Innovation as Routine: Reconciling the Ecology and Adaptation Perspectives on Change

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Innovation as Routine Reconciling the Ecology
and Adaptation Perspectives on Change

• Jacqueline Zinn, Ph.D.
• Vincent Mor, Ph.D.
• Zhanlian Feng, Ph.D.
• Orna Intrator, Ph.D.

Temple University School of Management Brown
University Medical School
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INNOVATION

• Adoption of an idea or behavior new to the
  organization and to the organizations industry,
  market or general environment (Daft 1982)

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Theoretical Perspectives on the Impact of Change

• Rational Adaptation (e.g., Contingency Theory)
• Innovation is a problem-driven, rational response
  to environmental change or uncertainty
• Fills a performance gap
• Prevents failure and promotes survival
• Organizational Ecology
• Innovation recreates the liability of newness
• Risky and disruptiveorganizations remain inert
  unless forced to change
• Places organizations at greater risk of failure

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Reconciling Divergent Perspectives on Change

• Boundary conditions separating adaptive and
  disruptive change studied in diverse industries
• Results indicate that theories are complementary,
  suggesting a conceptual link
• Organizational routines (Nelson and Winter 1982)
  Repetitive patterns of activity by organizational
  groups and individuals
• The accumulated knowledge base of the
  organization
• Stable, reproducible routines are the foundation
  of reliable performance

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Innovation as Organizational Routine

• Organizational ecology Innovation disrupts
  routines (e.g., existing patterns of
  intra-organizational relationships)
• In a culture of innovation, innovation is a
  normal routine
• Curtailing innovation would be disruptive
• Whether innovation is adaptive or disruptive may
  depend on degree of commitment

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Objective

• In the context of the nursing home industry
• test the hypothesis that in organizations where
  innovation is a normal routine, it provides an
  adaptive defense against failure
• However
• When innovation is the exception rather than the
  rule it is disruptive and contributes to failure

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Perilous Times in the Nursing Home Industry

• 2001 5 of 10 largest nursing home chains in
  Chapter 11 (1 out of 10 nursing homes)
• Why so failure prone?
• 1998 Medicares PPS for SNFs implemented
• 25 drop in average daily payments at Genesis
• Assisted living siphoning off private pay
• Ill-advised, debt-financed expansion
• Regulations increase operating costs
• Malpractice increases insurance rates

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Repositioning in the Market

• Heavy reliance on public financing emergence of
  viable substitutes rising operating costs
  increased threat of failure
• Sub-acute care
• Increasing nursing home case mix acuity since DRG
  implementation
• Managed care
• Specialty care in dementia and Alzheimers care
• Whether innovation succeeds in facilitating
  transition may depend on extent of commitment

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Methods

• Data
• On-line Survey Certification Reporting (OSCAR)
  system, 1997-2002
• Area Resource File (ARF)
• Sample
• All urban freestanding facilities within a MSA
• N54,628 surveys from 10,201 facilities

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Measuring Organizational Failure

• Termination from Medicare/Medicaid Program
  Participation
• Most severe indicator of performance gap is loss
  of certification
• Reimburses care of 3 out of 4 nursing home
  residents
• Roughly 8 terminated from 1997-2002

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Innovation

• Technical innovations reflecting the resource
  inputs needed for sub-acute and specialty care

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Measuring Innovation Relative to Diffusion in
Market (Goes Park 96)

• AI k,t Adjusted innovation score for NH k at
  time t
• I k,i,t Innovation rating (0 or 1) for NH k on
  the ith innovation at time t
• Pi,t Proportion of NHs in local market (MSA)
  that had adopted the ith innovation at time t

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Levels of Innovation

• Minimal, low, moderate and high defined by
  quartiles of the innovation score distribution
• Omitted category no innovation (0 on innovation
  score)
• Moderate to high
• Innovation is routine and adaptive
• Minimal to low
• Innovation is infrequent and disruptive

