Health Care Rx: New Technology and Creative New Ventures

In an October 11th interview, Senator Debbie Stabenow (D- Minnesota) noted we need to employ new technology to improve our health care system. In a letter I recently shared with the Senator, I emphasized that her comments were right on target and offered the following observations:

-- The health care sector has lagged behind all others in using leading edge technologies to improve operations- vested interests have really not worried too much about costs; these were just passed on to consumers, directly and indirectly.

-- We learned lessons years ago with the e-commerce revolution where companies replaced paper with electronic transactions. Moving from paper to electronic changes processes, creates new way of conducting business, and these are the real benefits. This point has been missed in much of today’s health care dialog.

-- U.S. hospitals are, by all measures, the most expensive in the world. About one-third of all private hospital expenses look like what you may expect in a hotel business – costs for check-in, room service, reservations, meals, cleaning and check out. Years ago I was involved in a major health care study which also reinforced the same points- not much has changed since. Hospital costs are the largest component of health care costs; administration and support costs are a major component of hospital costs- if we set the objective of reducing hospital costs by perhaps 5 percent and with proper incentives, we can achieve real measurable cost benefits. We are far behind the curve and should look at best practices elsewhere. In early 2009, I was invited to participate in an Israeli hospital management company which used Israeli logistics 'best practices' to optimize scheduling for all perioperative procedures to efficiently handle large patient volumes- these same new processes have excellent applications in US hospitals.

Entrepreneurial Challenge: ‘Choking on Growth’

Starting a venture is tough. But successfully growing an early stage business and surviving long term is even tougher based on experience and statistics. This seems counterintuitive to many who feel the hard part is done. Products developed, ‘proof of concept’ completed, the many pricing, product positioning, marketing, distribution and management decisions all done. The business is up and running, maybe cash flow positive and profitable, positioned for growth. Maybe the business reached this milestone, as most do, with careful planning, much trial and error, many false starts and plain old luck.

Entrepreneurs at this point usually take a deep breath, believing they have made it through the toughest part. Yes and no. Statistics vary widely but most agree about 45 to 50 percent of new ventures fail within the first year, increasing to over 55 percent in high technology sectors. The good news- reaching the critical one year ‘survival’ milestone. The bad news- more formidable and challenging decisions lie ahead.

Why? Most early stage companies often ‘choke on their growth,’ unable to develop transition strategies, technologies, sales and marketing, management, systems and corporate culture to meet growth challenges. These new skills differ from those needed to conceive and launch the business. Many believe money is the answer. Working with many early stage companies, I often hear “… if we secure funding of $xxx, we hire more staff, increase sales, develop new products and so on.” Looking closer, you realize no effective growth strategy exists. Hiring new sales staff does not, by itself, maximize a company’s probability of future success and, in many volatile markets, survival.

So on one hand growth is critical, but on the other hand growth may sink the company. What are the lessons to be learned here; what is needed to win?

Here are some recommendations for early stage firms, which may sound counterintuitive:

Take a longer view and think like a larger company

What products, markets, strategies, corporate infrastructure and management team are needed to support growth? What are the key performance indicators (‘KPIs’) to keep score, i.e., how do you know you are winning — successfully managing growth, or “choking?” Increasing sales with declining profits is a common early problem indicator. Successful companies must go beyond this red flag and answer the ‘why and what’ questions; why are profits sinking and what do we do to fix it

Manage innovation not invention

Early stage companies often measure ‘innovation’ success, focusing on technical developments, the need to create new technologies, products and/or services. Long term success demands moving the focus from invention to innovation, i.e., the “commercialization” of new technologies. Even major companies often fail to capitalize on breakthrough technologies- remember Xerox’s failure to commercialize their early PC technology. Many also do not know that ATT developed the transistor in the late 1940’s- selling these rights to Texas Instruments, Sony, others for $25,000- ATT missed the semiconductor market. Early stage companies face similar challenges- effective commercialization strategy is essential, demanding new management skills.

Acquire adequate capital resources to support growth

Companies need capital for growth and governance, not just technology development and sales. Investors must understand the company’s business model, value proposition, the opportunities and risks. Smart investors understand transitioning from an entrepreneurial to a professionally managed firm is one of the highest risks and a major hurdle for most. Demonstrating clarity on plans and strategies to address growth challenges improves probability of securing growth capital.

Develop new complementary entrepreneurial management skills

Moving beyond entrepreneurial, ‘start your own business’ skills, early stage, high growth firm executives need to acquire new management skills which can be learned. Seminars and university programs play a role here. Examining case studies of entrepreneurial successes, failures, and best practices is a valuable learning tool. Consider two often cited examples – Osborne and Compaq Computer. Both firms were 1980s’ startups in the explosive PC growth market. Sales and profits ramped up quickly- Osborn achieving monthly sales of $10 million within less than 6 months; Compaq first year sales over $100 million. Compaq did well and survived. Osborne is fodder for business cases. Why? Compaq successfully moved from an entrepreneurial mindset to a professionally managed firm, quickly evolving its systems, infrastructure and culture to address the growth challenges; Osborn choked on growth. Many other industry examples can be cited as well.

