Porter and Teisberg's landmark book applying value chain thinking to the 2 trillion dollar healthcare system in America.

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2. Sum total
of beliefs
Four Concepts Four Words
Manageable
groupings
Universe Philosophy
Disaggregation Reason
Conceptual Scheme Knowledge
Relative Significance Behavior
You!
Walking Stick/Valid
Information
2

3. Michael E. Porter
Elizabeth Olmsted Teisberg
Redefining
Health Care
Creating
Value-Based Competition
On Results
3
HAR VAR D B U S I N E S S S C H O O L PR E S S

4. Note:
The following cells are excerpted
from the book for discussion purposes only.
Please refer to the book itself for exact verbiage,
references and quotations.
Michael E. Porter and Elizabeth Olmsted Teisberg.
Redefining Health Care (Boston, MA: Harvard Business
School Press, 2006).
4

5. Reform Efforts Failed Because the Diagnosis was Wrong
Past Objective: Present Objective:
Reduce Costs, Avoid Costs Enable Choice, Reduce Errors
Focus: Costs, bargaining power Focus: Choice of health plan.
and rationing. System characterized by:
System characterized by: Competition among health plans.
Cost shifting among patients, Information on health plans.
providers, physicians, payers, Financial incentives for patients.
employers, government.
Focus: On provider and hospital
Limits on access to service. practice.
Bargained-down prices for
System characterized by:
drugs and services.
Online order entry.
Prices unrelated to the
Six Sigma practices.
economics of delivering care.
Appropriate ICU staffing.
Focus: Legal recourse and Volume thresholds for complex
regulation.
referrals.
System characterized by: Mandatory guidelines.
Patients’ rights. “Pay for performance”
Detailed rules for system participants. when standards of care are used.
Increased reliance on the legal system.
Source: Porter and Teisberg, “Redefining Competition in Health
5
The evolution of reform models Care,” Harvard Business Review, June 2004, 64-77.
Copyright HBS Publishing

6. Address the Absence of Value-Based Competition on Results
Future
Objective: Increase Value
Focus: Should be on the nature
of competition.
System characterized by:
Competition at the level of
specific diseases and conditions.
Distinctive strategies by payers
and providers.
Incentives to increase value
rather than shift costs.
Information on providers’
experiences, outcomes,
and prices.
Consumer choice.
Source: Porter and Teisberg, “Redefining Competition in Health
6
The evolution of reform models Care,” Harvard Business Review, June 2004, 64-77.
Copyright HBS Publishing

7. Does the United States Spend Too Much on Health Care?
The value perspective makes it clear that the share of U.S. GDP
that goes into health care is not the right measure of the success
of a health care system. Success can only be measured by the
value delivered per dollar spent.
Health care is more expensive today than it was in the 1930s, but
the average life expectancy has increased from about 60 years to
77 years, and the quality of life for older Americans is far better.
Hence it is clear that there have been important advances.
It is also clear that the efficiency of the system is far less
than it could be, and that quality falls well short of the ideal.
Meaningful change will need to focus on value at the medical
condition level, and redefining competition around value.
7

8. Deeper penetration
(and geographic expansion)
In a medical condition
Improving reputation Rapidly accumulating
experience
Better results,
adjusted for risk Rising efficiency
Faster innovation Better information/
clinical data
Greater patient
volume to spread More fully
IT, measurement, dedicated teams
process improvement
costs More tailored
facilities
Wider capabilities Greater leverage
in the care cycle in purchasing
Rising capability for
subspecialization
8
The virtuous circle in health care delivery

9. The Value Chain
Firm Infrastructure (Finance, Planning, etc.)
Human Resource Management
Technology Development
M
Procurement A
R
G
Inbound Outbound After-Sale I
Logistics Logistics Service N
Operations Marketing
(Mfg) & Sales
Michael Porter, Competitive Advantage of Nations
9

10. The Value Chain Technologies
Firm Infrastructure Finance Planning
Budget Office
Human Resource Mgmt Training Motivation Research
Info Systems
Technology Dev. Product Tech Software Info Sys
Computer-aided design Pilot Plant M
Info Sys Technology Commo Sys Technology A
Procurement Transportation Sys Technology
R
Transportation Process Transportation Media Diagnostic &
Mtl Handling Machine Tool Mtl Handling Audio &Video Testing G
Storage & Mtl Handling Storage & Commo Sys Commo Sys I
Preservation Packaging Preservation Info Sys Info Sys
Commo Sys Maintenance Packaging
N
Testing Building Commo Sys
Info Sys Design & Ops Info Sys
Inbound Operations Outbound Marketing After-Sale
Logistics (Mfg) Logistics & Sales Service
Michael Porter, Competitive Advantage
10

