On Automobile, and Health Care Companies Run by Finance People

The New Republic published "Upper Mismanagement" about what happens when businesses are run by people who do not understand their companies' businesses.  Although the article was focused on the decline of manufacturing in the US, its applicability to health care is obvious:

Harvard business professor Rakesh Khurana, with whom I discussed these questions at length, observes that most of GM’s top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost. As Khurana quips, “That’s how you end up with GM rather than Toyota.”

How did we get to this point? In some sense, it’s the result of broad historical and economic forces. Up until World War I, the archetypal manufacturing CEO was production oriented—usually an engineer or inventor of some kind. Even as late as the 1930s, business school curriculums focused mostly on production. Khurana notes that many schools during this era had mini-factories on campus to train future managers.

After World War II, large corporations went on acquisition binges and turned themselves into massive conglomerates. In their landmark Harvard Business Review article from 1980, 'Managing Our Way to Economic Decline,' Robert Hayes and William Abernathy pointed out that the conglomerate structure forced managers to think of their firms as a collection of financial assets, where the goal was to allocate capital efficiently, rather than as makers of specific products, where the goal was to maximize quality and long-term* market share.

By the 1980s, the conglomerate boom was reversing itself. Investors began seizing control of overgrown public companies and breaking them up. But this task was, if anything, even more dependent on fluency in financial abstractions. The leveraged-buyout boom produced a whole generation of finance tycoons—the Michael Milkens of the world—whose ability to value corporate assets was far more important than their ability to run them.

The new managerial class tended to neglect process innovation because it was hard to justify in a quarterly earnings report, where metrics like “return on investment” reigned supreme. 'In an era of management by the numbers, many American managers … are reluctant to invest heavily in the development of new manufacturing processes,' Hayes and Abernathy wrote. 'Many of them have effectively forsworn long-term technological superiority as a competitive weapon.' By contrast, European and Japanese manufacturers, who lived and died on the strength of their exports, innovated relentlessly

Furthermore,

The business schools had their own incentives to channel students into high-paying fields like finance, thanks to the rising importance of school rankings, which heavily weighted starting salaries. The career offices at places like Harvard, Stanford, and Chicago institutionalized the process—for example, by making it easier for Wall Street outfits and consulting firms to recruit on campus. A recent Harvard Business School case study about General Electric shows that the company had so much trouble competing for MBAs that it decided to woo top graduates from non-elite schools rather than settle for elite-school graduates in the bottom half or bottom quarter of their classes.

No surprise then that, over time, the faculty and curriculum at the Harvards and Stanfords of the world began to evolve. 'If you look at the distribution of faculty at leading business schools,' says Khurana, '“they’re mostly in finance. … Business schools are responsive to changes in the external environment.' Which meant that, even if a student aspired to become a top operations man (or woman) at a big industrial company, the infrastructure to teach him didn’t really exist.

If business schools did little to teach about manufacturing, they did almost nothing to teach about health care. But at the same time the finance people were taking over manufacturing, health care organizations were pushed to turn over their leadership to business people to improve efficiency and break the physician's "guild." Would there be any reason to expect that a finance background would be better preparation to run a health care corporation than to run an automobile company?

For the latest thought- and wince-provoking example of how leaders of health care corporations seem to know almost nothing about the actual health care their companies provide, see a DailyFinance interview with Mr Kent Thiry, CEO of DaVita, a for-profit corporate provider of dialysis services. According to the company web-site, "prior to working for Vivra, Mr. Thiry was a partner at Bain & Company, an International management consulting company. He earned his BA degree, with distinction and Phi Beta Kappa, in Political Science from Stanford University in 1978, and his MBA, with honors from Harvard Business School in 1983"  So he got his MBA from an elite US business school at the time in which finance was becoming dominant as described above. 

Asked to explain his business model, Mr Thiry responded:

Most of us have a couple of kidneys. These kidneys are amazing organs -- some of the most complex, sophisticated organs in the human body, which is why they've been so difficult to replicate compared to other organs like the heart and lung and others. And when the kidney fails, you need to go on dialysis, unless you're one of the fortunate few to get a transplant. And we operate the centers that people come to if their kidney fails and they can't get a transplant.

And what we do in our centers is take care of these people typically three times a week -- four hours each time -- where we take their blood out of their body, clean out all the toxins that they would normally clean out themselves through the act of urinating. But you don't do that anymore once you've lost your kidney function. And we take that part out, take the toxins out and then put the blood back in with some other nutrients.

To be charitable, I do not think that would merit a "C" on a high school biology test. [Medical science cannot "replicate" hearts or lungs. Kidney function is not the same thing as "urinating." The functions of the kidney are far more complex than "cleaning out toxins."]

Does it make any sense to put someone who obviously understands so little about kidneys in charge of a kidney dialysis company?  (On the other hand, see this post on accusations that DaVita's ruthless business practices treat patients like "dialysis dollars.")

So, if putting finance people in charge of automobile companies turned out to be a recipe for bankruptcy, why should we expect from putting finance people in charge of dialysis companies, or hospitals, or drug, biotechnology or medical device companies, or health care insurance companies, or health care information technology companies?

The CEOs of big health care organizations, most of whom have business, not health care backgrounds, have mainly been good at paying themselves and their cronies well. (For example, according to the 2009 DaVita proxy statement, in 2008, Mr Thiry owned over 2 million shares of stock, 1.9% of all shares outstanding, and received more than $11 million in total compensation.  Clearly, he was not paid according to his knowledge of kidney biology.)  Meanwhile, health care costs rise, access falls, and quality degrades.

