Book Review

Market-Driven Health Care: Who wins, who loses in the transformation of America's largest service industry

N Engl J Med 1997; 337:353-354July 31, 1997

Article

Market-Driven Health Care: Who wins, who loses in the transformation of America's largest service industry
By Regina E. Herzlinger. 379 pp. Reading, Mass., Addison–Wesley, 1997. $25. ISBN: 0-201-48994-5

Regina Herzlinger, a leading analyst of the health care business and a professor at the Harvard Business School, has written an engaging book about the changes in the American health care industry. It is a multifaceted work in which Herzlinger addresses the impact of technology on health care costs, the structure of health care financing, and the emerging role of consumer choice. The book will interest a broad range of readers, but it is especially important for physicians and health care administrators.

The book has an informal style and is peppered with insights gleaned from Herzlinger's own experience. This informality should not be confused with superficiality; her analyses of medical and nonmedical business ventures are sophisticated and insightful. In fact, one of the high points of the book for physicians is the elucidation of how similar “their” industry is to other industries from a business point of view.

The book has many subjects. Herzlinger's discussion of the integration of technology into medical care is even-handed, and she vigorously supports medical savings accounts and consumer choice. The most important part of the book is her argument for restructuring health care. Her view is that today's hospitals resemble the factories that dotted the American landscape in the 1970s. These old factories were made obsolescent by their nimbler, smaller, more customer-focused Japanese and German counterparts. She believes the same is true in health care and sees a need to focus on what individual parts of the health care team do well and on the needs of the consumer. Herzlinger believes that medical care should evolve, to the greatest extent possible, into a network of “focused factories.”

The concept of focused factories is appealing, yet somewhat indistinct. Outside of health care, focused factories range from boutique steel mills to McDonald's restaurants. In health care, there are elements of focused factories in the Shouldice Hospital in Toronto (providing hernia operations at a discount), the Mayo Clinic, and Pearle Vision Centers. Perhaps the most important example is the Saleck chain of oncology centers. Herzlinger argues that Saleck has concentrated on the needs of the customer and on doing one thing well: providing oncology services. She believes this is a model worth emulating.

This point is a very important one for physicians and health care administrators. It is true that there has been too little emphasis on the needs of patients as customers. Herzlinger points out that most hospitals are organized to meet the needs and interests of the providers, not the patients. Moreover, there is much to be gained from greater specialization and from the reconfiguration of care along service lines.

However, I would like to take issue with Herzlinger on some points. Her support for focused factories has an underlying thesis — that the vertical integration now taking place in medical care is not appropriate. She believes that vertical integration results from the outdated philosophy that “big is better.” She makes a spirited argument that hospitals should not be buying primary care practices, and she supports her conclusions with an analysis of the failure of Humana to develop an integrated network. I think Herzlinger may be overly influenced by the Humana experience, however. She notes that vertical integration has “beneficial results primarily for firms that integrate to secure rare or erratic sources of supply.” Yet hospitals are becoming vertically integrated by buying or affiliating with primary care practices in order to secure just such an erratic supply — in this case, of patients. The locally based integrated delivery system is a different animal from the Humana empire. Herzlinger's point is well taken, but it seems to me that her opposition to integration goes a bit too far.

Elements in the managed-care marketplace could play havoc with her approach to focused factories. The book pays insufficient attention to the dynamics of managed care, noting, for instance, that capitated contracts remove the need for primary physicians to act as gatekeepers. Just the opposite is true under many fully capitated contracts. Moreover, if there were two competing focused factories, providing, for instance, oncology services, it would be in the interest of a capitated group of health care providers to “whipsaw” the two in order to lower prices. This kind of competition will make it difficult for focused factories to locate the capital necessary for expansion. Competing wholly integrated networks may be better and more efficient for patients. Indeed, single-specialty institutions are an endangered species in the health care environment.

Herzlinger provokes the reader in this book. It should be read by those interested in trying to understand the direction in which our fast-moving industry is headed.

Troyen A. Brennan, M.D., J.D., M.P.H.
Harvard School of Public Health, Boston, MA 02115