11. The Value System
Diversified Firm
Firm Value Chain
Business Unit
Value Chain
Supplier
Supplier Business Unit Channel
Channel Buyer
Buyer
Value Chains
Value Chains Value Chain Value Chains
Value Chains Value Chains
Value Chains
Business Unit
Value Chain
Michael Porter, Competitive Advantage
11

12. Value Chain Linkages
Firm Value Chain Buyer Value Chain
FI FI
HRM HRM
TD TD
P P
IL O OL MS S IL O OL MS S
“A company lowers buyer cost or raises
buyer performance through the impact
of its value chain on the buyer’s value chain.”
Michael Porter, Competitive Advantage
12

13. organized at the medical condition level
Patient Value
(health results
Knowledge Results measurement & tracking, staff physician P per unit of
development training, technology development, process improvement
R costs)
Patient education, patient counseling, pre-intervention education
Informing programs, patient compliance counseling O
V
Tests, imaging, patient records management
Measuring I
D
Office visits, lab visits, hospital sites of care, patient transport, visiting nurses,
Accessing remote consultation E
R
Monitoring/ Diagnosing Preparing Intervening Recovering/ Monitoring/ managing
preventing •Medical history •Medical N
•Ordering & Rehab •The patient’s
•Specifying administrating •Inpatient I
•Medical history condition
history & organizing •Screening drug therapy recovery •Therapy G
•Screening tests •Identifying •Performing •Inpatient/ compliance
outpatient R
•Identifying •Interpreting risk factors procedures •Lifestyle
risk factors data •Prevention •Performing rehab modifications A
•Prevention •Consultation programs counseling •Therapy
programs w/ experts therapy fine tuning M enablers
•Determining •Developing a
treatment plan discharge plan 1.CDVC
2.IT
3.PKD*
Feedback loops
*process for knowledge development
13
The care delivery value chain for an integrated practice unit

14. Overcoming Barriers to Value-Based Competition
 Health Plan Practices – have worked against value-based
competition… have focused on the size of discounts rather than
patient value...have sought contracts with broad-line providers
and fostered unproductive duplication of services. They have
attempted to micromanage providers rather than rewarding
excellent results with more patients. Integrated health plan and
provider networks have mitigated many of these dysfunctional
practices, but value-based competition will work better if health
plans are separate from providers.
14
(see chapter six)

15. Overcoming Barriers to Value-Based Competition
 Medicare Reimbursement – strong influence
on reimbursement throughout the system…has worked against
value-based competition (e.g. Medicare reimbursement levels
are not tied to cost or value, leading to cross subsidies and
excess capacity). Reimbursement has been biased toward
treatment procedures, rather than improving value over the care
cycle. The reimbursement structure is also unintentionally
biased against cost-reducing innovations in treatment methods.
15
(see chapter eight)

16. Overcoming Barriers to Value-Based Competition
 Regulation – regulatory and legal impediments work against
value-enhancing strategies and structures. “Certificate of Need”
regulation tends to protect established institutions rather than
encourage new, high-value competitors…“Stark” law and
corporate practice of medicine laws inadvertently work against
care-cycle integration. State-level licensing works against cross-
geographic integration of care delivery.
16
(see chapter eight)

17. Overcoming Barriers to Value-Based Competition
 Governance – Provider governance structures inadvertently
work against value-based strategies. A local orientation and a
full-service bias are reinforced by local boards and community
service obligations… resistance to closing any service, and
closing an entire hospital is almost unthinkable even if there are
other nearby institutions of better quality. The mind-set that
“closer is better” is deeply ingrained. Boards must embrace
patient value as the central goal. A hospital will create more
value for more patients if it provides only services where its
results are excellent.
17
(see chapter eight)

18. Overcoming Barriers to Value-Based Competition
 Attitudes & Mind-sets – Old assumptions, attitudes, and mind-
sets are pervasive in health care. The bias toward breadth of
services is deeply ingrained. Some physicians bristle at the idea
of being held accountable for results. Another pervasive mind-
set is that it is wrong to compete, since medicine is collaborative
and competition will only result in price cutting. These attitudes
will begin to change as the system realigns its focus around
patient value.
18
(see chapter eight)

