Skip to main content

AHA: Christensen Cautions Hospital Leaders on Costs

 |  By Philip Betbeze  
   July 23, 2012

Harvard Business School professor Clayton M. Christensen, one of the keynote speakers at this year's American Hospital Association Leadership Summit in San Francisco, spoke to hospital leaders about their impossible mission and how they can work to make healthcare more affordable and higher quality.

Christensen, 60, also spoke of his multiple battles with health problems in recent years, and tried to shed light on some strategies hospitals could use to deal with the disruptive innovation that he believes will soon place leaders in the crosshairs of significant competitive pressures.

Having survived a dangerous heart attack, a battle with lymphoma, (now in remission) and a stroke that affected the part of his brain where speech is generated, Christensen speaks from experience with a healthcare system that he says is set up in most cases, by mission, to do "anything for everybody."

That results in tremendous overhead costs which place hospitals at severe risk of disruptive innovation from future (and current) competitors.

"If you were suckered into taking a job as a CEO of a hospital, that is a really bad choice, because you have a job that's impossible to do," he said, only half-jokingly.

Based on his research, he says about 85% of hospitals' costs consist of overhead. He compared the dilemma to that of a Michigan truck axle plant that could custom-build any axle for any application. The factory did fantastic work, he said, but because of the time, effort, and processes that must take place in order to offer this level of customization, the factory supervisor was told that if changes couldn't be made, the parent company was prepared to shutter the factory. Another factory in Ohio owned by the same company boasted less than half the overhead.

"The other plant wouldn't do anything for anyone, but they told customers that if you have a design that incorporates one of two processes, we can do it at low cost and high quality," Christensen said.

He said a colleague who studied the company found that every time the pathways to completing the manufacture of the axles doubled, cost per unit increased by 30%.

The complexity of this plant is what drove the overhead costs so high, he explained.

"The plant wasn't inefficient, but the overhead exists because of complexity involved in promising that they would do anything for anyone," he said. "You have the same proposition. No matter what's wrong with you, bring it here."

As a consequence, the overhead costs are enormous.

One of Christenson's colleagues tried to figure out how many pathways patients could go through at UC Irvine. He found 110, "but it's infinite numbers, really."

He argued that most hospitals need to "fragment themselves. You can only address overhead through simplification."

Philip Betbeze is the senior leadership editor at HealthLeaders.

Tagged Under:


Get the latest on healthcare leadership in your inbox.