The Challenge Dividend

Healthcare Challenge Round-up

I've collected a few odds and ends in the past week or so on how healthcare is faring under the challenge of rising costs and frustrated patients and businesses.  Here are three of the most interesting nuggets:

Pricing Pills by Results
Pharma companies like J&J and GSK are beginning to work with the national health systems of Europe to price pills according to the results that they produce.  For example:

"Johnson & Johnson has proposed that Britain’s national health service pay for the cancer drug Velcade, but only for people who benefit from the medicine, which can cost $48,000 a patient. The company would refund any money spent on patients whose tumors do not shrink sufficiently after a trial treatment."

It's a brilliant concept and helps overcome these government health plans resistance to spending tens of thousands of dollars on medication that fails to work.  Similar to pay for performance in employee wages, this challenge can drive greater efficiency by ensuring that rewards are directly linked to results.

Hospital Rankings Show Real Difference in Results
Dr. Ashish Jha, an assistant professor of health policy and management at Harvard School of Public Health recently conducted a study showing that hospitals with higher quality save more lives.  The study used information from the Hospital Quality Alliance, a public-private partnership that includes the Centers for Medicare & Medicaid Services and the American Hospital Association.

The data is pretty compelling: "if the lowest-ranked hospitals had the same death rates for these conditions as the top-ranked hospitals, there would be 2,200 fewer patient deaths each year, the researchers concluded."

These rankings are a type of challenge that can drive improvement in several ways.  First, consumers increasingly have a choice about their medical care and can use the rankings to select better hospitals.  In turn, the lower ranked institutions have a very visible incentive to improve, while the highly ranked must keep improving to retain their slot.

I also love that the government is getting involved in helping create this market: The U.S. Department of Health and Human Services provides a comparison tool online.  That's a service worth taxing me for.

Doctor Shortage Results from Universal Coverage
As a few states experiment with universal healthcare for all, newly-covered patients are finding that scheduling a doctor visit is not easy.  The impact is especially felt with primary-care physicians.  As a whole, their number is declining steadily.  More med students are opting for specialty roles, and the AMA continues to keep the number of medical students artificially low.

Net, as more people are covered by insurance their will be greater demand for care.  A flat to declining number of primary-care physicians sets up a challenge that demands innovation.  A few weeks ago I wrote of grocery stores hosting clinics run by nurse practitioners.  More innovation is possible, as long as the government and special interests stay out of the way.

NBA: "Calamity as a Catalyst"

In case you haven't gotten the memo, the National Basketball Association is in serious trouble.  Aside from years of declining TV ratings and an utterly boring Finals match-up, last week a major scandal erupted as referee Tim Donaghy resigned amid serious point shaving allegations.  Some predict that this breach in the legitimacy of the game could spread wider, and might further undermine fan interest.

Other sports haven't fared much better lately.  Just as excitement gears up around the NFL at the start of training camp, superstar Michael Vick has been charged with running a dog fighting operation.  Meanwhile, Major League Baseball is about to see a cherished record broken by Barry Bonds, an admitted steroid user and all-around jerk.  Overall, it's a darker conversation at the sports bars and water coolers today.

But at least one leader sees some glimmer of improvement from this challenge.  Controversial Dallas Mavericks owner, Mark Cuban, published a blog entry titled "Calamity as a Catalyst".  In this post, Cuban embraces the Challenge Dividend philosophy:

• "Shit happens. Bad Shit happens. When it does, there are two options. Cry over it and do nothing or recognize the problem and do the best you possibly can to not only fix it, but make the entire organization stronger."
• "As bad as the allegations facing the NBA today are, its also an opportunity to face every allegation that has ever been directed towards the NBA and its officials and pre empt them from ever occurring in the future."
• "There are any number of examples in the business world where calamity led to better management, better communications, greater transparency and even better products. As the proverb goes, Necessity is the Mother of Invention."