If we really want to reform health care, maybe we should take a lesson from Toyota. Put the car guys and gals in charge of car companies. And put the health care guys and gals in charge of health care.

Turning Patients into "Dialysis Dollars"

As we have discussed in previous posts (here and here), prior to a US Supreme Court decision in 1975, physicians (and other professionals) were left free to set up and enforce their own codes of ethics. Until about 1980, the US American Medical Association (AMA) stated,

• "in the practice of medicine a physician should limit the source of his professional income to medical services actually rendered by him, or under his supervision, to his patients"
• "the practice of medicine should not be commercialized, nor treated as a commodity in trade"

The Supreme Court decision was widely construed as meaning that any promulgation by US professional organizations of ethical regulations that constrained any economic practices of their members was a violation of anti-trust laws. Thus, in 1980, the AMA dropped their prohibitions against the commercialization of medicine, and nobody, it appeared, tried to change the anti-trust law whose provisions the court interpreted.

A vivid example of how physicians and patients may be caught in the cross-fires among health care corporations in this brave new era of commercialized health care was provided by a recent report in the Denver Post:

News that Fortune 500 company DaVita Dialysis is moving its headquarters to Denver socked its competitors like a punch in the gut.

To its rivals, the kidney-care giant is a bully armed with high-powered attorneys who use lawsuits as tools to intimidate.

DaVita executives counter that they are simply strong competitors — they act as aggressors only when doctors or nurses or other dialysis companies break promises and double-cross them.

Either way, a string of DaVita-filed lawsuits around the country — with two major battles boiling in Denver and Colorado Springs — shed light on the ruthless competition over dialysis patients in an industry that costs Medicare alone more than $8 billion per year.

For years, DaVita's competition in Colorado's two largest cities was almost nonexistent.

The mud began to fly last year when the second-largest group of Denver kidney doctors, called nephrologists, ended their exclusive affiliation with DaVita and partnered with a Massachusetts dialysis company entering the Denver market. Near the same time, the largest nephrology group in Colorado Springs dumped DaVita in favor of Liberty Dialysis, which recently opened two dialysis centers in the city.

DaVita quickly sued doctors in both cities, plus a nurse battling breast cancer who quit her job at a DaVita dialysis center and took one with Liberty.

The hostility between the companies is so intense, it's seeping down to the patients.
'With everything that is going on, you feel like you are becoming sort of a dialysis dollar,' said Julie Estes, a 53-year- old Colorado Springs woman who spends three days a week, four hours at a time, hooked to a dialysis machine in order to stay alive.

DaVita says it 'paid millions' in 1998 to the doctors of Western Nephrology in Denver to retain them as medical directors of six dialysis centers in the metro area for 10 years. The doctors signed non-compete agreements, promising not to join forces with DaVita rivals or steal any of the California-based company's nurses.

Patients are free by law to choose any dialysis center they want. But dialysis companies bank on the fact that snagging the most popular kidney doctors in town to serve as medical directors of their centers will bring in the most patients — and the most dollars.

Every dialysis center is required by federal law to have a medical director to oversee the care of patients and the water purification system used to flush toxins from the blood of people with failing kidneys.

It's a side job, separate from a nephrologist's practice, that some estimate takes only a couple of hours each week. Companies and doctors declined to say what salary comes with the job, but estimates range from $20,000 to $200,000 per year depending on the competitiveness of the market.

After 10 years with DaVita, when they believed the non-compete agreement was about to expire, Western Nephrology doctors began making plans to become medical directors of shiny-new American Renal Associates dialysis centers opening in Denver with a flat-panel TV and heated, massage chair at every dialysis station.

Four of the new centers are within 3 1/2 miles of existing Da Vita centers. The non-compete agreement that Western Nephrology doctors had signed for DaVita prohibited them from having relationships with competitors within a 35-mile radius.

DaVita contends in its lawsuit that it found out about Western Nephrology's 'secret campaign' because the dialysis company they were working with applied for Medicare billing numbers for five new centers in the Denver area.

In its counterclaim, American Renal Associates accused DaVita of violating federal antitrust law — the company had controlled at least 80 percent of the Denver market. DaVita lagged in updating its dialysis centers until competition was imminent, according to court records. And the claim accused DaVita of 'filing legal actions that are objectively baseless' merely as an 'anticompetitive weapon.'

"Ruthless competition," "lawsuits as a tool to intimidate," "double crosses," flying mud, patients who feel like "dialyis dollars," non-compete agreements, medical directors paid according to "the competitiveness of the market," "secret campaigns?" - is this any way to run a health care system?

As Dr Arnold Relman pointed out (see our previous posts linked above), through the 1960s there was some consensus that health care does not function like a pure market, partially because patients cannot function like steely-eyed consumers. They do not have enough information about the benefits, harms and costs of their possible choices. They have trouble understanding the ambiguity and uncertainty of the medical context. And most important, they may not be capable of the cold cognition the free market model requires, since they may be dealing with choices whose potential outcomes prompt extreme emotions, and in many cases, they may be too frightened, sick, or cognitively impaired to make fully rational choices. In particular, patients with end-stage kidney disease, requiring dialysis to maintain life, seem very different from some ideal, coldly cognitive consumers. So what in the world are they doing caught up in these sorts of disputes?

I submit that real health care reform ought to help physicians and other health care professionals renew their professionalism, and put the provision of health care (and health education and clinical research) back in the hands of people who view these activities as callings, not purely as ways to get rich. Meanwhile, when you are a patient, be prepared to be treated merely like a source of revenue.

PS - Please note that, as we have posted before, the new US "czar" for health care reform is a former member of the board of directors of DaVita.