The Innovator’s Prescription - HIT SymposiumThe Innovator’s Prescription: How Disruptive...

6/23/2009 Copyright Clayton M. Christensen 1

The Innovator’s Prescription:How Disruptive Innovation

Can Transform Health Care

Clayton Christensen

Harvard Business School

cchristensen@hbs.edu

6/23/2009 Copyright Clayton M. Christensen 2

Centralization followed by decentralization: Computing

6/23/2009 Copyright Clayton M. Christensen 3

Decentralization is disruptive, and is hard to catch

Perfo

rm

an

ce

Time

Sustaining innovations

60% on

$500,000

45% on

$250,000

40% 20%

on $2,000

Disruptive

Innovation

s

Disruptive

Innovation

s

Disruptive

Innovation

s

Disruptive

Innovation

s

Time

6/23/2009 Copyright Clayton M. Christensen 4

The decentralization that follows centralization

is only beginning in healthcare

Surg

ical

suit

es

High-speed multi-

channel testers

Imaging: MRI,

CT, PET Scanners

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The pursuit of profit and differentiation in sustaining competition amongst similar business models generally adds cost.

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Disruption in business models has been the dominant historical

mechanism for making things more affordable and accessible, and for generating corporate and economic growth

Today

• Toyota

• Wal-Mart

• Dell

• Southwest, RyanAir

• Fidelity

• Canon

• Microsoft

• Oracle

• Cingular

• Apple iPod

• Korea, Taiwan, HK

Yesterday

• Ford

• Dept. Stores

• Digital Eqpt.

• Delta

• JP Morgan

• Xerox

• IBM

• Cullinet

• AT&T

• Sony DiskMan

• Japan

Tomorrow:

• Chery

• Internet retail

• RIM Blackberry

• SkyWest, Air taxis

• ETFs

• Zink

• Linux

• Salesforce.com

• Skype

• Cell Phones

• China, India

6/23/2009 Copyright Clayton M. Christensen 7Non-consumers or

Non-consuming

occasions

Different measure

Of Performance

Time

Three Enablers of Disruption

1.Sim

plifyi

ng

Technol

ogy

2. Business model

Innovation

Perfo

rm

an

ce

Time3. New Value Network

• Customers

• Distribution• Suppliers

Who can pull this off?

• Integrated fixed-fee providers. They profit from

wellness

– Reimbursement issues disappear

– Licensing & accreditation don’t block disruption

– Personal electronic medical records

– Assessment of systemic value; integration of supply,

demand, and value to define price

• Orchestrators that profit from wellness

– Major employers

– Government cannot orchestrate

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Rules-Based

6/23/2009 Copyright Clayton M. Christensen 9

Disruption is facilitated when historically valuable (and expensive) expertise becomes commoditized

Experimentation

& problem-solving

Probabilistic

Pattern Recognition

TECHNOLOGY

Precision

MedicineIntuitive

Medicine

Empirical

Medicine

Imaging & molecular diagnostics

PROCESSES:

Ways of working together to

address recurrent tasks in a

consistent way: training,

development, manufacturing,

budgeting, planning, etc.

6/23/2009 Copyright Clayton M. Christensen 10

What is a business model, and how is it built?

PROFIT FORMULA:

Assets & fixed cost structure,

and the margins & velocity

required to cover them

THE VALUE PROPOSITION:

A product that helps

customers do more effectively,

conveniently & affordably a

job they’ve been trying to do

RESOURCES:

People, technology, products,

facilities, equipment, brands,

and cash that are required to

deliver this value proposition

to the targeted customers

6/23/2009 Copyright Clayton M. Christensen 11

Value Proposition:

Don’t know what’s

wrong? We can address

any problem you bring

Resources

ProcessesProfit formula

The Traditional General Hospital Is Not a

Viable Business Model

6/23/2009 Copyright Clayton M. Christensen 12

Polishing Dept.Turning machines

Hobbing departmentTapping equipment

Boring machines

Stamping machines

De-burring machines

Annealing

furnace

Ship

pin

g D

epa

rtm

ent

Cut-offsaws

Pat

h ta

ken

by p

rodu

ct A

A s

tarts

here

Path

taken

by p

roduct B

B starts here

Office area

Storage

6/23/2009 Copyright Clayton M. Christensen 13

Sources & magnitude of cost differences:

Value-adding process clinic vs. general hospital

9.02.7

751

$7,000$2,300

$6030$1600

$670$600

$300$100

General HospitalShouldice Hospital

(hernia repair)

