Customers Determine the Financial Incentives

Image source: http://www.aldarin-electronics.com

This is one of the great non-understood truths about how industries work: (see title). [Brief pause to let the words sink in.] Let me illustrate:

I was at the 2012 Healthcare Conference at Harvard Business School and heard H. Lawrence (Larry?) Culp, the President and CEO of Danaher Corporation, speak. Danaher Corporation, just so you know, is one of the big suppliers to the healthcare industry. It’s the parent company for a ton of brands that make really sciency devices and diagnostic stuff. And now that I’ve slaughtered the description of the company. . . . So, Mr. Culp spoke about how profitable they are and how successful they are and whatnot, and then he opened it up for questions at the end.

Now, before I tell you what I asked him, you should know that I’ve always believed, based on what I learned in my business strategy education, that if we could fix the financial incentives in the healthcare system itself, the suppliers to the healthcare system will have their incentives fixed for them as well. So, if doctors all of a sudden start making tons of money by providing really high-value care for patients, but the big thing limiting them from improving their value by decreasing their prices even more is the cost of MRI machines and diagnostic tests, I’ve thought that the makers of those MRIs and diagnostic tests would see that, if they want to kill their competition, all they’d have to do is find a way to make much cheaper stuff to sell to the doctors, and the doctors would jump all over it. But, before the suppliers will invest money into developing those cheaper MRIs and diagnostic tests, they have to know that the doctors really want and will preferentially purchase cheaper stuff that still gets the job done.

So, with that background, I asked my question to Mr. Culp: “I see your company as a supplier of devices and diagnostics to the healthcare industry; in other words, you are providing a lot of the innovation to the industry. This is awesome, because it will help me do so much more for my future patients. But the discussion about how innovation is the main thing driving unsustainable health spending has become more and more important lately, so I’m just wondering, does that conversation affects how you choose to focus your R&D money by pushing you to start developing more cost-lowering innovations, or are R&D investments just determined by what customers are requesting?”

He gave a very professional and politically correct answer, and this is what it boiled down to: We’re a company, and just like every other successful company in this country, we’re trying to make money by making what customers will buy. As soon as customers start demanding cheaper devices and diagnostics, we’ll “pivot” our R&D investments toward those. (Yes, he actually used the word “pivot,” and it was very articulate of him.)

What’s the message in all of this? Customers determine the financial incentives.

Pop quiz: If everyone thinks MRIs are remaining unnecessarily expensive, how should we fix it?

  • A: Tell the MRI makers that they’re not providing high value machines, and then regulate them into developing cheaper technology
  • B: Realize that they’re not investing in developing cheaper MRIs because customers aren’t demanding cheaper MRIs, so figure out why customers aren’t demanding cheaper MRIs and solve that problem

I hope you chose the second option. Now apply this to what we’re seeing with all these regulations to try to fix the value provided by doctors and hospitals. Shouldn’t we be looking at the doctors’ and hospitals’ customers and fixing whatever is keeping them from choosing high-value doctors? The regulations will likely help, but they’re not going to be a sustainable solution to our providers’ value problem. We need to understand and fix whatever’s going on with their customers (ahem, patients and insurers). Oh, insurers aren’t providing the highest value insurance they could provide? Why could that be?

Parting thoughts:

In the medical devices/diagnostics-provider relationship, the provider is the customer. But in the insurer-provider relationship, the provider is the supplier. Remember, there is a whole chain of customer-supplier relationships in every industry, so this means if we want to fix the financial incentives in the healthcare system, we have to go all the way back to the very beginning customer in the chain and fix what they’re doing, which will then fix what the next party in the chain is doing, which will then fix what the next party in the chain is doing, . . .

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2 thoughts on “Customers Determine the Financial Incentives”

  1. How is the provider a supplier in the insurer-provider relationship? Insurers don’t contract with provider groups and thereby gain membership? Members are the supplier, providers are cost to insurers.

    1. I’m defining “supplier” and “customer” the way B-schools do. A supplier is a party from which you buy goods or services. When an insured person needs healthcare services, the insurance company buys the healthcare services from providers. So this makes providers a supplier to insurers. That sounds confusing when I write it, but hopefully it’s clear.

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