Book Review: The Innovator’s Prescription

Posted on October 6, 2010


How to control rising healthcare costs is a popular topic for debate these days, but all the water cooler talk in the world will not solve the riddle. Even recent legislation is the equivalent of a band-aid on a bullet wound.

Effective long-term change rarely happens at the height of a crisis because there is too much hysteria. And the U.S. cannot wait until a Healthcare Crisis similar to the Banking Crisis. Healthcare is a subject that needs intense study and deep, intelligent insight with actionable items and politicians are not go-to guys for unbiased research. Luckily, Clay Christensen has taken on the task.

Christensen is not the first to write on the subject of fixing healthcare. However, the reason his book, The Innovator’s Prescription, is notable is because he has applied his successful problem identification model and research (from his well-regarded The Innovator’s Dilemma) to healthcare. To him, the approach to fix healthcare involves innovation and what an editor would call a global revision; in other words, there is a shell worth keeping but the main story needs rewritten.

For Christensen, this means starting with the business model, which is how each hospital is organized to make money. The business model is then reformulated and updated based on current market behavior and information. If change is not made, the business model becomes ineffective and outdated and is a candidate for ‘disruption’ by a more innovative and insightful provider. Disruption’s three components are:  1) a technology that transforms a technical problem into a simple one; 2) a business model that can take the simplified solution to market at low cost; and 3) a supporting cast of suppliers and distributors whose business models are consistent, which comprise the value network.

Within healthcare, the ways healthcare providers can organize themselves and make money are three:  solution shops (which diagnose problems and recommend solutions, compensated on fee-for-service basis), value-added processes (treat definitively diagnosed problems through a relatively standard sequence of steps, and are paid on a fee-for-outcome basis) , and facilitated networks (professionals and patients who exchange with and help each other, where coordinators are compensated on a fee-for-membership basis).

By default, the common and well-known general hospital model is not viable over the long-term.  Hospitals that try to do it all often have very high overhead, which is hard to quantify and allocate, quality problems and poor integration. Christensen writes:  “Affordability comes from reducing complexity-driven overhead, and quality stems from rational integration around the jobs of patients.”

To compound matters, most hospitals have pricing problems. Hospitals mix business models (and do not separate tasks or track overhead costs properly), so they must charge the only way they can—on a fee-for-service basis. This seems reasonable only by tradition. Healthcare, like many other services, should always be outcomes-focused:  if it takes three visits to correctly diagnose an ailment when it should only take one, you should pay for only one time through the system to get the expected outcome. Current hospital business models profit from patients’ illness, rather than wellness.  And with chronic diseases (diabetes, hypertension, obesity, addictions, congestive heart failure, coronary artery disease) accounting for 70% of all healthcare-related costs, it makes sense to pursue wellness over paying to treat illness, if simply to free up healthcare resources for people who need critical, emergency treatment.

Christensen’s perspective on healthcare insurance focuses on a couple key points.  Frustrating the fee side of healthcare, CMS (Centers for Medicare & Medicaid Services) and private insurers set prices on abstract formulas, not based on supply, demand, value, etc., which affects pricing of insurers. For him, reimbursement needs to be replaced by true, high-deductible insurance and HSA (health savings accounts), which encourage proactive safekeeping of self rather than treatment of illness after-the-fact.

Other innovation will assist in healthcare’s metamorphosis.  Electronic Health Records will help coordinate treatment. Pharmaceutical companies, which are currently disintegrating away from value chain activities, will need to do much less outsourcing and more research linking families of symptoms and understanding how drugs can more precisely treat specific symptoms, and with more consistency and less side effects. Medical schools will need to produce less specialists and more general practitioners, which will aid integration on multiple levels of the treatment model. Simultaneously, more treatments will migrate to less specialized care givers like nurses, practitioners, and general doctors.

In his conclusion, Christensen puts politics in the proper perspective in relation to change in healthcare:  democracy a good tool for small adjustments and maintaining status quo, not for major change because too many levers exist for influencers to affect processes and block change. The Innovator’s Prescription is a comprehensive and insightful project on healthcare reform that is practical and business-based, which avoids the politically-charged emotion on the patient care and benefits end. Healthcare costs today are complex and broken in too many ways for law to change. We need holistic change that makes sense, and Christensen’s work does the job.