The Innovator's Prescription

1. Disruptive innovation transforms complex, expensive products into simple, affordable ones

The disruptive innovation theory explains the process by which complicated, expensive products and services are transformed into simple, affordable ones.

Disruptive innovations start by targeting overlooked segments with "good enough" offerings. They improve over time, moving upmarket and eventually displacing established products and companies. This pattern has played out across industries like computing, retail, and automobiles. In healthcare, examples include:

• Retail clinics staffed by nurse practitioners disrupting primary care practices
• Ambulatory surgical centers disrupting general hospitals
• Home dialysis machines disrupting dialysis centers

Disruptive innovations succeed by:

• Being simpler and more affordable than existing options
• Targeting "nonconsumers" or overserved customers
• Improving along a different trajectory than mainstream products
• Eventually becoming "good enough" for mainstream customers

2. Technological enablers, business models, and value networks drive disruptive innovation in healthcare

Three key lessons from the history of disruptive innovation are particularly important in the disruption of health care.

Three key elements enable disruptive innovation in healthcare:

1. Technological enablers: Tools and techniques that simplify complex problems and enable rules-based solutions. In healthcare, these include:

   • Molecular diagnostics
   • Imaging technologies
   • Ubiquitous telecommunications

2. Business model innovations: New approaches to delivering and capturing value. Examples include:

   • Retail clinics with nurse practitioners
   • Focused hospitals for specific procedures
   • Home-based care enabled by technology

3. Disruptive value networks: Systems of suppliers, distributors, and customers with aligned business models. This requires:

   • Integration of technological enablers and business models
   • Coordination among multiple disruptive innovations
   • Overcoming resistance from existing healthcare institutions

Successful disruption requires all three elements working together synergistically. The healthcare industry's complex, interdependent nature makes this especially challenging but potentially transformative.

3. Hospitals and physicians' practices need to separate into focused business models

The hospital business model that has emerged from this conflation of activities is an extraordinarily complex and expensive one that lacks focus.

Hospitals and physician practices currently combine multiple business models, leading to inefficiency and high costs. They need to separate into focused models:

1. Solution shops: For diagnosing complex problems through iterative, intuitive processes. Examples:

   • Specialized diagnostic centers
   • Consultations for rare or complex conditions

2. Value-adding process (VAP) businesses: For treating well-understood conditions through standard processes. Examples:

   • Focused surgical centers
   • Chronic disease management clinics

3. Facilitated networks: For managing conditions requiring extensive patient involvement. Examples:

   • Online communities for chronic disease patients
   • Peer support networks for behavioral health

Benefits of separation:

• Improved efficiency and lower costs
• Better alignment of resources and processes with specific jobs to be done
• Increased transparency in pricing and quality measures
• Enables disruption by more focused, efficient business models

4. Retail clinics and facilitated networks will disrupt traditional healthcare delivery

Retail clinics, as VAP business models, can integrate the steps in this process in a way that optimizes the fulfillment of this particular job, consistently within 15 minutes or less and with no waiting.

Retail clinics staffed by nurse practitioners are disrupting primary care by offering convenient, affordable care for simple conditions. Key features:

• Located in pharmacies and retail stores
• Limited scope of services (e.g., flu shots, strep tests)
• Transparent, low pricing
• Extended hours and no appointments needed

Facilitated networks are disrupting chronic disease management by enabling peer support and information sharing. Examples:

• Online communities for patients with specific conditions
• Mobile apps for tracking symptoms and sharing data
• Telehealth platforms connecting patients with providers

These models succeed by:

• Focusing on specific, well-defined jobs to be done
• Leveraging lower-cost providers and technology
• Offering greater convenience and accessibility
• Empowering patients to manage their own health

As these models improve, they will take on more complex cases, further disrupting traditional healthcare delivery.

5. Precision medicine enables lower-cost venues and providers to do more sophisticated work

Once efficacy and reliability are assured, solutions once again become decentralized, as the basis of competition shifts toward convenience and other new metrics of performance.

