In Class

Health Care Prescription: Management

Is there a better way to manage the economics of health care? That’s the question for M.B.A. students in the Simon School’s Health Science concentration. By Scott Hauser

In the late 1980s, Lawrence Van Horn was part of an NIH-funded team studying the economic benefits of introducing a new way to remove gallbladders. The technique—a laparoscopic-based procedure—promised to have patients home in hours instead of days.

Van Horn

As the assistant professor of economics at the Simon School told his M.B.A. class last spring, switching to the new technique seemed to be “a slam dunk.”

Patients would benefit because they would not have to stay in the hospital for up to a week recovering from open surgery. Hospitals would benefit because the expensive resources of operating rooms could be focused better on less-routine surgeries. And insurers would benefit because they would pay less to reimburse hospitals for the procedure.

So why are only the patients happy—and even that point might be debated—with laparoscopic cholecystectomy?

Because they don’t have to deal with the economics of health care, which as students in Van Horn’s Health Sciences Management and Strategy course quickly discover, don’t always make, well, economic sense.

Far from reducing the overall cost of gallbladder surgery in the United States, introduction of the new procedure increased costs because the number of people scheduled for gallbladder removal—many of whom would not have been considered for open surgery—ballooned. The increased volume more than ate up the savings expected from each individual operation.

Such prognoses are enough to give hospital administrators stomach pains.

“What appear to be very simple problems are actually quite complex when it comes to understanding the delivery of health care,” Van Horn says later. “I want students to develop an appreciation for the complexity of the health care industry and give them enough of the institutional context so that they can understand what drives managers as they make decisions.”

The anecdote is just one of many real-world insights Van Horn imparts during his fast-paced tour of the intricacies of the unique economics of health care. One of five courses in Simon’s Health Sciences concentration, the class provides an overview of the management challenges faced by hospitals, insurance companies, physicians, pharmaceutical and medical device firms, as well as others involved with health care.

Long considered an outlier when it comes to management science, the industry is getting more focused attention from business schools. Guided by Van Horn in 1996, Simon joined only a handful of top M.B.A. programs in the country in offering a systematic approach to understanding a segment of the economy that has grown threefold in the past four decades.

In the 1970s, an estimated 7 percent of the gross national product was devoted to health care. Today, health care is estimated to be responsible for up to 14 percent of the GNP. According to some estimates, one of out of every seven Americans works in a job involved with health care.

Ronald Hansen, associate dean of the Simon School, says interest in the program has steadily increased since its introduction as more students—many of them from the Medical Center—recognize the influence of health care in the economy.

“There’s a growing sense that this is a business and that it needs management skills just like any other business,” Hansen says.

The Simon School also taps into the expertise of the largest health care employer in the Rochester area by working closely with the Medical Center to augment the program. Top administrators at Strong, such as Peter Robinson, chief operating officer for Strong Health and the Medical Center, are frequent guest lecturers.
Health Sciences is the only industry-specific concentration offered at the school (alongside traditional topic-oriented concentrations such as finance, accounting, and marketing), Hansen says. That’s partly a recognition of the sheer size of the health care economy.

But it’s also a recognition that the business of health care has a dynamic all its own, he says. Unlike most markets in which the consumer decides what she wants to buy, how much she’s willing to spend, and then uses what she buys, health care separates those three staples of supply and demand.

A physician usually decides what gets bought (in most cases a procedure or a service), the patient receives the benefits of the procedure, and an insurance company pays.

“In almost all other markets, those three functions are rolled into one person—the consumer,” Hansen says.

Such quirky supply and demand issues are the focus of much of the early sessions of the Management and Strategy course as Van Horn analyzes the economic tension among doctors, patients, and health insurers. It is a tension that has been symptomatic of the field since the beginning of the modern approach to health insurance as an employee benefit shortly after World War II.

Van Horn plays devil’s advocate as he presents the perspectives of each element in the dynamic, arguing at times as if he were a physician and at others as if he were an accountant for an insurance company.

For each incarnation, the 30 students, many of whom have backgrounds in health care themselves, offer counterarguments, an interactive exchange that Van Horn and the students clearly enjoy.

“Why have things come to this? Isn’t there a better way?” a student asks after Van Horn has led the class up a rhetorical cul de sac where it appears that insurers, physicians, and hospital administrators will never see eye to eye.

“That’s a fundamental management question that we’re going to discuss throughout this class,” Van Horn replies.

David Kleinman, an eye surgeon in private practice in Rochester, says the program is expanding his skills.

“This is an opportunity for me to learn how to be more successful as a manager by gaining skills in quantitative analysis and management,” he says.

Increasing the supply of such well-trained professionals who understand both the clinical and business sides of health care is Van Horn’s goal:

“The effective organization and management of both the delivery and the supply sides of the market can create real value for patients, and we need people who are trained in the science of management to do that.”