I love Cuban's point - let's stop finger pointing and take the opportunity at hand to improve our game.  There's no guarantee that the NBA (or other sports) will turn its challenge into an improvement.  It takes guts and leadership.  With owners like Cuban around, they just might make it happen.

Rowling Meets the Challenge

(No spoilers here...I promise)

Usually I spend a few hours per weekend writing posts for this Challenge Dividend blog.  But starting Saturday afternoon at 1:15pm and ending Sunday afternoon at 4:45pm, I read Harry Potter and the Deathly Hallows.  In pondering the end of J.K. Rowling's series and sitting down to write toward what I hope will be a best-seller of my own, I see a small Challenge Dividend lesson in between the lines of her work.

Overall, the seventh and final book in the series has exceeded my expectations.  I was a fairly late arrival on the Harry Potter bandwagon.  About five years ago my wife was up to reading the fourth book and I finally caved in to her frequent suggestion that I join Dumbledore's Army.  I quickly caught up in no time and thoroughly enjoyed the stories.  I read books Five and Six a few weeks after each came out.

But this year was a little different - I went back and re-read book Six during a beach vacation a few weeks ago, and soon began counting the days to the final book's release on Friday.  I even convinced my wife to take our 6-year-old to a nearby midnight book store party - which drew roughly two thousand people.  With the book safely in hand I started reading in earnest the following day.

I hoped for the best, but also feared that the book would turn out to fall short of my and millions of readers' high expectations.  After all, there are very few book or movie sequels that come anywhere close to even meeting the success and skill of the original.  Take Fletch Lives...please.

But Harry Potter and the Deathly Hallows succeeds where these many have fallen.  I do not want to give anything away by fawning too much, but let me just say that it brings intense excitement, emotion and closure.  It rewards our years of reading and waiting, and reaffirms many meaningful parts of life.

Perhaps this is another example of challenge driving improvement.  Rowling surely recognized the challenge to continue success for seven books straight was massive.  Imagine her fear of letting down a generation of children and adults.  I am sure that this pressure to make all of us happy drove her to take her story and character to higher and higher levels.

And now, the Harry Potter series will serve as a bar for generations of aspiring authors.  She has shown us a harrowing path, but one with a potential reward of fame, money and making millions of readers happy.  We will surely reap the dividends from her challenge - both the writers and the readers. 

Thanks, J.K.

Engineers Learn from Failure

It seems that I'm not the only guy diligently tracking examples of where challenge drives improvement.  I recently discovered a new book by Henry Petroski, a professor of history at my alma mater, Duke University.  Petroski's book is called Success Through Failure: The Paradox of Design.  The thesis of the book is that engineers and designers often only learn how to improve by watching the very visible failure of others. 

A few interesting examples from Petroski make his point clear (from a recent Q&A in Duke Magazine):

• "Frank Gehry, the architect, designed the Disney concert hall in Los Angeles. Aesthetically, it's a great success. But one corner of the [polished stainless-steel] building reflected sunlight into a condominium complex across the street that was blinding and also heated up the condominiums by fifteen degrees. That would be an example of something generally working, but there's this unintended consequence. You could say that in the ideal world, that would have been anticipated. And in the future, it's another thing that designers will note what not to do."
• You go to the drugstore and you get a prescription filled, and it's in this container with a cap you have to push down and twist [to open]. These things became required when a lot of children were dying of overdoses of medicine that they weren't supposed to be having access to. The idea was, let's make child-resistant packaging—simple as that. But sometimes you can make something almost too good, and it turned out that a lot of older people and arthritic people couldn't open these packages, so they would ask somebody to open them for them, and if they did get them open, they'd leave them open. So these older people would leave open medicine bottles all around, and their grandchildren would come and visit them—same thing was happening."

I think Petroski's insight is one that we find throughout the history of human society.  We tell stories and revisit history as a way to remember and attempt to repeat the mistakes of the past.  This includes the failure of leaders and organizations - from Hitler to Enron.  But it happens everyday as fathers and mothers try to pass lessons to their children. 