19. Overcoming Barriers to Value-Based Competition
 Management Capabilities – Management expertise within
health care providers is limited, especially among individuals
with medical training. These resources will be sorely tested by
the kinds of organizational structures and delivery methods and
processes described here. Improving managerial capability will
be a challenge for nearly every provider, especially since the
culture of medicine has not viewed “management” as important
or prestigious. Providers will need to mount a conscious strategy
to equip management staff with training as their roles expand.
19
(see chapter eight)

20. Overcoming Barriers to Value-Based Competition
 Medical Education – does not equip young physicians for their
role in a value-driven health care system, nor does it serve the
needs of experienced physicians. Medical education fails to
address such crucial agendas as the role of teams, integrated
care, care cycles, results measurement, knowledge
development processes, information technology, and practice
unit management.
20
(see page 221-225)

21. Overcoming Barriers to Value-Based Competition
 The Structure of Physician Practice – Improving care is
difficult to accomplish when physicians see process
improvement as a chore, which is the current norm. What we
are talking about is a far cry from typical rounds in which senior
doctors grill residents as part of medical education. Physician
organization is enshrined in medical boards and societies
involved in certification and in medical training. Another barrier
to strategy is the free agent model so common in medicine.
Most broadly, the free agent model means that health care
delivery is physician centric, rather than patient and value
centric.
21
(see chapter eight)

22. Transforming the Roles of Health Plans
Old Role: New Role: Value-Based
Culture of denial Competition on Results
Restrict patient choice of Enable informed patient and
providers and treatment. physician choice and patient
management of health.
Micromanage provider Measure and reward providers
processes and choices. based on results.
Minimize cost of each Maximize the value of care
service or treatment. over the full care cycle.
Complex paperwork and Minimize the need for
administrative transactions administrative transactions.
with providers and subscribers Simplify billing.
to control costs and settle bills.
Compete on minimizing Compete on subscriber health
premium increases. results.
22

23. Imperatives for Health Plans
Provide health information and support to patients and
physicians
Organize around medical conditions, not geography or
administrative functions.
Develop measures/assemble results on providers and treatments.
Support provider and treatment choice with information and
unbiased counseling.
Organize information and patient support around full cycle of care.
Provide disease management and prevention services to all
members, even healthy ones.
Restructure the “health plan – provider” relationship
Shift the nature of information sharing with providers.
Reward provider excellence and value-enhancing innovation for
patients.
Move to single bills/single prices for episodes and cycles of care.
Simplify, standardize, and eliminate paperwork
and transactions.
(Page I of II)
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24. Imperatives for Health Plans
Redefine the “health plan – subscriber” relationship
Move to multiyear subscriber contracts and shift the nature of plan
contracting.
End cost shifting practices, such as re-underwriting, that erode
trust in health plans and breed cynicism.
Assist in managing members’ medical records.
(Page II of II)
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25. Electronic Medical Record (EMR)
An (EMR) is central and indispensable from a health value
standpoint to:
Reduce the cost of transactions and eliminate paperwork.
Lower the cost of maintaining records of all actions taken and
facilities used. This will also support decisions and enable
detailed understanding of cost at the activity level.
Make patient information easily and instantly available to
physicians.
Allow the sharing of information in real time across doctors and
institutions to improve decision making and eliminate redundant
tests and effort.
Facilitate aggregation of patient information across episodes of
care and time.
Integrate decision support tools to reduce errors and bring
learning about diagnosis and treatment “best practices” to providers.
Create an information platform from which provider results, process
metrics, and experience metrics can be extracted at a very low cost.
25

26. The Benefits
Imagine if health plans were seen as experts on health
and the member’s greatest advocates. Imagine if a health
plan informed and advised members and reduced the anxiety
of illness. Imagine if members knew that their health plan was
dedicated to their getting the best provider for their condition,
and receiving the most effective and up-to-date treatment.
Imagine if health plans took responsibility for helping a patient
navigate the system. Imagine if members and health plans
worked jointly to keep the member healthy. Imagine if the
interests of health plans, patients, providers, and plan sponsors
were all fundamentally aligned. If health plans were truly
dedicated to health, the consequences in terms of creativity,
innovation, and health care value would be enormous.
26