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Change in Ownership

• Even good facilities acquired by a
  debt-strapped chain may be under-capitalized and
  at risk of failure
• Ownership change in prior 36 months

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Performance

• All measured as dichotomous variables relative to
  other facilities in MSA
• Low Occupancy (bottom quartile)
• High Medicaid Census (upper quartile)
• Regulatory Compliance (upper quartile of
  deficiency citations)

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Other Control Variables

• Organizational characteristics
• Size
• Chain affiliation
• Control status
• Stand-alone x for-profit indicator
• Market conditions
• Competition (Herfindahl Index)
• Excess capacity (ave. empty beds/facility)
• Per capita income
• Year dummy variables to control for secular
  effects

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Methods

• Panel Data analysis using a cross-sectional, time
  series model
• Since dependent variable binary
• GEE logit model (XTGEE, Stata V8) with time
  varying, 1-year lagged covariates
• Within-facility correlation structure
• Robust variance estimator

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Description of Facilities (N10,201)
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Effect of Innovation on Termination
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Performance Predicting Termination
Controlling for Innovation, ownership, time and
ownership change
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Size and Market Characteristics
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Conclusions

• No evidence that innovation is disruptive and
  contributes to organizational failure
• Support for rational adaptation argument that
  when innovation is routine, it buffers against
  failure
• Limited innovation may not hurt, but neither does
  it help survival prospects
• Change of ownership increases likelihood of
  failure
• Organizations that undergo major re-organization
  become new again the liability of newness

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Conclusions

• Prior poor performance matters
• Inability to close a performance gap
• There may be a liability of smallness
• Monotonic relationship between size and failure
• Institutional linkages (chain status) may not
  provide a buffer against failure
• Inadequate environmental carrying capacity
  promotes market exit, in this case, the
  Medicare/Medicaid market

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Conclusions

• A significant proportion of free-standing nursing
  homes in the U.S. do not innovate
• There do appear to be significant returns on
  investment for facilities that embrace this type
  of response to environmental change
• Termination from Medicare/Medicaid is rare but
  facilities embracing innovation as a strategy are
  40 less likely to terminate, controlling for the
  BENEFITS of performance as well as the stress
  chaos of ownership change.

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Nursing Home Innovation

• Prior research found that facilities in
  competitive markets those with higher MCO
  penetration were more likely to establish special
  care units
• In response to BBA reimbursement changes,
  facilities in competitive markets undertook
  strategies to control therapy costs by employing
  therapists rather than contracting
• Current movement to establish quality improvement
  collaboratives another mark of innovation
• BUT, most think of nursing home innovation as
  an oxymoron
• We find that moderate to high Innovators tend to
  be consistent early adopters relative to their
  local peers they take the risks to innovate and
  reap the benefits

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Limitations

• Our indicators of innovation were limited by data
  availability and are known to have measurement
  problems
• Only looked at 1997-2002 since not all data were
  available from 1993 forward
• Unable to estimate the effect of assisted living
  and home care in the markets
• Did control for local competition

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Implications for Nursing Homes

• Having management capable of perceiving the need
  for, devising, marketing and implementing
  innovations in service lines and practice is VERY
  important
• Same principles apply across all markets, but not
  likely that same innovations work equally well in
  all markets
• May need national, regional and local input in
  devising a strategy for successful innovation

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Implications for Theory-Driven Health Services
Research

• Reinforces the notion that innovation can be a
  successful strategy to cope with environmental
  change and competition
• Establishes the importance of studying all the
  organizations in an industry longitudinally
• Establishes the importance of defining innovation
  and performance relative to local peers

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Areas of Needed Research

• Expand array of innovations being studied
• Explicitly test revenues (margin) profitability
  as performance measures
• Examine HOW good managers perceive the need to
  innovate
• Examine effects of innovative management strategy
  on the quality of care experienced by patients,
  controlling for performance level

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• Thank You!