Many senior executives of high growth firms believe sales and capturing new business is their critical survival issue. If new business is good, then even more business and high growth should be better, or so the logic goes. The concept of ‘choking’ on too much business is tough for many senior executives to accept. Unfortunately their company’s long term survival may depend upon understanding and addressing ‘choking on growth’ challenges.

Paul B. Silverman

October 31, 2009

EMR : Right Answer, Wrong Question

The administration is moving at warp speed to improve our health care system by pursuing new EMR initiatives-one key component of the administration’s health care reform bil. The objective, reinforced by President Obama: computerize all medical records within five years. Proposed benefits include reducing waste, eliminating red tape, reducing the need to repeat expensive medical tests and helping reduce costly medical errors. So if these are the benefits, and these are the right answers to the how can EMR help, why is there ‘pushback’ on EMR and reluctance to aggressively pursue new EMR initiatives.

Maybe these are the right answers but maybe we have the wrong question here. Fixing the system makes sense when you look at today’s health care system problems. Many studies exist- I find the University of Maine study (2001) reviewing OECD and WHO data particularly insightful. Look at some of the statistics; 42 million uninsured in the U.S.; we spend about $4,178 per capita for health care in the U.S., more than two times the median cost of $1,783 in OECD countries and much more than Switzerland which is next on the list at $2,794; we spend 13.6 percent of our GDP on health care vs. the next highest at 10.6 and 10.4 percent in Germany and Switzerland.

So with these investments you may assume our health care system should be world class. Unfortunately the same study, and many others, tell a different story. Overall health care system satisfaction among the population ranks reasonably high in many OECD countries; Denmark, Finland, and the United Kingdom are at 91, 81 and 60 percent respectively. Canada, notwithstanding any commercials we have seen, shows a 46 percent satisfaction rate. Most countries are over 50 percent some are over 60. Compare these to the United States where only 40 percent of the population is satisfied with our health care system- small comfort that we exceed only Italy where only 20 percent are satisfied with their system. Some may argue this is perception and studies are subject to error in design or methodology. What is more difficult to challenge, and I find particularly insightful, are ‘hard’ statistics such as infant mortality rates where the U.S. ranked 26^th among all industrialized countries with 7.2 deaths per 1000 live births. Compare this to Japan, Norway, Finland and Sweden which are all under 4, and the United Kingdom, Canada and Germany at 5.9, 5.2 and 4.9 respectively.

Now related to EMR, one statistic I find most insightful is U.S. hospitals, by all measures the most expensive in the world, spend about 19.3 to 24.1 percent of their total budget on administrative costs. For private, ‘for profit’ hospitals this increases to about 34 percent vs. 19.3 percent for public hospitals. I do not see these statistics mentioned. What this means is about one-third of all private hospital expenses look like what you may expect in a hotel business – costs for check-in, room service, reservations, meals, cleaning and check out. Given this model, which I believe fits well based on my experience, we need a new operational paradigm to shift the focus from the benefits of reducing paper to changing business processes. Virtually all other industry sectors learned years ago in the e-commerce revolution that replacing paper is not the cost saver. Business re-engineering of processes is how firms drive bottom line improvements to achieve improved performance. You spend more to create efficient operations structures then you save by reducing operating costs.

So given the above and going back to EMR, I suggest we reframe the EMR question – the additional cost to implement EMR is an issue but should not be. The real EMR question should be what are the primary and secondary business processes that will be enabled by EMR and what are the investment and process improvement metrics?. That should be the key question, not implementation cost of over $100,000 per physician office or other cost metrics. Other sectors migrating to a paperless environment all show cost increases which are often dramatically offset by process improvement savings. When today’s average private hospital is spending about 34 percent of total budget on administrative costs, we can clearly see the opportunity to achieve dramatic efficiency improvements.

As one example, consider hospital operating rooms which many do no know are a profit center within hospitals. Studies suggest these facilities today operate at less than 60 percent efficiency. Why? Changes or delays in patient admittance means facilities become available but this information is useless unless it can be managed, disseminated and acted upon to reschedule surgeries, identify the location of hospital assets and maximize use of resources. Imagine a hotel where a cancellation occurs and it takes hours to reschedule other customers to use the room. These problems occur in every sector today and are solved by robust, agile information systems and solutions driven by well proven business process re-engineering techniques. That is the real opportunity I foresee today in the U.S. health care sector. We are now well positioned to make substantive changes in our health care sector driven by national leadership and vision, new technologies and the opportunity to dramatically reshape health care sector business processes.

Paul B. Silverman

November 1, 2009