The Business of Health Care

Last fall, Wharton’s health care systems department celebrated its 25th Anniversary. Faculty and alumni have led the effort to link the disciplines of economics and management to the practice of medicine.

To understand why Wharton’s health care management program was first established in 1970, and why it has been so successful in educating undergraduate, MBA and doctoral students, it helps to know some of the history. For example:

– In 1965, the year Medicaid and Medicare were passed, health care represented six percent of the Gross Domestic Product. Today, it is a trillion dollar industry — the largest in the nation — totaling 13.9 percent of GDP.

– In 1967, the Leonard Davis Institute of Health Economics was established with a gift from Leonard Davis, founder of Colonial Penn Insurance Co. LDI’s mission was, and is, to serve as a multidisciplinary research institute focused on the economic, behavioral and public policy aspects of health care delivery and financing.

The visionary behind LDI, which is recognized as the precursor to the health care systems department, was founding director Robert Eilers, professor of insurance at Wharton and of community medicine in the School of Medicine until his death in 1974 at age 43.

“Eilers more than anyone established LDI as a university-wide institute specifically with the mission of bridging medicine and Wharton,” says William Kissick, chairman of LDI’s governing board. “And it was Eilers who decided early on that if the institute was going to have credibility in Wharton it had to have an educational component.” That meant an MBA program — and later undergraduate and doctoral programs — with the specific goal of training managers and analysts of health care systems.

– In 1970, the Wharton faculty approved the creation of a graduate health care management program at Wharton. At the time, says Mark Pauly, Bendheim Professor of Health Care Systems and vice dean of doctoral programs at Wharton, health economics in the minds of Leonard Davis and many others meant cost containment. The passage of Medicare and Medicaid two years earlier had unleashed the payment of billions of dollars in state and federal reimbursements to hospitals and doctors who provided health care to the poor, elderly and handicapped. By 1967, lack of effective constraints on these programs had caused health-related inflation to skyrocket.

“Health care was a non-system,” says Arnold Rosoff, professor of legal studies and health care systems. “All the elements were functioning separately. The delivery of care was not linked to the payment of care. Medicine was dominated by physicians who had no economics background and no training as managers.”

Another area of interest to LDI founders in the late 1960s was universal insurance coverage for health care services. Medicare and Medicaid together covered about 20 percent of the population while private employer-based coverage spread rapidly to most employees and their dependents. Yet millions of other Americans who didn’t qualify for Medicaid but couldn’t obtain health insurance fell between the cracks. Although Congress gave serious consideration to national health insurance in 1974 and again in 1993, no legislation was approved and universal coverage remains an elusive goal.

Last fall, the health care systems department celebrated its 25th anniversary. Cost containment and health care for the uninsured are still two of the major challenges facing the industry, but they have been joined by the equally important issues of quality assurance and technology assessment. Meanwhile, phrases used by Wharton planners in 1970 to frame the issues are now common language in the health care debate: Patients are referred to as consumers of health care; doctors and hospitals are referred to as providers; managed care is a relatively new term that holds out the promise of controlling health costs through the use of provider-targeted incentives and directives.

The rationale for placing a health care program in a business school — essentially linking medicine to the disciplines of economics and management — has clearly been justified. “Our program exists because health care does respond to market forces,” says Patricia Danzon, Celia Z. Moh Professor of Health Care Systems, professor of insurance and risk management, and chair of the health care systems department. “Competitive pressures have become much more aggressive and management skills have become essential.”

THE ISSUES

Kissick compares today’s health care industry to an onion. “Every time you peel something away, there is another layer … and the more you peel, the more layers there are,” he says. “In 1965, I totally understood the American health care enterprise — its system, the financing, everything. I had my arms around it. I can’t do that today. It is so complex and it is changing so rapidly.”

One of the biggest drivers of this change has been the advent of insurance products with different kinds of incentives for the behavior of physicians and patients. These can range from the pre-hospitalization testing that some insurers require to a staff model HMO where physicians are employees of the plan to an Independent Practice Association (IPA) where physicians groups contract with an outside carrier.

