This current system is not designed to do the things that people increasingly want a health-care system to do: to deliver chronic disease management; to deliver wellness care; to counsel people when they’re well; or to differentiate between serious problems and problems that need rapid, convenient solutions. When the established system does those things, it comes at a very high cost, but that’s because it wasn’t designed to manage these types of care.
As more people seek different kinds of care, the pressure on the current system grows stronger. And throughout our book we talk about niches where we think disruptive innovation is most likely to occur first. These niches can be fertile ground for entrepreneurs, but they are currently markets with low margins — at least compared to the traditional sick care setting. So they are typically unattractive to the incumbents in the industry: the big pharmaceutical companies, the established providers of service (like hospitals and related chains), and the major payors (largely insurance companies). Disruptive outside players could gain an early foothold in these niches, and then become dominant in the future, challenging and eventually replacing some of today’s incumbents.
Disruptions of this sort happen despite the regulatory environment, which favors the well-heeled incumbents. Indeed, historically, regulations tend to relax only after disruptive players have established a niche and have proven themselves in the marketplace. In other words, regulatory reform is often the natural outgrowth of disruption, not vice versa.
S+B: When you talk about a “niche,” it has a different meaning from what we would normally think of as a “niche market.” Can you explain?
HWANG: For us a niche is a part of the market — a group of health-care consumers — with a distinctive set of needs. One niche, for example, might be working mothers with sick children. A typical mother of this sort, as we describe her in our book, has a specific “job” in mind, which she hires the health-care system to do. Whether or not she and her child have health insurance, there’s a desire for convenience that the current system is not designed to deliver. Therefore, even though she could go to a pediatrician’s office, she chooses instead to bring her child to a retail clinic. In this case the value proposition is convenience. It’s an opportunity for innovation, and the health-care system finds itself competing against any other product or service that attempts to deliver convenience to the mother.
The same concept applies to wellness and chronic disease care. These are areas of the marketplace that are not served well by the existing delivery system and where disruptive players could gain a very early foothold and become dominant in the future.
S+B: What are some of the new practices that might serve these niches? HWANG: Some of them involve payors, such as health insurance companies. In The Innovator’s Prescription, we describe the need for insurance that decentralizes decision making and the control of costs. In other words, insurance that puts more of the decision making into the hands of patients. The optimal vehicle that we’ve seen, although it’s not perfect, is the health savings account. Combined with high-deductible insurance (for catastrophic expenses), this is a funded bank account that consumers have available for relatively predictable medical costs. The more judiciously they spend it on medical care, the more they have for retirement.
For hospital care, we need to differentiate the industry into separate types of hospitals, each with its own business model. Some would keep the currently prevalent “solution-shop” model, which is expertise-driven and focused on complex care. Others would need to specialize in specific conditions and procedures, like orthopedic hospitals or the Shouldice Hospital, which does nothing but hernia surgeries. The doctors get very good at that one procedure, and the whole business can be designed around it.