The need to transform expensive, complicated products and services into ones that are higher in quality, lower in cost, and more conveniently accessible is a challenge that is not unique to health care. Most modern industries started where health care is today, with products and services that were expensive and complex, but were transformed toward improved quality, cost, and convenience through disruptive innovation. Disruptive transformations were rarely initiated by the leading companies in these industries. The reasons? At the outset the disruptive innovations could not meet the needs of industry leaders or their customers. And the profits from disruption were unattractive when viewed from the perspective of the dominant business model. Instead, disruptions have always taken root by first addressing the simplest problems of the least demanding customers.
Disruptive technologies and business models have been the mechanisms that brought affordability, consistent quality, and convenient accessibility to most facets of our society. Disruption hasn't treated kindly the companies that have ignored it. But it has been good for mankind. In industry after industry disruption has made obsolete the trade-off that previously forced a choice between quality and affordability. It delivers both.
Every disruption is comprised of three components: a technology that transforms the fundamental technical problem in an industry from a complicated one into a simple one; a business model that can take that simplified solution to the market at low cost; and a supporting cast of suppliers and distributors whose business models are consistent with one another, which we call a value network. Disruptions combining these three factors actually have long been at work in health care, transforming the care of most infectious diseases into simple, affordable, convenient services of remarkable efficacy in much of the world.
More disruptive innovation is poised to be unshackled in other major sectors of health care. Precision diagnostics, often the prerequisites for development of predictably effective therapies, are emerging—transforming care from the realm of intuitive medicine into that of empirical medicine and ultimately into precision medicine—disease by disease, step by step. In the face of this technological progress, however, a host of factors have combined to trap the delivery of care in obsolete and costly business models. If health-care administrators and policy makers heed the call of this book for disruptive business model and value network innovations that complement this advance of technology, they can profoundly reshape the cost, quality, and convenience of health care. This industry is horrifically complicated. But in its essential elements, health care isn't substantially different from other industries that have already been transformed through disruption.
The general hospital is not a viable business model. In the absence of an array of cross-subsidies, restraints on competition, and philanthropic life support, most of them would collapse. The value proposition of general hospitals, which is to diagnose and treat any disorder that anyone might bring through their doors, has caused them to harbor each of the three generic types of business models under the same roof:
• Solution shops, which diagnose problems and recommend solutions, and must be compensated on a fee-for-service basis.
• Value-adding process businesses, performing procedures in which definitively diagnosed problems are repaired or treated through a relatively standard sequence of steps, and paid for on a fee-for-outcome basis.
• Facilitated networks, in which professionals and patients exchange with and help each other, and whose coordinators typically need to be compensated on a fee-for-membership basis.1
Trying to do anything for everybody has forced most general hospitals to organize their individual specialist physicians and their pieces of equipment to stand independently of each other and to not be tightly integrated. This enables patients to be routed from one department to the next in a maximally flexible, ad-hoc manner. It also means, however, that hospitals cannot be integrated in an optimal way to do well any of the jobs that individual patients need to have done. Hospitals therefore suffer from extraordinarily high, complexity-driven overheads as they attempt to manage the myriad patient pathways that snake through their facilities.
Hospitals need to disrupt themselves into the three types of business models, or they must be disrupted by others. The overwhelming burden of a hospital's cost is tied to its overhead. And inconsistent quality and safety stem from the patchwork integration of caregivers and equipment. Hospitals are ill-equipped to do each of their different jobs in an optimal manner. Creating coherent solution shops for the practice of intuitive medicine, value-adding process clinics for performing procedures after definitive diagnosis, and disease management networks for the care of many chronic illnesses, will both reduce overhead costs and enable appropriate integration. This is how the historically binding trade-off between quality and cost can be broken in health care, giving us significant improvement in both. Affordability comes from reducing complexity-driven overhead, and quality stems from rational integration around the jobs of patients.2
Primary care physicians' practices need to be dissected into these three business models as well—handing off rules-based care to value-adding process (VAP) retail clinics and the care of chronically ill patients to disease management networks. Primary care physicians can then focus on disrupting specialists in the practice of intuitive medicine.
There are three perversions in the revenue models of today's system that combine to obfuscate value and misguide investment:
• Because hospitals conflate business models, they must price all services—not just solution shop activities—on a fee-for-service basis. And health assistance plans negotiate blanket contracts with providers, through which deep discounts for some services offset very high prices for others, in an opaque rather than transparent way.
• CMS and private insurers set prices based on formulas that do not account for supply, demand, systemic value created, or differences in cost associated with providing services via different types of business models.
• Nearly all Americans are cared for by business models that profit from patients' sickness, rather than wellness.
Who can pull off a rational reform of this system?
There are circumstances in which the perfect, atomistic competition of Adam Smith is an ideal mechanism for arriving at prices that accurately reflect supply, demand, and value. But today's health-care system, characterized by pervasive interdependencies, is not one of those circumstances. We need what Alfred Chandler calls "the visible hand of managerial capitalism"—the deliberate involvement of an integrated provider whose scope encompasses a complete system. Only with a systemic perspective can the real merit of specific activities such as precise diagnosis be assessed, and only then will prices that reflect real cost and real value be established.