“Back in 1970, cost containment looked like an insuperable problem,” says Pauly. “But with the spread of managed care, there seems to be evidence that costs are, at the very least, increasing at a slower rate, that insurers aren’t paying for unnecessary procedures and treatments, and that waste and inefficiency have been reduced.”

Danzon

The managed care revolution is part of an ongoing restructuring that has turned the whole health care delivery system on its head. Added to the recent increase in horizontal mergers — between hospitals, managed care systems and insurers, for example — has been an even more pronounced interest in vertical mergers, where a continuum of care is provided through the merger of, for example, a hospital system, a physician practice, a nursing home and a home health facility.

“This is a new level of integration,” Danzon says. “What’s good is that it’s being driven by pressures in the marketplace, not by the political system. The physician group that wants to hold out as an independent practice is going to lose market share. The reason hospitals are buying physician practices and setting up feeder networks is so that they can play in this new arena. You have to participate if you want to survive.”

A key concept in health reform is the idea that risk ought to be shared by those who provide the service. Many physicians groups are already operating under incentive systems where they promise to deliver whatever care is needed for a pre-determined capitation fee per patient, notes June Kinney, associate director of the health care systems department since 1981. “What’s new is that hospitals are beginning to have to capitate care [beyond primary care] for specialized services, such as radiology, and for products, such as pharmaceuticals.”

The new system raises many questions for those in charge of running the enterprise. “Working out how to manage the players within those organizations, and how to design the information systems so that you can deliver high quality care at lower costs and also provide solid evidence on health outcomes … is the major challenge facing the delivery system now,” says Danzon.

Part of that challenge concerns capitalizing on the promise of new technologies, not just sophisticated medical advances like gene therapy and tissue engineering, but information technology. “Health care is basically an information industry,” says Kissick. “We collect, interpret, store, retrieve, analyze and apply information. We can do so much now that we couldn’t 25 years ago.”

New and more sophisticated software has led to a growing industry in technology assessment. Evaluating the cost vs. the effectiveness of new techniques will most likely become an increasingly important component in decisions about what should and should not be covered by health plans.

“You frequently hear that health care is more like other industries,” notes Danzon. “I think that is true, but nevertheless there will always be significant differences, partly because health care matters so much to people and because quality is so intangible, but also because there will always be significant third party payments. When there is third party payment, and consumers are not going out and paying with their own money, then they will behave differently.

“This means that management techniques and controls in health care have to be quite different.”

THE PROGRAM

Each year, 40 MBA students with backgrounds in all segments of the industry — pharmaceuticals, hospitals, consulting companies, medical practices, insurers and the public policy arena — enter Wharton’s health care management program. Approximately 15 percent of those are physicians, and three to four each year do a joint MBA-MD program with Penn’s medical school.

Between 15 and 20 undergraduates a year concentrate in health care, and three to four candidates enter the doctoral program.

The MBA students are required to take the same core courses as the other MBAs, as well as five health care major courses plus electives. The program also includes an advanced study project and a summer internship at a health care organization.

During its 25 years, the curriculum has continually changed to reflect the evolution of health care delivery. But over the past decade, that pace of change has accelerated as new relationships have formed among health professionals, hospitals and third party payers.

Last year, for example, a course was added on collaborative structures in health care delivery in response to the creation of integrated delivery networks and new alignments of doctors and hospitals. The course looks at the complex organizational designs and management challenges of these new entities.

In 1990, says Kinney, the department added a course on the pharmaceutical industry. “Pharmaceutical companies used to focus mainly on just marketing their products. Now they are concerned with cost effectiveness, price pressures and the challenges of having to sell in a managed care environment.”

Pauly

“Many of our courses evolve as the environment changes,” adds Danzon. “For example, the course on HMOs and managed care used to be called health care financing and it looked at employer considerations in choosing a health plan. While that is still covered, the course now looks more at management and internal controls within HMOs.”