At my office, we recently began publishing weekly stories of actual mistakes and successes that we have experienced recently.  And last year I wrote of how I have often improved most by learning from mistakes in new product marketing and new business pitches.

To err is human, as is to learn from our mistakes.  And yet again, challenge leads to improvement.

More Patent Doubt

The American entrepreneurial dream used to be to build an invention, file for a patent, and start making product and profits.  But a key part of that process - the patent - is increasingly viewed as a barrier to innovation and profitability rather than a help.  Inventors and entrepreneurs today may be better off pitching the patent process and embracing competition.

Overall, I believe patents and trademarks can be a force to drive innovation; they offer the promise of rewards and success for hard work - a great challenge dividend.  But at the end of the day, a patent is a legal monopoly - and any Economics student can describe the dead weight loss on society that monopolies cause.  It is a tricky balance - and in today's legal environment, and when patents are awarded too broadly, patents are clearly hurting innovation and improvement.

There are two key areas where patents are inhibiting improvement:

• Granted too broadly.  In the recent twenty years or so, companies have been aggressively patenting "innovations" that were far from the product of years of research and toil.  Take Amazon.com's "1-Click" patent, for example.  Overall, the U.S. Patent Office thought little about how to patent ideas and software, so they granted patents liberally.  Many "patent trolls" are following the American dream by buying up patents and aggressively suing large and small companies.  Thankfully, the Supreme Court recently made a unanimous decision to increase the bar for patent grants.  But much more reform is needed.  The patent office itself is underfunded and slow to change.
• Too costly to secure.   More and more companies are feeling the pain of patents in their bottom line.  New research by James Bessen - who himself invented Wysiwyg software, without getting a patent - shows that  litigation costs outstrip patent profits for public companies.  As the New York Times reports, they estimate that $9.3 billion in global profits came from patents in 1999, yet domestic litigation costs alone totaled $16 billion.  In addition to hurting hard profits, patent protection also seems to take companies' eyes off of their traditional business lines.  My recent blog entry on Levi's suggests that the company's aggressive trademark litigation is coming at the cost of innovation.

I believe that our economy would be much more innovative and productive if patents were severely restricted.  At the end of the day, they provide an incentive, but at a high cost of monopoly power and litigation expenses - which end up reducing the net benefit of the original invention.  Further, some of the greatest "inventions" of recent years have nothing to do with patent incentives; for example, the Firefox browser, Starbucks, and iPod all have been successful because of great design rather than a single patent. 

Thankfully, the abuse of the patent system is a challenge that is leading the courts to interject and improve the process.

UPDATE: I had to add that in the news yesterday, four prison inmates were punished for copyrighting their names and claiming that the prison owed them millions in licensing fees for unauthorized use of their names.  It's a pretty good sign that things need to change.

Weekend Competition Updates

Every once in a while I like to re-examine some historic posts where I've come across new news.  Here's two examples:

The $100 Laptop:
A few weeks ago I wrote about the growing competition between Intel and the not-for-profit One Laptop Per Child foundation (OLPC). Both groups are fighting to build a low-cost computer that can be produced in vast numbers and sold to developing nations around the world.  My argument was that this competition between the two groups - each with different strategies and tactics - would be good for the overall mission and society as a whole.  Simply put, competition would lead to a cheaper, better laptop, sooner.

However last week the competition ended.  Intel joined the 10 other companies that are members of OLPC.  After publicly chastising Intel on 60 Minutes, OLPC leader, Nicholas Negroponte, said:

"Intel joins the OLPC board as a world leader in technology, helping reach the world's children. Collaboration with Intel means that the maximum number of laptops will reach children."

We really won't be able to tell if a truce in the $100 laptop war will help or hurt the ultimate mission.  I believe it will slow progress for three reasons.  First, it eliminates the pressure of competition.  Second, it reduces the number of strategies to employ - like in evolution, divergence usually results in a better way.  Third, there are now 11 companies in the project, each with its own selfish goals and bent on using its own hardware and software; OLPC will be under pressure to keep its partners happy, rather then the poor children that are its customers.

