Once a system that provided quality medicine in an equitable fee-for-service exchange, the current healthcare system in the U.S. has slowly fallen victim to its own structure. Various players are struggling with one another on an expensive battleground — and patients aren’t the only ones getting stung. Corporate America’s involvement and portion of the bill is at the forefront of discussion.

As cries for a major overhaul of the healthcare system have increased, policymakers have responded with a flood of proposals — over 30 new bills so far this year. An integrated approach to healthcare reform, however, must start with an understanding of the system as a whole.

Multiple Players

The healthcare system is made up of a complex, interconnected network of players. Without a common mission, each group pursues policies that are often at odds with the long-term interests of everyone involved. To understand how the system works (or doesn’t work) we need to see how the various players’ actions play out in the broader system.

Healthcare Providers. Healthcare professionals’ primary concern is that patients receive the best care available. This sets up the system for cost escalation by encouraging doctors and hospitals to provide more tests and procedures in the belief that more is better. Providers’ fear of malpractice suits further exacerbates the problem. In addition, practices such as unbundling (charging separate fees for each part of a treatment) and self-referrals (where doctors send patients to labs or facilities in which they have a personal investment) also contribute to escalating costs.

A surge in hospital construction over the last decade has also contributed to escalating costs, as hospitals scrambled to win healthcare dollars by adding state-of-the-art technology and facilities (see “The Medical Arms Race,” Systems Sleuth, November 1991 for description of escalation dynamics in healthcare). The result is an “Escalation” structure, where one hospital’s expansion efforts are seen by others as a threat to their attractiveness, prompting them in turn to add more services (see “Healthcare Providers: Escalation Dynamics”). The cost of expansion is then passed along to patients and insurers in the form of higher bills — thereby raising the total cost of healthcare.

Consumers. Consumers play into the escalation dynamic through their determination to receive the best treatment, regardless of price. As hospitals add more machines and services, the success rate and public awareness of those services increases (see “Consumer Demand”). Consequently, consumers’ demand for high-tech treatment increases, which gives hospitals further incentive to add more technology. The result a system where supply actually creates demand, rather than balancing it.

Currently, there are few incentives for patients to go to the most efficient, cost-effective providers. As James C. Robinson, a healthcare economist at U.C. Berkeley puts it, “Imagine if we sold auto-purchase insurance and said, ‘Go and buy whatever car you want and we’ll pay 80 percent of it.’ Most people would probably buy a Mercedes” (“Wasted Healthcare Dollars”).

Government. The government is a major player in the healthcare system through Medicare and Medicaid programs. Their goal: to provide the highest-quality health coverage to the poor and elderly at the lowest rate to taxpayers. Efforts to curb Medicare spending, however, have inadvertently increased costs throughout the system (see “Government The Medicare Fix that Failed”). By limiting Medicare coverage, the government reduced its own spending (B4), but increased the share of the cost borne by providers. Providers, in turn, passed those costs on to patients for non-Medicare services. When those to whom the costs are shifted can’t afford to pay, they are left without coverage. This puts pressure on the government to expand its Medicaid program to absorb the additional uninsured people, which increases its healthcare expenditures (R5).

Business. Like the government, businesses have also responded to rising healthcare costs by looking for money-saving opportunities. Many large businesses are cutting costs by enrolling their employees in preferred provider organizations (PPO’s) or health maintenance organizations (HMO’s), which offer low premiums. Such managed-care organizations are designed to reduce costs through methods such as decreasing hospital usage and narrowing provider choices.

But HMO’s, although they are increasing both in membership and revenues from premiums, are hurting financially because of their very attraction — low prices. Despite a 14% increase in premiums, income from HMO’s is expected to drop to $350 million this year, from $850 million in 1991 (“An Operation Fraught With Risks,” Business Week, Jan. 13, 1992). Given this trend, premiums are likely to continue rising until there will no longer be a significant cost differential.

In the meantime, the short-term savings for businesses is increasing long-term costs for everyone in the system. As HMO and PPO membership has increased, enrollment in traditional plans is decreasing (loop B7 in “Businesses: Cost-Cutting Efforts”).

To attract healthcare dollars, hospitals will bid against each other to win managed care contracts, while doctors band together to cut deals with HMO’s, and medical supply companies offer cost-saving products to hospitals. Lost revenues from discounting will put pressure on providers to shift additional costs to individuals and small businesses who are not covered by HMO’s or PPO’s. Similar to the Medicare cuts, these higher costs will force more people out, further reducing enrollment in traditional plans (R8).

Insurers. Although healthcare insurance was originally intended to protect against catastrophic illness or accidents, over time coverage has continually expanded to attract more people (see “Insurance: Expanding Coverage”). The ever-expanding coverage gives consumers more financial incentives to seek treatments. In fact, people with health insurance consume up to 60% more physician services and three times as many hospital services than those without coverage (“Business and the Future of American Healthcare,” Business Week, June 22, 1992). As usage increases, costs rise, leading to higher premiums and demand for even more coverage and choices (R9).