Running throughout the program is the theme of sharing risk among different payers, hospitals and physicians, says Kinney. “That involves much more complicated information systems that look at such things as data on medical outcomes, cost benefit and cost effectiveness analysis and disease management.”

The issue of access to health care for the uninsured, among other policy issues, is covered in health economics, while a course on comparative health systems looks at how countries like England, Germany, Canada and Japan finance and manage health care.

The success of Wharton’s program is indicated by its high rankings in national polls and its ability to draw top health care students. “Because of our positioning — in a business school, with a strong insurance and economics base in our faculty and with strong ties to the medical, nursing and dental schools — we attract business talent which may not have gone into this field otherwise,” notes Kinney. “These are the kinds of people you need to accomplish this task of introducing market concepts into a field that has been dominated by the old values, which were to spend and not take account of efficiency.”

When the health care program went from being a unit to a full-fledged department in 1983, it also meant the addition of faculty whose primary appointments were in health care systems. Several of these faculty have been involved in health care issues in the national arena: During the debate over universal health insurance in the early 1990s, Danzon and Pauly wrote a proposal with two colleagues for national health care reform that would obligate all Americans to purchase basic health insurance and make such insurance affordable to all income groups, regardless of their employment status.

Danzon also has done research on Canadian health care and has analyzed pricing systems for pharmaceuticals. Pauly is writing a book on the impact of business on the health reform debate and, in a separate project, is analyzing HMOs’ treatment of new technology and how that influences which kinds of insurance people buy. With a colleague, he is conducting a study on the cost of hospice care for people with AIDS.

Lawton Burns, associate professor of health care systems and co-author of a recent book called Health Care Management, is part of a four-university research team studying integrated delivery systems in 10 hospitals. “Right now,” he says, “nobody knows what impact these systems will have. The industry is pursuing them with the hope that they will save money and improve quality, but nobody has figured out the right questions to ask or the right information to gather.”

Kissick, who is also the George Seckel Pepper Professor of Public Health and Preventive Medicine and professor of health care systems, recently published a book called Medicine’s Dilemmas: Infinite Needs Versus Finite Resources and is working on several others. He has also done extensive work with the state of West Virginia on the cost of medical education.

Skip Rosoff is researching the legal implications of using clinical practice guidelines in court cases. If a doctor treats patients according to guidelines laid down by a managed care organization, for example, and if one of the patients suffers damage because a more costly, more invasive procedure was not used, “one of the key legal questions is: Can the doctor defend the treatment by saying that he or she was relying on the guidelines set by the managed care organization?” asks Rosoff. “To what extent will the courts allow these clinical practice guidelines to be used as a defense?”

Faculty research aside, the reasons students choose the health care major vary. For students who are doctors, the motives are clear: “One of the spurs to our program was that physicians saw these changes in health care coming and they didn’t want be managed by non-physicians,” says Rosoff. The majority of students, however, aren’t doctors. For them, suggests Pauly, “the intellectual, managerial and interpersonal challenges of managing our health care system seem more immediate than doing a deal on Wall Street.”

THE SUCCESSES

The complexity of our health care system, and the debate over how much health care should be provided, for whom, and at what price, leads to what Kissick calls the Iron Triangle of health care — “the tension in our society between access, cost and quality, and our inability to balance all three, or even two.”

The consensus among many educated observers is that the successes already achieved by managed care in holding the line on costs are an excellent start, although for consumers the changes bring certain restrictions, including a more limited choice of doctors and hospitals and closer monitoring of the services covered by their insurance plans.

The whole subject of restrictions leads to the increasing role that rationing, or as some would prefer to call it, resource allocation, may inevitably come to play in health care delivery choices.

“Managers need to be taught to ration properly,” says Pauly. “You can never hope anymore that you will have enough resources in an HMO or in Medicare to do all the medical things that can possibly do some good. So the challenge is to decide which are the ones that are most worth doing, which is what your patients and members want you to do. Your HMO could pay for bone marrow transplants, but your premiums would be higher. What should be the protocol for very low birthweight babies? A lot of HMOs are trying to adopt clinical pathways or guidelines.”