Integrated fixed-fee providers can fulfill this role, profiting from patient wellness and the disruption of their own hospitals and specialist physicians by utilizing lower-cost caregivers and venues of care. We therefore urge the few providers that fit this profile to expand their geographic scope to a regional, if not national, scale and encourage providers that are not now integrated to become so.
In regions that are not served by integrated fixed-fee providers, employers will need to orchestrate the creation of disruptive value networks. Reimbursement needs to be replaced by true, high-deductible insurance and health savings accounts. In order to direct volume to the appropriate coherent solution shops, VAP clinics, and facilitated networks, employers need to negotiate directly with providers and begin playing a much more active role in directing employee care. This is how they can facilitate disruption.
Chronic diseases account for 70 percent of all health-care costs3—and as populations age this will only get worse. Employers who pay for the care of those with behavior-dependent chronic diseases with deferred consequences (patients in the "Chronic Quadrangle"), in particular need to find ways to tie those patients' adherence to prescribed therapy to their financial health. The reason is that, like it or not, financial well-being is a more pervasively held job-to-be-done for most people than maintaining physical health. Disease management networks, which are structured to profit from maintaining wellness, and patient networks need to be given much more prominent roles in the care of chronic diseases. The business model of the doctor's office simply was not designed to do this job.
The mechanism for coordinating care across this fragmented group of business-model-focused providers must be a personally controlled electronic health record—because the number and complexity of variables that must be orchestrated have simply surpassed the cognitive capacity of even the brightest physicians who have historically borne the responsibility of coordinating our care. To manage this Herculean task, integrated provider systems have already built proprietary record systems. But the open system that will make our health records portable across providers needs to be constructed from the point of view of the patient, and not the provider—just as Toyota organized its vaunted information system around the perspective of the car.
Drug companies and device manufacturers face extraordinary growth opportunities, in the form of technological enablers that transmit the ability to provide better care into the hands of lower-cost caregivers and decentralized venues of care. In concert with the NIH and the FDA, they are the institutions that can push diseases along the continuum from intuitive to empirical to precision medicine. We fear, however, that many of today's leading pharmaceutical companies are dis-integrating away from the stages in their value chain where these activities will originate—and where competitive advantage and attractive profits can be gained and earned in the future.
We also are not training the professionals that tomorrow's health-care system will need. Our chronic shortage of nurses will become even more acute because we simply lack training capacity, while our universities are investing elsewhere. America's medical schools are training more and more specialists, even while the dearth of primary care physicians is severe and getting worse. Though most politicians would never say it, we will: thank goodness for international medical schools and for the well-trained immigrants from the Philippines, India, the Caribbean, and Latin America. Without them we'd lose more than one-quarter of tomorrow's capacity to care for our health.
We need significant policy and regulatory changes from our federal and state governments to facilitate disruptive change. Despite Americans' faith to the contrary, democracy as a tool for eliciting cooperation around a course of action only works when little significant change is needed. The reason is that regardless of how badly broken things might be, there are always powerful entities that benefit from the status quo. Regulations always benefit someone, and democracy provides myriad levers that these entities with a lot at stake can pull in order to block change.
We hope, however, that the concepts in this book can give government officials a language and a deeper understanding of how the world works, so they can sort self-serving arguments from public-serving ones. In particular, we hope we've provided convincing theory and evidence that the solutions cannot come simply from demanding that existing providers operate more efficiently or compete against each other more intensely. Straightening the deck chairs on the Titanic might have been a good thing to do, but it wasn't the real problem. The health-care industry needs to be disrupted.
Because of the shackles that democracy imposes on those responsible for regulation, the employers that now pay for health care, and the companies that make health-care products and provide health-care services, need to initiate the regulatory changes that enable disruption. They must do this in the way that disruptive deregulation has always occurred—by innovating where the regulations can't reach, don't apply, or are off the radar screens that regulators most intensely monitor. Internalizing decisions and transactions that formerly occurred at arm's length between independent entities—which this book terms "integration"—is one way to do this. Competing against nonconsumption is another.
We are grateful, the three of us, for your patient willingness to read this book and consider what we've distilled to date from spending much of 10 years examining the health-care industry through the lenses of our research on innovation. This book is simply one milestone in a long and difficult process of learning. We're trying to understand the root causes of the industry's problems. We're struggling to articulate in a crisp and compelling way what needs to be done to address these problems. And we're anxious to watch and help those who follow our prescriptions, and to learn what they learn about what else needs to be done. We are confident that many of our recommendations are solidly grounded. We are also confident that we've not yet fully understood many other important issues. We have the greatest confidence, however, that you, our readers, have a lot more to teach the rest of us. We simply hope that this book can play a role in helping us all learn from each other about how to make health care higher in quality, lower in cost, and more conveniently accessible for all.
1. This membership fee can be paid directly by the user; by an employer or insurer; or indirectly by users through advertisers.
2. We have touched on this theme in a number of places in this book. The key to Toyota's quality, for example, is in managing the activities, connections, and pathways of each process in an optimally integrated way. The mechanism by which AT&T came to offer the highest quality telephone service in the world, from 1925 to 1980, was through its optimal integration; and so on.
3. Health Care Costs. Fact Sheet. AHRQ Publication No. 02-P033, September 2002. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/news/costsfact.htm