Precision medicine is shifting care from intuitive to rules-based approaches, enabling:

1. Lower-cost providers to perform more complex work:

   • Nurse practitioners managing chronic diseases
   • Pharmacists administering vaccinations
   • Patients self-managing conditions with technology

2. Care to move to more convenient, lower-cost settings:

   • Retail clinics for simple acute conditions
   • Home-based care for chronic disease management
   • Telemedicine for remote consultations

This progression follows three stages:

1. Intuitive medicine: Based on physician judgment and experience
2. Empirical medicine: Using statistical correlations to guide treatment
3. Precision medicine: Rules-based care based on exact diagnosis

Enabling technologies:

• Molecular diagnostics for precise disease identification
• Decision support tools integrating medical knowledge
• Remote monitoring devices for ongoing patient management

As more conditions move towards precision medicine, care will continue to decentralize and become more accessible and affordable.

6. Integrated fixed-fee providers and employers are best positioned to create disruptive value networks

Integrated fixed-fee providers aren't as captive to obsolete regulations as fragmented providers, in the following sense.

Integrated fixed-fee providers like Kaiser Permanente have key advantages in implementing disruptive innovation:

1. Aligned incentives: Profit from keeping patients healthy, not from providing more services
2. System-wide perspective: Can optimize across different care settings and provider types
3. Control over full care continuum: Able to implement coordinated, disruptive business models
4. Financial flexibility: Can invest in prevention and lower-cost care models that reduce long-term costs

Employers are also well-positioned to drive disruption:

• Long-term interest in employee health and productivity
• Ability to contract directly with innovative providers
• Motivation to reduce healthcare costs while improving quality
• Potential to integrate health management with other employee benefits

Key strategies for these entities:

• Investing in precision diagnostics and preventive care
• Implementing value-based payment models
• Leveraging technology for care coordination and patient engagement
• Partnering with disruptive innovators in healthcare delivery

By creating aligned disruptive value networks, these organizations can accelerate the transformation of healthcare.

7. Reimbursement reform is crucial for enabling disruptive innovation in healthcare

The reimbursement system is structured to sustain the status quo.

Current reimbursement systems hinder disruptive innovation in several ways:

1. Fee-for-service incentivizes volume over value
2. Administered pricing distorts market signals
3. Complex billing codes make it difficult to introduce new care models
4. Blanket contracting funnels patients to high-cost providers

Key reforms needed:

1. Separate true insurance from routine healthcare financing:

   • High-deductible plans for catastrophic coverage
   • Health savings accounts for routine care

2. Enable value-based payment models:

   • Bundled payments for episodes of care
   • Capitation for integrated care systems
   • Pay-for-performance incentives

3. Simplify and modernize billing codes:

   • Create codes for new care models and technologies
   • Allow for more flexible, value-based pricing

4. Encourage direct contracting between employers/patients and providers:

   • Bypass traditional insurers for routine care
   • Enable transparent pricing and quality comparisons

These reforms would create financial incentives aligned with disruptive innovation, enabling new business models and care delivery approaches to flourish.

8. The pharmaceutical industry faces supply chain disruption and must focus on diagnostics

Unless they reverse course, many of today's major pharmaceutical companies will find a decade from now that they have inadvertently leveled the playing field in their industry, so that entrants can overcome what historically had been high barriers to entry.

The pharmaceutical industry is undergoing significant disruption:

1. Supply chain disaggregation:

   • Outsourcing of drug discovery, clinical trials, and manufacturing
   • Rise of specialized contract research and manufacturing organizations
   • Erosion of traditional barriers to entry

2. Shift in value creation:

   • Declining productivity of traditional R&D models
   • Increasing importance of precise diagnostics
   • Growing role of personalized medicine

To succeed, pharmaceutical companies must:

• Invest in diagnostic technologies and companion diagnostics
• Focus on diseases moving towards precision medicine
• Develop targeted therapies based on molecular understanding
• Integrate across the diagnostics-therapeutics continuum
• Partner with healthcare providers to demonstrate real-world value

The future of pharmaceuticals lies in enabling precision medicine and lower-cost care delivery models, rather than solely developing blockbuster drugs. Companies that "skate to where the puck is going" by focusing on diagnostics and targeted therapies will be best positioned for success.

Last updated: August 29, 2024