Kissick’s image of health care is as a “quasi-regulated market system with certain checks and balances … where health care institutions develop budgets, receive capitation payments, and then allocate those funds based on input from consumers as well as providers.” Pauly sees a supply and demand system where health care providers such as HMOs closely monitor their physicians and reward those who are responsive to patients. Patients for their part choose a health plan based on the plan’s cost, the services covered and its reputation.

All observers agree that whether the debate is about rationing or cost containment or better service, one of the great promises for improvement lies in information technology and its potential for better allocating resources, measuring quality and conveying information to buyers and consumers — ideally with the goal of using information more wisely to improve care as well as hold down costs.

“The systems and incentives are right, provided we have good measures of outcomes,” notes Danzon. “We still have a long way to go before we have reliable report cards [to help us] compare plans on both outcomes and costs.

“At the same time, there has been enormous growth in this industry. It’s a very exciting development and the U.S. is leading the world.”

THE ALUMNI

According to figures from the health care systems department, alumni of the program fall into the following categories: Approximately 30 percent work in health care delivery organizations, including hospitals, managed care, long-term care and clinical practice; 21 percent in consulting; eight percent in pharmaceuticals, biotechnology firms or equipment manufacturers; six percent in financial services and insurance; eight percent in educational or research institutions or foundations; three percent in federal, state or local government, and the remainder in other health-related positions (see below for several profiles of Wharton alumni in the health care industry).

As a group, Wharton’s health care alumni graduates are an unusually cohesive and activist bunch. Two years ago, for example, 10 alumni and students spent a week in Beijing offering quality management training to 60 administrators from China’s preeminent teaching hospitals.

In addition, the health care alumni make up one of only two alumni clubs based on industry (rather than geography), and they sponsor numerous symposia, lectures and conferences, including October’s three-day celebration of the department’s 25th anniversary entitled “Redesigning Our Future.”

At that event, the Robert D. Eilers Memorial Lecturer was John Eisenberg, WG’76, chairman of medicine and physician-in-chief at Georgetown University. The speaker is typically an individual who is distinguished and visible in the field of health care. “That we have someone of that caliber in our own alumni ranks is a sign of the program’s success,” says Rosoff.

“We were the first and the biggest program to train physicians in management,” notes Pauly. “Many of them went off to be leaders in managed care plans. And we also created a kind of fifth column in medical schools, people like John Eisenberg who are spreading the word that physicians have to start thinking about management issues.”

John Ferry, MD, WG’82: President and CEO of Southampton Hospital in Southampton, NY.
Southampton Hospital is a 194-bed community hospital in a semi-rural resort area known as The Hamptons on Long Island, NY. Because of its location, “we have one of the wackier staffing and organizational problems I’ve heard of,” notes hospital president and CEO John Ferry, WG’82.

Year-round, the population is about 80,000, consisting mainly of retirees, farmers, fishermen and service people for the local economy. In the summer, the population bulges to 300,000, including actors and actresses, movie directors, Wall Street investors, models and so forth. Finally, about a mile from the hospital is an Indian reservation.

If that sounds complicated, the challenges are only beginning. Southampton Hospital is about to merge with two others “to allow us to survive,” says Ferry, who has been CEO of the $55 million facility for approximately two years. “Before I came here, the hospital was losing close to $3 million a year. Last year we lost about $643,000. This year we will make a profit. But I don’t feel a false sense of security because I can’t tighten the belt anymore.”

Add to that the likelihood that the hospital will take a multimillion dollar hit from Medicare/Medicaid reform, “and you can see why economies of scale” are appealing, he notes.

Still unclear is who will be CEO of the newly merged entity and where it will be located — in one or more of the existing facilities or on a totally new site.

