at UNC's Cecil B. Sheps Center for Health Services Research.
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