Lessons of the COVID-19 crisis for business schools

As the world is moving in measured steps out of COVID-19 lockdown, business schools should start focusing on the lessons that can be drawn from this pandemic of historical proportions.

It may be tempting to treat the affair as an outlier event that will not see a repetition in our lifetime, especially after a range of fixes will have been put in place to shield humankind from another outbreak.

But even if we were to follow this argumentative route, we cannot ignore the systemic vulnerabilities in the medical care sector that have been uncovered in the process and that will linger on for the time being. They are the direct consequence of the managerialist gospel preached by business leaders and their academic mentors.

Corporatisation has encroached many sectors previously withdrawn from the unbridled influence of the ‘market’, be it defence, transportation infrastructure, utilities, higher education, or, in our case, medical care.

Under the disguise of aligning incentives with purpose, neoliberal toolboxes are being deployed to implement arm’s length dealing whenever feasible, in order to chase efficiency gains, to foster accountability and transparency or to withdraw from risk-sharing commitments of non-transactional exchanges.

This has, however, also invited gaming of the system by profit takers and, as a result, has led to the societal mission of these areas dropping out of focus.

The corporatisation of medical care

Medical care is part of a nation’s critical infrastructure that is instrumental for the functioning of the economy, especially during times of distress. COVID-19 has demonstrated that its breakdown can lead to painful cuts into a society’s social fabric, with rapid onset. It has left especially those who have been entrusted with the care of the most vulnerable in society unacceptably unprepared.

While the pandemic crisis may have potentially overstressed the medical care system in any event, its progressing corporatisation in recent decades has exacerbated the situation significantly. As a first step, let us explore why corporatisation has been fraying medical care in the first place.

Medical care is nowadays financed in three different ways – contribution-based within national social security systems, tax-based NHS systems and private funding or insurance schemes. Individuals may be given opt-out or opt-in options and can often choose hybrid models as well.

Independent of the specific financing schemes, medical providers and their regulators focus on cost containment as a key objective, with rationing (typically age-based), wait-listing, co-payments or exclusion clauses for certain procedures or pre-existing conditions being some approaches.

Cost efficiency is a much sought after but also elusive goal because of the ‘credence good’ character of medical care and built-in information asymmetries between providers, insurers and patients as well as inflationary pressures due to technological progress and rising quality assurance standards.

The combination of these factors has created a fertile ground for corporatisation and gradual privatisation that invite the overselling of services in contribution-based systems and more (implicit/explicit) rationing in tax-based ones.

Nobel Prize winner Kenneth Arrow had already questioned the usefulness of market mechanisms as they may expose stakeholders to excessive uncertainty. Indeed, what about the interests of stakeholders?

Medical care providers often contract with large intermediaries, be they government agencies (such as Medicare or Medicaid) and health insurance companies, and then receive financial compensation based on highly formalised reimbursement systems that invite strategic gaming.

Providers are incentivised to focus on lucrative interventions and reduce staffing costs by driving down staff-patient ratios and average per capita compensation (for instance, by lowering staff qualifications).

In less regulated environments, the price mechanism based on supply and demand distorts incentives to the same effect and can lead to the agglomeration of capacity in affluent municipalities with probably also less price elastic patients. The servicing of unattractive rural or otherwise low-income areas is then often left to non-profit providers unable to attract or pay qualified staff and invest in state-of-the-art medical equipment.

Overselling incentives

Corporatisation invites the overselling of services that offer high margins and that may at the same time yield questionable benefits for the patient.

Take, for instance, the treatment of prolapsed discs. In-patient treatments in Germany have increased by approximately 33% between 2007 and 2017, while surgical interventions have increased by a staggering 71%. Regional numbers differ by a factor of up to 13, which cannot be fully explained by the regional agglomeration of high-end care.

Along the same lines, a 2017 study led by Heather Lyu presents conclusive survey evidence from the United States that overtreatment of patients is strongly influenced by the doctors’ income motives.

Corporatisation may also enable price gauging at the expense of patients. When the new US price transparency regulations came into effect at the beginning of 2019 requiring hospitals to publish charges for standardised procedures, it was discovered that intra-region price differences of 50%-70% were not unusual.

To put it bluntly, applying the corporate value maximisation logic means that patients get sold treatments they do not need and that they get overcharged in the process. Moreover, because of the credence character of medical care, the expense may not correlate with service quality.

