08 Apr 2009  Research & Ideas

Clay Christensen on Disrupting Health Care

In The Innovator's Prescription, professor Clayton Christensen and his coauthors target disruptive innovations that will make health care both more affordable and more effective in the future. Q&A with Christensen. From the HBS Alumni Bulletin. Key concepts include:

  • Today's doctors are rewarded for the number and cost of the services they provide rather than by the value of those services in helping patients.
  • We need a system of new value networks in health care that disrupt old business models.

 

An acclaimed author and expert on the development and commercialization of technological and business innovation, HBS professor Clayton Christensen has written a new book aimed at changing our national conversation about health care. In The Innovator's Prescription: A Disruptive Solution for Health Care (read an excerpt), Christensen and his coauthors, the late Jerome Grossman and Jason Hwang (MBA '06), focus not on how the United States will pay for health care in the coming decades, but rather on targeting innovations that will make health care both more affordable and more effective in the future.

Deborah Blagg: "Disruptive innovation" is a term you've used in your analyses of other industries, but what does it mean in the context of the health-care industry?

Clayton Christensen: People think they know what disruptive innovation means, but I've found it's often misunderstood. The simplest way to describe it—in a way that applies to health care or any industry—is innovation that transforms a product or service that historically has been very complicated and expensive into something that is affordable and simple to use.

Q: In your book, you identify fee-for-service reimbursement as a "runaway reactor" in accelerating the rise in health-care costs. Why is this system such a problem?

A: By some estimates, 50 percent of all health care is driven by physician and hospital supply, not by patients' needs. Today's doctors work in a system where they are rewarded by Medicare and insurance companies for the number and cost of the services they provide rather than by the value of those services in helping patients. In short, medical professionals make money when their patients become sick.

Here's one example of how the problem plays out in practice. In our research, we came across a book by George Halverson, the CEO of Kaiser Permanente. In making the argument for flat-fee reimbursement (which his company employs), Halverson notes that even though there is an affordable sealant that is almost 100 percent effective in protecting children's teeth against decay, only about one-third of kids get it. By contrast, in the minority of dental plans that provide comprehensive care for a yearly fixed fee, nearly all children are treated with the sealant. Now why might this be? Because in the fixed-fee system, filling cavities is a cost, not a revenue opportunity. So the financial incentive supports preventive care.

Q: So a system where health providers offer comprehensive care for a fixed fee is the disruptive innovation that will bring down costs?

A: It's a key component, but one reason why health-care reform is such a tough problem is that the challenges are complicated and interrelated. People who have studied this industry for a long time have come up with a number of feasible ideas to get at the cost problem, including high-deductible insurance and health savings accounts. But until we make sure that the treatments and services consumers are getting are effective and affordable, changing the way we consumers pay for the services doesn't fix anything.

What we need is a system of new value networks that will disrupt the old business models in this industry. We need a new approach not just to insurance and reimbursement, but also to the places where medical services are delivered, the way we use technology, the way pharmaceuticals are developed, the way we educate medical professionals, and who performs what kinds of services. These things are all connected, and changing one piece, or plugging an isolated innovation into an existing framework, will not solve the larger problem.

Q: You mentioned that the places where health care is delivered are part of the outmoded business model. Could you elaborate?

A: You can't make CT scans more affordable by changing the way big hospitals are run. But if you take procedures that once had to be performed at Mass General [Massachusetts General Hospital], for example, and you make them available at lower-cost, focused hospitals, that saves money. And as the technology evolves and becomes more portable, some procedures that took place in a focused hospital might move right into the doctor's office or clinic. It's by making lower-cost venues of care more capable that health care becomes affordable, not by expecting large hospitals to charge less.

Q: Could you give an example of a technological innovation that you think will have great impact?

A: The advantages of electronic medical records, which make patient information accessible and portable, have been talked about for a long time. One hurdle to progress on this relates, again, to the existing business model, which makes it difficult for information stored on one health-care provider's software system to merge with information from other facilities. There's a new disruptive technology in the works, personal electronic health records (PEHRs), an open-source tool that collects data from all providers and gives patients access over the Internet or by mobile phone.

It's not hard to imagine how PEHRs can help us manage our own health care, but the technology is transformative in lots of unexpected ways. In some areas of sub-Saharan Africa, for example, PEHR technology in the hands of health-care workers has already helped reduce the transmission of mother-to-child HIV. For many pharmaceutical companies, complete and accurate patient data would help in screening participants in drug trials and make it possible to track and troubleshoot unexpected problems that show up after a drug is introduced into the general population, like what happened with Vioxx. The potential of this technology is far-reaching.

Q: Your prescription calls for widespread, coordinated change. Who is responsible for leading the way?

A: We hope policymakers in Washington will give our approach consideration, but to transform a complicated industry like this, you need buy-in from a broad range of people, including executives of provider organizations, as well as hospital, insurance, drug, retail, and medical device companies; deans of medical schools; and employers, who pay the bulk of health-care costs. All these parties interact in an interdependent way inside the current system and need to work together to bring about real change.

Q: Is this change happening, and if so, where are we on the transition timeline?

A: System problems require a systemic solution. You need what the great [HBS professor] Al Chandler called "the visible hand of managerial capitalism." When this kind of change happened in personal computers, IBM weighed in and orchestrated the creation of a new business ecosystem.

That's what we need in health care. Right now, only 5 percent of health care in America is provided by integrated institutions such as Kaiser, Intermountain, and Geisinger, but 95 percent of health care is still provided by disintegrated, specialized providers. And if those providers don't start to integrate as competitors in the health-care market, they will be the losers.

About the author

Deborah Blagg writes for the HBS Alumni Bulletin.