How to afford health care is not the question we should be asking in these times of unsustainable health care cost increases. The right question to ask is this: How do we make health care more affordable? That is the question tackled by Hwang and Christensen¹ in a recent paper published in Health Affairs: Disruptive Innovation in Health Care Delivery: A Framework for Business-Model Innovation.
The authors begin by defining disruptive innovation, a concept popularized by one of the authors, Harvard Business School professor Clayton Christensen, which in part explains how complicated and expensive products are turned into simpler, less expensive products. Sustaining innovation is the practice used by successful incumbent organizations to create better products for a discerning customer base.
Using a simple graph illustrating the trajectories of sustaining innovations and of disruptive innovations against customer demand, the authors explain that disruptive innovations occur when product innovation outpaces customers’ ability to make use of the new features. The customers willing to pay the highest price typically do not use disruptive products, and new suppliers in a market usually introduce them. Once a disruptive product gets a foothold in a market, however, it improves over time, positioning the upstart to become the new market leader.
The authors offer the example of the PC disrupting the business models that produced mainframe computers, noting that although we spend far more on computers today than in the mainframe era, we are better off, most of us would agree. “The widespread belief that increased spending on health care, particularly on new technologies, is something that must be quelled shows how long we have tried to answer the wrong question,” the authors continue. “When embedded within disruptive business models that capitalize on increased convenience and affordability, new technologies can deliver tremendous value.”
Why Health Care Resists Disruption
The reason health care has resisted disruption, despite the fact that so many new technologies have been introduced, is that these technologies have been introduced in such a way as to sustain hospitals and physicians in solving complex problems. To explain why, the authors analyze the makeup of a business model. A successful business model begins with a value proposition, a product or service that makes practical and economic sense, followed by a set of resources deployed by management to deliver the value proposition, the authors explain. As employees generate the product, processes are distilled, and they become a part of the business model.
It is the authors’ belief that an established business model, over time, will determine the types of business propositions that an organization can and cannot deliver. The relationship between business propositions and processes then commences to work in reverse, limiting the types of value propositions that an organization can take to market. Although many companies have had disruptive technologies within their grasp, the authors offer only one example of an established organization that was able to take a disruptive technology to market: That was IBM, which established a separate business model in Florida to develop the PC and allowed the unit to work autonomously, resulting in the demise of the mainframe.
The authors categorize business models into three types: solutions shops, built to diagnose and solve problems primarily by the people they hire; value-adding process businesses, which leverage resources into outputs of greater value; and facilitated user networks, in which business transactions occur within a collective.
"The widespread belief that increased spending on health care, particularly on new technologies, is something that must be quelled shows how long we have tried to answer the wrong question"
Most hospital and physician practices can be characterized as solutions shops; retailing, restaurants, and automobile manufacturing are examples of value-adding process businesses; and insurance and telecommunications companies are examples of facilitated user networks.
Although solutions shops are the primary business model in health care, the authors suggest that many activities have developed in health care that would be better delivered in a value-adding processes or user-network model. Examples range from a nurse using a rules-based diagnostic test to verify group A streptococcal pharyngitis