15 Feb 2000  Research & Ideas

Growing Pains: Prescriptions for U.S. Health Care

The health care industry may look seriously ill, says HBS Professor Clayton M. Christensen, but it's merely suffering the growing pains of a natural evolution as technology forces change at both the high and low ends of the market.

 

We know the symptoms all too well. We wait months to see a doctor. Office visits end, it seems, just moments after they begin. Managed care firms hold sway over doctors' treatment plans, and health insurance premiums are heading for the stratosphere. While the U.S. health-care industry may seem gravely ill, HBS professor Clayton Christensen finds its prognosis encouraging. These symptoms, he says, merely reflect inefficient delivery systems that market forces have already begun to reshape.

Christensen's optimistic outlook stems from his extensive research on how organizations cope with and manage technological innovation. In his book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (HBS Press), Christensen describes how large, well-established companies often get into trouble because they gradually lose step with the markets they serve. From disk drive and computer manufacturers to steel mills and retailing, he has discovered consistent patterns in the way technological innovation affects both companies and industries. Health care, he declares, is no exception.

According to Christensen's research, competition and the profit motive compel established companies to develop ever more sophisticated technologies, products, and systems — typically for the market's high end, where margins are greatest. However, the market's ability to utilize and pay for these advances grows more slowly, leaving new technologies underutilized. Meanwhile, the market's low-end needs are increasingly ignored by these firms, which now require large margins to support their burgeoning overhead. The low-end gap thus created offers fertile ground for startups to enter the market with innovative approaches Christensen calls "disruptive technologies."

Examples supporting this model abound. While IBM concentrated on building complex and costly mainframes, for instance, Digital Equipment Corporation created the minicomputer for users with more limited needs and budgets. Minicomputers, in turn, were supplanted by PCs. Close parallels exist in many other industries, including financial services, steel production, automobile manufacturing, and retailing. "What we find," Christensen explains, "is upstart companies with extremely low overhead introducing new ways to meet the market's ill-served, low-end needs. When entrenched organizations finally realize the potential threat posed by these new technologies, they invariably enter a downward spiral of cost-cutting and consolidation in a futile effort to become competitive again at the market's low end. Ironically, this 'thumbscrew tightening' diminishes their ability to serve the market well at its upper end."

Christensen sees the same pattern in health care. Sophisticated procedures and treatments, along with an abundance of highly trained professionals, have combined to drive costs out of sight. Today's general hospital, home to the latest technology and top-flight specialists, has become adept at handling complex medical problems (the market's high-end need) but is no longer able to treat simple conditions (low-end need) with any semblance of cost-effectiveness. Enter managed care, a disruptive technology that tries to control expenses by keeping close tabs on institutions and practitioners alike.

"Tightening the thumbscrews on the current business model through cost-cutting and consolidation has been the wrong answer to a serious predicament," says Christensen. "Large, integrated institutions, regardless of their industry, can never extract enough cost from their systems to regain competitiveness on their market's low end. At the same time, reducing resources makes these organizations less competitive at the high end. What's needed is an entirely new model better attuned to current market demand." In health care, Christensen finds that examples have already begun to appear in the form of specialized treatment centers that concentrate, for instance, on cardiac or renal disorders or high-tech medical imaging. This narrow focus minimizes overhead costs and increases efficiency, enabling them to deliver high-quality service at costs well below those of general hospitals.

On the other hand, says Christensen, the old model still applies to physicians, who are called upon to treat everything from colds to cancer. "Doctors spend most of their time treating conditions that utilize only a small fraction of their training," he declares. "The fact of the matter is, advances in medical technology now make it possible for nurse practitioners to handle many cases with considerable expertise and at considerably less expense. Similarly, family physicians can now administer many treatments that once demanded the expertise of specialists."

What, then, are the implications of Christensen's research for the health-care industry? If the historical pattern holds true, he predicts, most large, full-scale hospitals will eventually be replaced by focused-care institutions like the Austin Heart Hospital in Texas — centers that are already proving themselves to be successful, low-cost providers without sacrificing quality. "Only a limited number of general hospitals will survive to treat patients with complex illnesses," he says, "while the role of nonphysicians in the treatment of patients will increase dramatically."

According to Christensen, none of these changes will take place without staunch resistance from the medical establishment. Even federal regulators are being asked to enter the fray, recalling previous cries for government intervention by the computer, auto, and steel industries. Be that as it may, Christensen asserts, market forces will prevail.

"If high-quality, more cost-effective patient care is the ultimate goal," Christensen concludes, "medical schools, practitioners, hospitals, and insurers alike should strive to facilitate the natural evolution of their industry. Disruptive technologies are merely growing pains, and health care will be the healthier because of them."

From Working Knowledge: A Report on Research at Harvard Business School, Vol. III, No. IV.