27. Part Two
27

28. New Opportunities for Suppliers
Compete on delivering unique value over the full
cycle of care.
Creating unique value for patients.
Focus on cycles of care rather than narrow product usage.
Sell not just products, but provider and patient support.
Demonstrate value based on careful study of long-term
results and costs versus alternative therapies.
Use evidence of long-term clinical outcomes and cost to
demonstrate value compared to alternative therapies.
Conduct new types of long-term comparative studies in
collaboration with providers and patients.
Ensure that products are used by the right patients.
Increase the success rate instead of maximizing usage.
Target marketing and sales to minimize unnecessary or
ineffective therapies.
(Page I of II)
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29. New Opportunities for Suppliers
Ensure that products are embedded in the right care delivery
processes.
Help providers utilize products better and minimize errors.
Build marketing campaigns based on value, information and
customer support.
Concentrate marketing efforts on value, not volume and discounts.
Offer support services that add value rather than reinforce
cost shifting.
Support provider efforts to measure and improve results at the
medical condition level.
(Page II of II)
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30. New Responsibilities for Consumers
Participate actively in managing personal health.
Take responsibility for health and health care.
Manage health through lifestyle choices, obtaining routine care
and testing, complying with treatments, and active participation
in disease management and prevention.
Expect relevant information and seek advice.
Gather information on provider results and experience in
medical conditions.
Seek help and advice in interpreting information from physicians
and the health plan.
Utilize independent medical information companies when
needed.
Make treatment and provider choices based on excellent
results and personal values, not convenience or amenities.
Choose excellent providers, not the closest
provider or the past provider of unrelated care.
(Page I of II)
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31. New Responsibilities for Consumers
Choose a health plan based on value added.
Expect the health plan to be the overall health adviser.
Choose cost-effective health plan structures involving
deductibles together with health savings accounts (HSAs)
to save for future health care needs.
Build a long-term relationship with an excellent health care
plan.
Seek a long-term relationship instead of plan churning.
Act responsibly.
Accept responsibility for health and health care.
Communicate personal intentions regarding organ donorship
and end-of-life care.
Designate a health care proxy and prepare a living will.
(Page II of II)
31

32. New Roles for Employers
Goal of increasing health value, not minimizing
health benefit costs.
Set new expectations for health plans, including self-insured
plans.
Choose plans that demonstrate excellence in the roles of
“Imperatives for Health Plans” (cells 19-20).
Select plans and plan administrators based on health results, not
administrative convenience.
Provide for health plan continuity for employees, rather than
plan churning.
Align interests by encouraging long-term relationships between
the plan and subscribers.
(Page I of III)
32

33. New Roles for Employers
Goal of increasing health value, not minimizing
health benefit costs.
Enhance provider competition on results.
Expect demonstrated excellence from all providers involved in
employee care.
Collaborate with other employers in advancing value-based
competition.
Support and motivate employees in making good health
choices and in managing their own health.
Offer encouragement, incentives and support to employees in
managing their health.
Provide independent information and advising services to
employees to supplement other sources.
Offer health plan structures that provide good value and encourage
saving for long-term health needs.
(Page II of III)
33

34. New Roles for Employers
Goal of increasing health value, not minimizing
health benefit costs.
Find ways to expand insurance coverage and advocate
reform of the insurance system.
Create collaborative vehicles with other employers to offer group
insurance coverage to employees or affiliated individuals not
currently part of the employer’s health plan.
Support insurance reform that levels the playing field among
employers.
Measure and hold employee benefit staff accountable for
the company’s health value.
Health benefits must ultimately be a senior management
responsibility, with staff responsible for results.
(Page III of III)
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35. Changes in Employer Health Benefits 2003 to 2004
Premium increases
$4,000.00 Total $3,695
Total $3,383
$3,500.00 9.2%
$558
$3,000.00 $508
9.8%
$2,500.00
$2,000.00
$1,500.00 $3,137
$2,875 9.1%
$1,000.00
$500.00
$0.00
2003 2004
Employer contribution Worker contribution
Source: Data from Kaiser Family Foundation and Health Research and Education 35
Trust (2004), based on 1,925 randomly selected firms with three or more employees

36. % of Workers Covered by their Employer Health Benefits
66%
65%
64%
63%
62%
61%
60%
59%
2001 2002 2003 2004
Source: Data from Kaiser Family Foundation and Health Research and Education 36
Trust (2004), based on 1,925 randomly selected firms with three or more employees

37. Level of Benefits for Covered Workers
Compared to Previous Year
15%
6%
79%
Less More Same
Source: Data from Kaiser Family Foundation and Health Research and Education 37
Trust (2004), based on 1,925 randomly selected firms with three or more employees