In the midst of this uncertainty, Ferry, who was trained in medical school as a pediatrician, offers some thoughts on health care:

“I have a lot of hope for the idea of provider-sponsored networks,” he notes. These networks, composed of doctors and hospitals, would start taking on some of the financial risk of providing health care, “which is what the insurance companies are trying to get us to do anyway, except that they want to take some of the profits.”

Working with insurers, Ferry notes, does have benefits: Insurers offer marketing, which hospitals “don’t exactly excel at,” and they offer information systems that are clinical and claims-based, and relate specifically to physician activity. This allows insurers to sift through information systems to come up with trends, develop profiles on patients and doctors, and so forth.

“But the technology is transportable,” Ferry says. “Insurance companies don’t have a lock on it. Provider networks could very well develop this on their own.”

Another implication of these networks is that physicians over 40 who went into medicine to be their own bosses will no longer be practicing the way they expected to,” Ferry adds. “Instead, they will work in groups. Also, patients will have less choice, which they will come to expect because they will be paying less, and they will also have to drive farther to get services.

“It’s a disruptive scenario, but in the end will we be much worse off? No, not in terms of what people call medical care. And there may well be pluses, such as an emphasis on outcomes measurement, which means that as physicians we can no longer say we are doing a good job, we have to prove it.”

Lynn C. Bongiorno, WG’95: Manager, medical delivery systems, Oxford Health Plans
Lynn Bongiorno chose to work for Oxford Health Plans because, she says, “HMOs are driving where the health care dollars are being spent.”

Oxford has 3,000 employees and close to one million members in Connecticut, New Jersey and New York. The organization, based in Norwalk, Conn., recently expanded into New Hampshire and Pennsylvania. Bongiorno is in charge of negotiating contracts with ancillary vendors such as laboratories and home care companies. “I’m trying to change the whole contracting system to bring cost, access and quality into the negotiation. It will allow us to make better decisions about what services to bring into our network, in what geographic region and at what price,” she says. “Ultimately we are trying to use analytical techniques to link the whole system back into quality.”

From Bongiorno’s perspective, the two biggest issues in health care these days are the unchecked use of medical technology and the inevitability of rationing care. “Technology is a major culprit behind the cost increases,” she says. “The challenge is to figure out the appropriate use of technology by applying statistical analysis to determine the best outcomes. It also means working with doctors as partners and trying to educate them regarding our results.”

In the area of rationing, Bongiorno says, “HMOs are trying to accomplish it in a logical and efficient way. You put together a list of protocols so that clinical judgments can be made about what to cover and what not to cover. When is something experimental, when is it medically unnecessary, and so forth. Our goal is not to give directives to physicians, but to capture information and do more outcomes measurement so that we can then inform and educate doctors about the appropriateness of certain types of care.”

Another target of health care reform, says Bongiorno, is the typical hospital system which “isn’t yet run like a business. Hospitals tend to have too many people doing very finite tasks with an inordinate amount of equipment. They don’t cross-train their employees to do different jobs in ways that would create a more patient-focused environment.

“Until hospitals can run themselves more efficiently, we don’t want to share risk with them,” says Bongiorno. “They are too expensive.”

As part of its own health care reform efforts, Oxford three years ago developed a concept called group practices without walls. It calls for the establishment of private practice partnerships in which doctors remain independent and have their own offices, but also agree to share the risk with Oxford of providing care.

“For every member who signs up with a primary care physician in one of these partnerships, we put an actuarially determined number of dollars into a fund. The physician keeps what is left in the fund at the end of the quarter. We don’t police the physicians. They make all their own decisions, and they operate independently, but they have the same incentives we do. They assume some of the risk.”

Oxford now has about 120 of these physician practice partnerships, each with 25 to 50 doctors. They work “astonishingly well,” says Bongiorno.

Mark D. Smith, MD, WG’89: Executive Vice President, The Henry J. Kaiser Family Foundation
One of the reasons Mark Smith went to Wharton was because he sees “business as both the culprit and the solution” in the health care crisis.