PPO’s and HMO’s were designed to stop escalation by providing limited options at lower costs. As discussed above, however, the rise of PPO’s and HMO’s has come at the expense of traditional insurers and creates a “Fixes that Fail” situation.

The Big Picture

The actions taken by each of the players in the healthcare system are all contributing to a “Tragedy of the Commons” scenario, where the attainment of individual goals are at odds with the long-term health of the system. The “commons” in this case is access to healthcare, and the limiting factor is financial resources. If the present situation continues, the healthcare system may collapse because of the financial burden it places on the whole economy. Currently, more than 12 cents out of every dollar is spent on healthcare, and costs are rising at double the rate of inflation. If current trends continue, in 70 years our entire GNP will be spent on healthcare (“The Brave New World of Healthcare,” Richard D. Lamm, University of Denver, 1990).

Insurance: Expanding Coverage

Ever-expanding insurance coverage gives consumers more financial incentives to seek treatments. Higher usage increases costs, leading to higher premiums and more demand for expanded coverage.

Consumer demand for high-tech treatment and government expansion of Medicare and Medicaid play into the “Tragedy of the Commons” structure by contributing to total healthcare expenditures. This raises the cost per treatment and also limits access (loops B10 and B11 in “Healthcare’s Tragedy of the Commons: One Example”). Likewise, consumer demand for high-tech treatment also affects the “Escalation” structure between competing hospitals. As hospitals invest in new equipment and services, the cost per treatment rises, again limiting access.

The shift toward HMO’s and PPO’s plays into the “Tragedy of the Commons” structure as well. As hospitals respond to discounting by shifting costs to small businesses and individuals, the number of people who cannot afford coverage increases. Those individuals must then be covered by government programs (which increases total healthcare expenditures), or simply forego coverage and pay only that portion of their healthcare bills they can afford. The cost of those unpaid bills shows up once again in higher costs per treatment, as providers raise their rates to cover delinquent accounts.

Looking for Leverage

Current proposals for reform center around three critical problems afflicting healthcare: uncontrollable, rising costs; a lack of a long-term healthcare program, and an increasing number of uninsured and under-insured. Although the plans vary widely on details such as eligibility, acute care, preventative care, long-term care, and the role of Medicare and Medicaid, they can be grouped into three broad categories: government-sponsored (single-payer), employer-based (play or pay), and private plans (market-based reform). (See “Healthcare Reform: Evaluating the Proposals” for a discussion of how these proposals affect the dynamics described above).

Perhaps the most important element of any reform is that the recipient and payer of services be more closely linked. One lesson of the “Tragedy of the Commons” archetype is that the problem cannot be addressed at the individual level. Adequate information, however, will help consumers see the “big picture” and judge the value of alternative care. No matter who pays for coverage, some link needs to be made so consumers feel the financial impact of their decisions.

From Disease Treatment to Health Building

One crucial aspect of reform that is absent from most of the current proposals is a deep change in attitudes surrounding the purpose and direction of healthcare. Most Americans believe that access to healthcare is a “right,” no matter what the cost. Not surprisingly, there seems to be more support for universal access programs than for national health insurance. Many people are afraid of non-market-based plans because of they fear a nationalized system would take away the freedom of choice and the ability to receive whatever care one can afford. But as the “Tragedy of the Commons” structure illustrates, consumers will have to learn that there are limits to everything in a finite world. One reality we all may have to face is that we can no longer expect unlimited choice and care.

How we view responsibility for an individual’s health must also change. Over time, the burden of responsibility for one’s health has shifted from the individual to the healthcare system; the implicit message has been, “live your life any way you want and we will take care of you when your body breaks down.” This gradual shift might not have been too damaging if the healthcare system were focused on helping people stay healthy. Instead, it concentrated its efforts on making treatments more effective and convenient. In a way, it is analogous to finding faster, more painless ways to repair wrecked automobiles, rather than teach people how to be safer drivers and designing better highway systems to reduce the likelihood of accidents. The result? Escalating automobile premiums, runaway costs, and a growing pool of uninsured motorists — the same problems currently facing the healthcare system.

of cure” translates into “a dollar spent on health building may be worth thousands in hospitalization and treatment costs.” The challenge is to design a system that gets away from treating symptoms—where there is the least leverage and the highest costs—and focuses instead on efforts to build health.

The healthcare system in America is not deteriorating in a vacuum. “Health care, for all its technical genius, has become an economic cancer that is eating into other necessary public functions…Our health care industry is draining resources desperately needed elsewhere to keep America a competitive nation” (“The Brave New World of Health Care”). Not only is the healthcare system destroying itself and the economic position of its players, but it is also affecting quality and efficiency in many other arenas. To be truly effective, reform must take into account not just the roles of the players and the structure of the system, but also how the system affects the economy health of the country as a whole.

References: ‘The Brave New World of Health Care.” Richard D. Gamin, University of Denver, May 1990; “Healthcare Reform: A Closer Look.” Management Accounting, Dec. 1991; “Healthcare Reform Stews in Congressional Pressure Cooker.” Healthcare Financial Management, Jan. 1992; “Wasted Healthcare Dollars.” Consumer Reports, July 1992; “Business and the Future of American Healthcare.” Business Week, June 22, 1992. For other re-sources, call our offices at (617) 576-1231.