Guitar Hero
Back in April I gushed about my experience playing Guitar Hero 2 for the Xbox 360.  My point was that the game is filled with a variety of small challenges and rewards that help players learn how to improve their skills and increase their enjoyment. 

For a while, the Guitar Hero franchise has owned the guitar play-along category.  As a result, one could argue that they have not improved fast enough.  Guitar Hero 2 is very similar to the first version, but simply adds a few songs.  It also lacks the ability to jam with friends over Xbox Live - a function that is increasingly expected among games.  Activision is preparing to launch GH3 in the Fall, but it too looks like more of the same.

Meanwhile, some new competitors are pushing the boundaries in the category and might drive further competitive benefits.  The biggest news is that MTV is partnering with Harmonix (an original developer of GH1 and GH2 who was case aside when Activision bought the franchise) to launch "Rock Band" this holiday season.  Rock Band will take the basic set up of Guitar Hero, but add the ability to sing along and play drums.  It will allow Internet play, and brings cooler new Fender guitar controllers.

While I keep working on my Guitar Hero skills, I am psyched that another developer is working to feed my hunger for more.  Bank on the guys at Guitar Hero quaking in their boots and working on adding new features and functions in response to the huge buzz already surrounding Rock Band.

Yeah, it's a goofy example to most people - but you cannot deny that challenge is driving improvement in the rock-a-long video game category!

UPDATE: OK, it stopped being goofy today because The New York Times featured a story today on how Guitar Hero is becoming the next karaoke at big city clubs.  I might have to start the Cincinnati version...

Performance Pay Drives Inequality

Along with issues like environmental sustainability and the Half Beard, there is a growing concern over rising income inequality in the United States.  In spite of the hype, new studies suggest that income inequality is a product of rewarding harder work.  And I believe performance-based pay epitomizes fairness in a democratic nation.

Most economists agree that income inequality is growing in the United States.  Some fear that this is a sign of decline for our nation.  Politicians like John Edwards have pushed an idea that the privileged few are enjoying the spoils that come from a toiling and squeezed middle class.  But the truth is much different than the fear and hype.

A recent study by the National Bureau of Economic Research shows that rising income inequality is mainly driven by companies' increased use of performance pay.  They study found that "24% of the increase in inequality from 1976 to 1993 occurred because of the increase in performance pay" and that "performance pay explains almost all of the increase in inequality for the top 20% of wage earners."

Performance pay is increasingly common across our nation.  The percentage of all jobs with some form of performance pay increased from 30% in 1976 to 45% in 1998.  And half of all salaried employees have some performance pay today.  BusinessWeek points out that "new technologies have made it easier to measure performance of individuals workers."

I believe performance pay has grown in our society because we increasingly demand fairness at work.  Just as we are eliminating race and sex-based discrimination, we are rolling back the idea that each person deserves the same salary regardless of actual performance.  Higher pay for better performance is not only "fair" but it provides an incentive (or challenge) for harder work. 

I've worked in enough jobs with equal pay to see that it discourages harder work - in fact, I remember a summer of moving furniture in which my crew pressured me to work slower so that they wouldn't look bad.  We were all getting paid the same amount, so why hustle?

But if income inequality is actually a sign of improvement and opportunity - for both the rich and the rest of us who enjoy their successful products and services - there still seem to be negatives that public policy should address.  I believe our society (through the government) should work to ensure that all citizens have equal opportunity to succeed.  A few suggestions:

• Keep and raise the Estate Tax - I wrote about this a year ago.  If we let the rich pass their fortunes to the next generation - who didn't lift a finger to earn it - then we will have a generations of unfair inequality - remember the aristocrats of Europe?.
• Encourage further performance pay - There is nothing more fair than paying the higher performers more than the lower performers.  Our governments should ensure they are practicing this model everywhere they employ people, from schools to Congress.
• Help those who failed pick themselves up - There are bound to be losers in any competitive economy.  So we should have a safety net for those who are left on the sidelines.  This may include subsidized training for those whose jobs have been outsourced, and its another argument for national health insurance coverage.

