Management practices and principles in healthcare

Management in Healthcare

The value chain is a methodology developed in management studies to understand how firms derive value. There are five elements to the value chain -- inbound logistics, operations, outbound logistics, marketing & sales and service. A company can develop value through any of these, but most companies will focus on just one or two. This leaves room for improvement by developing the other areas of the value chain (MindTools, 2014). This paper will outline how a health care provider can improve its value chain.

Value Chain

The concept of the value chain has been re-imagined for the health care setting, for a couple of reasons. The first is that many providers are non-profit entities, so deriving profits is not a primary objective. The second reason is that value for the patients is an entirely different issue from value for the organization. There are areas of intersection between the two, but there is little doubt that the needs of the patient are so important in health care, and not all decisions are based on economic principles like utility. This calls for a re-imaging of the health care system to take these realities into account. The result is a value chain that has a division between pre-service, point of service and after-service components. Pre-service includes marketing and logistics, two classic value chain elements. Point-of-service includes operations and service; after-service includes follow-up marketing and billing (Swayne, Duncan & Ginter, 2008). To an extent, the health care value chain attempts to balance the needs of the patient with the needs of the organization.

Service delivery is arguably the most important part of the value chain, in that this is where the patient gets what they need, and if that does not occur, then nothing else the organization does matters (Walters & Jones, 2001). Service delivery needs to be focused on total value, rather than simply on cutting costs, or moving patients through the facility quickly. Porter has

Strengths in Value Chain

The health care industry is strong in a couple of components of the value chain. In general service provision is a strength. One element of the service provision is the actual medical service provided by doctors and nurses. The quality is high, because the levels of training are high, the equipment is excellent and most health care organizations have high standards of care. The result is that across the system, value is delivered in terms of treating ailments and healing people. This is the service element of the original value chain and the point-of-service element in the healthcare value chain.

Another strength in this value chain is with respect to marketing and promotion. Health care marketing expenditures are typically quite high. When compared with other countries, the American health care system engages in extensive marketing and works hard to convince patients to seek medical care. The result is that Americans spend a lot more on health care than do people in any other country. There is little doubt that marketing is a key component of the value chain, and a revenue driver within the industry

For any individual provider, marketing in particular is a key element of the value chain. Providers will work to attract key payers -- for example becoming a provider of choice for a popular insurance plan -- as this creates demand. Creating demand is essential to meeting the high fixed costs and ensuring that capacity in the business is filled. When there is overcapacity in a geographic area this provides considerable impetus for firms in this industry to engage in aggressive marketing, usually targeting insurance companies and other payers, rather than strictly targeting the patients

Weaknesses in the Value Chain

Michael Porter (2005), the creator of the value chain, has outlined some specific weaknesses in the way that the health care system handles its business. The first area that Porter identified weakness is that operationally, there has been a push to decrease costs as opposed to increasing value. The result of that is inevitably that there will be issues with patient satisfaction and ultimately patient care will suffer. The problem for the industry is that the government has tremendous bargaining power, and uses that to reduce the amount of payout, which in turns places emphasis on cost-cutting. Porter sees this as the wrong way to go, because cutting costs is not the same thing as creating value, where creating value is how you win customers. Another issue related to costs is the supply chain, or inbound logistics (Sweet, Hamilton & Willis, 2005). Health care companies are price takers, such that they must pass absurd costs onto their customers, and in part that is because they manage their supply chains so poorly, a bad habit that derives from having customers with low price elasticity of demand -- healthcare organizations never had to worry about their supply chains.

Another area of the value chain that Porter has identified as an issue in health care is the logistics of health care. He argues that while there are mergers and consolidation at the higher level, there is a high degree of segmentation at the service delivery level. Further, focusing only on a local geographic market breeds inefficiency. A restructuring of the logistics of health care, focusing on service-level consolidation, distance medicine and other ideas that allow for greater economies of scale in service delivery, are better ways to reduce costs than the tactics currently being pursued in the industry. The fear of electronic health records also runs counter to most industries, where information technology is used to increase efficiency and accuracy -- it will do the same in healthcare as well.

The weaknesses argue for an rethink of how health care organizations structure themselves strategically. There seems to be a lack of creative thinking in the industry with respect to driving value, and that is one of the reasons why the healthcare-specific value chain was created. For healthcare organizations, there is imperative to structure the organization in such a way that efficient, high-quality service is delivered.

Competitive Relevance

When it comes to competition, Porter argues that healthcare organizations are basically doing it wrong. They have, he argues, a poor sense of their value chains. Value is derived mainly at the service delivery level. Instead, many health care organizations place emphasis on marketing, billing, and other such distractions. Moreover, they will often consolidate their operations under the logic that managerial consolidation can deliver value, but the reality is that unless service is streamlined, decoupled at least somewhat from geography, and is based on a poor understanding of what the health care product is. Porter's point about product is that health care is not commodity but as discrete interventions and treatments.