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The tanker industry is typical of any cyclical market, says Bakken. “People invest in new ships when times are good and demand is high, but they don’t sufficiently take into account that other investors are doing the same. So during good times everyone orders more ships and, quite predictably, four to five years later there is an overabundance. Then there is a five to ten year period of low demand for ships, and many old ones arc scrapped. Eventually the market goes back up and the same thing happens all over again.”

“The period between peaks in the commercial real estate industry is 18 years; for tankers, 15-20. What takes years to experience in real time takes just minutes in the games.”

The basic structure behind the cycle is a negative feedback loop with delays (see Toolbox, page 5). When graphed over time, the market shows a series of peaks and valleys.

Bakken has created simulation games of both the oil tanker and the commercial real estate markets. His purpose is two-fold: to help managers better understand long-term cyclical dynamics, and to study their ability to transfer learning from one setting to another. Why these particular markets? “I chose markets that had the same underlying structure, but I wanted them to be different enough so that the similarities would not be immediately apparent to the players” Bakken explains.

In both games, the player assumes the role of a shipping magnate or commercial real estate developer.

Over a forty year period, he or she decides how many ships (or buildings) to buy, sell, and build. The game keeps score of the player’s net profit. The real estate game adds an extra touch of reality — the developer begins in the midst of the currently depressed Boston market, and must navigate his or her firm through the tough times ahead.

Both games — simplified versions of the actual industries — share the same core system dynamics model and the same basic lesson: the markets are cyclical because of over-investment in boom years. Although it may sound simple, Bakken cautions that the lesson is not easily learned in the real world, since the period between peaks in the commercial real estate industry is 12-18 years; for tankers, 15-20. What takes years to experience in real time takes just minutes in the games. And, Bakken adds, experiencing a sharp downturn and possibly even going bankrupt gives players a vivid experience of the dangers — and potential opportunities — such cycles create.

“People in the industry are so caught up in day-to-day decisions and information…But in order to see the structure they have to take the time to go outside the system to think and reflect.”

What do people in the tanker and real estate industries have to say about the similarities between their businesses? When Bakken presented the tanker game to a group of real estate professionals they were enthusiastic about the idea. “As we discussed the game they realized that the long-term dynamics are similar in the two industries and they also realized why they arc similar — because of construction lags in the real estate industry and building lags in the tanker industry.”

Transferring Learning

As part of his research, Bakken compares players’ scores from each game to gauge their ability to transfer learning from one setting to another. His preliminary results have shown that people who play the real estate game first have higher net profits in the tanker game than those who have only played the tanker version. He has also compared the results of players who were similar in all respects except for their knowledge of system dynamics. The result: People with system dynamics experience seem to learn faster and have higher profits.

The reason, Bakken believes, is that “people need access to what I call a ‘higher level language’ in order to see the common elements between different situations. System dynamics is such a language — it allows people to abstract from the case at hand a core insight that can be transferred to another situation.”

The Big Picture

To help facilitate the transfer of learning into the workplace, Bakken is now incorporating the games into systems thinking workshops that will help managers pull out the core lesson and apply it to wide-ranging situations. His work is part of the MIT Systems Thinking and Organizational Learning Research project. As part of the MIT Sloan School’s curriculum development, he is also creating stand-alone “management flight simulator” versions of the games to be used at MIT and other business schools.

Bakken feels that much of the benefit that managers derive from the games will stem from the opportunity to step back and think about the system in which they work. “People in the industry are so caught up in day-to-day decisions and information,” he explains. “But in order to see the structure they have to take the time to go outside the system to think and reflect.”

“If managers learn how to recognize a particular underlying structure they will be able to understand what is happening in a new situation and can make better decisions.”

The games will also help people see the “big picture,” which is especially important for younger professionals who have only been in the industry for a few years. “One overwhelming comment from the real estate professionals who have played the game is that it is morale-boosting,” Bakken says. ‘These people entered the industry just about the time the market began its downturn, so all they have seen is bad times. The game shows them that the market will turn up eventually.”

Generic Structures

Bakken’s work on the real estate and tanker games is part of an effort to create a broad-based system dynamics management education. “There’s a big difference between just telling people that there are a set of 15-20 generic structures that produce most business dynamics and letting them experience it for themselves,” he believes.

“If you only show people examples of generic structures and don’t let them interact with systems where those structures are working, their understanding will be very abstract. It is unlikely that their behavior will change. But if managers experience the same structure working in various settings, they gain confidence in the existence of such core structures. Then if they learn how to recognize that particular underlying structure they will be able to understand what’s happening in a new situation and can make better decisions.” Further reading: “For Supertankers, Super Profits,” New York Times, December 5, 1989. Also, “Crumbling Castles,” Barron’s, December 18, 1989.

For more information about the real estate and tanker games, contact Bent Bakken, E40-294, MIT Sloan School of Management, Cambridge, MA 02142. (617)253-9865.

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