Sunday, November 21, 2010

Hospitals Need To Focus On Culture In Order to Be Able to Survive in an Era of Accountable Care Organizations and Medicaid Reimbursement Rates

When a health system asked me to facilitate a Board discussion on physician alignment and integration on November 12, 2010, I was already committed to giving a keynote on the future of health care for the American Institute of CPAs in Las Vegas on November 11. Although I usually fly Delta or USAir where I have priority frequent flyer status, the only way I could get to the Board meeting was by flying from Las Vegas on Southwest Airlines.

My experience on Southwest reminded me of the importance of culture in navigating change in a rapidly evolving environment like we have in health care in the United States today. It is all too easy to focus on all the technical issues hospitals face in setting up Accountable Care Organizations to handle the inevitable global payments that will replace the current fee for service system. This blog is a plea for hospitals and doctors and consultants to pay attention to both the technical and the cultural or adaptive challenges we face in transforming a $2.5 trillion American industry.

Recent articles on companies outside of health care have highlighted how important culture has been to the success or failure of Southwest Airlines (, QVC (, and Zagat ( to respond to changing business conditions. Southwest’s COO states “our culture is our biggest competitive strength,” and the flight attendant and pilots’ union worry about how the recent purchase of AirTran will affect their unique culture. I have seen Southwest pilots help clean up the cabin, and the flight attendant on my recent trip told me she was giving up her day off because the company needed her help. QVC is trying to use the same methods and culture that made selling on TV popular with Internet customers. And Zagat, which had cultural troubles moving from book format to online, is now hoping that smart phone applications will reinvigorate their business model.

Harvard’s Ron Heifetz differentiates between technical and adaptive work (, and I have found this concept useful in working with health systems responding to payment reform. Everyone involved in hospital physician integration efforts will need to undergo a cultural (adaptive) shift because the healthcare reform law and the transition from fee for service to global payments mean the old ways of doing things are not sustainable. Even if all the technical tasks are superbly done, difficulties will arise if the leadership, management, care teams, and physicians still have the old mindset and culture.

In attending conferences and working with hospital CEOs, I have found that there is more emphasis on the technical tasks that need to be accomplished in order to form an Accountable Care Organization than on the culture such a change will require. I have heard a lot of keynotes filled with power point slides on defining the role and reporting structures for newly formed physician leadership teams; creating system-wide operational councils; and specific legal structures of ACOs so they can accept and distribute global payments. These are all important technical tasks, but they will fail if the culture does not change too.

Two concrete example may help make this point. Sony engineers came up with the equivalent of the iPod long before Apple. However, Sony ran into internal obstacles because of its culture. Sony’s leadership and organization was designed to come up with improvements to the next generation of CD players, but the new iPod technology threatened how Sony’s leaders and engineers thought about their product line. They could not overcome the cultural barriers to marketing such a revolutionary product. Sony’s failure was not one of technical expertise; it was and adaptive failure of cultural mindset.

My travels found me in Savannah, Georgia recently having lunch with Joe Scodari who sits on three Boards of Directors in the health care space. Scodari related a similar story of cultural failure to adapt when Kodak engineers invented the digital camera; the film culture at Kodak did not approve marketing such a transformational product that would cut into Kodachrome film sales. Kodak missed out on digital cameras, and film sales plummeted anyway.

So how do hospital system CEOs avoid the fate of Sony and Kodak as they respond to the sweeping changes in the new federal health care reform law? They must focus on both technical and cultural issues. Jane Kornacki and Jack Silversin ( who pioneered the physician/hospital compact model and Bob Kegan and Lisa Laskow Lahey ( who developed the immunity to change model for transformation have much to teach all of us. Physician leadership academies are another essential ingredient in transforming culture among newly employed physicians who are not used to being employees.

Southwest Airlines made money when other airlines floundered; they attribute this success to culture. Hospitals that focus on culture and technical tasks will have a better chance of survival in an environment that is increasingly saying you better get ready to survive on Medicaid rates, not private insurance rates.


  1. Thoughtful post... but I have serious doubts that physicians and hospitals will respond and adopt the cultural changes that are obviously necessary. Everyone will instead be focused on being first...

    Physicians have seldom demonstrated the ability to effectively organize themselves into groups, agree on clinical guidelines, and devise ways to equitably distribute money. And memories of the failed capitation models of the 1990s may make some physicians hesitant to participate.

    I believe this is from an article in the NEJM... not sure..

    If physicians come to dominate, hospitals’ census will decline, and their revenue will fall, with little compensatory growth in outpatient services, since physicians are likely to self-refer. This decline will, in turn, lower hospitals’ bond ratings, making it harder for them to borrow money and expand. As hospitals’ financial activity and employment decline, their influence in their local communities will also wane. And it will be hard for them to recover from this diminished role.

    Conversely, if hospitals come to dominate ACOs, they will accrue more of the savings from the new delivery system, and physicians’ incomes and status as independent professionals will decline. Once relegated to the position of employees and contractors, physicians will have difficulty regaining income, status, the ability to raise capital, and the influence necessary to control health care institutions.

    If this is where we are starting from ...... :-( !!

  2. Kent,
    In Fairfield Cty CT, hospitals are staring down the barrel of a shotgun loaded with Quest and Labcorp. They will most certainly either
    A. Lose the lab work to cheaper labs, due to cost sharing agreements with physician led ACOs etc.
    B. Lose the crazy profit they make off of outpatient labs as they try to maintain local market competitiveness.

    What do you think they will do to counter this among other trends?

  3. Excellent post and comments, but I feel the culture change which needs to occur goes beyond the hospital-physician paradigm to include the patient - who, after all, was the intended beneficiary of the continuity in care, reduced errors, and efficiency projected for ACO's. Until we all get over making money as our primary objective, this fighting over the pie will continue.
    I quoted your post on Paul Levy's blog post of last night, regarding market power and ACO's:

    bev M.D.

  4. Thanks for sharing, I really love your blog I'm looking forward for more updaes. EMR can only provide you with benefits if they are usable and do not slow the physician and clinical staff down.