Cost of materials & supplies

Cost of direct labor

Overhead burden

Total cost for equivalent

length of stay

# service families offered

Overhead burden rate

6/23/2009 Copyright Clayton M. Christensen 14

Disruptive business model innovation in physicians’ practices

Value Proposition:

The solution to any

problem starts here

Resources

ProcessesProfit formula

Value Proposition:

Fast, convenient

resolution of rules-

based acute disorders

Resources

ProcessesProfit formula

Fee for service Fee for outcome Fee for Membership,

fee for use

Hospitals are expensive conflations of three types of business models

• Consulting firms

• High-end law firms

• R&D organizations

• Diagnostic & intuitive

activities of hospitals

Solution Shops

• Manufacturing

• Education

•Food services

• Medical procedures

Value-adding process

businesses

• Telecommunications

• Insurance

• EBay

• D-Life

• SimulConsult

Facilitated Networks

Disjointed

VAP Clinic

Disjointed

Solution Shop

TodayCoherent Solution Shop

Hypo-

thesis

Treat-

ment

Coherent Value-Adding Process Clinics:

Orthopedic, hernia, eye, etc.

Stage 1 Primary care

physicians disrupt

solution shops

Stage 2

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Disruption of the hospital business model

Physicians’

assistants disrupt

physicians

Resources

ProcessesProfit formula

Breaking the trade-off

• The cost is in overhead.

– Focus reduces overheads

• Quality comes from tightly coupled integration

– Focus on a job enables appropriate integration

• The concept of hospitals emerged when

transportation was expensive and doctors were

cheap.

• Costs will fall and outcomes will greatly

improve when focused solution shops emerge

for major categories of disease

6/23/2009 Copyright Clayton M. Christensen 17

© 2007 Innosight LLC

18

Market Understanding that Mirrors how

Customers Experience Life

“The customer rarely buys what the company

thinks it is selling him” - Peter Drucker

What jobs are

students trying

to do?

•Be successful

•Have fun

•Have friends

Business models for adherence in chronic care

Degree to which behavior change is requiredMinimal Extensive

Moti

vati

on

to

ad

her

e to

th

erap

y

Strong:

quickly feel

consequences

Weak:

Complications

are deferred

Type I Diabetes

AddictionsType II

Diabetes

Asthma

Congestive

heart

failure Obesity

Hypertension

Osteoporosis

CancerHIV

Myopia Crohn’s disease

Chronic back pain

Ulcerative colitis

Infertility

6/23/2009 Copyright Clayton M. Christensen 20

Diagnosis Adherence Complications

Rules-Based: Individual doctor can diagnose and

prescribe evidence-based therapy

Type I diabetesHypothyroidism

Cystic Fibrosis

Hypertension Congestive heart failure

HyperlipidemiaOsteoporosis

Celiac disease

Business models for chronic care

Diagnosis

Type II DiabetesSchizophrenia

Epilepsy

Parkinson’s diseaseAsthma

Ulcerative colitisChronic Back pain

Alzheimer’s Disease

Intuitive :

Requires coherent solution shop

Business models for ongoing care

Degree to which behavior change is requiredMinimal Extensive

Moti

vati

on

to

ad

her

e to

th

erap

y

Strong:

quickly feel

consequences

Weak:

Complications

are deferred

Type I Diabetes

AddictionsType II Diabetes

Asthma

Congestive

heart failureObesity

Hypertension

Osteoporosis

CancerHIV

Myopia Crohn’s disease

Chronic back pain

Ulcerative colitis

Infertility

Doctor’s office

User Networks

Employer-

Managed Care

Electronic Medical Records:

Organizing Principles

6/23/2009 Copyright Clayton M. Christensen 22

• Must help users do a job that they’re trying to do. Records themselves create no value – they sit on a disk drive instead

of in a file drawer.

• Patients and providers need to pull the records into use. If EMRs are pushed upon them they will not be used.

• Data must be open-source, readable by all. Proprietary applications that help patients and providers do the jobs

they need to do can then be built upon the data.

• Problems must surface before the problems can be solved.

Interoperability problems, in particular, will be resolved

only after they are encountered.

6/23/2009 Copyright Clayton M. Christensen 23

Specialized

solution shops

(fee for service)

Focused

value-added process

clinics (fee for

outcome)

Retail clinics

(fee for outcome)

User Networks

(fee for membership)

High-deductible

insurance & health

savings accounts

Personal care

physicians

Employer-

negotiated

pricing

Pharmacists

Personal

electronic medical

record

Electronic Medical Records, not an Individual, Must Coordinate Care