Overall, performance pay is another great example of the Challenge Dividend at work.  The opportunity to increase income by working harder is directly driving improvement in productivity in our economy.  Income inequality is merely a byproduct - just like the byproduct of better products and profitability for the companies who use performance pay (who benefit along with their customers and shareholders).

An enlightened society should be able to ignore the neighbor's bigger house or bank account, and focus on making sure there is an equal chance for all to earn their way into the top earning percentile.

Toyota Stays Paranoid

Last summer I wrote a series of posts about how some of the most successful organizations in the world seem to have been spoiled by their success.  Examples like Google, Starbucks, Apple, China, and the Republican Party suggested that when your organization reaches the top, it tends to feel less pressure, and thus fails to improve.  But BusinessWeek article on July 2 suggests that Toyota is bucking the trend.

By just about any measure I think we can conclude that Toyota is a successful company at the top of its game.  Two months ago it overcame GM to become the world's biggest carmaker.  It pulled down a record $15 billion profit last year.  And it has one of the hottest cars on the market with its Prius.

But while the profits and accolades keep rolling in - and its competition in Detroit is suffering - Toyota executives "are worried that they'll be spoiled by success."  In an interview with BusinessWeek, Toyota President Katsuaki Watanabe claimed that "the scariest symptom of 'big-company disease' is that complacency will breed."  So at the top of its game, Toyota's U.S. management team is launching an improvement plan called EM2 - meaning "Everything Matters Exponentially".  As part of the plan, the company is conducting a "total examination of product planning, customer service, sales and marketing, and even the car dealers that the company doesn't own.

One of the keys to Toyota's reinvention is its Japanese heritage of continuous improvement, or kaizen.  This mentality drives a belief that improvement is always possible.  Another key is Toyota's push to unearth and address its weaknesses.  For example, its rapid growth has caused recalls to triple over the last three years, and the company has dropped a few notches in the J.D. Power quality survey. 

Professor Ranjay Gulati at the Kellogg School of Management provides four tips for avoiding complacency, based on watching Toyota and studying other large companies:

• "Avoid the Post-Pellet Pause - lab rats always take a break when they find that pellet of food.  Recognize that once an organization achieves success, it's only natural to want to take it easy.
• Look Outside the Industry - Comparing yourself only with industry competitors can create a false sense of security.  Set performance goals that are world-class, not just industry bests.
• Use Internal Metrics - External metrics such as market share matter.  But supplement them with internal goals, such as quality and sales growth, which can be better for driving absolute, year-over-year improvements.
• Give Customers More to Love - If customers already like your product, try to improve the experience that supports the product.  That extends the competitive advantage of having the best offering in the market."

Bigger picture, these and other tactics help organizations keep the challenge dividend going even when they have a natural tendency to relax.  With this attitude, Toyota is sure to retain and grow its lead - while making even better cars and trucks for its consumers around the world.

Giving Till It Hurts...So Good

Last week the Wall Street Journal (subs rec'd) published an article which described a recent trend in charitable giving: individuals are increasingly making "Stretch Gifts" which are a large-enough percentage of their net worth so as to negatively impact their lives.  One example is James Doty, a 51-year-old neurosurgeon with a 3-year-old son who recently gave away $37 million - which amounted to 99% of his net worth.  Doty will have to keep working for a long time to save enough for his child's education and his own retirement.

The reasons for literally giving until it hurts are many.  Some are looking for greater meaning to their lives.  Others are tired of gathering "things" and shun the second homes and luxury lifestyle.  Many want to repay the organizations that helped them reach success in the first place.  And still others feel that passing along a large inheritance could spoil their children (see my post on the Estate Tax)

But the most fascinating insight is that these Stretch Gifts not only make a bigger impact on society, but they might create more incentive for the giver to do even more.  Syracuse University professor Arthur C. Brooks published research in his book Who Really Cares that shows a dollar donated to charity brings on average an additional $3.75 back to the giver.  According to Brooks:

"They often create great discomfort among their families, but when people give there is substantial personal transformation.  They tend to work harder," leading to greater prosperity, and in the long run, he says, "this leads to more success, both financial and nonfinancial."

