“Your Company is Too Risk-Averse,” says the latest issue of the Harvard Business Review. This article has great insights for anyone running a benefits plan to consider as we have seen far too many Chief Medical Officers, HR Executives, and even C-Suite decision makers abandon the opportunity for transformative change to pursue small, incremental change.
Health care decision-making is even more risk-averse. In the article, “The Coming Golden Age of Disruptive Innovation in Health Care,” the authors discuss the typical innovation pathway in healthcare.
“In health care delivery systems, we have rather preferred to adopt ‘accretive’ innovation – new technology or services that are added to existing services, thus adding new revenue streams without jeopardizing existing provider or supplier income. We promote ever more sensitive scanners, build unproven proton beam radiation centers, and purchase brand name drugs with tiny benefits over existing generics. Accretive innovation can yield better outcomes, and causes little dislocation in the health care sector, but does not dramatically increase value.”
So, why do we pursue small changes? We are hard-wired to be loss averse. The article cites a 2012 McKinsey survey where managers were presented with an opportunity for an investment that would either produce a 4x return (NPV) over four years or crater in the first year. These managers were then asked how much risk they were willing to accept, a question that should be a mathematical decision. They were only willing to accept an 18% chance of loss vs. the mathematically neutral 75% chance.
Companies also put processes in place that encourage group-think and discourage risk-taking. Many decisions on benefits go through a never-ending committee process for evaluation. Decisions that can get made by executives go through a process of getting buy-in from the broker, CMO, various committees, and finally after getting approval from every conceivable stakeholder are approved. It’s really no wonder that we favor small incremental changes.