38. Measurements – Health Value Received
Employee health outcomes and results
Extent of illness, number of health care interventions (e.g. office
visits, treatments) sick days and lost time, absences, extent of
disability, and progression of chronic conditions.
Employee health results per dollar of spending, controlling for
employee demographics, health status and location.
Measures of health results for family members.
Health plan performance for each health plan
Overall employee and family health results per dollar expended.
Employee and family health results by medical condition.
Results measures compared to external benchmarks.
Provider performance by condition
Comparative results of providers serving employees and their
families, by medical condition.
38

39. Health Insurance Standards
and Access for Coverage
Structure of
Health Care
Delivery
39
Issues in health care reform

40. Imperatives for Policy Makers:
Improving health insurance and access
Enact mandatory health coverage.
Provide subsidies or vouchers for low-income individuals
and families.
Create risk pools for high-risk individuals.
Enable affordable insurance plans.
Minimize distortions from uneven employer contributions.
Eliminate unproductive insurance rules and billing practices:
Ban re-underwriting.
Clarify legal responsibility for medical bills.
Eliminate balance billing.
Health Insurance
and Access 40
Issues in health care reform

41. Imperatives for Policy Makers:
Setting standards for coverage
Establish a national standard for minimum required
coverage:
Include primary care, preventive care, and essential coverage.
Review minimum coverage standards periodically to update.
Use Federal Employee Health Benefits as an initial standard.
Consider medical outcomes and patient preferences in
covering end-of-life care:
Require a medical power of attorney and living will as a
condition of health coverage.
Introduce individual accountability for participation in
health care.
Standards
for Coverage 41
Issues in health care reform

42. Imperatives for Policy Makers:
Improving the structure of health care delivery
Enable universal results information:
Establish a process for defining outcome measures.
Enact mandatory results reporting.
Establish information collection and dissemination
infrastructure.
Improve pricing practices:
Establish episode and care cycle pricing.
Set limits on price discrimination.
Structure of (Page I of III)
Health Care
Delivery Issues in health care reform 42

43. Imperatives for Policy Makers:
Improving the structure of health care delivery
Open up competition at the right level:
Reduce artificial barriers to practice area integration.
Require value justification for captive referrals or treatment
involving an economic interest.
Eliminate artificial restrictions to new entry.
Institute results-based license renewal.
Strictly enforce anti-trust policies.
Curtail anticompetitive buying group practices.
Eliminate barriers to competition across geography.
Establish standards and rules that enable information
technology and information sharing:
Develop standards for medical data (and hardware and software).
Enhance identification and security procedures.
Provide incentives for adoption of information technology.
Structure of (Page II of III)
Health Care
Delivery Issues in health care reform 43

44. Imperatives for Policy Makers:
Improving the structure of health care delivery
Reform the malpractice system.
Redesign Medicare policies and practices:
Make Medicare a health plan, not a payer or regulator.
Modify counterproductive pricing practices.
Improve Medicare pay for performance.
Lead the move to bundled pricing models.
Require results-based referrals.
Allow providers to set prices.
Align Medicaid with Medicare.
Invest in medical and clinical research.
Structure of (Page III of III)
Health Care
Delivery Issues in health care reform 44

45. Conclusion
Value-based competition on results is a positive-sum competition
in which all participants can win, so long as they are dedicated and
capable. However, those participants that will enjoy the greatest
rewards will be those that move early. For anyone in the health care
system, the time to act is now.
The coming transformation will unleash the talent and energy of the
many extraordinary individuals working in the health care system on
a positive agenda of dramatic value improvements. Costs will be
brought under control, and the health of citizens will advance
significantly. As this happens, the benefits will accrue to every U.S.
health care consumer & will spread to other countries as well. And
all of this could happen sooner than now seems imaginable.
Michael E. Porter
Elizabeth Olmsted Teisberg 45

46. Redefining Health Care
 The focus should be on value for patients, not just lowering costs.
 Competition must be based on results.
 Competition should center on medical conditions over the full
cycle of care.
 High-quality care should be less costly.
 Value must be driven by provider experience, scale, and learning
at the medical condition level.
 Competition should be regional and national, not just local.
 Results information to support value-based competition must be
widely available.
 Innovations that increase value must be strongly rewarded.
Porter & Teisberg 46
Principles of value-based competition p.98 RHC

47. Veritas
jgillis767@aol.com
First Light L.L.C.
47