Business-Model Innovation in Healthcare Delivery

Written by Jason Hwang and Clayton M. Christensen

Disruptive innovation has brought affordability and convenience to customers in a variety of industries. However, health care remains expensive and inaccessible to many because of the lack of business-model innovation. In this article, the authors present a framework for categorizing and developing business models in health care, followed by a discussion of some of the reasons why disruptive innovation in health care delivery has been slow.

A typology of business models

Before describing what can and needs to be done in health care, we present a construct for classifying and analyzing business-model innovation. In general, business models can be categorized into three types: solution shops, value-adding process businesses, and facilitated user networks.

Solution shops

Solution shops are institutions built to diagnose and solve unstructured problems. Consulting firms, advertising agencies, research and development organizations, and many law firms employ this type of business model. These solution shops deliver value primarily through the people they employ—experts who draw upon their intuition and problem-solving skills to diagnose the cause of complicated problems and recommend solutions—and successful firms are those that can attract the best talent. Solution-shop work tends to be unique for each customer, who is often quite willing to pay very high prices in return.

Value-adding process businesses

These businesses transform inputs of resources, such as people, equipment, raw materials, energy, and capital, into outputs of greater value. The business model is built to do this in repetitive ways so that the organization’s capabilities are embedded more in its processes than in its resources. Although some value-adding process businesses may be more efficient than others, as a whole they focus their attention on process excellence that can deliver high-quality services and products consistently at a lower cost, and they are less affected than other types of businesses are by the variability that occurs when outcomes depend on people’s intuition. Often, results can be guaranteed or redone free of charge. Retailing, restaurants, automobile manufacturing, and petroleum refining are examples of this type of business model.

Facilitated user networks

User networks are enterprises in which the same people buy and sell and deliver and receive things to and from each other. In these types of businesses, the companies that deliver value and make money are those that facilitate the effective operation of the network and its user transactions. Mutual insurance companies are user-network businesses—customers deposit their insurance premiums into a collective pool, and they take claims out of it. Telecommunications companies, which facilitate calls and data transfers among their customers, as well as the online auction site eBay, stock exchanges, and many activities of banks are also user-network businesses.

Challenges to new business models in health care

Fragmentation of care

Carving focused facilities and user networks out of today’s mixed models of health care delivery might indeed capture unrealized efficiencies and cost savings, but they also might fragment the delivery of care. Coordination of care in such a system is critical, and the importance of interoperable health information technology (IT) cannot be stressed enough. Health IT systems must serve as the connective tissue joining the various pieces of health care delivery into a coherent system that delivers continuity through safe, satisfying relationships. The role of care coordination can also be performed to varying degrees by a patient-centered medical home (PCMH), telephonic services such as Revolution Health’s Nightingale service, Web-based decision-making software, and personal health records (PHRs).

Lack of a retail market

Disruptive innovation requires that a market of consumers carry proper incentives to shop for products and services that best meet their needs. This has long been the criticism of the third-party payer system, and dizzying combinations of deductibles, coinsurance, copayments, and limits have failed to create the true retail market necessary to generate shopping behavior. Health savings accounts (HSAs), in combination with high-deductible health plans, are perhaps the best vehicle available today to encourage rational health care purchasing decisions.

However, it is important to recognize that the health care system comprises highly interdependent business models, and one cannot simply plug in a new component and expect it to work. HSAs do create proper incentives for healthy behavior, but as long as the health care delivery system remains costly and inconvenient, customers rationally avoid spending their money on those services. In other words, until we see business-model innovation in health care delivery in conjunction with HSAs, we will continue to see individuals paradoxically avoiding the healthy behavior that these vehicles were meant to encourage.

Regulatory barriers

Well-known battles over federal moratoria on focused specialty hospitals, state certificate-of-need (CON) policies, and restrictions on physicians’ ownership of medical facilities have all involved impassioned claims by proponents of the status quo that disruptive change could jeopardize public safety for the sake of higher profits. Interestingly, every company and industry that was eventually disrupted has had supporters who at one time lobbied against change and argued that disruptive enterprises could never offer more than substandard performance and unacceptable quality.

The firms that grew to become successful under specific regulatory conditions subsequently worked very hard to make sure that those conditions remained in their favor. It wasn’t very long ago that General Motors lobbied for increased tariffs and quotas on Japanese imports, arguing before Congress, “What’s good for General Motors is good for America.”

However, although often written with good intentions, these regulations unintentionally trap health care in high-cost models of care. For example, many states do not allow nurses to interpret simple test results or write basic prescriptions, leaving care delivery to be performed by physician-staffed solution shops. This makes sense for complex illnesses that require the intuition of experts, but such regulations leave no room for value-added process businesses such as nurse-staffed retail clinics that can deliver better and more cost-effective care for a growing list of conditions. Health care policymakers must recognize the hidden cost of supporting and renewing regulations that inhibit innovation over the long run.

Reimbursement

Finally, returning to our original premise that it is a mistake to focus only on cutting costs when trying to fix the health care system, regulators and payers often direct their attention to cutting reimbursement rates as the primary solution. However, cutting reimbursement in an attempt to force the solution-shop business models of hospitals and physician practices to somehow figure out a way to become more efficient does little to improve health care delivery. With lower reimbursement, hospitals and physicians struggle even more to fulfill their value propositions of providing complex, inherently expensive medical care, and they become even less inclined to hand off work to value-added process businesses.

By coupling technological advances with appropriately matched business models, it could brought the right prescription for the ailing health care system.