In effect, Stretch Gifts put pressure on the giver.  They are newly challenged to work harder to pay the bills.  This leads to a burst of new productivity, and in turn added income to give away.  The challenge of a Stretch Gift drives the dividend of added income for the giver - which he or she can use to improve the world further with even more charitable giving. 

AMA Afraid of Retail Clinics

You don't have to have seen Micheal Moore's new movie to recognize that we have significant issues in the U.S. health care system.  Escalating costs, over 40 million uninsured, and poor cost/benefit as compared to other developed nations all leave many individuals and organizations searching for new solutions.  But with each proposed solution, we can count on some entrenched group - who benefits from the failing model - to stand in the way of progress.  Would you have thought one of these laggards to be the American Medical Association?

The American Medical Association (AMA), was founded in 1847 to represent the interests of physicians across the country.  It's Mission is: "To promote the art and science of medicine and the betterment of public health."  While this noble mission says nothing about representing physicians' interests, most of the organization's viewpoints have a clear bias. 

One recent example is the AMA's call for investigation of Retail Health Clinics.  Retail Health Clinics have been a growing force in the demand for more affordable and quicker service.  Stores like Walgreens and Kroger have opened over 500 clinics in the past few years.  They are staffed by nurse practitioners who are licensed to diagnose and treat a variety of minor illnesses.  One common example is a case of strep-throat; instead of waiting for a traditional doctor appointment and paying $100 or more, a parent can bring her child to a clinic for a quick diagnosis and prescription right next door.

But this represents a significant challenge to the established health industry.  Physicians make a lot of money from these minor illnesses, after all.  And retailers could bring significant resources and organization to quickly exploit this market opportunity.  So the AMA is representing physicians' interests by calling for more investigations and regulation of these clinics.  Somewhat diabolically, the AMA claims that its concern for retail clinics is based only on a concern for patients.  It claims that there is a conflict of interest in which the retail clinic is incented to direct patients to purchase medical products from the host retailer.  Of course, the AMA does not mention its own conflict of interest: that these clinics might make it tougher for their members to earn income.

At the end of the day, the AMA is a monopoly-like organization that is using its power to limit competitive challenge and improvement.  And it's not the first time the AMA done this.  In fact, for over a century the AMA has directly limited the supply of physicians in the marketplace.  First, the AMA has been responsible for certifying medical schools (which it also receives millions of dollars for), and is able to limit the number of institutions and the number of graduates.  This restriction of supply guarantees higher income for physicians but higher prices and longer waiting for patients.  Second, it has used political influence to push regulations that limit the practices of nurse, chiropractors, and midwives.  The strategy is perhaps best described by Clark Havighurst, Duke University Professor of Law:

"Professional licensure laws have long made the provision of most personal health services the exclusive province of physicians. Obviously, such regulation limits consumers' options by forcing them to use highly trained, expensive personnel when other types might serve quite well."

Ironically, the AMA and its members are at risk of being hoist on their own petard.  The AMA's strategy has been to push for a "Rolls Royce model" of health care, in which only a minority of very highly-skilled physicians are able to practice.  But consumers are becoming smarter about health care.  The Internet and a growing amount of useful over-the-counter remedies are helping them self-diagnose and treat.  And the growing "Rolls Royce cost" of health care is pushing the market to develop new models.  But what will happen when this revolution comes? (and it WILL come).  The AMA and its physicians are simply not ready to compete in a traditional market environment.  If they embrace "good enough" care, it could jeopardize the only leg they have to stand on.

Already the AMA is a declining power, as only about 33% of physicians are members of the organization.  In this time of health care crisis, I believe its stand on issues like retail health clinics are more likely to generate cynicism than sympathy.