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Rules of Business = Rules of Health Care (14:47)

As the MBA Class of 1960 Professor of Business Administration at Harvard Business School, Leemore Dafny is often asked how health care is different from all other businesses. When government is ubiquitous, and when we can’t agree on anything other than that we need to optimize costs, do the same rules apply, especially when we’re talking about life and death?

“There are a lot of industries out there that sell outputs and have complicated institutions, and the same rules of business apply. And the same is true for health care,” Dafny says. “And I think part of the reason that we have such a disappointing outcome for the U.S. health care system is the failure to recognize that.”

The profit cycle is a useful organizing framework when it comes to new risks and new business models. Where there is profit and success, there is entry, Dafny says. Technology shocks and reimbursement change create new opportunities.

“When entrants can come in and capitalize on that new market opportunity, overcome barriers to entry, they can reap substantial profits,” says Dafny.

But, where there is profit and success, what follows is entry and imitation, eroding your profit success. Then comes depreciation in market opportunities. The challenge for businesses becomes how to redeploy your resources and continue to create value. If you’re unlucky, some shock happens, and boom — your industry is gone, says Dafny.

“It’s never a good sign if someone is giving away what you’re trying to sell,” she adds. For example, take the now-defunct Palm Pilot — in the beginning, they reaped substantial benefit, until new competitors took over. Needless to say, Palm did not win that battle, and the challenges Palm faced are no different from the challenges health care faces today.

Health care professionals might say: we’re not about profits, we’re about mission. To that, Dafny says in order to achieve your mission, you need a bottom line.

“In order to get our health care system to deliver the quality we want, at a cost we can afford, we have got to consider this cycle, and we have got to focus on creating value,” says Dafny.

From the NEJM Catalyst event New Risk, New Business Models held in Boston, October 6, 2016.

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