Profit first methodologies

These examples reflect an already deeply rooted culture of profiteering that is supported by academic methodologies applied in business school classrooms.

These, for instance, include the management of stakeholder incentives based on simplistic (often static) representations of principal-agent logics, the derivation of governance principles and business objectives from the ‘nexus of contracts’ model that puts the interests of financial claimants at its core and the deployment of valuation methodologies that explain fair compensation of financial stakeholders on the basis of risk premia determined by financial markets.

Corporatisation invites socially questionable behaviour in normal times and is also causally related to the creation of the systemic vulnerabilities uncovered during the COVID-19 crisis.

We need only recall the pictures of hospital staff struggling to cope with the inflow of COVID-19 patients: overworked, inadequately protected, emotionally unprepared for triage with deadly consequences, and a considerable number of them eventually infected by the virus themselves.

If hospitals are critical infrastructure, then downtrading the availability and qualification of staff leads to tighter organisational coupling. And whenever tight coupling meets complexity, then small perturbations or errors can lead to large-scale system failure. Insufficiently trained staff become quickly overworked as a consequence, resulting in a breakdown of already weak crisis protocols, combined with wavering crisis leadership, explain the observed system meltdown in the pandemic hot spots.

Tight coupling can also be interpreted as the absence of slack which is a critical resource for developing forward vision and for detecting the small and hardly traceable signs that typically precede a larger crisis event.

How can we otherwise explain the rampant spread of the virus in elderly homes with generally no precautionary measures put in place to protect residents that were mostly classified as high risk?

If the quality and availability of medical care correlate with local population affluence, then this may be a contributing factor as to why the Afro-American population in the US is experiencing more severe courses of the disease and higher fatality rates.

The role of business schools

COVID-19 has blown apart the promise of corporatisation leading to better and more effectively managed medical care, something that is also illustrated by current attempts to allocate access rights to vaccine research outcomes, protective gear and respirators based on ability or willingness to pay. But what can business schools do to improve the status quo?

First and foremost, the focus of the debate needs to shift from how medical care is regulated to how it is managed. Business school scholars should engage with practice to identify workable governance models that facilitate the provision of medical care in the interests of patients rather than the owners of the respective cash flow rights.

Society requires ‘tigers’ that are better behaved rather than ever shakier ‘cages’ to lock them up in.

Positive examples exist and thrive. Leonard Berry and Kent Seltman, for example, explain how a complex service organisation such as the not-for-profit Mayo Clinic is consistently exceeding customer expectations and cultivating a deep sense of loyalty in customers and staff; and all based on an egalitarian salary model that counteracts the overselling of services.

Second, medical care providers are in need of leadership development that reflects their role as critical infrastructure and, again, business schools are ideally positioned to take on this challenge.

Karl Weick and Kathleen Sutcliffe argue that they should be pre-occupied with failure (to avoid the potentially devastating small errors), beware of oversimplification (bottom-up analysis tends to outperform the top-down approach), align authority with expertise rather than hierarchy, cultivate situational awareness by being sensitive to operational details and display a commitment to resilience (to cultivate the ability to bounce back after disruptive set-backs).

It appears that system meltdown triggered by COVID-19 in different hot spot regions involved a violation of all of these principles. By contrast, the organisational DNA of the Mayo Clinic appears to embody all of them by design.

Third, business schools are nowadays placing much more attention on their institutional impact. Funding policies linked to impact, impact certifications, impact rankings, impact becoming a constituent part of international accreditations and impact as a recurring theme of major business school conferences underscore its growing importance.

In order to tackle this issue credibly, business schools will, however, need to change their posture and approach.

The production of management insights and talent will necessitate more than a topical shift. It will require them to bring together propositional and experiential knowledge that is currently, for the most part, not sitting in business schools. Making them part of the natural domain of management education is an opportunity not to be missed.

Ulrich Hommel is professor of finance at EBS Business School and specialises in risk management as well as restructuring in higher education. He has published extensively on these topics. He is also founding partner of XOLAS, a higher education consultancy specialising in data-analytic advisory. Petra Riemer-Hommel is professor of healthcare management at HTW Saar, Germany. She specialises in managing risk and organisational change in healthcare and is a Team STEPPS® Master Trainer.