“The country is profoundly ambivalent about the corporatization of health care services,” he says. “Certain aspects of health care have always been part of the corporate for-profit culture, such as pharmaceutical companies and X-ray machines. But what is new is the increasing number of hospitals, HMOs and physician service corporations that are now for profit.

“People aren’t sure how to feel about that. We want health care to be more business-like, more accountable, more efficient, and we want it to have an ethic of customer service in ways it certainly doesn’t now. But it makes us a little queasy to think about return on investment when taking care of people with AIDS, for example.”

Smith is an internist who continues to do clinical work at San Francisco General Hospital and has a faculty appointment at UCSF. He also serves on the anti-viral advisory committee of the FDA, and has chaired the CDC’s HIV prevention advisory committee. While earning his MBA from Wharton, he ran the Philadelphia Commission on AIDS, and after graduation, was director of outpatient services at Johns Hopkins.

He is now in Menlo Park, Calif., at the Kaiser Foundation, an independent health care philanthropy whose focus is the care of low-income and underserved Americans and also South Africans. One of the foundation’s grant-making priorities is HIV diseases.

The foundation has recently funded a series of patient education fact sheets, provider fact sheets, an interactive CD-ROM for AIDS patients, and needle exchange and condom distribution programs.

One of the issues in the health care dilemma that should be more prominently debated is professional ethics, Smith says. “Part of the problem lies in the realm of public policy. How do you establish a public policy environment that rewards the best of the business model and restricts its worst, in an industry that does not act like other industries?

“Also, there are clear indications of market failure in, for example, the fact that 31 million Americans are uninsured. Unless we curb some of the unraveling of the traditional insurance markets so that there is a place for spreading risk, these people won’t get cared for very well. You could end up with a system that is great as long as you are healthy.

“The issue of providing coverage for the uninsured involves political and financial will. There is not a technical solution, no magic bullet way to do it. The question is, do we have leadership in the political process that would make this a priority and build a consensus to handle it? I don’t know that I see that right now.

“People in almost every aspect of health care, including doctors, nurses, consultants and health policy analysts, have lived through 50 years of an uninterrupted bull market— always more money, bigger hospitals, higher salaries, higher premium levels, more jobs, bigger slices of GNP. That bull market is now over in many segments. It behooves people all the more to think about what kind of contribution they want to make.”

Lisa David, WG’84: Partner, APM Inc.
“Everyone involved with serving patients recognizes that we are in for a period of tumultuous change,” notes Lisa David, a partner in the consulting firm of APM, Inc., in Manhattan. “As a consultant, there is a lot more intensity and pressure in what we do, but in many respects it’s easier because you don’t have to sell anybody on the need for change. It’s a matter of helping them come up with the right answer.

“We are doing more to improve basic care than we did eight years ago,” adds David, who has been with APM since 1985. “The interests of doctors, hospitals, alternative providers and so forth are coming together. So you start to get whole answers instead of improving things on the margin. And for people with good business training there are better career opportunities than ever before, including all kinds of new businesses as well as new roles in all the traditional health care organizations.”

APM works mostly for health care providers, including hospitals, large medical groups and institutional provider networks. “We are looking for cost efficiencies, better coordination of services from the patients’ perspectives, and the delivery of higher quality, more proactive care,” David says. This could mean designing a provider network’s relationship with managed care companies and/or helping decide the network’s organizational structure. APM also looks at how hospital processes are configured to deliver care, and analyzes information systems to determine appropriate technology use.

In some respects, David says, “the delivery structure is being redesigned by the health care providers themselves. What is not being answered are the policy issues of who is covered and how many standards of care we have in this country. The current dialogue will get worse in terms of what we are willing to pay for. We will have more uninsured, and there will be a greater discrepancy between what those with coverage will have access to, and what those who don’t, won’t.”

There are reasons for concern over health care, David says, “but the potential for doing the right thing is there … For every company I see coming in to make money, there is another company that is getting paid to do it better from a patient’s perspective. A good number of managed care companies do well because they actually are doing a better job of working with the patient, not just restricting access. There are models out there to follow.”

 

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